HUD and the Federal Housing Finance Agency (“FHFA”) published the Joint Mortgage Servicing Compensation Initiative in February 2011, suggesting that servicer compensation incentives were misaligned with the interests of borrowers and guarantors. Their original position paper can be seen by clicking on this link: FHFA Servicing Compensation Initiative.
On September 27, 2011, FHFA released an Alternative Mortgage Servicing Compensation Discussion Paper that abandoned several approaches suggested in the February paper and introducing the concept of a minimal Fee For Service (“FFS”) for performing mortgages. The Discussion Paper also introduced a concept proposed by the Mortgage Bankers Association of America (“MBA”) which reduced the minimum servicing fee to 20-basis points while establishing a 5-basis point annual reserve fund to partially cover the higher costs of non-performing mortgage servicing. The FHFA’s Discussion Paper can be reviewed here: FHFA Alternative Mortgage Servicing Compensation Discussion Paper.
UCM believes that FHFA’s premise that servicer compensation incentives are misaligned with borrowers’ and guarantors’ interests is totally flawed and baseless. Under the current compensation arrangement servicers receive servicing fees only as the borrower pays. The servicing fee is collected out of the borrowers’ remittances. If a loan goes delinquent there is no remittance from which to collect the servicing fee. In most cases the servicer is required to advance principal and interest to investors and protect the property if it’s abandoned, maintain insurance and taxes, etc. If the servicer can successfully modify the loan, then the delinquent servicing fees can be collected. If the loan forecloses, the unpaid fees are never collected. These economics create a powerful incentive to keep mortgages current and work with borrowers when loans go delinquent.
Even if FHFA’s premise were correct, their proposed FFS does nothing to further align servicer/borrower interests. FHFA’s proposal is silent about non-performing loan (“NPL”) compensation.
FHFA’s September Discussion Paper asks several questions of the mortgage industry regarding servicing compensation. UCM strongly encourages the mortgage industry to join us in responding. Our response to FHFA’s specific questions can be downloaded from here: UCM’s Response To FHFA’s Discussion Paper Questions. In addition to responding to FHFA’s specific questions in their September Discussion Paper, UCM also prepared a short, general response to the Discussion Paper. Our response dated October 3, 2011 can be seen here: UCM’s Short Response to FHFA’s September Discussion Paper. This Response raises several additional concerns not addressed by FHFA’s stacked questions.