“Because Ginnie Mae differs from the Enterprises in its model, powers and limitations, any change to servicing compensation or to servicer risk exposure” would have to be examined by the Government National Mortgage Association, which is part of HUD.
FHFA, as part of a joint initiative with the Department of Housing and Urban Development, is now seeking comment on two GSE-only compensation models, after first floating the idea of change back in February.
Currently, servicers processing Fannie Mae and Freddie Mac loans are paid a minimum of 25 basis points of the loan amount.
In its talking paper, FHFA once again floats the idea of paying a set dollar amount for servicing loans, while keeping open to the idea of maintaining a minimum servicing fee model similar to the current structure, but one with a reserve account option. “The reserve account would be available to offset unexpectedly high servicing costs resulting from extraordinary deteriorations in industry conditions,” the talking paper notes.
The government seems to be leaning toward a new model that in particular addresses the servicing of delinquent loans, offering a higher fee structure, but some mortgage bankers believe this might actually incentivize servicers to allow borderline loans to go into arrears because it would trigger higher processing fees.
Over the past six months the agency has held formal and informal talks on the issue with several industry participants including mortgage bankers, megabanks with large MSR portfolios, and industry advisors who sell and hedge MSRs.
The regulator of Fannie and Freddie says commentators “expressed concerns that certain changes in the mortgage servicing compensation structure—specifically, a reduced MSF—would result in further consolidation in the servicing industry.”
Those in favor of maintaining the status quo fear that “servicers without significant economies of scale would suffer if the servicing fee were significantly reduced,” the agency explains. “They extrapolated that the end result would likely be the elimination of small- and medium-sized servicing entities for whom servicing would no longer be profitable or viable.”
At this time it does not appear that FHFA is pushing any one idea particularly hard – though it's concerned about the processing of delinquent loans, particularly in light of the robosigning scandals – and still has an open mind on the issue.
Meanwhile, regulators are keen to note that the industry is “virtually uniform in their support for bifurcating the selling and servicing representations and warranties.”
According to comments already received, mortgage professionals are worried about “the inability to split representations and warranties” which has become a hurdle to transfers of servicing portfolios, the agency says. “Successor servicers are reluctant to accept a transfer of servicing because of the requirement to accept the origination representations and warranties, and this hinders the transfer of servicing portfolios (and non-performing segments of servicing portfolios) in circumstances where a potential successor is concerned that a transferring servicer may have failed to meet required servicing performance standards.”