Mozilo Thinks GSEs Should Cut Minimum Servicing Fee

Countrywide's Angelo Mozilo has fought many battles in his long and storied career but before he retires he would like to accomplish one more feat of daring - convincing Fannie Mae and Freddie Mac to slash their minimum servicing fee. Under current rules of engagement with the industry, Fannie and Freddie have set a minimum servicing fee of 25 basis points. Mr. Mozilo, chairman and chief executive of Countrywide Financial, the nation's largest residential funder, thinks a 12 basis point servicing fee sounds about right.

On the surface, 25 basis points may seem like a fair arrangement, but the problem - as Mr. Mozilo and others in the industry point out - is that the 25 basis points of anticipated servicing income has to be capitalized and hedged against, and therein lies the problem. Over the past 30 months the mortgage industry has tried to manage through what seems like a never-ending refinancing tsunami. Industry production keeps chugging along at a near-record pace, but servicing impairment charges (and hedging costs) have become a major nuisance.

"That 25 basis points is an asset we have to hedge against," said Mr. Mozilo, who is nearing the end of his career. "It costs us and the industry hundreds of millions of dollars a year."

But will the government-sponsored enterprises bite? Mr. Mozilo said he has discussed the issue with Franklin Raines, and Richard Syron, the chairmen and CEOs, respectively, of Fannie and Freddie.

"So far the answer has been no," said Mr. Mozilo. (Countrywide sells most of its conventional production to Fannie, but might in the future begin giving Freddie more business.) But he also believes that in time, the GSEs might possibly see the light.

"If the GSEs cut the minimum to 12 basis points, costs could come down dramatically for the consumer," he said. "Given what these two firms have been through lately" in regard to their accounting problems, "I think they're beginning to open their eyes."

What do others in the industry think of the idea? One executive at a large, West Coast-based servicer, requesting anonymity, said, "We like to see that reduction, too. Everyone is sick of the all the problems we've had with hedging the MSR."

One Texas lender said, "It would be nice not to capitalize the asset and it would probably make everyone more efficient. I'm just concerned it might drive the 'rollup' in the industry." The lender added that it also could result in there being too many servicing "monopolies." He said, "Given the recent problems of Fannie and Freddie having more mortgage monopolies wouldn't be good."

Alison Utermohlen, an expert on servicing issues for the Mortgage Bankers Association, agrees that if the servicing fee was reduced to 12 bps, firms "wouldn't have such a big asset on their books - and they wouldn't have to hedge as much."

She noted, "I assume that's what drove the reduction in the Ginnie Mae servicing fee." (Last year the Government National Mortgage Association reduced the servicing fee on certain securities to 19 basis points from 44 basis points.)

On conventional loans the 25 basis points, the so-called servicing strip, belongs to the servicer. Because the GSEs have established a contractual minimum of 25 basis points, that means the servicer has one of two choices: keep the servicing strip or sell it off.

If the GSEs cut the minimum to 12 it would allow servicers, such as Countrywide, Wells Fargo, Washington Mutual (and anyone else) to include more of the loan's original yield in securities backed by the loans they sell.

Under such a scenario, they could raise cash and save a ton of money on hedging and impairment charges. Of course, such a reduction would greatly benefit Countrywide, the nation's second largest servicer with $786 billion in housing receivables.

Last week, shortly before National Mortgage News went to press, Countrywide announced third-quarter earnings - and the news wasn't good. The company saw earnings plunge by 47% and it revised its guidance for coming quarters.

Mr. Mozilo, 65, who is expected to step down as CEO (but remain as chairman) sometime in the next two years, knows better than anyone what Countrywide could do if the Fannie/Freddie servicing fee was just 12 basis points.

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