Some Oppose Servicing Fee Cut

Key players in the mortgage industry appear to have differing opinions on whether Fannie Mae and Freddie Mac should cut their minimum servicing fee to 12.5 basis points.

In early February, the Mortgage Bankers Association held a private forum on the issue with 30 participants attending - some making presentations for a cut and others arguing for maintaining the current minimum of 25 basis points.

Discussing the meeting, Steve O'Connor, vice president of government affairs for MBA, said, "A number of people support the cut, a number of people want to maintain the status quo, and a number are undecided."

However, Mr. O'Connor said he could not identify which firms are for, against and neutral. He would not comment further.

According to one participant in the meeting, Wells Fargo Home Mortgage, Des Moines, the nation's second-largest servicer, is adamantly opposed to any type of significant cut in the minimum servicing fee and made a presentation at the MBA forum highlighting its concerns.

The participant, requesting his name not be used, added that he felt "a lot of Wells' arguments were pretty contrived."

A spokeswoman for WFHM said the company would not be commenting on the matter.

Several large GSE seller servicers, including Countrywide Home Loans, Calabasas, Calif., and Washington Mutual, Seattle, are in favor of cutting the GSE servicing fee.

A Lehman Brothers report on the issue notes that a cut in the GSE servicing fee would "enable the servicer to monetize upon the sale of its loans [servicing retained] the value of the mortgage rate that went toward those expected cash flows."

The Lehman report notes, however, that "despite the significant benefits to servicers, the GSEs may resist the change to protect MBS investors."

Some players in the bond market - including Pacific Investment Management Co. - want to maintain the 25 basis point structure.

At the MBA meeting, Fannie and Freddie officials offered no timetable on when they might make a decision regarding a fee cut, said one source.

MBA itself has yet to take a position on the issue and for now is acting as facilitator. The trade group has members of all sizes - and with different opinions.

As reported by Mortgage Servicing News in its last issue, both Fannie and Freddie are contemplating slashing the minimum servicing fee, a move that could radically alter the way mortgage firms manage their receivables.

The 25 basis point servicing strip that GSE seller/servicers retain must be capitalized and hedged against, increasing costs for any firm that invests in receivables.

The servicing strip can be particularly difficult to manage during periods when refinancings accelerate.

Two years ago the Government National Mortgage Association reduced the minimum servicing fee on certain securities to 19 basis points from 44 basis points.

One West Coast-based mortgage banker, whose shop services loans, said he fears a cut in the fee could impact the quality of servicing. "If you cut the fee you'll be paying them less to do the same work," he said. "It could have an impact on quality."

He added, "The reason people are talking about a cut is that they are tired of the volatility of MSRs (mortgage servicing rights)."

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