Exec: Beware of Cutting Servicing Fee

Terry Klein, the former head of First Nationwide Mortgage who now works as an industry consultant, says mortgage companies could live to regret reducing mortgage servicing fees the next time a real estate recession surfaces.Mr. Klein told the Mortgage Bankers Association's National Mortgage Servicing Conference in San Diego that he is skeptical of proposals that would reduce fees to the current operational cost of servicing a loan. He pointed out that the subprime credit lending industry has never been stress-tested by a real estate downturn. As a result, the impact on delinquencies and defaults -- and the cost of managing those problems -- is not fully known. Mr. Klein acknowledged that several trends have reduced servicing costs and could justify a lower fee. Advances in technology have improved servicing efficiency, and higher average loan balances have increased the dollar size of the servicing fee, which is typically expressed as a percentage of the loan. Mr. Klein said reducing servicing fees too much could front-load profits before the work of managing the loans is actually performed. "If real estate values stop growing, the game changes," he noted. "I think we should be careful about reducing the servicing fee."