Mortgage servicers should approach efforts to overhaul their compensated structure with caution, as changes to the status quo "could have ripple effects across the entire real estate finance industry," warned Mortgage Bankers Association Chairman David Motley.
Servicers typically receive 25 basis points of borrowers' monthly mortgage payments as a fee for managing loan accounts. With enough scale and automation, the cumulative fee revenue from a servicing portfolio can sustain operations. But when delinquencies and defaults soar, as they did during the financial crisis, many servicers found themselves in a cash crunch, particularly as investors and regulators demanded greater levels of loss mitigation and foreclosure timelines grew incredibly lengthy.
That's led to calls for an overhaul of how servicers get paid, with many calling for a "fee for service" model where servicers would receive a base fee (though perhaps smaller than they receive now) to manage performing loan accounts, plus add-on fees to compensate servicers for the additional work involved when a borrower falls behind or defaults.
"I suggest we be very cautious here. There is a lot to consider," Motley said during a speech at the MBA's Servicing Conference, ongoing this week in Dallas.
"What is the right amount of servicing fee? Do you set the amount now and have it adjust with some index? How do you estimate what future costs there might be?" Motley, the Chairman and President of Fort Worth-based Colonial Savings FA asked.
"This is a very complicated topic and one for which we need to be very thoughtful and deliberate after having received a lot of input from the entire industry — originators, servicers, guarantors and investors," he added.
Still, Motley pointed to the association's other recent efforts to improve business conditions for servicers, including a re-evaluation of the Basel III capital requirements for mortgage servicing rights.
"[T]he three prudential regulators gave us a 'pause' in the Basel implementation timeline last fall and subsequently proposed 'a simplification' of the capital treatment that would raise the cap on MSAs from 10% to 25%," Motley said.
"This was a huge success story. But, we won't back down." (In what was perhaps a not-so-subtle message to MBA members, Motley began his remarks by walking onstage to the Tom Petty song, "I Won't Back Down," just as he did before his remarks at the MBA Annual Convention last October.)
"We look forward to finalization of a 'simplified' rule that would 'loosen the noose' of punitive capital standards that the original rule imposed," he added.