New GSE incentive cap for servicers encourages one-and-done workouts
A new cap on the aggregate incentive fees government-sponsored enterprises pay housing finance companies for workouts may play a role in how federally mandated forbearance plans get resolved.
The cap encourages servicers to commit to whatever forbearance exit plan they initially work out with a borrower, limiting consideration of new options down the road.
"The total fees a servicer in aggregate is going to be able to obtain is $1,000, so I do think that is incentivizing the servicer to look closely at the borrower’s situation and really think about what's going to be the best long term," said Patrick DellaValle, director in Guidehouse's financial services advisory and compliance practice.
First announced in June and updated in July the limit's potential impact is coming into focus now, as the end of the first coronavirus-related six-month forbearance period approaches, and expanded unemployment benefits expire. The most recent weekly unemployment-claims report from the Department of Labor shows that while the seasonally adjusted numbers are down significantly from a peak near 6.9 million in March, they inched up recently and remain above 1 million.
The number of borrowers with forbearance plans continues to decline, but the extent of that decline has slowed. In addition, more than half of all borrowers with forbearance plans have extended them, and a small percentage of borrowers that exited forbearance earlier are re-entering it.
The cap could be a strain on mortgage companies if the market’s distress levels are high.
"One impact that I do see as changes to these incentive fees come into effect or play out is how costly they are for servicers," said DellaValle.
On the flipside, the fee does help control the GSEs' spending at a time when the Federal Housing Finance Agency would like to rebuild their capital ahead of an exit from conservancy.
GSE fees paid to servicers vary based on the complexity of the workout and the costs involved, so they don't necessarily incent the use of one workout over another. However, they do encourage the servicer to get loans out of forbearance and back on track quickly.
"An incentive fee is really in lieu of not getting paid anything during the whole forbearance period, and servicers may not get a fee if the borrower stays delinquent," said Larry Platt, a partner at Mayer Brown.
Fees generally range from $500 to $1,000 with some exceptions.
For example, one of the simplest current options for workouts — a deferral that tacks forborne payments onto the end of the loan — results in a $500 payment to servicers.
At the other end of the scale is a modification of loan terms that accounts for a reduction in a borrower's income, and that fee is currently capped at $1,000.
Servicers used to get payments for these modifications, which were based on how delinquent borrowers were and whether those borrowers successfully made payments through a trial period.
The maximum payment was $1,600 for 120-day-plus delinquencies, for example. It's now a flat fee regardless of a loan’s delinquency status.
The structure of these fees is likely to change again before the pandemic's done, Paul Anselmo, CEO of industry technology vendor Evolve Mortgage Services, said in an email.
"The GSEs' incentive programs have evolved along with the financial crisis and will likely continue to do so," he said. "In fact, there have been at least four changes so far to the details of the incentive programs since they were first announced in March. Back then, we still didn't grasp the extent of the crisis. We still don't know what the future holds, as the long-term impacts are still unfolding."