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Possible Changes for Servicer Compensation on NPLs

Mortgage News

The current compensation structure for agency servicers on non-performing conventional mortgages is not working, and changes are being considered.

Word of the possible change came Tuesday from the Federal Housing Finance Agency, which regulates — and currently is the conservator of — Fannie Mae and Freddie Mac.

The two companies have been directed to work on a joint initiative to consider alternatives to mortgage servicing structures and servicing compensation for their single-family mortgage loans.

The problem with the current model, according to FHFA, is that servicers are paid based on a minimum servicing fee that is built into the interest rate — reducing the flexibility needed to service non-performing loans. The regulator also said that mortgage servicing rights created through the current system are hard to manage.

The goal of the initiative is to “improve service for borrowers, reduce financial risk to servicers, and provide flexibility for guarantors to better manage non-performing loans, while promoting continued liquidity in the To-Be-Announced mortgage securities market.”

One possible alternative outlined in FHFA’s news release was a fee structure designed for non-performing loans. Another option is to eliminate the minimum mortgage servicing fee for performing loans.

“Many of these issues have been the subject of discussion within the mortgage industry for years,” FHFA said. “FHFA will coordinate efforts of the initiative over the next several months to gather feedback from the industry, consumer groups and investors, and from other regulators and government agencies.”

The implementation of any new servicing compensation structure would require “significant lead time,” be prospective in nature and not occur before the summer of 2012.

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