The industry knows there is a gigantic problem surrounding servicer compensation. But there’s a difference between knowing the problem and knowing how to solve it.
As Laurie Goodman, codirector of the Housing Finance Policy Center with the Urban Institute, so eloquently put it at a housing policy event on Wednesday, “It is much more difficult to say the current system does not work than it is actually come up with something better.”
At the event hosted by the Urban Institute and CoreLogic and moderated by Faith Schwartz, principal, Housing Finance System Strategies, Ed DeMarco, senior fellow in residence with the Center for Financial Markets, Milken Institute, Raghu Kakumanu, senior vice president of housing policy and capital markets with Wells Fargo, Laurie Maggiano, program manager, servicing and secondary markets with the Consumer Financial Protection Bureau, and Michael Stegman, fellow at the Bipartisan Policy Center, joined Goodman onstage todiscuss the “Emerging Issues in Mortgage Servicing.”
One of the biggest topics up for discussion: Servicer compensation.
As background, nearly half a decade ago, the Federal Housing Finance Agency and theU.S. Department of Housing and Urban Development teamed up to address the growing difficulties in making a profit in mortgage servicing. The FHFA announced back in September 2011 that was seeking public comment on two proposed plans for collecting mortgage servicing compensation.
But despite the seemingly promising start to change, the talk has fizzled out over time, until now.
Compass Point Trading and Research put out a note on the servicing event, stating that it believes the servicing compensation debate will return, even if consensus is unlikely.
Currently, the mortgage servicer is generally required to retain a minimum servicing fee of 25 basis points for Fannie Mae and Freddie Mac.
Goodman noted in her presentation that this 25 bps fee has been used since the mid-1980s, ignoring the fact that the average loan size has gone up from $70,200 to $215,000 in that period.
Doing the math, Goodman calculated that servicing a performing loan costs $181/year in 2015, and servicing a non-performing loan costs $2,386/per in 2015.
However, gross revenue from servicing the average loan size of $215,000 is $538/year in 2015.
“It costs way too much to service non-performing loans, and way too little to service performing loans,” Goodman said.
Going back to the two proposed plans (1) the reserve account and (2) a fee-for-service structure, Goodman said, “In today’s environment neither of these is a slam dunk. The first is an easier change. However, the second fits the growing non-bank servicer model much better.”
“Under the current system, our concern is that servicers may skimp on nonperforming loan servicing,” she said. “If we moved to a fee-for-service basis with compensation reform, will services be disincentive to make a proactive call when they can collect higher fees if they wait?”
She also noted that the industry has to think about servicing, and its impact on asset to credit. “If we were to perform servicing through either mechanism, the reserve account or the fee-for-service basis, it would introduce risk-based pricing into the servicing equation,” she said.
It’s these issues that Goodman said she has to think about with servicing compensation reform. “There are just no really easy solutions,” she concluded.
Goodman wasn’t the only panelist weighing on the discussion.
Michael Stegman, fellow at the Bipartisan Policy Center and the former top housing advisor at the White House, also emphasized the need to align incentives between borrowers and others in the servicing space with the escalating costs of servicing nonperforming loans.
In its note over the discussion, Compass Point summarized the talk stating, “The panelist were uniform in their support for renewing the policy conversation regarding mortgage servicing compensation but their tone underscored the issue’s inherent complexity.”
However, Compass Point isn’t too positive on the issue, concluding “We fully expect the mortgage servicing compensation issue to reemerge in 2017, which could foster headline uncertainty in the space, but there appears to be insufficient consensus among policymakers and stakeholders which leaves us pessimistic regarding the effort.”
Check here to watch a replay of the event.