The Mortgage Bankers Association (MBA) has what it calls
“strong reservations” about the short timetable set out by the Departments
of Treasury, Housing and Urban Development and the Federal Housing Finance Agency
(FHFA) for revamping the fee structure for loan servicers. The agencies are seeking to make a final
decision on the matter by mid-summer, timing that MBA says could lead to a
“rush to judgment on this critical and complex issue.”
MBA, which represents a membership composed of mortgage bankers,
brokers, commercial bankers, life insurance companies, and Wall Street
conduits, sent a letter
on Tuesday to Secretaries Timothy Geithner and Shaun Donovan of
Treasury and HUD and Edward J. DeMarco the Acting Director of FHFA expressing
concern about the timing of the decision and laying out four pages of
questions about the alternatives proposed for restructuring the fee.
The letter, signed by John A Courson, President and Chief Executive
Officer, says servicing is the predominate asset of most mortgage
companies and thus it is critical that changes to the current fee
structure be done with extreme caution, research, and input from
stakeholders. According to the letter, changes could affect more than
just compensation; they also affect counterparty risk, servicing values,
tax policy, representations and warranties, prepayment speeds, and
rights to the asset. They could also impact the TBA MBS market and
ultimately the liquidity of the secondary market for mortgage loans.
Courson urged the agency heads to take deliberate steps to ensure the decision is not rushed, that the industry receives answers to its questions, and has sufficient time to respond and comment.
The Federal Housing Finance Agency (FHFA) on January 18, 2011
instructed Fannie Mae and Freddie Mac to study possible alternatives to
the current servicing and compensation structure that they employ for
their single-family mortgage loans. The initiative hopes to improve
service for borrowers, reduce financial risk to servicers, and provide
flexibility for guarantors to better manage non-performing loans.
Loan Servicers’ handling of the foreclosure crisis has generated
criticism from many quarters including the FDIC Chairman, Federal
Reserve Board members, consumer groups, as well as academics. Typical of
the criticism were remarks last fall by Federal Reserve Governor Sarah
Bloom Raskin. Raskin told a meeting of the National Consumer Law Center
that mortgage servicing is an outgrowth of securitization which changed
the old model from one where the lender also services a loan to a system
where loans owned by many investors are consolidated and serviced by a
few companies, some of which are also lenders. This consolidation has
led to significant economies of scale in routine matters.
In addition to servicing fees, servicers earn money from other fees such
as late fees and float interest while streamlining processes to keep
costs down, but servicers have been ill-equipped to deal with their new
role as loan modifiers. The structural incentives that influence
servicers’ actions, especially when they are servicing loans for a third
party, now run counter to the interests of homeowners and investors,
Raskin said. A foreclosure almost always costs the investor money but
may bring the servicer additional fees while proactive measures to avoid
foreclosure and minimize investor losses cost the servicer. Loan
modification is costly and those costs may not be reimbursed; during
forbearance the servicer must still advance payments to the investor.
“Even in the case of a servicer who has every best intention of doing
the right thing,”incentives are largely misaligned with
everyone else involved in the transaction, and most certainly the
The bottom line: The MBA is asking mortgage and housing regulators to slow their decision making process to allow for the proper exploration of unintended consequences.
A copy of the questions accompanying the letter are printed here in their entirety.
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