WASHINGTON (12/29/11)--The Federal Housing Finance Authority (FHFA) has issued a discussion paper intended to find an alternative mortgage servicing compensation plan that would improve service for borrowers, reduce financial risk to servicers, and provide flexibility for guarantors to better manage non-performing loans while promoting liquidity in the mortgage securities market. However, the Credit Union National Association (CUNA), in a comment letter, warns that the plans put forth by the FHFA are too vague and could have the effect of consolidating the servicing industry into a few large players resulting in diminishing service levels to borrowers.
In its discussion paper, the FHFA outlined two alternative servicing compensation proposals for public consideration and comment. They are:
- A "reserve account" approach that would establish a reserve account within the current servicing compensation structure, in which case the minimum servicing fee would be reduced from today's 25 basis point (BP) minimum to a minimum of between 12.5 and 20 bps, with an additional reserve amount of between 3 and 5 bps set aside in a reserve account. This would be used to offset unexpectedly high servicing costs associated with servicing non-performing loans; or
- A "fee for service," which would create a new compensation structure, under which the guarantor would pay a set dollar fee per loan for servicing, effectively tying the compensation to the number of loans being serviced rather than the size of the loans. This would be funded by a master servicing strip collected by the guarantor from interest payments paid by the borrowers.
CUNA told the FHFA that any change in the mortgage servicing compensation structure is unnecessary and inappropriate at this time, given all of the changes occurring relating to servicing standards and the unknown future of Fannie Mae and Freddie Mac, and voiced its concern that the proposed changes could have the ill effects on servicing such as consolidation of the servicing industry and declining service to borrowers.
"CUNA and its members urge FHFA to release further details on each proposal laid out in the Discussion Paper, and to refrain from making any changes to the servicing compensation structure until the future of the (government-sponsored housing enterprises) are determined and national servicing standards are developed," CUNA wrote.
"While we understand FHFA's objectives, it is impossible to understand at this point what the effects of either proposal will be on credit unions and on the industry as a whole," the letter added.
Use the resource link to read the comment letter in detail.