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FHFA Opens Up Servicing Compensation Proposals for Discussion

The ""Federal Housing Finance Agency"":http://www.fhfa.gov (FHFA) is seeking public comment on two new compensation structures for mortgage servicing.

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The agency says the current model was not designed for today's market conditions. After meetings and discussions with various stakeholders, FHFA has put forth two alternatives.

One proposal would establish a reserve account within the current servicing compensation structure. The other proposal would create a new ""Fee for Service"" model.

In January, FHFA began working with Fannie Mae, Freddie Mac, and HUD to evaluate alternatives for future mortgage servicing structures and servicing compensation for single-family loans.

Through those efforts, FHFA has released a ""discussion paper"":http://www.fhfa.gov/webfiles/22663/ServicingCompDiscussionPaperFinal092711.pdf outlining two concept proposals.

The first entails what the agency describes as “modest changes” to the current servicing compensation model used by the GSEs. This fee structure, in the form of a reserve account, was put forth by the Mortgage Bankers Association (MBA) and the Clearing House Association.

It provides for a reduced minimum servicing fee relative to today’s 25 basis points, ranging from 12.5 to 20 basis points, and establishes a separate reserve account available to pay for non-performing loan servicing.

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The account might be funded through several options, including reallocation of basis points from the borrower’s payment. Several alternatives are suggested for where the reserve account would be held, such as within the trust structure of the mortgage-backed security.

The second proposal makes “fundamental changes” to the GSEs’ current servicing compensation structure. It introduces a “Fee for Service” model that provides for a base servicing fee for performing loans (either a dollar fee per loan or basis point fee).

FHFA says this structure reengineers the servicing-related cash flows in an attempt to more accurately reflect the interests of the borrower, the servicer, and the investor, guarantor, or trustee, while directly tying compensation to the actual services performed by the servicer.

Within the discussion paper released Tuesday, FHFA outlined the three primary goals of this initiative: to improve service for borrowers; reduce financial risk to servicers; and provide flexibility for guarantors to better manage non-performing loans.

In addition to those specific goals, FHFA says it is considering more broadly, options for mortgage servicing compensation that lead to greater competition and can be replicated effectively no matter the state of the housing finance market.

The federal agency says with today’s market challenges, “the lack of servicer investment in improving non-performing loan servicing led to a need for enhanced incentives paid to the servicers….[T]he ultimate cost of poor servicer performance has adversely affected the guarantors/investors/trustees and the overall housing market.”

The details of the servicing compensation proposals can be accessed ""online on FHFA’s site"":http://www.fhfa.gov/webfiles/22663/ServicingCompDiscussionPaperFinal092711.pdf.

FHFA is requesting public input on the proposals over the next 90 days. Comments should be submitted to [email protected].

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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