A new report published by Urban Institute, Urban’s Housing and Finance Policy Center, and the Mortgage Servicing Collaborative (MSC) discusses three options for how best to approach mortgage servicing compensation structure. The report is divided into three options: retain the status quo, move to a fee-for-service model, or move to a central default utility model.
According to MSC members, retaining the status quo would reduce NPL costs and improve borrower outcomes. Members in favor of retaining the status quo note that the current loss mitigation toolkit is more robust than was the case historically. Additionally, the MSC notes that nonbanks have increased their servicing market presence in recent years as banks have pulled back. The risk associated with the status quo is the lack of a formal structure to fund the high cost of servicing nonperforming loans.
The next option, according to Urban, is the fee-for-service model for nonperforming loans, in which servicers would handle the servicing of performing loans as they do today, but the way they get compensated would change to ensure continued revenues, even for delinquent loans. Instead of receiving the full 25 basis point fee for performing and effectively nothing for nonperforming loans, servicers would retain less than 25 basis points while the loan is current.
The last option Urban and the MSC suggest is the the creation of a central utility for default servicing, a larger change than a fee-for-servicing option. Servicers would continue to service performing loans as they do today but would outsource the loss mitigation function to a central default utility once a loan becomes 60 days delinquent.
While some MSC members note that they want a change to the compensation model, some are in support of maintaining the status quo. To learn more about the options and changes proposed, you can read the complete brief here.