The need for servicing compensation reform was a major topic of discussion among several housing experts during an hour and a half-long panel on Emerging Issues in Mortgage Servicing Wednesday at the Urban Institute.
Panelist Ed DeMarco, Milken Institute Senior Fellow and former FHFA Acting Commissioner, pointed out that while the servicing industry has changed profoundly in the last several years, mortgage servicing compensation has remained unchanged for decades.
“Since the 1980s, servicing compensation has been set—a minimum servicing fee required by Fannie and Freddie of 25 basis points,” DeMarco said. “There is broad consensus that this 25 basis point minimum servicing fee results in compensation to the servicer that far exceeds that actual cost of servicing a performing loan. Yet is it is less than needed for nonperforming loans.”
DeMarco pointed out the gap between the cost of servicing a performing loan compared to servicing a non-performing one is widening—in 2008, it was eight times more expensive to service a non-performing loan. By 2015, it had grown to 13 percent more.
“This inflexibility in servicing comp left Fannie and Freddie scrambling to incentivize servicers to properly beef up operations and make the direct hands-on effort with homeowners who are having trouble with their mortgages,” DeMarco said. “We ended up with a lot of additional compensation being paid out in the form of incentive fees and other compensation that got layered on. But that was done in the midst of the crisis and really is something that ought to be addressed, especially given these stark differences.”
Panelist Michael Stegman, who recently served as the top housing policy adviser for the Obama Administration, said, “With respect to compensation reform, again going back to the FSOC (Financial Stability Oversight Council), we recognize the need to align incentives with the escalating costs of servicing nonperforming loans. That report in 2013 called for efforts to implement, and I quote, compensation structures that align incentives of mortgage servicing with those of borrowers and other participants in the mortgage market. We tried, but unsuccessfully, to actually get it into Johnson-Crapo in that joint rulemaking for national loss mitigation standards, also compensation reform. So I continue to believe that it’s very important to move on that issue.”
Stegman pointed out a recent JPMorgan Chase securitization that went on to the market under the FDIC’s “Safe Harbor” rule and noted that the FDIC rules requires servicer compensation to include incentives for servicing and loss mitigation action.
“This deal that went to market that is out there really has adopted a compensation structure and a fee-for-service structure similar to one of the options that Ed spoke about and put out in the 2011 white paper that is really interesting and something that we all should be interested in and following,” Stegman said. “Instead of that flat 25 basis point servicing fee IO strip, it’s really a compensation structure in three parts. It establishes a base servicing fee for performing loans of $19 a month per loan. There are monetary incentives to the servicer when that loan or those loans go into delinquency—$200 a loan per month for loans that are 30 to 119 days delinquent but not in foreclosure or REO. It escalates to $252 per loan per month if they are 120 or more days delinquent. And there is a series of one-time event-driven fees, $1,500 for a completed short sale to the servicer, $500 for a completed deed in lieu of foreclosure, and $1,000 for a completed REO sale.”
The panel, co-hosted by Urban Institute and CoreLogic, addressed such topics as a recap of the updates to the CFPB’s mortgage servicing rules, the rise of non-banks in the mortgage servicing space, and the need to adopt a national standard loss mitigation program.
The panel was moderated by Faith Schwartz, SVP of Government Solutions with CoreLogic, and panelists included Ed DeMarco, Milken Institute Senior Fellow and former FHFA Acting Commissioner; Laurie Goodman, Co-Director, Housing Finance Policy Center, Urban Institute; Raghu Kakamanu, SVP, Housing Policy and Capital Markets, Wells Fargo; Laurie Maggiano, Program Manager, Servicing and Secondary Markets, Consumer Financial Protection Bureau; and Michael Stegman, Fellow, Bipartisan Center and former top Housing Adviser in the White House.