With mortgage delinquencies at unprecedented levels, it's become clear that the current servicing-fee model is lacking.
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The Federal Housing Finance Agency (FHFA), Fannie Mae, Freddie Mac, and Ginnie Mae are in the process of developing ""new servicing compensation structures"":http://dsnews.comarticles/fhfa-to-work-with-fannie-freddie-and-hud-develop-new-mortgage-compensation-plan-2011-01-18 to provide greater flexibility for the servicing of nonperforming loans.
The ""Mortgage Bankers Association"":http://www.mortgagebankers.org (MBA) is recommending that they consider the idea of a new ""reserve account"" strategy to cover the higher expenses associated with default servicing.
David Stevens, MBA's president and CEO, explained the concept of his organization's reserve account proposal to lawmakers ""at a congressional hearing"":http://www.mortgagebankers.org/files/News/InternalResource/77024_MBATestimonyonServicingJuly72011.pdf this week on mortgage servicing standards.
Under this proposal, Stevens said, the new ""normal servicing"" fee would drop from 25 basis points to 20 basis
[COLUMN_BREAK]points, but five additional basis points would be collected from borrower payments and set aside in a ""trust"" cash account.
These cash reserves would remain in the account for a specified period and be used to pay for the higher servicing costs that come with handling delinquent mortgages, Stevens explained.
""Servicers could recapture the funds based upon a specified seasoning, level of portfolio performance, and other factors deemed appropriate,"" Stevens said.
He also stressed to lawmakers that the higher expense of default servicing should be a consideration when crafting new regulatory standards for mortgage servicing.
""National servicing standards should ensure the fair treatment of servicers and recognize the economic realities of the servicing business,"" Stevens noted.
He says new rules must take into account the costs of delinquency and foreclosure, including late fees and other compensatory fees necessary to offset the cost of delinquency.
""Many of the suggested standards question these charges,"" Stevens said, ""yet these fees are necessary to ensure quality customer service, to enable advance payments to bondholders as required, and to provide the loss mitigation products borrowers seek.""
According to Stevens, policymakers have a delicate balancing act ahead of them when it comes to crafting new standards that meet the needs of both borrowers and servicers.