Fed Governor Calls for Revised Incentives for Servicers

The current compensation structure for servicers provides misaligned incentives and needs revision so servicers' incentives will align with borrowers and investors, stated Federal Reserve Governor Sarah Bloom Raskin addressing an audience at the Maryland State Bar Association Advanced Real Property Institute in Columbia Maryland Tuesday.

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""[I]t is imperative to reconsider the compensation structure so that servicers have adequate incentives to perform payment processing efficiently on performing mortgages, and to perform effective loss mitigation on delinquent loans,"" Raskin stated.

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Raskin also believes investors need methods to allow them to monitor servicer performance.

She noted that ""house prices have fallen by nearly one-third since their peak in the first quarter of 2006, and total homeowners' equity in the United States has shrunk by more than one-half-a loss of more than $7 trillion.""

In addition, as of the second quarter of this year, 3 million families were paying above-market interest rates and are unable to refinance to today's lower rates, and 4 percent of mortgages were undergoing foreclosure.

Servicing delinquent loans is costly for servicers, who were not built to withstand such high rates of delinquencies.

Generally, servicers receive one-fourth to one-half of the unpaid loan balance annually for servicing a loan. While this fee is more than enough to cover the cost of covering performing loans, it is far less than the cost of servicing a delinquent loan.

""When mortgage delinquencies are high, mortgage servicing is not profitable, and servicers may feel extra pressure to cut costs as much as possible,"" Raskin explained.

""We need to consider our current array of mortgage contracts with a dispassionate eye and open mind,"" Raskin stated.