On September 27, the Federal Housing Finance Agency ("FHFA") issued a release to solicit comment on alternative models for residential mortgage servicing compensation. This release is part of the FHFA's ongoing industry-wide Joint Initiative on Mortgage Servicing Compensation, which the agency first announced in January of this year. The proposals described in the release, which have been under consideration at FHFA for some time and will be subject to months of debate, are designed to address inefficiencies inherent in providing the same compensation for loans regardless of loan performance. Servicing a non-performing loan requires significant investment in technology and human resources to manage foreclosures, collections, and loss mitigation. These costs vary widely from loan to loan. Servicing a performing loan, by contrast, carries a far more predictable cost that is generally uniform despite the loan amount. The two proposals seek to address these issues in radically different ways.
Reserve Account Proposal - Proposed by the Mortgage Bankers Association and the Clearing House, under this option the servicer compensation would be reduced to 20 basis points per loan (from 25), with a reserve account set up for the difference. The servicer would not earn any compensation from the reserve account for performing loans. For non-performing loans, servicers would be compensated for excess costs from the reserve account, and also be compensated from the reserve account if they meet incentives for efficient servicing of non-performing loans.
Fee for Service Proposal - Proposed by FHFA directly, under this option servicers would receive a flat $10 processing fee for performing loans. For non-performing loans, servicers would be compensated based on the discrete expenses occurred and, like the Reserve Account Proposal, would set benchmarks for efficient performance which would produce greater compensation if met.
The details of the respective proposals can be reviewed here. The comment period will remain open 90 days