The Mortgage Bankers Association (MBA) has what it calls "strong reservations" about the short timetable set out by the Departments of Treasury, Housing and Urban Development and the Federal Housing Finance Agency (FHFA) for revamping the fee structure for loan servicers.  The agencies are seeking to make a final decision on the matter by mid-summer, timing that MBA says could lead to a "rush to judgment on this critical and complex issue."

MBA, which represents a membership composed of mortgage bankers, brokers, commercial bankers, life insurance companies, and Wall Street conduits, sent a letter on Tuesday to Secretaries Timothy Geithner and Shaun Donovan of Treasury and HUD and Edward J. DeMarco the Acting Director of FHFA expressing concern about the timing of the decision and laying out four pages of questions about the alternatives proposed for restructuring the fee.

The letter, signed by John A Courson, President and Chief Executive Officer, says servicing is the predominate asset of most mortgage companies and thus it is critical that changes to the current fee structure be done with extreme caution, research, and input from stakeholders.   According to the letter, changes could affect more than just compensation; they also affect counterparty risk, servicing values, tax policy, representations and warranties, prepayment speeds, and rights to the asset.  They could also impact the TBA MBS market and ultimately the liquidity of the secondary market for mortgage loans.

Courson urged the agency heads to take deliberate steps to ensure the decision is not rushed, that the industry receives answers to its questions, and has sufficient time to respond and comment.

The Federal Housing Finance Agency (FHFA) on January 18, 2011 instructed Fannie Mae and Freddie Mac to study possible alternatives to the current servicing and compensation structure that they employ for their single-family mortgage loans. The initiative hopes to improve service for borrowers, reduce financial risk to servicers, and provide flexibility for guarantors to better manage non-performing loans.

Loan Servicers' handling of the foreclosure crisis has generated criticism from many quarters including the FDIC Chairman, Federal Reserve Board members, consumer groups, as well as academics. Typical of the criticism were remarks last fall by Federal Reserve Governor Sarah Bloom Raskin. Raskin told a meeting of the National Consumer Law Center that mortgage servicing is an outgrowth of securitization which changed the old model from one where the lender also services a loan to a system where loans owned by many investors are consolidated and serviced by a few companies, some of which are also lenders. This consolidation has led to significant economies of scale in routine matters.

In addition to servicing fees, servicers earn money from other fees such as late fees and float interest while streamlining processes to keep costs down, but servicers have been ill-equipped to deal with their new role as loan modifiers. The structural incentives that influence servicers' actions, especially when they are servicing loans for a third party, now run counter to the interests of homeowners and investors, Raskin said. A foreclosure almost always costs the investor money but may bring the servicer additional fees while proactive measures to avoid foreclosure and minimize investor losses cost the servicer. Loan modification is costly and those costs may not be reimbursed; during forbearance the servicer must still advance payments to the investor. "Even in the case of a servicer who has every best intention of doing the right thing,"incentives are largely misaligned with everyone else involved in the transaction, and most certainly the homeowners themselves."

The bottom line: The MBA is asking mortgage and housing regulators to slow their decision making process to allow for the proper exploration of unintended consequences.

A copy of the questions accompanying the letter are printed here in their entirety.


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