The Mortgage Bankers Association (MBA) submitted an Alternative Mortgage Servicing Compensation Discussion Paper to the Federal Housing Finance Agency (FHFA) on Thursday in response to the latter's proposal for four servicing fee structures that FHFA, Fannie Mae, Freddie Mac and Ginnie Mae are exploring.
The first structure (The Alternative Minimum Servicing Fee or AMSF) involves the servicer taking an unguaranteed 1 percent interest in both the principal and interest cash flows from a loan. The other three structures were various permutations of the existing fee structure, the first with a minimum servicing bee of 12.5 basis points (bps), the second a minimum of 3 bps, and the final assumed no minimum servicing fee. These fees would be for performing loans and the guarantor would pay the servicer additional fees for each non-performing loan on the basis of a flat dollar amount per loan based on the stage of delinquency.
In response MBA and the Clearing House Group separately proposed alternative structures which defer part of the existing servicing fee as cash reserve to cover servicing costs for catastrophic economic and default situations. Subsequently FHFA requested comments on the Cash Reserve proposal and on an additional structure that calls for paying $10 per month to service performing loans and existing incentive payments for non-performing loans. At present this is the structure favored by FHFA.
MBA says it generally opposes changing the servicing fee structure at the current time and if change is needed it should not be a radical departure from the current one. In the document it sent to Acting FHFA Director Edward J. DeMarco, MBA also expresses displeasure with the timing of the proposed change. With Freddie Mac and Fannie Mae in the process of putting together a standardized servicer guide and consumer groups, states' attorneys general and others calling for more robust servicing standards, it would make more sense to finalize standards setting the scope of servicers' work before compensation issues are addressed. There is also the issue of a reemerging market for MBS from Freddie and Fannie which could be endangered by changes to any of the underlying structures of TBA.
The variety of sizes of servicers and their cost to service structures requires that, if FHFA decides to implement the cash reserve fee structure, normal servicing should be in a reasonable range of 12. Bps to 20bps plus the bps of principal placed in a cash reserve for catastrophic non-performing loan servicing. This would provide a range of fees to fit all sizes of servicers and would result in fewer barriers to entry for new servicers.
MBA addressed whether the proposed fee for service structure would accomplish FHFA's stated objectives for the project of improving services to borrowers, reducing risk to servicers, and promoting liquidity for TBA for GSE MBs.
The proposed $10 per loan per month without additional compensation for NPLs other than the existing incentive compensation would represent a net income decrease and may not be sufficient for small and medium servicers to invest in long term facilities and infrastructure to serve the borrower. Coupled with a potential increase in G-fees it will ultimately increase borrower costs.
While the flat fee would result in less compensation it would increase cash flow up front which would reduce the amount of mortgage servicing rights (MSRs) capitalized on balance sheets and result in less income volatility and hedge costs. However, servicer risks are raised because of (a) locking in a flat rate for 30 years which presents inflation risk (b) the possibility that the GSEs could change the fees (c) the lack of compensating income in the event of another catastrophic economic event (d) the uncertain future of the GSEs.
MBA does not believe that the proposed fee for service model would help the GSEs better manage NPLs other than that the bifurcation of seller reps and warranties from servicer reps and warranties would make it easier to find a successor servicer; the guarantor could move servicing with less financial impact to the servicer, or the proposed compensation structure may be so unattractive to servicers that private equity comes into the market to replace the loans historically sold or serviced through the GSEs. Any one of these can be better accomplished through other mechanisms.
As to the impact on the liquidity of TBA, MBA noted that one of the factors in TBA liquidity is that one of the key players has "skin in the game" to provide a negative incentive to refinance or "chum" the portfolio. The fee for service proposal reduces skin in the game to an immaterial amount. It could also split the Freddie Mac liquidity into old vs. new securities reducing competition between the GSEs
As to whether the proposed fee structure would be consistent with the Obama administration's objective of reducing the government's role in housing finance, MBA concludes that the fee for service structure actually leads in the opposite direction. It would reduce the servicers to the role of a subservicer for the GSEs and move much of the banking industry's investment in MSR assets off the balance sheet of servicers and transfer additional operational risks to Fannie Mae and Freddie Mac.
MBA expressed concern with the process followed by FHFA in the fee project including:
- Failing to include actual servicing practitioners in the working group to establish the fee structure;
- The current attempt on behalf of the government to set a pricing structure and initial price seems to be moving toward more government and less private market involvement in housing finance.
- Fannie Mae's recent purchase of a servicing portfolio makes it a competitor with private sector servicers.
- It is difficult to analyze the impact of the fee structure until after the potential G fees are established.
- Current discussions do not include adequate information on NPLs; at what point in a delinquency do they occur? Does FHFA have other fees in mind for servicing them? Is there a separate fee schedule in mind for servicing NPL?
The extensive MBA document also provides answers to questions posed by FHFA for discussion regarding the flat rate fee structure and an update of the "The Good, the Bad and the Ugly Analysis" originally presented to FHFA in June. The entire document can be viewed at http://www.mortgagebankers.org/files/News/InternalResource/78989_MBACommentLettertoFHFAonServicerCompensation.pdf.
