Loan Servicing Education: Reform Perspectives Summarized

Last December the Mortgage Bankers Association (MBA)rnassembled a task force to examine and issue recommendations for the future ofrnresidential mortgage servicing.   That group, the Council on ResidentialrnMortgage Servicing for the 21st Century is led by Debra W. Still,rnPresident and CEO of Pulte Mortgage and composed of key MBA members. That group has released its first product.  </p

The white paper titled “Residential Mortgage Servicing in the 21strnCentury”  provides information on what a servicer does; how a servicer is compensated; and the perspectives of consumers, regulators, and the legal community with regard to servicer performance in the current crisis.  It also identifies issues that need further examination and examines trends in servicer compensation and expenses. It is meant to provide an educational background as well as an “environmental scan” of the events leading up to the currentrnhousing and mortgage crisis.</p

Much of the material in the paper grew out of a summit which included industry leaders, consumer advocates, economists,rnacademics and policymakers “who took a detailed look at the issues that havernchallenged the industry and started to process of identifying the essentialrnbuilding blocks for the future of servicing.” rnSummit participants identified three major areas for further study andrndevelopment of policy recommendations.</p<ul class="unIndentedList"<liA review of existing servicing standards andrnpractices especially in the area of dealing with large volumes ofrnnon-performing loans, foreclosure practices, and loss mitigation practices.</li<liEvaluation of the legal issues related to thernforeclosure process, chain of title, and other issues.</li<liAnalysis of proposed changes in servicerrncompensation proposed by the Federal Housing Finance Agency (FHFA). Ginnie Maernand the government sponsored enterprises (GSEs).</li</ul

The report is based closely on the summit proceedings and,rnin line with the composition of the presenting panels, looks at the issues fromrnthe perspectives of the Secondary Market, the Servicer, the Regulator, thernConsumer and the legal issues.  </p

Secondary Market Perspective</p

The general themes that emerged from this discussion are thernneed to increase predictability and flexibility while decreasing volatility andrnconcentration risk.  Some participantsrnfelt that an alternative to the existing I/O strip method of calculatingrnservicing fees would decrease volatility but that raised the issue of who wouldrnabsorb the volatility in servicing fees in an ecnoomic downturn, the investor orrnguarantor.  To be flexible it wasrnsuggested that servicing rights should incorporate factors that reflect marketrnconditions so that the fee varies accordingly. rnHowever, the market’s desire for certainty and predictability runsrncounter to a flexible approach to calculating servicing rights.</p

Ideally, the calculation method also should be designed tornimprove the ability of firms to hold servicing rights regardless of their sizernor structure.  This would address thernexisting concentration risk and the lack of excess capacity in the servicingrnindustry to absorb dramatic changes in volumes of loans requiring extra attention.</p

Shortly after the summit FHFA released information on fourrntypes of servicing fees structures that it was considering for Ginnie Mae andrnthe GSEs.   Each of the proposedrnalternatives relates to performing loans and the guarantor would pay thernservicer or special servicer additional fees for each non-performing loan onrnthe basis of a flat dollar amount per loan per month based upon stage ofrndelinquency. </p

Regulators’ Perspectives</p

Three regulators addressed participants at the summit;rnSheila Bair, Chairman, Federal Deposit Insurance Corporation; David H. Stevens,rnAssistant Secretary for Housing and Commissioner of the Federal HousingrnAdministration (now CEO of MBA), and Richard Neiman, New York StaternSuperintendant of Banks. </p

The threernaddressed the idea of setting common standards for the residential mortgagernservicing industry which would include a national servicing standard especiallyrnfor foreclosure and default administration. rnOther standards would address human resource issues such as adequaternstaffing to deal with large numbers of delinquent loans, a single point ofrncontact within the servicer for distressed borrowers, and adequate training forrnstaff.  </p

Council members met with other regulators and the paperrndiscusses some of their suggestions and proposals such as a “short refinance“rnprogram that would enable homeowners facing foreclosure to refinance into arnmortgage based on current interest rates and home values.  </p

Legal Perspective</p

The summit looked at four major legal issues relating tornresidential mortgage servicing.</p<ol