MBA Sends FHFA Critique of Proposed Fee Structure Revisions

The Mortgage Bankers Association (MBA) submitted anrnAlternative Mortgage Servicing Compensation Discussion Paper to the FederalrnHousing Finance Agency (FHFA) on Thursday in response to the latter’s proposalrnfor four servicing fee structures that FHFA, Fannie Mae, Freddie Mac and GinniernMae are exploring.   </p

The first structure (The Alternative Minimum Servicing Feernor AMSF) involves the servicer taking an unguaranteed 1 percent interest inrnboth the principal and interest cash flows from a loan.  The other three structures were variousrnpermutations of the existing fee structure, the first with a minimum servicingrnbee of 12.5 basis points (bps), the second a minimum of 3 bps, and the finalrnassumed no minimum servicing fee.  Thesernfees would be for performing loans and the guarantor would pay the servicerrnadditional fees for each non-performing loan on the basis of a flat dollar amountrnper loan based on the stage of delinquency. rn </p

In response MBA and the Clearing House Group separatelyrnproposed alternative structures which defer part of the existing servicing feernas cash reserve to cover servicing costs for catastrophic economic and defaultrnsituations.  Subsequently FHFA requestedrncomments on the Cash Reserve proposal and on an additional structure that callsrnfor paying $10 per month to service performing loans and existing incentivernpayments for non-performing loans.  Atrnpresent this is the structure favored by FHFA.</p

MBA says it generally opposes changing the servicing feernstructure at the current time and if change is needed it should not be arnradical departure from the current one. rnIn the document it sent to Acting FHFA Director Edward J. DeMarco, MBArnalso expresses displeasure with the timing of the proposed change.  With Freddie Mac and Fannie Mae in thernprocess of putting together a standardized servicer guide and consumer groups,rnstates’ attorneys general and others calling for more robust servicingrnstandards, it would make more sense to finalize standards setting the scope ofrnservicers’ work before compensation issues are addressed.  There is also the issue of a reemergingrnmarket for MBS from Freddie and Fannie which could be endangered by changes tornany of the underlying structures of TBA. </p

The variety of sizes of servicers and their cost to servicernstructures requires that, if FHFA decides to implement the cash reserve feernstructure, normal servicing should be in a reasonable range of 12. Bps to 20bpsrnplus the bps of principal placed in a cash reserve for catastrophic non-performingrnloan servicing.  This would provide arnrange of fees to fit all sizes of servicers and would result in fewer barriersrnto entry for new servicers.</p

MBA addressed whether the proposed fee for service structurernwould accomplish FHFA’s stated objectives for the project of improving servicesrnto borrowers, reducing risk to servicers, and promoting liquidity for TBA forrnGSE MBs.</p

The proposed $10 per loan per month without additionalrncompensation for NPLs other than the existing incentive compensation wouldrnrepresent a net income decrease and may not be sufficient for small and mediumrnservicers to invest in long term facilities and infrastructure to serve thernborrower.  Coupled with a potentialrnincrease in G-fees it will ultimately increase borrower costs. </p

While the flat fee would result in less compensation itrnwould increase cash flow up front which would reduce the amount of mortgagernservicing rights (MSRs) capitalized on balance sheets and result in less incomernvolatility and hedge costs.  However,rnservicer risks are raised because of (a) locking in a flat rate for 30 yearsrnwhich presents inflation risk (b) the possibility that the GSEs could changernthe fees (c) the lack of compensating income in the event of another catastrophicrneconomic event (d) the uncertain future of the GSEs.</p

MBA does not believe that the proposed fee for service modelrnwould help the GSEs better manage NPLs other than that the bifurcation ofrnseller reps and warranties from servicer reps and warranties would make itrneasier to find a successor servicer; the guarantor could move servicing withrnless financial impact to the servicer, or the proposed compensation structurernmay be so unattractive to servicers that private equity comes into the marketrnto replace the loans historically sold or serviced through the GSEs.  Any one of these can be better accomplishedrnthrough other mechanisms.</p

As to the impact on the liquidity of TBA, MBA noted that onernof the factors in TBA liquidity is that one of the key players has “skin in therngame” to provide a negative incentive to refinance or “chum” thernportfolio.  The fee for service proposalrnreduces skin in the game to an immaterial amount.  It could also split the Freddie Mac liquidityrninto old vs. new securities reducing competition between the GSEs</p

As to whether the proposed fee structure would be consistentrnwith the Obama administration’s objective of reducing the government’s role inrnhousing finance, MBA concludes that the fee for service structure actuallyrnleads in the opposite direction.  Itrnwould reduce the servicers to the role of a subservicer for the GSEs and movernmuch of the banking industry’s investment in MSR assets off the balance sheetrnof servicers and transfer additional operational risks to Fannie Mae andrnFreddie Mac.</p

MBA expressed concern with the process followed by FHFA inrnthe fee project including:</p<ul class="unIndentedList"<liFailing to include actual servicing practitionersrnin the working group to establish the fee structure;</li<liThe current attempt on behalf of the governmentrnto set a pricing structure and initial price seems to be moving toward morerngovernment and less private market involvement in housing finance.</li<liFannie Mae's recent purchase of a servicingrnportfolio makes it a competitor with private sector servicers.</li<liIt is difficult to analyze the impact of the feernstructure until after the potential G fees are established.</li<liCurrent discussions do not include adequaterninformation on NPLs; at what point in a delinquency do they occur? Does FHFA have other fees in mind forrnservicing them? Is there a separate feernschedule in mind for servicing NPL?</li</ul

The extensive MBA document also provides answers tornquestions posed by FHFA for discussion regarding the flat rate fee structurernand an update of the “The Good, the Bad and the Ugly Analysis” originallyrnpresented to FHFA in June.  The entirerndocument can be viewed at http://www.mortgagebankers.org/files/News/InternalResource/78989_MBACommentLettertoFHFAonServicerCompensation.pdf.rn

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