Stability Council Urges Servicer Compensation Reform And Unified Standards

The Financial Stability OversightrnCouncil released its 2013 annual report on Thursday.  The Council is composed of representatives ofrnmost of the financial and regulatory agencies in the federal governmentrnincluding Housing and Urban Development (HUD), the Federal Reserve, ConsumerrnFinancial Projection Bureau (CFPB), Treasury, and the Office of Comptroller ofrnthe Currency.</p

The report deals primarily with thernlarger issues in the financial system such as structural vulnerabilities,rnliquidity, U.S. sensitivity to foreign events, interest rate risk, and cyber security.rn The Council, however does recap some ofrnthe recent events and current concerns about housing finance and makes a fewrnrecommendations for going forward. </p

The report acknowledges that structural and cyclical weaknessrnpersist in the housing sector.  Inrnparticular the large numbers of households with low or negative equity in theirrnhomes could result in increased pressures on the housing market should there berna slowdown in economic growth.  As inrnother sectors, cyber security is an area of concern.</p

The housing finance system has required an extraordinaryrnlevel of government support in the past few years.  The two government sponsored enterprisesrn(GSEs) Freddie Mac and Fannie Mae have been in conservatorship since 2008 andrneven now approximately 90 percent of new mortgages carry some form ofrngovernment support because the market does not have enough private support tornback residential mortgage credit risk.</p

Over the past year some of the Council’s member agenciesrnhave worked on a framework for housing reform to encourage the return ofrnprivate capital and reduce taxpayer support while protecting consumers fromrnabuses.  The Federal Housing FinancernAgency (FHFA) has developed a Strategic Plan for the GSEs that includes plansrnfor new mortgage infrastructure, reduction of GSE credit risk, and increasedrnincentives for the private sector to absorb more credit risk.</p

In addition CFPB is developing rules to implement provisionsrnof the Dodd-Frank Act that apply to mortgage lenders and other member agenciesrnare working to promote more efficient markets for residential mortgage-backedrnsecurities (RMBS).   Of note, thernSecurities and Exchange Commission (SEC) continues to consider appropriaterndisclosure rules for RMBS.</p

More needs to be done to increase certainty about the futurernof the housing finance infrastructure and related policy issues to furtherrnpromote the return of private capital. rnThere are not yet any broadly agreed-upon standards to characterize thernquality and consistency of mortgage underwriting which is necessary to supportrnthe valuation and liquidity of mortgage-backed instruments.  Foreclosure practices lack uniformity acrossrnthe states and there remains uncertainty about the obligations of mortgage securitizersrnwhen a loan fails to conform to representations and warranties.</p

The Council recommends that Council members continue thernwork begun by HUD and Treasury in a joint white paper in 2011 to develop a longrnterm housing reform framework and to work with Congress to address thernweaknesses that became evident in the recent housing crisis. </p

The Council also continues to focus on the need for nationalrnmortgage servicing standards and servicer compensation reform.  Earlier work by multiple agencies and anrninteragency work group resulted in supervisory consent orders with majorrnservicers that are now being implemented. rnAlso in 2011 FHFA announced the Servicing Alignment Initiative tornstandardize practices of servicers of GSE loans.  This produced a consistent set of protocolsrnfor servicing mortgages from the onset of delinquency.  The work group has provided a public outlinernof its plans for mortgage servicing regulations and formal rules are expectedrnto be proposed for comment this summer.  </p

The Council recommends that FHFA, HUD, CFPB, and otherrnagencies as necessary develop comprehensive mortgage servicing standards thatrnrequire consistent and transparent processes for consumers and promoternefficient alternatives to foreclosure as appropriate.  In addition the Council recommends continuedrnefforts to implement compensation structures that align the incentives ofrnmortgage servicing with those of borrowers and other participants in the mortgagernmarkets.

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