FHFA Promotes Loan Servicing Uniformity and Penalties for Non-Compliance

by devteam February 25th, 2011 | Share

Despite the current political focus on reforming the housingrnfinance market, the Acting Director of the Federal Housing Finance Agencyrn(FHFA) told an audience that his agency remains committed to meeting the existingrngoals of the government sponsored enterprises (GSEs) Freddie Mac and Fannie Maernfor which FHFA is the conservator.  EdwardrnJ. DeMarco, speaking to members of the Mortgage Bankers Association at its NationalrnMortgage Servicing Conference and Expo said that FHFA seeks to retain value inrnthe GSE’s business operations and maintain their support for the housingrnmarket.</p

The GSEs have been instructed to undertake several jointrninitiatives to strengthen their business operations, DeMarco said.  The first, the Loan Quality Initiative (LQI)</arequires the GSEs to develop standards to improve the quality and uniformity ofrndata collected at the front end of the mortgage process.  If potential defects in the process can berndetected at the beginning of the process then it is possible to improve thernquality of mortgages the Enterprises purchase which will, in turn, reduce originators'rnrepurchase risk.   LQI is expected to bernphased in over the remainder of this year and next.</p

Second, the Joint Servicing Compensation Initiative willrninvolve the GSEs working with FHFA and the Department of Housing and UrbanrnDevelopment (HUD)) to consider alternative compensation for servicers ofrnsingle-family mortgages.  The goals ofrnthis initiative are to improve service for borrowers, reduce financial risk tornservicers, provide flexibility for guarantors to manage non-performing loans,rnand provide continued liquidity to the “To Be Announced” mortgage securitiesrnmarket.   </p

DeMarco said that meeting these goals will require taking intornaccount several factors:</p<ul class="unIndentedList"

  • <bMaintaining liquidity and consumer choice in thernmortgage market. This means allowing originatorsrnto offer borrowers the best rates. Thernextent to which the current servicer compensation structure provides protection againstrnexcessive refinancing solicitation and helps to make prepayment speeds morernpredictable and the impact of alternatives will be an issue the joint initiativernwill look at closely.</li</ul<ul class="unIndentedList"<liEnsuring that the servicing business model forrnboth performing and non-performing loans is profitable and available for allrnsizes of servicers. The industry isrnbecoming highly concentrated with 10 companies responsible for 70 percent ofrnthe servicing market. The extent tornwhich the compensation structure impacts the economic choice to maintain arnservicing platform must be evaluated.</li</ul<ul class="unIndentedList"
  • <bEnsuring that mortgage originators have flexiblernexecution options. At presentrnorigination and servicing are closely linked as the value of mortgage servicingrnoften offsets origination costs.rnHowever, retaining the servicing may be problematic for somerninstitutions. The initiative willrnconsider ways to provide flexibility to originators to retain or releasernservicing through other structures that do not mandate the holding of arnservicing right asset.</li</ul<ul class="unIndentedList"<liIncreasing flexibility for guarantors to managernnon-performing loans. The current systemrnwas not set up to handle large volumes of non-performing loans or compensaternservicers for managing them. DeMarcornsaid this contributes to “less than optimal servicer performance inrnforeclosure prevention efforts and hinders the Enterprises’ loss mitigationrnefforts.” The joint initiative is chargedrnwith seeking a structure that better aligns the cost of servicing to therncompensation received.</li</ul

    DeMarco said the initiative may consider a fee for servicingrncompensation structure for non-performing loans as well as the possibility ofrnreducing or eliminating the minimum mortgage servicing fee for performingrnloans.  FHFA expects to coordinaternefforts of the joint initiative over the next few months to gather feedbackrnfrom the industry, consumer groups and regulators.  Any implementation of a new structure wouldrnnot be expected to occur before the summer of 2012.  </p

    With respect to more near-term issues, DeMarco said that FHFArnand the GSEs have established a working group to align the GSEs’ currentrnservicing standards and establish appropriate incentives to encourage contactrnwith borrowers early in any delinquency, Each of the Enterprises has its own servicing guide and procedures, arngreater consistency will build on the best practices of each and ease thernburden on servicers.  The working grouprnwill develop consistent timelines and requirements for contacts with borrowersrnso there is no confusion about what is expected by the Enterprises fromrnservicers. This includes consideration of appropriate penalties to encourage efficient resolution and liquidation of properties in cases where foreclosure is necessary. The Enterprises will be moving forward with servicer penalties for last year in the coming weeks, but will announce arn new set of requirements, timelines, incentives, and penalties by the end of the first quarter of this year.</p

    DeMarco said that FHFA is closely involved with otherrnregulators in developing national servicing standards.  This heightened coordination between primaryrnand secondary market supervisors should help market participants operate withrnmore uniform regulatory standards and expectations.

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  • About the Author


    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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