Alternative Compensation Arrangements for Mortgage Servicing—The Debate Begins

Abstract

On January 18, 2011, the Federal Housing Finance Agency (FHFA) announced a joint initiative among Fannie Mae, Freddie Mac, FHFA, and the U.S. Department of Housing and Urban Development (HUD) to consider alternative structures for future mortgage servicing compensation. This initiative is aimed at new production of agency loans. The question is how to better align the fee structure with the servicer’s cost structure and how to create a servicing asset that is more capital friendly under Basel III. In this article, the authors discuss some of the proposals that have been put forth. They conclude that it makes sense to lower the minimum servicing fees on performing loans (coupled with a reduction in pooling flexibility for servicers), and to raise them on non-performing loans (coupling this with the elimination of the stigma on switching servicers).