The establishment of national servicing standards and the remodeling of servicing compensation schemes require urgent attention that must predate any broader housing finance reform, according to Laurie Goodman, senior managing director for Amherst Securities Group.
According to Goodman, who spoke Monday on a panel session at the Mortgage Bankers Association's (MBA) 98th Annual Convention and Expo in Chicago, even if reform of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac were to be fast-tracked, it would be unlikely that the new world of housing finance would come into fruition before 2017. (Goodman's timeline factors in the potentially hairy political environment of next year, an election year, and the uncertainty surrounding what form future securitizers will take, as well as the typically lengthy rule-making process.)
Certain servicing-related "frictions," such as subordinate-lien conflicts and a lack of transparency regarding servicing fees charged to borrowers, cannot wait until then, she said.
"You can't allow servicing compensation initiatives and some of these conflicts of interest to string along that long," Goodman commented. "I think national servicing standards and the alternative compensation structures need to be addressed well before that."
The Federal Housing Finance Agency (FHFA), which has taken the lead role on exploring alternative compensation structures, recently published for public comment a discussion paper that homes in on two potential models for future servicing contracts. One proposal layers a reserve fund (which would pay for nonperforming loan servicing functions) on top of a reduced minimum-servicing fee, while the second proposal calls for a fee-for-service model.
Mark Hanson, Freddie Mac's vice president of securitization and cash execution and another panelist speaking at the conference Monday, described the fee-for-service option as a "much more radical" approach.
He also emphasized that as policymakers proceed, they should be careful not to take action that would disrupt the To Be Announced market. Hanson additionally likened the creation of servicing standards to changing the tires on a car that is in motion.
On the topic of servicing standards, Vicki Vidal, the MBA's associate vice president of loan administration for the MBA's government affairs department, noted that a national set of rules could aid servicers, who are currently operating under a complicated web of federal, state and local regulations, not to mention various investor guidelines and a galaxy of disparate court rulings.
A federal interagency effort to craft servicing standards is under way, and Vidal opined that the new rules the effort produces will have a greater impact on the industry than either a potential settlement with state attorneys general or the consent orders issued to 14 servicers in April.
A rule-making process is preferable to enforcement action, Vidal said, because all stakeholders would have input and a chance to explain servicing nuances that are not obvious to policymakers.
Panel speakers also drew attention to two matters that, despite having received little attention, have the potential to reshape the servicing world.
Freddie Mac's Hanson explained that a Dodd-Frank Act requirement for securitizers to report loan-buyback activity to the Securities and Exchange Commission has the potential to enhance market transparency.
Starting Feb. 14, 2012, securitizers will have to report on a regular basis both the amount of repurchase requests made to servicers and the amount of buyback requests that servicers fulfill. The new reporting requirements will provide a window into putback demand that is currently difficult to quantify.
Meanwhile, Margaret Burns, a policy director at the FHFA, pinpointed the GSEs' Uniform Mortgage Data Program (UMDP) as something that is typically thought of as an originations-focused initiative.
Although lenders have felt the early brunt of the UMDP, Burns said the program will ultimately affect the entire life cycle of a loan. As data becomes more standardized, processes and disclosures – including those in servicing – will become more transparent, she said.
Burns also commented briefly on the FHFA's request for information regarding real estate owned (REO) disposition strategies. One of the FHFA's biggest concerns, she said, is the GSEs' huge aged inventory of distressed loans. With expectations that many of those loans will eventually flow into foreclosure and REO, the FHFA is looking to get ahead of the distressed-sales dilemma.
Although the GSEs' efforts to sell REOs to owner-occupants via traditional retail means has been successful, Burns said, the demand for properties will probably be inadequate to meet the huge supply by the time the shadow inventory steps into the light.