Fannie Mae and Freddie Mac, the regulators for government backed mortgages are looking at different models in hopes to change compensation for mortgage services. The changes they are looking into making would restructure fees and help to make the refinance process easier for troubled borrowers.
According to Edward J. DeMarco, the Federal Housing Finance Agency’s acting director, “As the recent problems in managing mortgage delinquencies suggest, the current servicing-compensation model was not designed for current market conditions. The goal of this joint initiative is to explore alternative models for single-family mortgage servicing compensation that better address the needs of borrowers, servicers, originators, investors and guarantors,” he said.
The reason behind the changes points right to how mortgage service provider receive payment. Currently there are no incentives in place for them to work with troubled homeowners to modify their mortgage and instead, they are much better off if they foreclose on a loan.
What happens is that when a loan is 30 or 60 days behind on payments, the servicer is the one responsible for covering payments to the investor. Recouping these costs are done quicker and easier through a foreclosure than through a loan modification, as the servicer has to continue to cover payments and fees over time.
“They are incentivized to foreclose rather than modify the loan because the servicer makes its money back right away if there is a foreclosure, and they only make it back over time with a modification,” said Alys Cohen, staff attorney at the National Consumer Law Center.
Both the FHA and the Housing and Urban Development Center are working together to come up with proposal for a new and better model for mortgage-servicing compensation. The hope is that new legislation and a new payment structure would allow for the servicer to be compensated in a way that would benefit them when a loan modification agreement was reached, instead of sending the loan to foreclosure.
In a time of high mortgage delinquencies it is clear that the current model form has not been working. If the model is changed, allowing for variable payments by mortgage servicers, it might just help get the mortgage crisis better under control.