SIFMA today filed a comment letter on the Federal Housing Finance Administration’s (FHFA) Alternative Mortgage Servicing Compensation Discussion Paper.
While SIFMA respects FHFA’s interest in aligning servicers’ financial interests and incentives with those of other pertinent parties, particularly those of investors, it has not seen any effort by FHFA to prove that case. The servicing industry compensation model, a subject critical to the soundness of housing and the more general economy, should not be subjected to radical change without strong research and proof. That has not been shown. Accordingly, SIFMA very strongly believes that changes to the structure of mortgage servicing compensation should not increase the cost of credit for mortgage borrowers, and is concerned that each of the fee-for-service and reserve fund approaches proposed by the FHFA proposals would do that.
Because the merits of the proposed changes are either illusory or have yet to be proved, SIFMA believes FHFA should not implement either of the proposals it outlines in its discussion paper at this time. Instead, SIFMA encourages FHFA to work more closely with the securitization industry to determine if there is a need to make changes in markets for Fannie Mae and Freddie Mac mortgage-backed securities (MBS) and, if so, what the most effective changes would look like.
In particular, SIFMA stresses that the proposed “fee for service” approach would make mortgages more expensive for nearly everyone in the country. Under this approach, servicers would receive a set dollar fee per loan for performing loan servicing, and separate compensation for distressed loans. This approach would severely impair liquidity in the “To-Be-Announced” (TBA) markets for Fannie Mae and Freddie Mac MBS, and therefore would increase borrowing costs for consumers.
“Currently, the Agency markets fund almost all residential mortgage credit in the United States. It is critical to ensure that any changes to the structure of the market do not impair its ability to meet the credit needs of American consumers,” said Richard Dorfman, managing director and head of SIFMA’s Securitization Group. “Homogeneity and stability are key underpinnings of this market. Securities traded in these markets must be fungible, and above all, attractive to investors.”
As an alternative, FHFA proposes a regime whereby servicers continue to be compensated with a strip of income based on the balance of the loans in a pool and a reserve account would be created, intended to cover costs for servicing non-performing loans. This proposal would represent a less dramatic change from the current regime but SIFMA believes this approach would still reduce TBA market liquidity and increase costs for mortgage borrowers. Therefore SIFMA urges FHFA to continue discussions with participants in the markets for Agency MBS before implementing any change.
The comment letter can be found at the following link:http://www.sifma.org/issues/item.aspx?id=8589936846
