Compensation Structure for Mortgage Servicers May Change in Coming Year

By Kyle Chezum Updated on 1/18/2011

1/18/11

Compensation structures for mortgage servicers may change soon to better incentivize loan modifications.  At present, loan modifications put servicers at a financial disadvantage relative to foreclosure.  Foreclosing on a property allows a mortgage provider to recoup expenses swiftly and suffer a minimal long term loss, while a mortgage modification stretches the loss over a much longer period of time.  This strains the relationship between the mortgage servicer and its investors.  Investor pressure makes foreclosure much more financially viable than modification.

The mortgage industry is regulated by the Federal Housing Finance Agency and the Department of Housing and Urban Development, two government bodies that have fought long and hard to increase the number of mortgage modifications provided to underwater borrowers.  The federal HAMP modification program has met with paltry success since its inception and regulators are hoping to find a way to make modifications more advantageous for major private banks.

Edward J. DeMarco, acting director of the FHFA, which regulates Fannie Mae and Freddie Mac, said it is examining new compensation structures for single family home mortgage servicers.  “The current servicing compensation model was not designed for current market conditions,” he said.  Timothy Geithner, Secretary of the Treasury, called the system “broken.”

It’s unclear what a new compensation structure would look like, but if DeMarco’s proposal is accepted, the underlying structure of the mortgage industry could experience a significant shift.  Follow the link for more information on this story.