FHFA’s DeMarco outlines plan for mortgage servicers to regain public trust

Establishing strong relationships with borrowers at origination, maintaining that bond and outlining all potential loan modification programs are necessary for mortgage servicers to regain the public’s trust and properly handle the high number of foreclosures. Edward DeMarco, acting director of the Federal Housing Finance Agency, said there needs to be improvements in the consistency, quality and uniformity of loan data at the front end of mortgage origination. Speaking to a packed room at the Mortgage Bankers Association National Servicing conference in Grapevine, Texas, DeMarco said this reduces the repurchase risk for lenders and enhances transparency for the borrower. He said the government is considering alternatives to the servicer compensation structure to ultimately reduce the financial risks for servicers, in addition to providing flexibility for guarantors and more choices for lenders and borrowers alike while boosting liquidity for the TBA market. DeMarco said any changes to the servicing compensation structure will ensure profitability and availability for all servicing shops. “The current servicing compensation model was not set up to handle the huge volumes of nonperforming loans, which causes problems from both the guarantors’ an borrowers’ perspective,” DeMarco said, adding that 10 companies hold 70% of the servicing market and that needs to change. “The servicing of delinquent loans must continue its path to improvement,” DeMarco said. “Modification in the early stages of delinquency is the most effective and greater consistency eases the burden on servicers. We need to establish clear and simple guidelines that provide complete and useful information regarding foreclosure prevention options” for borrowers. DeMarco also said the FHFA seeks a new structure that better aligns servicers’ costs and incentives, and the agency may consider a compensation structure that includes a fee for servicing nonperforming loans. He said the FHFA plans to propose its guidelines and timelines by the end of the first quarter. Michael Berman, head of CWCapital and chairman of the MBA this year, said fears of a double-dip recession appear to be fading and liquidity is starting to come back to the market. But Berman said “servicers remain in great peril and will continue to take heat” for the foreclosure crisis until more jobs are created and the unemployment rate goes down. “Servicers are still taking heat for the perceived failures of the whole industry whether it’s warranted or not,” Berman said, adding that everyone in the mortgage industry awaits the final rules and regulation “that we’ll be playing under for decades.” Vicki Bott, deputy assistant secretary for single-family housing at the Federal Housing Administration, said preparation is key to staving off another foreclosure crisis and fixing the current problems. She said the FHA is trying to improve communications with servicers to find out which loss-mitigation efforts work and which don’t. She also said the agency wants to increase training for servicers. Bott said it took too long to ramp up processes and hire staff to deal with the fallout of the subprime crisis and high level of foreclosures. That was echoed by Darius Kingsley, deputy chief within the homeownership preservation office of the Treasury Department and Anthony Renzi, executive vice president of single-family portfolio management at Freddie Mac. “Servicers didn’t have the capacity to deal with the crisis and the massive number of defaults,” Kingsley said. “Engaging homeowners is absolutely critical, but, as you all know, it can be hard to contact people. Still, there needs to be some homeowner safeguards, including full evaluation of the loan for potential modification before foreclosing.” “The servicing model wasn’t nimble and flexible enough to handle the number of nonperforming loans,” Renzi said. “We need to make it simple and streamlined.” Jeffery Hayward, senior vice president at Fannie Mae, stressed the importance of servicers establishing a solid relationship with borrowers at the earliest point and then maintaining a single point of contact. “Speed matters, and we expect it,” Hayward said. He also said there needs to be increased transparency because “people have to know how and what the servicers are doing” with the loan. “We need to break down the silos within the servicing companies and reestablish that we can do foreclosures properly,” Hayward said. “We need to reestablish what we do before localities establish their own laws that, frankly, will end up costing all of us more money.” Kingsley said the industry needs to show states and localities that there is uniform transparency in mortgage servicing. “It behooves the servicing industry to work with state regulators and AGs to address some of their concerns,” Kingsley said. Write to Jason Philyaw.