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Consumers Matter in Mortgage-Servicing Compensation Decision

Federal Housing Finance Agency Needs to Pay Heed

SOURCE: AP/Manuel Balce Ceneta

Federal Housing Finance Agency Acting Director Edward DeMarco testifies on Capitol Hill in Washington before the Senate Banking Committee hearing on problems in mortgage servicing in December 2010.

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Download the full text of the letter sent to the FHFA letter (pdf)

Read the letter in your web browser (Scribd)

The current structure of the mortgage-servicing industry is such that servicers are responsible to investors and “owe no duty at all to consider the needs and interests of consumers.” That is, the clients of mortgage-servicing companies are investors in mortgage-backed securities for whom the servicers collect monthly mortgage payments from homeowners and, as a result, servicers have no fiduciary responsibility to protect consumers from improper acts and omissions by mortgage servicers.

Fortunately, in September the Federal Housing Finance Agency announced that it was seeking public comments on alternative mortgage-servicing compensation structures. The so-called Request for Public Comment’s stated goals were to “improve service for borrowers; reduce financial risk to servicers; and provide flexibility for guarantors to better manage non-performing loans, while promoting continued liquidity” in the mortgage market.

The housing team at the Center for American Progress responded to FHFA’s request, making the case that in order to meet these goals, especially “improved service for borrowers,” there should be careful and explicit consideration of how homeowners will be affected by possible mortgage servicing compensation standards. Specifically, we maintain that:

  • The mortgage-servicing compensation system developed during the housing bubble did not work and led to improper actions on the part of employees of servicing firms.
  • Compensation standards for and consumer protections against mortgage servicers are not just important to borrowers but also matter to mortgage insurers and investors, as well as to the two mortgage finance giants now under federal conservatorship, Fannie Mae and Freddie Mac.
  • FHFA’s mandate as conservator of Fannie Mae and Freddie Mac is fulfilled by taking action to prevent taxpayer losses and improve the housing market in the long term.
  • To strengthen the housing and mortgage markets, mortgage-servicing standards should be implemented, and we believe FHFA is within its mandate to pursue consumer protection rules for mortgage services.

We commend FHFA for addressing the issue of mortgage-servicer compensation practices and hope that whatever compensation model the agency adopts, it puts the concerns of consumers front and center. We look forward to its final set of recommendations when it is published.

Download the full text of the letter sent to the FHFA letter (pdf)

Read the letter in your web browser (Scribd)

Peter Swire is a Senior Fellow at the Center for American Progress. Jordan Eizenga is an Economic Policy Analyst at the Center.

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