Fannie Mae, Freddie Mac Change Compensatory Fee Structure
In an important win for Mortgage Bankers Association members, Fannie Mae and Freddie Mac last month announced changes to their compensatory fee structures that better take into account a mortgage servicers’ operations and no longer impose fees at the outset of the process.
Compensatory fees were first widely imposed following the financial crisis and operated on the mechanical application of timelines promulgated by the GSEs. While the percentiles changed over time, the presumption was generally that a servicer had to demonstrate why they shouldn’t have to pay the fee.
“The GSEs approach changing this differently in their recent announcements, but the end result is the same–the fees will be assessed following performance management improvement strategies or ‘action plans’ to assess the issues that might be causing delays,” said MBA Senior Vice President of Residential Policy and Member Engagement Pete Mills.
“It’s a win for MBA and its members after many years of advocacy,” said Justin Wiseman, MBA Associate Vice President and Managing Regulatory Counsel in Public Policy and Industry Relations. “The two announcements indicate an important shift in GSE loan servicing management.”
During the financial crisis the GSEs imposed these compensatory fees. The cutline for the initial comp fees were at the 67th percentile, unless servicers could show that any delays were not the responsibility of the servicers. Eventually, after discussions with MBA, the GSEs moved the cutline to the 50th percentile.
“We still viewed that as punitive and a presumption of guilt-half the loans carried a burden to prove that they didn’t owe the fee–rather than innocence,” Wiseman said.
Last month, however, Fannie Mae’s Servicing Guide Announcement 2018-10 (https://www.fanniemae.com/content/announcement/svc1810.pdf) introduced a new process of identifying and resolving default servicing issues with the Servicer Total Achievement & Rewards (STAR) performance management framework.
The STAR Program evaluates a servicer’s overall performance, measuring the magnitude of loans exceeding allowable foreclosure timeframes. Under the new policy, servicers will be subject to loan-level review to look for either of the following conditions: 1) more than 25% of the 90 day plus delinquent mortgages exceed allowable foreclosure times, or 2) the average number of days exceeded over the allowable timeline is greater than 650 days. If one of these conditions is met, and the servicer does not adhere to a performance improvement plan, compensatory fees will be assessed.
Meanwhile, Freddie Mac issued Bulletin 2018-26 (http://www.freddiemac.com/singlefamily/news/2018/1212_guidebulletin.html) outlining multiple conditions that make it possible for a servicer’s compensatory fees waived, including following an agency-prescribed “action plan.” Under the new structure, compensatory fees are waived if 1) exposure amount is less than or equal to $300,000, 2) a servicer’s performance is in the top 75% of its servicer-size group, 3) the servicer complies with its action plan. The four servicer groups are ranked annually by number of Freddie Mac loans serviced. Each servicer receives a Servicer Success Scorecard that can be compared to other servicers in the rank.
Over the past five years–and in particular, the past 18 months–Wiseman said MBA and several MBA members worked with the GSEs in getting them to relax the guidelines.
“MBA has long-supported a peer-to-peer evaluation , so long as it takes into account the composition of a servicer’s book, as it avoids arbitrary standards and insensitivities to factors in the market outside of a servicer’s control,” he said. “We are grateful to our members who assisted with this and we really appreciate the discussion and back-and-forth with Fannie Mae and Freddie Mac that got us to this point.”
