Better Compensation Could Mean More Mortgage Modifications

January 18, 2011

It always comes down to money, doesn’t it?

Fannie Mae and Freddie Mac announced today that they are looking into new ways to compensate mortgage servicers, which, in turn, could make getting a mortgage modification easier for struggling homeowners.

Here’s the gist: Right now, a mortgage servicer is paid a monthly fee each time a client pays the mortgage. When that homeowner starts to struggle and falls behind, the servicer doesn’t get paid.

A woman holding a house in her hand.These servicers have little incentive to communicate with the homeowner or to try to work out new terms on the mortgage, which is expensive and time-consuming.

In fact, because of the current compensation structure, the servicer might be motivated to push that struggling homeowner toward foreclosure rather than work with the borrower. Apparently, the servicer has to cover the homeowner’s missed payments and it’s much easier and quicker to recoup those losses through a foreclosure than a modification.

After the two government-controlled mortgage giants announced they would consider a new compensation structure, U.S. Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan wrote a statement in support.

“It is clear that the mortgage servicing compensation model is broken and should be fixed,” they wrote. “The current model has not motivated mortgage servicers to invest the time, effort and resources needed to fully explore all options to help delinquent borrowers avoid foreclosure.

“That is why we support your decision today to review the structural flaws in the current mortgage servicing compensation model. As we move ahead on a comprehensive plan to reform the Nation’s housing finance system, addressing this issue will help better protect homeowners, investors, and taxpayers, while also increasing efficiency and competition in the market.”

The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, is looking for ideas on how to change the system, though any modification will probably not go into effect before the summer of 2012.

Meanwhile, the Mortgage Bankers Association is hosting a summit in Washington D.C. on Wednesday for industry leaders to brainstorm this issue.

Stay tuned to Chicagoland Real Estate Forum for updates.

Categories: Economy, Mortgages

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