Governor Sarah Bloom Raskin, At the 2011 Midwinter Housing Finance, Conference, Park City, Utah, February 11, 2011 – Putting the Low Road Behind Us
“A better business model–one that might attract more entrants and increase competition–would more closely tie expenses with compensation and reduce many of the principal-agent problems that currently exist. Rather than rolling most of the compensation into one annual fee that covers performing and delinquent loans alike, servicers could be compensated quite modestly for the routine processing of payments involved with performing assets. They would be required to have either significant capacity for loss mitigation and the other work involved with non-performing loans, or business relationships with third parties, such as specialty servicers, that do. Contracts could spell out a structure wherein the investor would pay significantly higher and more direct compensation for the more labor-intensive work involved in delinquent loans, though they would need to be careful not to create perverse incentives to encourage such delinquencies. There would also need to be much more clarity and specificity about loss mitigation standards and systems for auditing internal procedures. Such a system could more appropriately compensate servicers and sub-servicers for the level of work involved in servicing very different types of loans. Specialists could emerge who focus primarily on the routine performing loans or the more involved non-performing ones. If the non-performing specialist was a third party, the existing servicer could either transfer the servicing rights once a loan hits a certain delinquency trigger, or simply have the loans subserviced–of course with high levels of accountability–on a fee-for-services basis until the delinquency is resolved.”
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