The debate on the appropriateness of the minimum servicing fees established by Fannie Mae and Freddie Mac - currently at 25 basis points - is heating up (see ASR 1/10/05). In this light, last week the Mortgage Bankers Association released a report featuring its member's views and concerns about the issue.
To underscore the importance of minimum servicing fees, the MBA said that the magnitude of GSE master servicing rights outstanding has reached over $3 trillion in unpaid principal amount. The Association added that a market concern is that the TBA market could be divided between pools with higher and lower minimum servicing fees, which could negatively affect liquidity and price levels and result in higher borrowing costs. The MBA further said that, "the servicing fee minimum level is such an integral part of the structure of the MBS and has the potential for such a competitive impact that many MBS market participants all have a stake in where the minimum level for servicing fees is set."
The MBA reported that the debate among its members is strictly divided along two lines: a reduction in the fee minimum to 12.5 basis points or maintaining it at 25 basis points, with little talk about bringing it down to a level between the two numbers. The Association added that in discussing the issues, its members have not gravitated toward any compromise position.
The MBA was also part of the debate over Ginnie Mae servicing fees in 2002. The Association noted that compared to Ginnie's time, more firms are currently concerned about accounting, hedging and capital issues. The report added that advocates for changing the minimum servicing fee are more determined this time around, and are adamant that the large MSRs they are carrying are not sustainable. The Association also said if a change is not made, a number of its members might look to alternative measures - such as the execution through non-TBA eligible MBS - just to limit mortgage servicing rights levels while at the same time maintaining their business strategies.
Meanwhile, Merrill Lynch MBS analysts, who have written extensively about the issue of mortgage servicing rights previously, said that the MBA report "is quite interesting and wide-ranging, and we would encourage investors to take a look at it."
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