As part of a joint initiative, the FHFA and HUD recently released a presentation outlining potential revisions to the current system of servicer compensation. The initiative's stated goals are 1) improving customer service for borrowers, 2) reducing financial risks for servicers, and 3) helping servicers better manage their pipeline of nonperforming loans (NPLs). In light of the asset's unusual economics, an examination of servicing compensation is long overdue. However, the initiative's proposed changes to the compensation structure for NPL servicing runs counter to the notion of reducing the mortgage market's dependence on the government.

The presentation outlines two distinct issues for discussion. It primarily analyzes a series of proposals for reducing the minimum required servicing, which currently is 25 basis points for most products.(As a brief refresher, the minimum servicing is an interest strip that must be held by the servicer. The remaining servicing is considered "excess," and falls out based on the originator's execution decision.)

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