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51 » VISIT US ONLINE @ DSNEWS.COM 3 WAYS TO STRUCTURE MORTGAGE SERVICING COMPENSATION A new report published by Urban Institute, Urban's Housing and Finance Policy Center, and the Mortgage Servicing Collaborative (MSC) discusses three options for how best to approach mortgage servicing compensation structure. e report is divided into three options: retain the status quo, move to a fee-for-service model, or move to a central default utility model. According to MSC members, retaining the status quo would reduce NPL costs and improve borrower outcomes. Members in favor of retaining the status quo note that the current loss mitigation toolkit is more robust than was the case historically. Additionally, the MSC notes that nonbanks have increased their servicing market presence in recent years as banks have pulled back. e risk associated with the status quo is the lack of a formal structure to fund the high cost of servicing nonperforming loans. e next option, according to Urban, is the fee-for-service model for nonperforming loans, in which servicers would handle the servicing of performing loans as they do today, but the way they get compensated would change to ensure continued revenues, even for delinquent loans. Instead of receiving the full 25 basis point fee for performing and effectively nothing for nonperforming loans, servicers would retain less than 25 basis points while the loan is current. e last option Urban and the MSC suggest is the creation of a central utility for default servicing, a larger change than a fee-for-servicing option. Servicers would continue to service performing loans as they do today but would outsource the loss mitigation function to a central default utility once a loan becomes 60 days delinquent. While some MSC members note that they want a change to the compensation model, some are in support of maintaining the status quo. THE RISKS AND REWARDS OF ARMs Adjustable-rate mortgages (ARM) are making a resurgence, despite lingering negative associations some borrowers may have for the product post-crisis. A recent Washington Post story explored the renewed popularity of ARMS, and how the modern versions differ from their predecessors. Ann ompson, a Retail Sales Executive for Bank of America in San Francisco, told the Post, "ARMs became a four-letter word after the housing crisis. ey got a bad rap and were lumped in with 'pick-a-payment' loans, which allowed people to pay as little or as much as they wanted on their mortgage." According to Ellie Mae data, ARMs made up 8.6% of new loans originated in January 2019, compared to only 5.5% in January 2018. at percentage decreased to 7.6% in February 2019. Many modern ARMs fall under the "hybrid" umbrella, featuring "a fixed period followed by annual adjustments in the rate," the Post explained while focusing on how modern ARMs factor in borrowers' ability to make payments after future rate adjustments—a critical consideration when managing risk. "Typically, lenders want at least a 10% down payment and they want a FICO score of 700 or above," said Shawn Sidhu, a mortgage consultant for C2 Financial. "ese loans really favor borrowers with an excellent credit profile." e article noted that borrowers leading up to the crisis were often "approved for ARMs without a down payment and with little documentation of their income and assets, which meant they lacked the equity to refinance and faced unsustainable payments when their rates increased." To help avoid default, Claudia Mobilia, SVP of Operations for Embrace Home Loans notes that borrowers should obtain a disclosure form that shows them what their maximum payments could be. "ey need to talk to a lender to make sure they know how long the rate is fixed in the beginning, what their payment could be at the first adjustment. and how high the payment can go," Mobilia said. "I don't recommend ARMs for first-time buyers because they may not understand the risks."

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