THE ADVENT OF EACH NEW YEAR should cause us to reflect upon what we can do to make this year better than the past year. The continuing evolution of the mortgage banking industry requires all of us to not only reflect, but also to commit ourselves to render our collective businesses relevant to the rapidly changing environment that confronts us each and every day.
In this regard, the minimum servicing fee requirement that the government-sponsored enterprises (GSEs) set at 25 basis points decades ago should be among the high priorities for thought and action. I propose cutting it in half to 12.5 basis points, to better align it with current trends in servicing costs.
Like many ideas, the GSEs' minimum servicing fee served a valuable purpose when introduced. The fee spoke to the realities of the world of mortgage finance in the 1970s and 1980s by compensating a loan servicer for expenses at a minimum of 25 basis points. That minimum may well have made sense at the time, but I submit that it is an anachronism today--one that is rapidly becoming a burden and, more important, a threat to the liquidity of the market for servicing portfolios. Based upon current trends, there is no question in my mind that servicing-released premiums will decrease over time.
Loan amounts--which provide the basis for servicing fee income, of course--have increased dramatically over the years since the 25 basis point fee was set. Today the size of the average loan is about 10 times what it was 20 years ago. At the same time, servicing expenses have decreased, primarily driven by efficiencies gained through the use of technology and the increased scale of servicing operations brought on by industry consolidation.
As a result, the cost to service a conventional conforming mortgage with an average balance has dropped over the last 20 years from about 8 basis points to just 3 basis points today. The minimum required servicing fee of 25 basis points is more than eight times that cost; and today's average fee is about 31 basis points, or more than 10 times the cost.
The math is simple, but of course the numbers don't completely address the issues. I recognize there are diverse opinions from various quarters that must be heard and considered in this discussion. However, after considerable study of this issue over several years--looking at it from these different points of view--it is my contention that the main arguments against reducing the minimum fee are spurious, the...