UPDATE 3-Obama admin calls for mortgage servicer revamp

Tue Jan 18, 2011 5:28pm EST

* Geithner-Donovan: System is "broken, should be fixed"

* Servicers now have little incentive to rework loans (Recasts, adds details on collection, background)

By Corbett B. Daly

WASHINGTON, Jan 18 (Reuters) - The Obama administration on Tuesday called for a revamp of the way companies that service home loans are paid, saying the current system offers little incentive to rewrite mortgages for distressed borrowers.

The way mortgage servicers -- firms that collect loan payments on behalf of a loan's owner -- are paid is fundamentally "broken and should be fixed," Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan said in a joint statement.

Geithner and Donovan's comments followed news the regulator for mortgage finance giants Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) said it would consider new ways for mortgage servicers to be compensated in order to make it easier to modify loan terms for struggling homeowners.

The existing system provides almost no incentive for mortgage servicers to change easily the terms of the loan if a borrower falls behind on monthly payments.

"The current model has not motivated mortgage servicers to invest the time, effort and resources needed to fully explore all options to help delinquent borrowers avoid foreclosure," Donovan and Geithner said, echoing the Federal Housing Finance Agency.

As it now stands, servicers are paid for collecting the payments from the borrower on performing loans. When those loans go bad, the servicer stops collecting their money but begins running a tab of excess fees and charges that it can collect down the road, when the home is foreclosed.

That structure gives the servicer little incentive to make an effort to communicate with the borrower and work out new terms, a time-consuming and costly process.

Critics have said this compensation structure is a key reason the number of loans modified for struggling borrowers has been relatively modest.

The Federal Housing Finance Agency said it is seeking input from industry, consumer groups, investors and other government agencies for ideas on how to change the system. Changes to the system are not expected to take place before the middle of next year, the agency said.

Just more than 500,000 borrowers have thus far received a permanent loan modification under the Home Affordable Modification Program, which is the administration's signature foreclosure prevention effort.

Banks seized more than 1 million U.S. homes in one year for the first time in 2010 as millions of home loans went bad amid high unemployment and a severe housing slump.

The announcement came hours before a new council of U.S. regulators aimed at ensuring stability in the U.S. financial markets said the overall securitization market needs an overhaul.

The Financial Stability Oversight Council, led by the Treasury Department and including representatives from all the major financial regulators, said new standards could reduce the kind of volatility in the asset-backed securities market that occurred during the 2007-2009 financial crisis when the housing market collapsed.

(Reporting by Corbett B. Daly and Dave Clarke; Editing by David Storey, Bill Trott and Sandra Maler)

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