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Servicing Alignment Initiative: Servicer Incentives and Compensatory Fees

June 14, 2011

This is the fourth article in a four-part series explaining the major components of the joint GSE Servicing Alignment Initiative announced on April 28, 2011.

Our dynamic approach to managing servicing performance, our methodology for the Freddie Mac Servicing Success Program, and Freddie Mac’s implementation of the Servicing Alignment Initiative all share the common goal of identifying and implementing a new set of standards that redefine our expectations of quality and responsible servicing. To reach these goals, we will institute both incentives and compensatory fees for Freddie Mac Servicers that emphasize and encourage early borrower intervention, receipt of complete Borrower Response Packages, and successful and timely workout settlements.

Our implementation of the Servicing Alignment requirements regarding incentives and compensatory fees focuses on rewarding Servicers for meeting quality benchmarks, and assessing compensatory fees and other remedies for failing to meet defined loss mitigation metrics. These include:

  • Borrower Response Package incentives and compensatory fees.
  • Workout incentives.
  • Foreclosure time line compensatory fees.

Borrower Response Package Incentives And Compensatory Fees

To encourage early intervention with borrowers, we will look at the population of borrowers who become 60 days delinquent as of the beginning of a month. Tracking this population of delinquent loans, we will measure Freddie Mac Servicers at the end of a six-month period to determine how many of these borrowers:

  • Delivers complete Borrower Response Packages,
  • Becomes current or pays off, or
  • Becomes less than 60 days delinquent.

We will measure performance to establish what percentage of the measured borrower population delivers complete Borrower Response Packages, becomes current, pays off or becomes less than 60 days delinquent by the end of a six-month period.

If 60 percent or more of the measured borrower population delivers complete Borrower Response Packages, becomes current, pays off, or becomes less than 60 days delinquent by the end of the six-month period, the Servicer will receive a $500 incentive for each complete Borrower Response Package received.

Conversely, if less than 50 percent of the measured borrower population delivers complete Borrower Response Packages, becomes current, pays off, or becomes less than 60 days delinquent by the end of the six-month period, the Servicer will be assessed a compensatory fee for not meeting the minimum performance benchmark. The fee will be $500 per the number of complete Borrower Response Packages the Servicer would have needed to reach the 50 percent minimum performance benchmark.

If a Servicer’s performance meets at least the 50 percent minimum performance benchmark but is below the 60 percent incentive benchmark, the Servicer will not be assessed a compensatory fee or be paid an incentive.

For example, three Servicers each have 1,000 borrowers who become 60 days delinquent in a particular month.

  • Of Servicer A’s population of borrowers, 550 (or 55 percent) submitted complete Borrower Response Packages, became current, paid off or became less than 60 days delinquent by the end of the six-month period. Servicer A met the minimum performance benchmark (50 percent, or 500 borrowers) but not the incentive benchmark (60 percent, or 600 borrowers), and will not be assessed a compensatory fee or be paid an incentive.
  • Of Servicer B’s population of borrowers, 670 (or 67 percent) submitted complete Borrower Response Packages, became current, paid off or became less than 60 days delinquent by the end of the six-month period. Servicer B not only met the minimum performance benchmark (50 percent, or 500 borrowers), it exceeded the incentive benchmark (60 percent, or 600 borrowers).  As a result, Servicer B will receive a $500 incentive for each of the complete Borrower Response Packages received. If all 670 borrowers submitted complete Borrower Response Packages, the Servicer would receive an incentive of $335,000 (670 x $500).
  • Of Servicer C’s population of borrowers, 420 (or 42 percent) submitted complete Borrower Response Packages, became current, paid off or became less than 60 days delinquent by the end of the six-month period. Servicer C needed 80 more complete Borrower Response Packages to reach the minimum performance benchmark (50 percent, or 500 borrowers).  As a result, Servicer C will be assessed a compensatory fee of $40,000 (80 x $500).

Standard Modification Workout Incentives

We are finalizing the details, requirements and operational approach for the new Freddie Mac Standard Modification. It will be initially available on a limited basis, and we anticipate it will be available to all Servicers late this year or early 2012.

When implemented, workout incentives for the new Freddie Mac Standard Modification will be based on the borrower’s delinquency status when the trial period plan starts.  Provided the modification settles within 60 days of a completed trial period plan, the following incentives will be paid when the modification settles:

  • $1,600 for each settled Freddie Mac Standard Modification for mortgages that are less than or equal to 120 days delinquent (less than or equal to 150 days from DDLPI).
  • $1,200 for each settled Freddie Mac Standard Modification for mortgages that are 121-210 days delinquent (151-240 days from DDLPI).
  • $400 for each settled Freddie Mac Standard Modification for mortgages that are greater than 210 days delinquent (240 days or more from DDLPI).

At this time, existing workout incentives are unchanged for settled:

  • Home Affordable Modification Program (HAMP) and “classic” Freddie Mac modifications.
  • Home Affordable Foreclosure Alternatives (HAFA) and non-HAFA short sales.
  • HAFA deeds-in-lieu and non-HAFA deeds-in-lieu.
  • Repayment plans.
  • Make-whole preforeclosure sales.

Foreclosure Time Line Compensatory Fees

Consistent foreclosure time line compensatory fees will be assessed to reinforce compliance with our overall foreclosure time line requirements. We anticipate that compensatory fees will become effective for mortgages referred to foreclosure this fall.

As part of the new requirements, there will be a new uniform loan-level calculation for compensatory fees for mortgages referred to foreclosure.

  • Compensatory fees will be calculated as follows: Unpaid Principal Balance (UPB) x Accounting Net Yield (ANY) as of the date of the foreclosure sale / 365 * Number of days over the overall allowed time line. The number of days over the overall allowed time line is the actual number of days from the DDLPI to foreclosure sale - (Performance maximum + 150 days to refer to foreclosure + any allowed delay days).
  • Netting will not be allowed; foreclosure sales completed under the foreclosure time line cannot offset loans exceeding the time line.

Payment of Incentives and Billing of Compensatory Fees

Freddie Mac will pay Servicers Borrower Response Package and workout incentives on a monthly basis. Compensatory fees for Borrower Response Packages and foreclosure time line violations will be billed monthly. Additionally, compensatory fees for foreclosure time line violations will not be issued if a Servicer’s aggregate amount of monthly compensatory fees for foreclosure time line violations is $1,000 or less.

Moving to a monthly billing statement for foreclosure time lines offers the opportunity to address and reconcile discrepancies in a timelier manner.

More Information

While the GSEs are aligned in their requirements for incentives and compensatory fees, there will be some differences in implementation. We will provide complete details on our requirements in our Guide Bulletins in the near future. For more information on Freddie Mac’s implementation of the Servicing Alignment Initiative:

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