As clients know, we have been saying for months that mortgage servicing is in for an unflattering makeover. This in part results from the changing capital rules governing MSRs and the overall new regulatory framework for the biggest banks that, for all intents and purposes, own this market. However, we have also anticipated pressure to change the compensation model for mortgage servicing, now taking form in light of FHFA’s Tuesday announcement. More imminent, though, is the battle over whether or not stringent servicing standards will be mandated in the new risk-retention rules, with FDIC Chairman Bair using remarks this morning to advance her campaign for very, very tough servicing constraints ASAP. We don’t think she’ll get her way, but the battle will lead to far tougher rules from FHFA and other regulators – assuming, of course, the pending AG settlement leaves servicers with any room to roam.

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