The Federal Housing Finance Agency is preparing to back away from a controversial plan to overhaul the minimum servicing fees paid on Fannie Mae and Freddie Mac loans, after intense, across-the-board industry opposition to the idea.

Changing the way servicers are currently paid has now been officially placed on the back burner, according to a government source and industry advisors who have worked on the issue with the FHFA.

"It's DOA," says one Washington source familiar with the situation.

Sources also say that a total 'fee for service' compensation model has been scrapped entirely.

FHFA spokeswoman Corinne Russell said in an emailed statement, "Considering changes to the structure of mortgage servicing compensation is an important component of improving the operations of the future mortgage market. We received useful input on the discussion paper, and will provide an update on next steps in the near future."

Sources say that the agency's point man on the issue, senior advisor Mario Ugoletti, is expected to discuss servicing compensation and what may lie ahead in a few weeks at a national servicing conference sponsored by the Mortgage Bankers Association.

In general, servicing advisory firms — companies that hedge, evaluate, and sell mortgage servicing rights — have fought any radical change to servicing compensation, saying that a "fee for service" structure would essential remove any "skin the game" servicers currently might have.

Most major servicers opposed any change, and many on Wednesday rejoiced at the news that it was no longer in the works.

"It's good news for the nation. It's good news for home owners," says Austin Tilghman, president and CEO of United Capital Markets in Denver.

Glen Corso, who runs a small trade group, also calls the potential change "great news."

Tilghman's partner at UCM, David Stephens, says that with the FHFA's apparent change of heart, "We can check off one of the uncertainties in mortgage banking that has been keeping us from moving forward."

Until a few weeks ago FHFA was still collecting public comments on changing the 25 basis-point minimum fee to one of two models: a fee for service structure, and a 20 basis-point payment with a 5 basis point reserve fund.

Among other things, industry members were angry that the agency gave them no guidance on what a servicer might earn should a loan go delinquent.

Critics of the current model have long alleged that, because compensation is tied to performing loans, the servicer has little incentive to spend money on the high-touch attention that delinquent loans require. A better model might tie compensation to how servicers deal with the troubled portion of their portfolio, these critics argued.

But the debate over a better compensation model never got off the ground. While the FHFA and Fannie Mae alluded to increased payments for delinquent loan and default servicing, no concrete proposal ever emerged.

"It was comical," Stephens says. "How can you say you're going to incent people to spend more time and money on the foreclosure process and then not make a proposal with dollars in it?"

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