The Federal Housing Finance Agency said it would consider a new approach to how home loans are managed so banks take on more of the risk, as well as find ways to spark more loan modifications so struggling borrowers can stay in their homes.

Studies have shown that foreclosure is often more profitable for a mortgage servicer, and as such, many companies avoid loan modifications in favor of foreclosure. But the FHFA hopes to change that by considering a new compensation structure for mortgage servicers that would allow servicers to receive fees for restructuring mortgages that avoid foreclosure.

The FHFA said that it does not expect any changes to the mortgage servicing compensation model to be made before summer 2012.

The FHFA is also targeting efforts to more tightly regulate what firms can do with the loans they make and how they can take on more of the risks associated with those loans. The goal is to get rid of risky lending made by banks.

Currently, banks pool mortgage loans together and sell them to investors, thereby passing the risk along to the investors. But FHFA's new approach would require banks to hold on to a portion of the investment. That would make it difficult for a bank to ignore risks associated with lending, experts note.

Source: Officials Looking at Ways to Protect Housing Market, Washington Post (Jan. 19, 2011)