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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2017

Managing the FHA Landscape

Servicing Federal Housing Administration loans requires diligence

Federal Housing Administration (FHA) loan products have filled a void in the marketplace for decades by offering financing to qualified borrowers who cannot afford the large downpayments or don’t have high enough FICO credit scores to secure conventional loans. In 2015 and 2016, FHA originations made up about 17 percent of total residential purchase loans, according to the U.S. Department of Housing and Urban Development. This percentage is expected to increase in 2017.

This origination growth will bring an increase in FHA loan servicing, making it even more important that mortgage originators understand the complex FHA servicing guidelines before matching borrowers up with FHA products. Learning this information can help originators answer borrowers’ questions about FHA programs and protect their company’s bottom line.

Due to nuances in the FHA guidelines, servicing FHA loans is very different than servicing loans sold to the government-sponsored enterprises (GSEs). To meet the demands and requirements that come with servicing a large FHA portfolio, proper training, testing, compliance and reporting must be part of the loan servicer’s infrastructure.

If a mortgage company does not service the loans it originates, it should ensure that the servicer it uses remains compliant with these requirements. The risk of not complying with the guidelines could include penalties, curtailments, excess advancing, re-conveyance and other demands — all of which add to the cost of servicing FHA loans and can ultimately impact servicers as well as their clients and companies.

Delinquency risks

 At a Glance

Conveyance condition standards

At the time of conveyance to the U.S. Department of Housing and Urban Development, a property must be undamaged by fire, flood, earthquake, hurricane, tornado, or mortgagee neglect. In addition, the property must be secured, the lawn maintained, winterized (as applicable), and interior and exterior debris must be removed with the property’s interior maintained in broom-swept condition. This includes the removal of any vehicles and removal of any personal property in accordance with local and state requirements. Mortgagees are responsible for the damage to, or destruction of, properties because of their failure to take reasonable action to secure, inspect, preserve and protect such properties.

Source: U.S. Department of Housing and Urban Development

Many of the risks of servicing FHA loans are centered on adherence to delinquent-loan servicing requirements. These include heightened property preservation guidelines, conveyance and re-conveyance timelines, and claims-processing rules.

If requirements related to these processes are not properly managed, both the risk and the cost of servicing FHA loans will rise. For many servicers, a primary objective in managing delinquent loans is to avoid the conveyance of assets back to FHA by leveraging programs such as foreclosure and post-foreclosure auctions. Both of these options are governed through updates to the FHA’s guidelines for claims without conveyance of title, or CWCOT.

During the default-servicing process, great care must be given to bringing an asset into conveyance condition. This requires meeting a detailed list of property conditions and title requirements. FHA requires that all of these resolution activities occur within 120 days of the start of foreclosure.

On average, 65 percent to 75 percent of defaulted assets are not conveyed back to FHA. The remaining 25 percent to 35 percent of assets that do not sell and are conveyed to FHA can cost servicers more than $5,000 per asset plus internal management costs.

Conveyed assets also carry additional risks because of the complexity of the conveyance guidelines. Failure to follow the guidelines may allow FHA to reconvey the asset back to the servicer with all expenses borne directly by the servicer.

Mitigating risks

To mitigate these risks, it is becoming more common for servicers to establish specialized FHA servicing teams that are extensively trained and tested on FHA guidelines and processes. These teams typically manage third-party vendors as well as the internal resources responsible for servicing the FHA portfolio.

Successful FHA servicing teams typically use rules engines — software systems encoded with regulations — to track and trigger workflow tied to the guidelines. The workflow also is distributed to the vendor network to ensure that proper tasking and data-integration controls are in place. This structure supports proper exception reporting, service-level agreement (SLA) monitoring and transparency throughout the process.

A recent trend is to hire vendors who can supply a bundled suite of FHA services leading up to the completion of a foreclosure sale. The right vendor should be able handle title, valuation, property preservation, marketing and auction services from 90 days before the foreclosure sale date all the way through conveyance.

This bundled service offers easier integration between the servicer and the vendor, limits handoffs and optimizes timelines while providing for consolidated oversight. The title can be cleansed, repairs to the property can be made and appropriate bid values and disposition strategies can be established efficiently and completely prior to the foreclosure sale. If effectively implemented, this approach will help ensure FHA guideline compliance and minimize the servicer’s cost.

• • •

With the expected continued growth of FHA originations and servicing portfolios, mortgage companies that service their own loans need a proper infrastructure to manage the risks and costs associated with servicing FHA loans. Dedicated teams, integrated technology and proper reporting are essential to avoid noncompliance.

Hiring vendors that are properly staffed, trained and capitalized can work just as well as a well-trained internal team. With proper investments in infrastructure, careful vendor selection and consistent oversight, the industry will become better equipped to manage the growth in FHA lending and servicing.


 


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