Audit: Two-thirds of FHA borrowers with COVID forbearances didn’t get proper loss mitigation

Scathing audit finds several issues with HUD, servicer responses to surge of borrower assistance activity

Some two-thirds of borrowers who had delinquent loans insured by the Federal Housing Administration (FHA) did not receive proper loss mitigation from servicers after the end of their COVID-19 pandemic-related forbearances, according to an audit from the U.S. Department of Housing and Urban Development (HUD).

Borrowers of approximately 155,297 FHA loans did not get the correct assistance from servicers after the expiration of their forbearances, HUD estimated. The department’s projection is based on a statistical sample of 85 loans audited by its Office of Inspector General (OIG). Of these 85 loans, 48 received “incorrect” loss mitigation in which the borrower either received an improper loss-mitigation option or a proper but erroneously calculated mitigation option. Thirty-one loans received flawed assistance because servicers did not properly follow HUD guidance, including significant delays, late mailings of loan modification documents or other such errors.

Overall, 67 of the 85 loans had issues identified by the audit. Based on these results, the audit’s statistical projection indicates that roughly 100,910 loans had incorrect loss mitigation, while 65,580 received mitigation in which servicers didn’t follow HUD’s guidance. (The two figures do not add up to 155,297 because some sampled loans had issues that fell under both categories.)

“The COVID-19 pandemic created a unique environment for mortgage servicing, which required FHA to make rapid changes to its requirements, and many servicers were challenged in adapting their servicing operations and processes to keep pace with these changes,” the audit report stated. “This environment placed significant stress on servicers’ loss-mitigation activities, and servicers struggled to ensure compliance with HUD’s new requirements. As a result, some delinquent borrowers previously on COVID-19 forbearance faced an additional hardship from improper loss mitigation.”

Twenty-two servicers were contacted to get information for the review. Based on responses from the servicers, the OIG came to the conclusion that the swell in loss-mitigation activity caused by the pandemic exposed servicers’ operational weaknesses. The audit cited one example of a servicer that automated its processes due to a 600% surge in loss-mitigation activity since 2019. But the company had “system issues” that wrongly applied partial-claim funds to borrower accounts.

Notably, the OIG also ran an audit on Mr. Cooper to complement the large-scale audit. According to the audit report, Mr. Cooper was selected after a risk assessment in 2021 that found a “significant volume” of delinquent loans with prior pandemic-related forbearances in the company’s portfolio. Furthermore, the company was chosen “based on our awareness of complaints made about [Mr. Cooper] to the Consumer Financial Protection Bureau and the HUD OIG hotline,” the report stated.

This audit was also scathing and found that Mr. Cooper did not provide proper loss-mitigation assistance to more than 80% of borrowers with delinquent FHA loans.

HUD itself wasn’t spared from criticism, with the audit also concluding that HUD didn’t ensure that servicers sufficiently informed borrowers of their COVID-related loss-mitigation options. While the department issued substantial guidance to servicers on administering these options, it didn’t develop standardized communications for servicers to pass along to borrowers.

Because of the errors, the audit stated that the FHA insurance fund could face heightened risk. Specifically, borrowers of the 100,910 loans that received inappropriate or miscalculated mitigation may now face higher chances of default, ultimately raising the risk of loss to HUD from potential insurance claims.

A memo from Julie Shaffer, deputy assistant secretary for single-family housing at HUD, offered a response to the audit’s criticisms.

“While we do not disagree with any specific recommendations, we believe the draft report does not fully capture the unprecedented volume and complexity of the policy and system changes that the FHA implemented to sustain an anomalously high number of borrowers struggling to make their mortgage payments during the COVID-19 national emergency,” Shaffer said.

“Nor does the report capture the broadly successful homeowner outcomes achieved during the COVID-19 emergency. More than 2 million FHA borrowers became delinquent during the national emergency, and more than 1.8 million borrowers took advantage of FHA’s COVID-19 forbearance offering. FHA helped more than 1 million of these borrowers to enter into a loss-mitigation plan to avoid foreclosure and retain their homes. Another 655,000 borrowers cured or paid off their mortgage without the need for a loss-mitigation plan.”

Bob Broeksmit, president and CEO of the Mortgage Bankers Association, was swift to come to the defense of servicers.

“A number of the technical faults that the report identifies were made by servicers in the spirit of helping COVID-affected borrowers exit forbearance and remain in their homes in the fastest, most efficient way possible,” he said. “Others were the unfortunate outcome of confusing or conflicting program requirements and the inherent difficulties of quickly scaling such a massive borrower assistance effort. But make no mistake, by focusing on delivering positive outcomes for homeowners, servicers’ implementation of COVID-19 relief is a major success story.” 


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