MBA, ABA Offer Recommendations to FHA Single-Family Loan Sale Program
Mike Sorohan firstname.lastname@example.org
The Mortgage Bankers Association and the American Bankers Association, in a letter to HUD, offered a series of recommendations to jump-start the FHA Single-Family Loan Sale program, which seen declining participation in recent years.
HUD recently announced an Advance Notice of Proposed Rulemaking and Request for Public Comment to transition the SFLS from a demonstration program to a permanent one. The program reduces loss to the FHA Mutual Mortgage Insurance Fund by removing non-performing mortgages from FHA's outstanding insurance obligations, thereby avoiding the high costs of maintaining and marketing a foreclosed property.
In its 2016 Annual Report to Congress, HUD estimated SFLS program sales netted an estimated $2.4 billion over what would have been collected by HUD through the standard conveyance claim and REO execution process. However, despite the clear benefit to the Fund over conveyance claims and the benefit of the disposition strategy, the number of property dispositions through SFLS has declined as has program participation in recent years.
In analyzing the program, MBA/ABA identified several obstacles to mortgage servicer participation, noting while the program provides an important alternative to the conveyance process, that process is complicated, time-consuming and expensive for both servicers and FHA.
"The conveyance process causes properties to remain vacant longer, which adversely affects neighborhoods and increases maintenance and repair costs," the letter said. "FHA can make changes to expand loan eligibility and encourage more servicer and investor participation." It identified these obstacles as:
--Restrictive eligibility criteria limits the number of loans able to participate which minimizes the effectiveness of the program.
--Administrative burdens incurred in responding to irregularly scheduled sales with short timeframes.
--Inability to obtain timely answers from FHA to questions that arise in assembling a loan package.
--Unreimbursed costs due to high rates of loan fallout (typically from initial eligibility results or rejected offers.)
--Increased costs and risk to servicers due to delays in receiving payment of interim servicing advances from purchasers and disputes over contract issues.
MBA/ABA offered the following recommendations for improving the Program and expanding participation:
--Establish a regular schedule of loan sales. FHA should maintain a consistent schedule for sales to increase predictability and provide servicers with sufficient time to identify eligible loan populations. "A predictable schedule would help mitigate the costs and resources associated with assembling offers by, among other things, allowing for staff training and efficiencies in staffing allocation," the letter said. "Predictable sales would also serve to reduce the administrative burden on FHA and allow for better allocation of staff resources."
--Lock eligible loans as of specific date. "Loan population should be fixed as of a certain date, and loans should not fall out of the eligible population, regardless of changes after that date," the letter said. "FHA should provide instructions as to how changes that occur after that date (such as loss mitigation activity or surchargeable damage) should be handled."
--Expand loan eligibility criteria. MBA/ABA said eligibility criteria should be expanded to encourage more loans to move through the Program, including:
----Expand eligibility to loans secured by properties with surchargable damage (provided the damage is insured or the FHA claim is reduced by the estimated amount to repair), loans secured by mobile homes, loans in bankruptcy and loans with resolved title claims.
----Eliminate or loosen the LTV and Maximum Missed Payment restrictions.
----Eliminate vacancy minimums.
----Eliminate Borrower Risk Scoring from the eligibility criteria.
In addition, MBA/ABA recommended the following policy changes:
--Expand Broker Price Opinions requirements to permit use of distressed property comparables to determine value.
--Require a new valuation prior to sale if there is a material change to the condition of the property determined by monthly property inspection results.
--Revise reps and warrants. MBA/ABA said FHA should modify the purchase agreements to include sunset date of six months for all representations and warranties; limit repurchase demands only to breaches of representations and warranties that materially and adversely affected the value of a mortgage loan; and remove the representation/warranty regarding "surchargeable" damage, since it is subjective and not typical for non-performing loan sales.
--Revise claims policies. The letter said FHA should consider reimbursing the following expenses for offers produced in good faith but are ultimately rejected and those incurred for loans initially eligible that later fall out.
--Eliminate the requirement that the tax and insurance disbursements be prorated based on the claim filing date. This requirement does not follow industry practices for non-performing loan sales and creates significant challenges because different tax authorities have different tax periods.
Additionally, the letter said for loans that fallout or are not included on the award list, FHA should provide automatic extensions to First Legal and Reasonable Diligence timeframes.
MBA/ABA also recommended FHA should extend payment of interest from 30 days following the eligible claim submission start date to 60 days to align with the claim filing window.