Loan Modification

Homeowner sues FHA, mortgage lender over foreclosure

By Karen Lawson

The Cincinnati Enquirer is reporting a lawsuit filed by a homeowner facing foreclosure by his mortgage lender. The lender did not respond to the home owner’s request for foreclosure prevention assistance, which is contrary to FHA guidelines requiring FHA approved lenders to avoid foreclosure when possible. Assuming that the homeowner in question has an FHA loan, this situation may light a fire under mortgage lenders and loan servicing companies who’ve been slow to respond to homeowners’ requests for assistance under FHA relief programs and other federal government programs providing help for homeowners facing foreclosure.  First, let’s identify the roles of FHA and mortgage lenders in terms of foreclosing a residential mortgage loan.

• FHA: The Federal Housing Administration (FHA) is a branch of the US Department of Housing and Urban Development (HUD). FHA insures its approved mortgage lenders against losses arising from foreclosures of loans made under FHA loan programs.
• FHA approved lenders: These firms are authorized to originate mortgage loans under FHA loan programs, and are held accountable by FHA for following FHA loan approval guidelines and loan servicing requirements.
• Loan servicing companies: These are the companies that take care of day-to-day administration duties associated with mortgage loans. They process payments, conduct collection activities, pay property taxes and insurance on behalf of homeowners, and also review requests for assistance from homeowners for avoiding foreclosure. Loan servicing companies also refer mortgage loans to attorneys and other authorized entities for foreclosure. FHA requires that lenders (and their designated loan servicing companies) make attempts to avoid foreclosure  through methods including temporary forbearance, repayment plans, loan modifications, and accepting short payoffs. The homeowner in the lawsuit mentioned above alleges that his mortgage lender did not offer or approve any foreclosure prevention efforts, which is in direct violation of FHA guidelines

In case you’re wondering why FHA should care whether a mortgage lender forecloses on homeowners who cannot make their mortgage payments, FHA insures mortgage lenders against losses associated with FHA loans. When an FHA loan is foreclosed, the mortgage lender (or its loan servicing company) files a claim with FHA for the unpaid mortgage balance, accrued interest, foreclosure fees and costs and allowable administrative costs.  Although FHA borrowers pay premiums for covering FHA mortgage insurance, the FHA has incurred dramatic losses in the past few years, and is attempting to rebuild its reserves by preventing future foreclosures.

FHA guidelines: Making rules, but leaving too much to chance

The problem with FHA loan servicing requirements is that much is left to the discretion of FHA approved lenders and loan servicing companies. Swamped with requests for assistance, some loan servicing companies are doubtless failing to properly consider all requests, or may not have staff trained for reviewing potential candidates for FHA and government relief programs. If this lawsuit makes one thing clear, it’s the obvious disconnect between the intention of preventing foreclosures and actual results.

Full post as published by FHA Mortgage Guide on January 06, 2011 (boomark / email).