Loan Modification

Mortgage Lenders Seek FHA Concessions

By Peter G. Miller

The Mortgage Bankers Association (MBA) has written to HUD pleading for a break, claiming that new HUD foreclosure policies are punitive and arbitrary — fancy language from a special-interest group asking for a special favor.

HUD is moving to speed the time it takes to start a foreclosure from 12 months to six months. The logic is that a faster process will save HUD big money in terms of lender claims. Lenders, of course, are paid either by the borrower when mortgages are performing or by HUD when FHA mortgages are in default.

The Mortgage Bankers Association says it want to revise the penalties HUD has established when lenders fail to promptly start foreclosures after six months.

“Over the years,” says the MBA, “HUD has placed servicers under increased performance pressure by reducing the timeframe to initiate foreclosure from 12 months to 6 months. This change has provided HUD with significant cost savings, but has increased the risk for servicers that must now manage loss mitigation and foreclosure timelines concurrently. As partners with FHA, we believe it is appropriate and desirable to create a penalty structure that is commensurate with the loss to FHA. Servicers who fail to perform should be required to make FHA whole for any losses resulting from their delay in getting the property conveyed to HUD. Unfortunately, the current penalty is punitive in nature and arbitrary in its severity. A more equitable policy would be a maximum penalty of 30 days of interest for each month the initiation of foreclosure is delayed. A revision is appropriate in light of the increased complexity of managing both the loss mitigation and foreclosure timeframes and their competing objectives.”

Is this really logical?

If it is true that “servicers who fail to perform should be required to make FHA whole for any losses resulting from their delay in getting the property conveyed to HUD” then why should the penalty for non-performance be reduced from paying all the damages to paying some of the damages?

Think of it this way: If someone robs a bank they have to give back all the money, not just part of it. If the policy was to give back only a sliver of what was taken then you could pretty much expect more robberies.

For the past two years HUD has been working to reduce FHA insurance costs. This has been done by changing FHA guidelines, having stricter standards for lenders and dumping lenders who don’t play by the rules.

Why in a rational world would HUD now agree that lenders should be somewhat responsible for the excess insurance claims they create? Under the MBA proposal a lender would only be required to pay a penalty of not more than 30 day’s interest for a delay in the foreclosure process, even if that delay stretched for months and therefore saddled HUD with huge costs. Such an arrangement doesn’t seem to create much incentive to lower FHA costs.

Full post as published by FHA Mortgage Guide on October 25, 2010 (boomark / email).