By Jodi Gaines
Mortgage servicers spend hundreds of millions of dollars a year to protect and preserve FHA-insured loans that are in default. In a perfect world, servicers would receive full reimbursement for these expenses. Unfortunately, this is not the case, and servicers spend substantial corporate dollars to preserve properties. For years, FHA servicers have self-curtailed legitimate property preservation (P&P) expenses incurred after loans missed the conveyance due date. These self-curtailed P&P expenses are a major contributing factor to the high cost of servicing FHA loans, as identified in the third brief from the Mortgage Servicing Collaborative (MSC) convened by the Housing Finance Policy Center at The Urban Institute, titled “Reforming the FHA’s Foreclosure and Conveyance Processes.” In fact, for conveyance liquidations, the average property preservation loss is $4,179. This translates to an average loss rate of 47% loss on all property preservation expenses incurred. Id. So, how can servicers reduce their out-of-pocket expenses? First, servicers should take steps to ensure properties are conveyed on time. Second, the reality is that 100% of properties will not convey on time so servicers must focus on claiming all eligible P&P expenses to reduce out-of-pocket costs. Unfortunately, we believe the industry has interpreted the governing Code of Federal Regulations (CFR) and HUD’s guidance when concluding that the conveyance due date, in and of itself, prevented mortgagees from claiming P&P expenses incurred after the conveyance due date. This interpretation resulted in massive losses for servicers of FHA loans.
These massive losses prompted MSI’s General Counsel, Baker Breedlove, to revisit the issue with a new lens. Ultimately, Breedlove submitted a memorandum to HUD outlining the issue, relevant CFRs, and HUD guidance, and providing analysis as to why expiration of the conveyance due date, in and of itself, does not require mortgage servicers to curtail P&P expenses incurred after its expiration. On February 4, 2020, Joseph Gormley, Deputy Assistant Secretary for Single-Family Housing, responded to MSI’s memo. An excerpt from this letter states: “FHA policies are developed and regularly revised to best serve our mission and the millions of homeowners we serve across the country. We appreciate your continued participation in HUD’s mission and your highlighting an area of perceived confusion
in our guidance. Every property, case, and conveyance process can have distinct issues and challenges, which may or may not allow a mortgagee to claim certain expenses. For properties where the P&P actions are performed in accordance with HUD guidance and all other FHA requirements are met, expenses incurred outside of the Conveyance Timeframe can be reimbursed so long as they are incurred prior to the date of conveyance. FHA policies require mortgagees to selfcurtail P&P expenses when Reasonable Diligence Time Frames or reporting requirements related to foreclosure timing are not met. If HUD makes changes to these policies in the future, those changes will be published in an FHA Mortgagee Letter and/ or an update to the Single-Family Housing Policy Handbook 4000.1”
What Does This Mean for Servicers of FHA Insured Loans?
If you are a bank or servicer managing a portfolio of FHA loans, you should revisit the exact circumstances when P&P expenses are self-curtailed and consider filing for qualified expenses that historically, you may not have claimed to HUD. This may also be true for supplemental requests. If you are not currently leveraging this guidance within your organization or have questions regarding this clarification, please feel free to reach out to the team at MSI. We are more than happy to share our initial request to HUD and their ultimate responses. We highly recommend that you consider the impact to your current process and make your own decisions internally, but keep in mind that this affects the bottom line for all servicers. MSI is extremely grateful to HUD for their quick response to this issue and we support their mission to create strong, sustainable communities and quality affordable homes for all.
About MSI and Insight One Solutions
MSI has been a national provider of field services including inspections, preservation, and repairs since 1983. Insight One Solutions is the parent company of MSI and is responsible for managing the default “end-to-end” solutions that allow us to manage assets from initial default to final disposition.
Jodi Gaines is the Chief Client Officer and EVP of Government Relations & Business Development for Insight One Financial.
Gaines has approximately 31 years’ mortgage and financial services industry experience. She is the former Co- Founder, CEO, and Vice Chair of Claims Recovery Financial Services (CRFS). Prior to starting CRFS, Gaines spent 14 years at Anchor Mortgage, Dime Savings Bank, North American Mortgage, and WAMU. She is currently the Co-Chair, MBA FHA Claims Committee, a Committee Member of MBA LAC and MBA Property Preservation, on the Board of Directors of NY Mortgage Bankers Association, and Loan Servicing Chair of NY Mortgage Bankers Association.