The Mortgage Bankers Association sent a letter to FHA yesterday, asking the agency to revised the penalty structure for servicers that fail to initiate foreclosure by a HUD-prescribed deadline.
HUD regulations require mortgagees to meet a series of event-specific timeframes during the default, foreclosure, conveyance and mortgage insurance claim cycles. Failure to timely meet any processing deadlines result in monetary penalties.
Over the years, HUD has placed servicers under increased performance pressure by reducing the timeframe to initiate foreclosure from 12 months to six months. While this change has provided HUD with significant cost savings, MBA said it has also 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,” MBA said. “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.”
MBA noted because at least seven “events” exist that lead to a cut-off of debenture interest, complexity is added to servicing and foreclosing on HUD loans, loss mitigation timing and preparing accurate and timely claims submissions. HUD has adopted policies for imposing penalties if its deadlines are not met. MBA said the most damaging policy currently in place is curtailment of debenture interest for a servicer’s failure to initiate foreclosure within six months of default. If this deadline is not strictly met, accrual of debenture interest is terminated from the date the foreclosure should have been commenced to the date of conveyance.
MBA said its primary concern is with the “arbitrary nature” of the penalty. It points out the amount of the servicer’s penalty is not directly related to the severity of the delay or HUD’s actual cost; rather, the size of the penalty is dependent on unrelated factors such as whether the property is located in a judicial or non-judicial foreclosure state or whether an intervening event occurs, such as a bankruptcy, which is outside of the servicer’s control. MBA said penalties should not vary for the same offense and same duration of noncompliance. However, a one-day delay in initiating foreclosure in New York, New Jersey or Pennsylvania is much more damaging for mortgagees than missing the timeframe in Texas, Virginia or Alabama.
“One can see that missing the deadline by one day results in an extreme penalty for the mortgagee,” MBA said. “An intervening bankruptcy could double or triple these losses. Failure to start foreclosure timely creates a more significant loss than the failure to meet any subsequent event. In fact, the failure to meet HUD’s timetable for early events (such as initiation of foreclosure) will result in serious losses for mortgagees, even if HUD’s timelines for completing foreclose sale or conveying property are met or reduced.”
MBA recommends HUD limit the curtailment of debenture interest to 30 days for each month that the servicer is delayed by one or more days in initiating foreclosure in that month. For example, if first legal action is required by September 1, but the servicer does not perform this task until September 2, debenture interest would be curtailed by 30 days. If first legal action does not occur until October 10, the servicer’s right to receive debenture interest would be curtailed by 60 days. The penalty would be imposed even if the reasonable diligence timeframe was met or bettered. If as a result of the delay, the servicer also failed to meet the state reasonable diligence timeframe, HUD would curtail interest for this reasonable diligence failure according to its current policy.
“Our recommended penalty, when imposed in connection with a failure to timely initiate foreclosure, will over-compensate HUD for any costs or losses it incurs because most servicers will go to extraordinary lengths to ensure that reporting and reasonable diligence timeframes are met despite the delay in starting foreclosure, MBA said. “Assuming state timeframes for completing foreclosure and conveying title are met, there would be no delay in marketing the property.”
MBA said this policy adjustment could be achieved through a regulation change or merely through a Mortgagee Letter utilizing the existing regulatory framework.
“Providing a more equitable penalty for missing FHA’s initiation of foreclosure deadline will enhance the FHA program and make it more attractive to service FHA loans,” MBA said. “Making the program less expensive to administer will ensure that FHA remains a dynamic housing program.”