Servicing a troubled Federal Housing Administration-backed loan costs three times as much as a loan from government-sponsored enterprises (GSEs) — largely due to the FHA’s steep penalties for any missteps during the process.
Writing in a new report for the Urban Institute, a group of researchers claims that the FHA and Department of Housing and Urban Development should reform its foreclosure penalty structure, asserting that the current system is far too onerous.
The key difference between FHA and GSE foreclosures, the team wrote, lies in the timing of penalties. The FHA assesses fines for missed deadlines during the foreclosure process, which accrue until the property turns over to HUD — regardless of whether the individual mistakes actually held up the overall foreclosure process.
GSEs, meanwhile, don’t assess penalties for individual missed deadlines as long as the overall timeline is met.
“This approach grants servicers more flexibility to tailor their work to accommodate operational challenges or borrower circumstances,” the team wrote. “This flexibility is useful during periods of high delinquencies, when servicing operations are already under duress.”
This was the case during the most recent housing crisis, the Urban Institute researchers assert, when the sheer volume of troubled loan swamped the FHA’s systems.
“Changes to loss mitigation guidelines and updated servicing rules and regulations created new complexity and compliance requirements, which led to delays, missed deadlines, and penalties across the servicing system,” they wrote.
The Washington, D.C.-based think tank analyzed proprietary data from 10 members of its Mortgage Servicing Collaborative, a group of servicers, lenders, and consumer watchdog groups. In 2015 and 2016, 43% of FHA insurance claims had some kind of interest curtailment penalty due to missed deadlines. For servicers that were late with their first legal actions, the average penalty was $5,360 per loan; those who missed the later due-diligence milestone were hit with an average of $4,619 per loan.
To remedy the situation, the Urban Institute researchers recommend that the FHA change its policies to penalize only servicers that miss the overall 180-day foreclosure timeframe — without individual fines for missed deadlines within that space — while also improving the process by which properties are conveyed to HUD.
“The FHA might benefit from encouraging or providing incentives for more voluntary liquidation options, such as short sales and streamlining those options to make them less cumbersome to execute,” the team wrote.
