FHA: Loss Mit Claims Rising
The Federal Housing Administration is paying loss mitigation claims on 90,000 delinquent loans so the borrowers have a chance to remain in the homes and resume their regular monthly mortgage payments again.
The FHA is paying off the delinquencies, bringing the loans current and taking back an interest-free subordinated mortgage, according to FHA director Joseph McCloskey.
"These are substantial investments by FHA in order to bring those loans current. As a result, FHA has avoided losses of over $2 billion this year," he told a FHA conference sponsored by the National Real Estate Development Center.
The FHA expects to pay its servicers $27 million in incentive fees for loan modifications and other loss mitigation efforts in fiscal year 2005, which just ended Sept. 30.
Servicers collected $25.4 million in incentive fees in FY 2004, when the FHA paid 78,000 loss mitigation claims. "We believe the loss mitigation program is very strong and we believe it is becoming the dominant approach to address a default," he said. Mr. McCloskey is a director of single-family asset management.
The FHA has a 6% default rate and a 1.38% foreclosure rate. FHA estimates show foreclosures declined in FY 2005 to 61,000, compared to 71,000 in FY 2004. This 14% drop in foreclosures occurred while the FHA's insured portfolio is shrinking at a 10% annual rate and loss mitigation claims rose 15.4%.
Meanwhile, FHA officials are telling servicers not to worry about a "treble damages" rule, which allows the Department of Housing and Urban Development to levy severe fines on servicers for failing to comply with the agency's loss mitigation standards.
Servicers are wary of this new rule and HUD does not want to scare servicers away from doing business with FHA.
"Unless you are planning to do some absolutely egregious things in failing to provide loss mitigation for homeowners, you are safe at FHA," Mr. McCloskey assured FHA lenders at the NREDC conference.
Under the treble damages rule, mandated by Congress, HUD could impose a $300,000 fine if a servicer is negligent in trying to prevent foreclosure on a $100,000 loan.
FHA deputy director Laurie Anne Maggiano stressed that only the worst-rated servicers that fall into tier 4 could potentially face penalties. "To get into tier 4 you have to be doing almost no loss mitigation," she said.
FHA consultant Bud Carter said FHA officials are trying to "reassure everyone that no legitimate servicer will be affected by treble damages." Mr. Carter is with the Washington consulting firm Potomac Partners.
Ms. Maggiano also noted that loss mitigation performance scores are coming soon and more servicers will qualify to receive incentive payments.
"We are very pleased with the work you have done so far," she said.
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