VA Proposal Puts More Weight on Shoulders of Servicers

The Department of Veterans Affairs proposal to delegate workout and loss mitigation responsibilities to private servicers has run into a wall of criticism, not for the direction VA is taking, but for the way it would be implemented.

Commenters have raised concerns about nearly every aspect of the proposed rule, which would completely revamp VA's servicing requirements.

Currently, VA personnel take over loss mitigation efforts once a veteran misses three monthly payments. Under the proposal, private servicers will be responsible for working with veterans to avoid foreclosure and getting the loan current again.

However, servicers are complaining about the way they would be paid for loan modifications, the reporting requirements for defaulted loans and a proposal that shifts the cost of title insurance to servicers.

"Many of the provisions contained in the proposal are extremely burdensome and out of sync with VA's industry peers," Midland Mortgage Co. says in a comment letter.

The Mortgage Bankers Association, Countrywide Home Loans, Wells Fargo Home Mortgage, Chase Home Mortgage, ABN Amro, Midland and other commenters support the overall direction VA is taking in delegating more responsibility to servicers.

"However, there are areas addressed in the proposed rule requiring further clarification. In addition, there are some aspects of the proposal which may actually be a detriment to the effective servicing of VA loans and processing of claims," Countrywide chief executive Steve Bailey says.

There are 2.3 million VA loans totaling $240 billion that are serviced by private firms.

Countrywide's first complaint centers on VA's proposal to eliminate title insurance policies on foreclosed properties and to require servicers to warrant marketability of title for up to three years.

"The effect of this proposal would be to shift the cost of obtaining a title policy to the servicer," Mr. Bailey said. "This would unfairly increase the cost to service VA loans."

Midland Mortgage, Oklahoma City, stresses that VA needs to recognize that servicers bear a lot of out-of-pocket expenses in arranging loan modifications.

The Federal Housing Administration reimburses servicers for title insurance costs and other reasonable fees can be assessed on borrowers. "It is unfair for VA to impose the cost of entering into loss mitigation plans on servicers when VA and veterans receive the most benefit of saving loans from foreclosure," Midland president and chief executive Ken Clark said.

Wells Fargo Home Mortgage contends that VA is going too far in requiring servicers to report the status of loans on a monthly basis and any significant events within five business days.

"This requirement is very costly, voluminous and burdensome to the servicers and could impact the servicers desire and ability to service VA loans," WFHM senior vice president Patrick Carey warns.

VA intends to monitor servicers very closely and intervene if the servicer is not taking the appropriate loss mitigation actions, according to Keith Pedigo, director of the VA loan guarantee program.

"We want to make sure - doubly sure - that veterans are being given every possible opportunity to save their properties," Mr. Pedigo said in February when the proposed rule was issued for public comment.

In conducting loan modifications, VA wants the interest rate lowered if it is above current market rates. MBA points out in a comment letter that servicers cannot lower the interest rate without the investor's approval.

Midland notes that no other insurer, guarantor or investor has a rule mandating rate reductions. If implemented, it would provide an incentive for borrowers to default "in order to get free rate reduction," Mr. Clark said.

Servicers also raised concerns about VA's proposal to delay the payment of an incentive for special forbearance until the loan reinstates. FHA pays an incentive when the servicer executes the special forbearance agreement, regardless of the outcome, Countywide said. "We incur significant expenses" in underwriting and processing special forbearance agreements, Mr. Bailey says, and this "extraordinary" servicing activity "deserves additional compensation."

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