FHA partial claim test incentives may miss small servicer costs

Initial reaction to the FHA's proposed test of a partial claim alternative: worth trying, but not every servicer will want in.

That fits in with the terms of the five-year demonstration project the FHA has floated, which would be open to all and voluntary.

If the test moves forward, various types of servicers will have to make decisions about whether to opt into a project that examines the viability of using an alternative to second liens for deferred payments.

"I think it has the potential to solve some problems. I think it is going to be very difficult for small to mid-sized servicers," Donna Schmidt, president and CEO of DLS Servicing.

Operations and cost considerations

Servicing experts generally agree with the FHA's rationale for testing an alternative, which is that second liens require time-consuming recording that must be coordinated with public offices. Also, some other agencies already offer deferred payments without second liens.

That means the proposed FHA partial claim alternative could standardize some of servicers' work in the long run if it's fully adopted.

But there also would be other new servicer requirements when the deferred obligations hit repayment triggers like loan maturity. This may come up long after the test period ends  in a market where mortgage terms frequently are as long as 30 years.

"FHA is shifting responsibility to the servicer for payoffs," Schmidt said

The proposal does still give servicers the option to assign the loan to the Department of Housing and Urban Development at a certain point when the borrower has difficulty repaying, and HUD also may allow the discharge of uncollectible debt, but both situations involve additional work. 

The FHA does offer some incentive payments ranging from $500 to $1,750 and additional reimbursement for title expenses up to $250 related to ensuring the enforceability of the first lien. But Schmidt said this may not be adequate compensation for all servicers.

"I'd say you have got to give them at least another $100 or $200," she said. 

While smaller lenders with in-house operations may lack some of the economies of scale and systems that could make testing a partial claim alternative challenging, those with sufficient oversight of efficient and accommodating third-party specialists may find it more viable.

"When you're with a well-established subservicer, you may feel a little bit more confident that you're able to absorb changes that are going to happen within the industry," said Craig Ungaro, chief operating officer at AnnieMac Home Mortgage.

Ungaro said he doesn't necessarily see size as playing a role in what companies test the concept. AnnieMac may be interested in testing a partial-lien alternative, depending on its final form, he said.

Consumer and systems impacts

Another advantage to the proposed partial-claim alternative could be increased consumer comfort with an obligation that wouldn't require a lien and has clear repayment plan options, although some might not like how limited the latter are.

"I think it will deter default rates," said Jane Mason, CEO of Clarifire, a servicing technology firm, of the partial claim alternative.

Some of the concept's features are in line with a recent J.D. Power survey findings related to what leads to customer satisfaction, she noted. Borrower stress is increasingly common and important to handle carefully, the survey finds.

Adjusting consumer-facing technology for an FHA partial claim alternative should be relatively easy but setting up servicers' systems of record to handle the changes in information flow could be a challenge that could deter some from testing the concept, Mason added.

"There have to be new data elements. There have to be repayment plans. There have to be processes that have to be implemented, and they're pretty rigid from a servicer perspective," said Mason. "Even though the servicers are incentivized, I don't know if everybody's going to jump right on board with that."

Servicers may also want to think hard about whether they want to manage a loan-by-loan process if they participate in testing, which they can opt to do but which may offer complications relative to a more standard approach, Mason said. 

Introducing new processes for staff or third-party partners also is a consideration and important because the terms of the proposed test include limited tolerance for delays.

"You have to retrain everybody because there are specific deadlines that are non-forgiving for the servicers," Mason said.

Policymakers will decide whether to move forward with the proposal as is, adjust it or drop the idea after a comment period that ends Sept. 3.