The Federal Housing Administration's deadline for new distressed borrower protocols has been pushed out further toward next year with a potential government shutdown looming, but some things are still changing as the month turns.
"There is no
Covid relief options are still ending, but protocols that preceded the pandemic are still available until
"There's already a permanent waterfall that's in place, but people have all been deferring to the Covid loss mitigation waterfall because it's easier to implement," said Joseph, who previously was chief of staff and deputy assistant secretary for single-family housing at FHA.
What the new permanent FHA waterfall changes
Overall, Joseph describes the new permanent waterfall as "broader but more complex." It incorporates versions of many loss mitigation innovations introduced in pandemic, such as the
"FHA is shifting from broad pandemic-era relief to a tighter, rule-based system. While it protects
The most notable change in the new permanent loss mitigation waterfall is that homeowners must now wait longer before they can request relief.
If borrowers have had a major workout, they've been able to request a new one after 18 months, but under the new rules they're generally not allowed to get another one for a 24 month period, said Donna Schmidt, president and CEO of DLS Servicing.
Schmidt said the move could have some benefits in that it "stops the constant swirling of people" that servicers handle. But Joseph worries that "borrowers facing repeated hardship could be locked out of assistance."
While that measure reduces servicers' operational burdens to some degree, other new requirements add to it.
Servicers must evaluate borrowers before four monthly installments are due and issue notice within 90 days, Joseph said, noting that the implication of this is that "earlier intervention may prevent deeper delinquency but increases servicer workload."
Imminent default borrowers also need to complete a fourth-month trial payment plan, said Joseph, noting that this "ensures affordability but delays permanent resolution for some households."
Some of the additional procedures may introduce uncertainty in servicers' determinations around the first day of default, Schmidt said.
Other details of the FHA's latest servicing protocols include a loss-mitigation assumption option that allows a nonborrower to take title to a distressed property, and an outside of the waterfall loan modification that gives servicers an option for nonresponsive borrowers, Joseph said.
Has the FHA struck the right balance with its new rules?
There are mixed opinions on whether the new waterfall went too far in removing pandemic flexibilities and adding more contingencies for assistance, got it right, or should tweak the mix.
New rules, for example, have added requirements that borrowers at least need to attest to their ability to afford different options designed to make their payments more affordable, such as a
Schmidt would like to see the mix of streamlining and procedure tweaked in the case of the new waterfall's 25% payment reduction target, which has a 15% minimum, contingent on a more old-school review of the borrower's financials.
"If a borrower says, 'honestly, I can't afford the best payment you give me at the 25%,' FHA is going to have to allow a full financial review," Schmidt said, noting that this tends to be a practice favored more by smaller servicers she works with than larger ones.
While streamlined payment relief proved effective during the pandemic, Schmidt said that it may be worth taking the time out to get a sense of the borrower's income to see if it's possible to provide more of a tailored form of payment relief.
"If I had to guess based on four years of experience, we're two years out from that, but I keep beating that drum," Schmidt said.
Attestation requirements may be manageable but FHA officials should keep in mind the difficulties that required documentation for modifications caused in the wake of the Great Financial Crisis, said Sapan Bafna, CEO of industry service provider Outamation.
"We all saw that doc chase nightmare," he said, referring to the period when one mass distress in the housing crash left servicers with hundreds of boxes of unread paperwork related to modifications.
How will the new rules affect operations?
Operations could be a concern when it comes to the timelines for the new loss mitigation regime at FHA and the new codes associated with it, according to Joseph.
However, both Bafna and Schmidt said they are offering automation to handle the workload.
"It's one of those things that there are technology providers like us who have completely put it in the box," Bafna said, noting that many aspects of the new requirements are standardized in ways conducive to automation.
"I sort of look back with my experience over the over sort of similar changes. Initially, every change, there is some little bit of upheaval and chaos, and then we all come to normalcy," he said.
When asked whether the FHA's new permanent loss mit rules will impact processing times, Bafna said, "We will have a spectrum across the board. There will be somebody who will come out with flying colors, and there will be some with challenges."
