As investors become more demanding, and regulatory oversight more stringent, many mortgage loan servicers haven't kept up with the times. Absent a servicing strategy that contemplates hazard claim settlement with remediation efforts, servicers put their own profitability at risk when conveying Federal Housing Administration properties in default.
By and large, they still use the same cookie-cutter approach to all of the loans they service. That's why it's critical that servicers rethink their historical processes if they're going to meet current portfolio demands.
Nowhere is this more evident than in filing hazard claims on damaged properties in default, specifically on loans guaranteed by the FHA. The three largest investors in these loans — Fannie Mae, Freddie Mac and the Department of Housing and Urban Development — each has its own guidelines on how to handle these properties, yet many servicers handle them the exact same way. That can have costly consequences.
Fannie Mae guidelines state that the servicer must first file a claim with the agency, along with a recommendation as to what to do with the settlement funds.
Freddie Mac, by contrast, explicitly directs servicers to file a claim directly with the property insurer where the borrower has not done so. Freddie also requires written pre-approval before the servicer spends any money on repairs. It also has an expectation, although not as clearly defined in the regulations, that a recommendation be made as to what to do with hazard claim settlement funds.
At HUD, servicers are expected to take appropriate action to recoup all available hazard insurance proceeds before they repair the damaged properties prior to conveying the property to HUD. They also have the option of requesting permission to convey the property as-is. But anyone who works with the conveyance of FHA properties to HUD knows that permission to convey a property as-is rarely occurs.
How can this approach to FHA conveyance be accomplished? First, given that hazard claims must be filed and repairs completed, servicers must account for how insurance policies operate in light of dwelling indemnity. How much of the work that must be done to a damaged property to convey to HUD is covered under that hazard claim settlement? What benefits can the servicer claim from the insurance company when using hazard claim funds to complete repairs?
Many servicers file hazard claims, or pay third parties to file them, simply to meet investor servicing requirements. The money is placed in a restricted escrow account, but repairs may not be completed for months, if not years. When repairs are finally authorized, a separate vendor is contracted to execute repairs, for another fee.
But according to the dwelling insurance contract, the money paid out in the hazard claim is after depreciation. In other words, it does not cover the full value of the loss. If the mortgagee does not use the claim funds to make the necessary repairs in a contractually stated time period, the recoverable depreciation is lost. Not only that, but dwelling policies also provide for overhead and profit if repairs are completed to the adjuster's scope of loss. Many standard line insurance policies also provide a payment for expenses incurred to obtain permits and/or expenses incurred for code upgrades (usually a percentage of the cost, between 5% to 15%). All of these benefits are forfeited when the mortgagee waits to make repairs.
Many servicers have also paid fees throughout the process that impact the overall corporate contribution to FHA conveyance: fees to vendors for multiple services throughout the process, fees to municipalities for possible violations at the property and debenture interest to HUD.
Ruth Delgado is vice president of operations at Superior Home Services Inc.