How the FHA's changes will transform foreclosure alternatives
February 7, 2023 8:26 AM
The upcoming changes to the Federal Housing Administration's options for distressed mortgage borrowers reveal how the pandemic has permanently reshaped the way loss mitigation is handled.
The changes at the FHA, which go into effect April 30, incorporate consumer and servicer feedback related to how pandemic foreclosure alternatives worked in practice. A continued review of their effectiveness will take place for the next 18 months.
The Housing Policy Council indicated that the balance of considerations for servicer and borrower is remarkable and shows a lot of attention to points each have raised, while leaving room for future adjustments.
"We do feel like this reflects engagement between the government agencies, FHA, in particular, and not only the industry, but the consumer advocacy community," said HPC Executive Vice President Meg Burns.
Here are a few ways the FHA's changes transform procedures to address industry and consumer concerns.
The changes at the FHA, which go into effect April 30, incorporate consumer and servicer feedback related to how pandemic foreclosure alternatives worked in practice. A continued review of their effectiveness will take place for the next 18 months.
The Housing Policy Council indicated that the balance of considerations for servicer and borrower is remarkable and shows a lot of attention to points each have raised, while leaving room for future adjustments.
"We do feel like this reflects engagement between the government agencies, FHA, in particular, and not only the industry, but the consumer advocacy community," said HPC Executive Vice President Meg Burns.
Here are a few ways the FHA's changes transform procedures to address industry and consumer concerns.
More expansive use of streamlined modifications
The FHA changes will more broadly streamline modification procedures that have required proof-of-income assessments from borrowers.
This could help borrowers with long-term reductions in pay, who have been frustrated by the documentation process involved, and the delays it causes in their ability to quickly obtain more affordable loan terms that could help them reperform.
It's in servicers' interest to accommodate this because delays in modifications hurt them too, often leaving them with a borrower that's not paying at all versus one that's making smaller payments. Studies have shown that the sooner borrowers get their modifications, the more likely they are to reperform, said Burns.
"What has mattered the most has been getting the modification done quickly, and getting the borrower a payment reduction, not tailoring the modification for individual borrower income," she said.
This could help borrowers with long-term reductions in pay, who have been frustrated by the documentation process involved, and the delays it causes in their ability to quickly obtain more affordable loan terms that could help them reperform.
It's in servicers' interest to accommodate this because delays in modifications hurt them too, often leaving them with a borrower that's not paying at all versus one that's making smaller payments. Studies have shown that the sooner borrowers get their modifications, the more likely they are to reperform, said Burns.
"What has mattered the most has been getting the modification done quickly, and getting the borrower a payment reduction, not tailoring the modification for individual borrower income," she said.
Broader incentives for servicers to avoid foreclosures
Servicers previously didn't receive incentive payments for the specialized pandemic-related foreclosure alternatives the way they did for others, but now that use of those options are being expanded, they will.
Among the things the incentives will help pay for are title checks that will continue to be required where partial claims are involved.
"In the FHA space in particular, default servicing costs a lot of money, and so having these incentives can help," Burns said of the payments, which range from $250 to $1,000 depending on the loss mitigation option involved.
Among the things the incentives will help pay for are title checks that will continue to be required where partial claims are involved.
"In the FHA space in particular, default servicing costs a lot of money, and so having these incentives can help," Burns said of the payments, which range from $250 to $1,000 depending on the loss mitigation option involved.
Increased access to affordable payments
There are at least two timely applications for another measure, which proportionally increases the amounts that can be set aside in a partial claim for later remuneration when borrowers have missed payments to the statutory maximum of 30% of the loan amount from 25%.
It'll help make payments more affordable for distressed borrowers who have set aside missed payments from forbearance in a partial claim and still have a hardship, and those whose affordability has been further challenged by upticks in interest rates.
"It gets harder to get a borrower into an affordable payment when some of the levers that are used are constrained, so they decided to open this one," Burns said.
It'll help make payments more affordable for distressed borrowers who have set aside missed payments from forbearance in a partial claim and still have a hardship, and those whose affordability has been further challenged by upticks in interest rates.
"It gets harder to get a borrower into an affordable payment when some of the levers that are used are constrained, so they decided to open this one," Burns said.
The likely outcome: reducing foreclosures, but not entirely
Neither the taxpayer-backed FHA's insurance fund nor mortgage companies that may be subject to some financial pressure themselves can endlessly absorb costs related to distressed borrowers' missed payments, but they do want to avoid foreclosures when possible.
While the changes increase access to alternatives, the FHA will still likely have to foreclose on some borrowers who, for example, won't be able to have their loan sufficiently modified to obtain an affordable payment even with the increase in the partial claim amount to 30%.
While some of the foreclosure alternatives don't allow borrowers to keep their homes, they may minimize the pain involved. If homeowners agree to a pre-foreclosure sale alternative, for example, they might be able to avoid hurting their credit score and ability to borrow money.
While the changes increase access to alternatives, the FHA will still likely have to foreclose on some borrowers who, for example, won't be able to have their loan sufficiently modified to obtain an affordable payment even with the increase in the partial claim amount to 30%.
While some of the foreclosure alternatives don't allow borrowers to keep their homes, they may minimize the pain involved. If homeowners agree to a pre-foreclosure sale alternative, for example, they might be able to avoid hurting their credit score and ability to borrow money.
