The Federal Housing Administration's (FHA) proposed servicing reforms are limiting credit access to borrowers by altering the time frame for filing insurance claims.
The report's author, Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute noted that in July 2015, the FHA proposed a new rule that would affect servicing FHA loans.
"The changes that the FHA has proposed both raise the cost and increase the uncertainty of servicing delinquent FHA loans, and thus may ultimately affect access to credit."
The new rule would limit the maximum period for filing insurance claims with the FHA, which would limit access to credit. In addition the rule would also change policies concerning curtailment of interest and disallowance of certain expenses incurred by servicers.
"Servicers are imposing overlays on the FHA credit box partly because they are concerned about both the high costs associated with servicing delinquent FHA loans and the inability to adequately price for foreclosure-related uncertainty," Goodman said. "The latter includes the fluctuating costs associated with long timelines, property preservation, and conveyance, as well as the unpredictability of when at what cost servicing can be transferred. The changes that the FHA has proposed both raise the cost and increase the uncertainty of servicing delinquent FHA loans, and thus may ultimately affect access to credit."
Previously, HUD did not have a specific deadline as to when a servicer must file an insurance claim and claims could be filed at any time as long as the servicer complies with all requirements. The newly proposed regulation requires servicers to file claims no more than 12 months after the "reasonable diligence time frame" (RDT) expires or the insurance will terminate automatically.
Problems from the Lender or Servicer Perspective:
1. First, the RTD-plus-12-month time frame to file a claim is simply unrealistic.
2. Second, the proposed rule is silent on how to handle reconveyances.
3. Finally, having the insurance terminate automatically and without notice will generate considerable uncertainty for lenders and servicers.
The proposed rule also raises concerns for servicers, borrowers, Ginnie Mae (GNMA), and the mortgage market as a whole. The new time frame could negatively affect borrowers who may benefit from loan modifications late in the foreclosure process. Higher risk of losses could occur as GNMA bear the counterparty risk on its originators.
"The proposed rule is a mixed bag, but on balance far more negative than positive," Goodman said. "It represents a modest improvement to very harsh rules for missing established deadlines. But it imposes an unrealistic timeline for filing FHA insurance claims and an overly punitive penalty for missing that timeline. We worry that this latter change will increase the uncertainty associated with servicing delinquent loans, unnecessarily tightening access to credit and the assistance provided to some struggling borrowers."
The Urban Institute is encouraging comments on the FHA's proposal until September 4, 2015.