Mortgage servicers have spent the previous couple of years watching as federal housing businesses adopted numerous methods to assist debtors who entered forbearance because of the COVID-19 pandemic however struggled to exit because of rising rates of interest.
Now they’ve a request for the incoming Trump administration — standardization and simplification of loss-mitigation frameworks.
Servicers say {that a} lack of alignment in program buildings throughout the Federal Housing Administration (FHA), U.S. Division of Veterans Affairs (VA) and U.S. Division of Agriculture (USDA) is inflicting operational inefficiencies and borrower confusion.
Including to the problem is uncertainty surrounding Regulation X, which the Client Monetary Safety Bureau (CFPB) is presently revising. This regulation governs foreclosures protections throughout loss-mitigation efforts.
“You’ve obtained a situation the place everybody’s gone down their very own path, and servicers are going together with it as a result of they gained’t deny individuals the chance to make the most of packages. Nevertheless it’s operationally very troublesome,” mentioned Matt Tully, chief compliance officer at mortgage servicing platform Sagent.
“Within the conversations I’ve participated in, the trade is making an attempt to craft a unified imaginative and prescient for streamlining waterfalls throughout FHA, VA and USDA to make processes smoother.”
Loss mitigation is a “perpetual situation for servicers,” in response to Krista Cooley, a companion at Mayer Brown, who spoke at an Data Administration Community (IMN) servicing convention in New York in November.
Cooley mentioned that the present choices underneath the federal businesses are nonetheless largely formed by insurance policies created throughout the COVID-19 pandemic — as a result of they haven’t “kind of discovered the right way to implement the lesson we’ve realized.” In the meantime, they’re typically unable to depend on conventional mortgage modifications because of present market circumstances.
Authorities program hiccups
Business specialists agree that loss mitigation is extra easy within the typical mortgage area. Fannie Mae and Freddie Mac have aligned their loss-mitigation waterfalls and carried out predictable, automated techniques.
The FHA, for instance, launched a fee complement partial declare resolution in February. This selection combines a standalone partial declare to carry the mortgage present together with a diminished principal fee for 3 years. Throughout this era, the mortgage will not be modified, permitting it to stay eligible on the market to Ginnie Mae.
However in late November, the FHA additionally proposed updates to its everlasting loss-mitigation choices. The draft outlines a number of choices for debtors, whether or not they can resume funds or not. These embrace a standalone partial declare, a 40-year mortgage modification and the fee complement, amongst different choices. It additionally introduces “guardrails” to make sure residence retention for debtors who can maintain month-to-month funds, resembling a three-month trial fee plan.
“FHA simply proposed their everlasting waterfall earlier than Thanksgiving, and we’re actually within the process of reviewing their updates to the handbook steering,” mentioned Brendan Kelleher, director of mortgage administration on the Mortgage Bankers Affiliation (MBA).
“The FHA COVID waterfall expires on April 30, and the nice danger is that beginning on Could 1, companies would technically return to the previous HAMP (Dwelling Reasonably priced Modification Program) guidelines,” Kelleher defined. “Happily, the FHA proposed a waterfall to make a number of these COVID modifications everlasting, and we’re hopeful they will finalize it as quickly as attainable.”
Some of the debated modifications to the waterfall comes from the VA with its introduction of the Veteran Affairs Servicing Buy (VASP) program. Introduced in April, VASP permits the VA to buy defaulted loans from mortgage servicers and maintain them in its portfolio at a 2.5% mounted rate of interest.
This system has confronted criticism from politicians who argue it creates a “ethical hazard” by doubtlessly incentivizing veteran debtors to turn into delinquent to allow them to safe a considerably decrease month-to-month fee. Critics have additionally raised considerations about its potential impression on the federal price range.
“It actually has its controversy, however it’s the solely present possibility,” mentioned Justin Wiseman, the MBA’s vp for residential coverage. “If somebody criticizes VASP, I’d ask them: How do you propose to assist the veterans who want help? Given the rate of interest dynamics and the present construction of the VA program, if we had a VA partial declare possibility that hadn’t sundown when it did, we would have extra instruments in our toolkit. However the actuality is, we don’t.”
Wiseman expects that underneath a Trump administration, there can be a “renewed concentrate on authorities effectivity and price range self-discipline.”
But additionally he believes that efficient packages like VASP, which offer reduction to debtors whereas supporting company targets, are more likely to stay intact. “The explanation it’s referred to as loss mitigation is {that a} well-structured program ought to lead to fewer losses by means of default than a poorly structured one,” Wiseman defined.
The MBA continues to advocate for a partial declare possibility within the VA area. Not like VASP, a partial declare program could be rate of interest impartial and will present quicker reduction to debtors who may not qualify for VASP.
Modifications to Regulation X
A key focus for mortgage servicers in 2025 and past would be the CFPB’s replace to the Regulation X loss-mitigation framework, which was introduced in July. The up to date guidelines emphasize borrower help and loss mitigation over foreclosures for owners struggling to make mortgage funds.
The CFPB’s proposal introduces a brand new “loss mitigation assessment cycle,” informally known as the “hand-raise” idea. This method replaces the normal requirement for an entire loss-mitigation software. Moreover, the proposal contains prohibitions on amassing servicing charges and third-party prices, together with a ban on advancing foreclosures proceedings if debtors have requested help.
Tully, from Sagent, mentioned that requiring a full software for mortgage modifications can typically be burdensome. That’s as a result of some data will be supplied by cellphone and third-party sources. In accordance with him, the CFPB is making an attempt to modernize the best way that debtors in want of help interface with their servicers.
However Cooley, from Mayer Brown, added that there are structural challenges within the proposed framework. “It’s extremely straightforward to get right into a loss-mitigation assessment and extremely troublesome to get out,” she mentioned. Below the brand new proposal, to exit, the borrower must turn into present, not talk with the servicer inside 90 days, or don’t have any different choices accessible for them after intensive evaluation.
The MBA agrees that the proposal wants enchancment. “As proposed, the loss-mitigation assessment cycle is an ambiguous and undefined commonplace that makes it troublesome for servicers to find out when foreclosures and price protections ought to appropriately begin and cease,” Kelleher mentioned.
Regardless of these criticisms, there may be uncertainty about whether or not the CFPB will pursue these modifications underneath the Trump administration.
“They might kind of kill it, and it doesn’t come out wanting something prefer it does, and we simply reside with the construction that’s within the present regulation,” Cooley mentioned. “They might re-propose a very completely different rule that addresses among the streamline classes realized within the pandemic, among the issues that may be good to have in a restructured regulation that applies to the loss-mitigation course of.
“Or they will additionally simply preserve going and assessment the feedback, kind of choose up the items that the brand new administration really thinks are good, or take among the trade ideas and the feedback which have already been made.”
One other important concern amongst trade executives is that broader housing coverage points, resembling ending the conservatorships of Fannie Mae and Freddie Mac, may overshadow these urgent wants round loss mitigation.
“If we get caught up on this euphoria of releasing the GSEs, that can suck all of the oxygen out of the room,” Tully mentioned. “If that turns into the large story in housing in 2025 and 2026, then nothing else will get performed.”