When it comes to moving REOs back into the marketplace, the Federal Housing Administration's (FHA) Claims Without Conveyance of Title (CWCOT) program is crucial. CWCOT provides mortgagees with procedures for bidding and payment claims under the Single Family FHA Mortgage Insurance Program. However, delving into the complexities of the program can be daunting, which is why we turned to two experts in the space, Altisource's SVP of Real Estate Services Min Alexander and Director of Real Estate Auction Services James Harp.
What is the Federal Housing Authority’s CWCOT program and how it has affected the servicing space?
Alexander: As HUD’s primary insurer for single-family home loans, the FHA faced challenges with limiting losses and quickly returning homes to communities in cases of mortgage default. The FHA created the CWCOT program in 1987 to reduce inventory owned by the Department of Housing and Urban Development (HUD) by providing an alternative disposition channel. Prior to the implementation of the CWCOT program, servicers had two options after foreclosure:
- Convey the property to HUD after meeting asset condition requirements or
- Forego the mortgage insurance claim payment and keep the property (i.e., not convey the property to HUD)
The CWCOT program created a third option permitting third-party sales as an alternative to conveyance. In theory, this option should have further decreased HUD-owned inventory by allowing servicers to sell properties in as is condition and thus reduce timelines and repair costs. In reality, the addition of third-party sales resulted in only minor improvements to the program. Following the 2008 housing crisis, HUD adjusted its guidelines to give the CWCOT program more flexibility. The revised program allowed servicers to accept offers for less than the full debt owed on the loan by utilizing a HUD-approved discounted value. This value-based pricing strategy allowed sales to occur at or below a property’s market value as opposed to requiring the full debt as the minimum acceptable sale price. The current program has allowed a much higher volume of homes to be sold via a third party, resulting in fewer properties being conveyed to HUD.
What are the key benefits of CWCOT programs to servicers and the marketplace broadly?
Alexander: FHA developed the CWCOT program to help build stronger communities by preserving the condition and accelerating the sale of its REO properties. To accomplish FHA’s objectives, the CWCOT program provides the servicer with two primary claim channels: third-party sale at foreclosure auction (or, in the early stages of REO, as a so-called “second chance” auction) and conveyance to HUD. By encouraging third-party purchasers to acquire these homes earlier in the default process, homes can be re-occupied much sooner while preventing REO stigma throughout the communities.
CWCOT is meant to help servicers reduce costs and accelerate the rate at which REO properties are moved back into market. To date, has it been effective at meeting these goals?
Harp: The CWCOT program has been very effective. By HUD’s estimates, the program has saved U.S. taxpayers over $3B in holding costs for FHA over the last few years by decreasing timelines and returning homes back to communities. Recent reports from HUD indicate that a majority of FHA-insured homes are now selling to third parties as opposed to conveyance, leading to reduced costs incurred by HUD to manage that inflated population. From a servicer’s perspective, every property that they are able to sell to a third party eliminates the need for continued management costs and advances and eliminates the complex requirements that must be satisfied when preparing a property for conveyance.
Everything the servicer does during the foreclosure process is subject to regulatory scrutiny. What compliance issues are associated with CWCOT auctions and how can they best be mitigated?
Harp: Any time a servicer introduces another vendor into their default process, an effective compliance and control program becomes critical to ensuring that the vendor is performing their duties as expected. Potential pitfalls exist for services ranging from ensuring that the foreclosure sale is conducted according to statutory requirements to properly pricing and marketing a property according to the program’s guidelines once the foreclosure has taken place. A vendor’s demonstrated competency in implementing and managing an effective control framework should be part of the servicer’s consideration. Additionally, technology and systemic workflow controls should be part of that overall framework supplied by the vendor to ensure that no errors are made in a highly regulated and governed program.
Why is data so critical to having a successful CWCOT program?
Alexander: A significant obstacle to optimizing CWCOT outcomes is the ability to leverage available data and analytics to make better decisions. While most information is available to servicers—including asset level, mortgage, market and vendor cost data—servicers often struggle to synthesize the information to produce clear, meaningful outputs that aid decision-making. This inability to synthesize data to produce actionable outcomes is evident in the waterfall resolution strategies utilized by most servicers for CWCOT assets. The waterfall resolution can be summarized as simply, “Try this, and if it doesn’t work, then try this.” This approach often creates timeline delays, increases costs and causes unnecessary escalations for servicers. This is because each action plan in the waterfall is (a) isolated from a broader view of outcomes, (b) sequential in order, starting with the path of least resistance, and (c) undifferentiated across a portfolio of assets.
Technology plays a large role in the real estate industry. What are the technology innovations transforming the management of CWCOT programs?
Alexander: Leading technologies to advance CWCOT program strategies will incorporate well-planned decision tree frameworks that provide a controlled road map to model a broad view of probable outcomes and related risks for assets through the late-stage default lifecycle. Real-time data for the asset, market, mortgage and vendor services are synthesized in the decision engine, which presents simplified scenarios along with the calculated NPV at each time period to facilitate proactive decision-making based on tangible comparisons. By digesting voluminous data for each probable outcome to present an apples-to-apples comparison through NPV, decision-makers can quantify the costs and risks of each decision path. This controlled decision theory framework can help overcome the three obstacles presented above to effectively utilize large amounts of data, develop intuitive technology platforms and reduce information asymmetries.
To learn more about CWCOT, you can download Altisource's recent white paper, "New Opportunities for Servicers to Optimize CWCOT Disposition Strategies" click here.