A new brief released by the Urban Institute explores ways to improve Federal Housing Administration (FHA) foreclosure timelines and conveyance processes so as to drive down costs and make things more efficient. The brief is the third in a series produced by the Mortgage Servicing Collaborative (MSC), convened by the Housing Finance Policy Center at the Urban Institute.
This latest brief delves into the costs associated with servicing non-performing FHA loans, including the expenses related to both foreclosures and conveyance of the properties to HUD. The brief hinges on two notions: 1) discovering whether servicing non-performing FHA loans is more expensive than servicing non-performing GSE loans, and 2) discovering whether the FHA’s current foreclosure and conveyance processes create extra expenses.
The study found that, indeed, foreclosing on FHA loans is “orders of magnitude more expensive than servicing loans backed by the GSEs”—three times as expensive, in fact, on average, as reported by servicers. The brief targets two major causes for these increased expenses: 1) “an inflexible foreclosure timeline and penalty system that does not improve outcomes,” and 2) “a property conveyance process that slows down resolution, which causes properties to remain vacant longer, which can adversely affect neighborhoods and increase maintenance and repair costs.”
One of the primary drivers of these costs is the “interim penalties associated with failure to meet the FHA’s milestones in the foreclosure timelines,” according to data from MSC servicer members. According to the Urban brief’s data analyzed for 2015 and 2016 FHA claims, “43 percent of insurance claims received an interest curtailment penalty because of missed first legal action or reasonable diligence milestones.” As the Urban brief points out, the GSEs “ use milestones to track progress toward foreclosure, but missing a milestone in and of itself does not trigger a penalty.”
The brief also found the FHA fees themselves to be “onerous.” According to the data, “the average first legal interest curtailment for loans that missed this deadline was $5,360 per loan, roughly 3 percent of an average FHA loan amount of $175,000.”
Urban’s research also found high penalties when it came to conveyance. According to cited MSC servicer data, “the average per loan property preservation cost for FHA properties that were conveyed was $8,819, compared with $2,113 for nonconveyance routes.” For conveyance liquidations, surveyed servicers reported an average property preservation loss of $4,179. This works out to “ a loss rate of 47 percent on the $8,819 in expenses.”
Urban’s brief recommends that the FHA change its foreclosure timelines to enact penalties and timelines that are more closely aligned with actual delays in the process. They suggest these changes could be enacted through a simple administrative rule change. They also recommend expanding the availability of conveyance alternatives and exploring other possibilities to improve the process.
You can read the full Urban Institute brief by clicking here.