Win-Win for Borrowers and Servicers

In an article titled, “Enhancing the FHA’s loss mitigation toolkit can improve borrower outcomes,” experts from the Urban Institute pointed out that loan modification can be key to reinstating the loan and in avoiding foreclosure in case a  mortgage borrower becomes delinquent.

The loans insured by the Federal Housing Administration (FHA), however, prescribe loss mitigation guidelines that servicers of delinquent FHA loans must follow. Though these rules are helpful in minimizing FHA’s losses, some of them end up being cumbersome as a process for borrowers and also increase the costs for servicers. The Urban Institute’s Mortgage Servicing Collaborative suggests that simplifying some of these requirements will improve outcomes for both borrowers and servicers.

Addressing the complexities involved in the documentation of household expenses and hardship, the article noted that the process of gathering information on monthly income and expenses is overwhelming for most borrowers. Such receipt requirements can delay or even prevent a borrower from receiving a modification for which they might otherwise qualify, the article stated.

In addition to this, establishing borrower hardship is complicated, with multiple causes that may happen over an extended period—some of which are nearly impossible to document. The article notes that these documentation requirements act as barriers for struggling borrowers seeking mortgage assistance and have increased costs for servicers.

Elimination of borrower expenses documentation

As borrower expenses play a minor role, the Mortgage Servicing Collaborative calls for the elimination of borrower expenses documentation for loss mitigation evaluation. The article states that it does not play a major role as servicers consider expenses only to determine whether to evaluate a borrower for a loan modification. Moreover, borrower expenses are not used to calculate the postmodification monthly payment, it indicated.

Adoption of Internal Revenue Services

In cases where expense analysis is required, HUD could adopt the IRS’ Collection Financial Standards, the article pointed out. This will help provide monthly allowances for specific living expenses on food, personal care, apparel and other items that the IRS considers to be reasonable, and do not require any documentation from taxpayers. Following IRS standards would obviate the need for documents in most cases and provide much-needed clarity for borrowers and servicers, it noted.

In order to collect evidence of borrower hardship and to help borrowers explain complicated situations, experts from the Urban Institute suggest that HUD use the government-sponsored enterprises’ standard hardship affidavit (Form 710), which provides 10 options.

The massive scale of the FHA program necessitates policies that maximize the number of borrowers assisted, said the Mortgage Servicing Collaborative.