The most recent mortgagee letter from HUD that was sent out to all FHA-approved single family mortgagees is bringing about a host of changes for servicers in the mortgage industry.
According to the mortgagee letter, the new changes will consolidate and update property preservation and protection (P&P) guidance for properties securing FHA-insured mortgages and:
- increases the Maximum Property Preservation Allowance and adds,
clarifies, and increases other line items;
- emphasizes FHA’s current conveyance condition standards;
- reminds mortgagees of FHA’s inspection requirements; and
- details claims calculation and documentation requirements for
property P&P actions.
Patrick Nackley, Director of Marketing and Business Development at Superior Home Services sat down with DS News to explain how the new HUD advisement will affect servicers' businesses and what they can do to adjust and comply with the changes.
Can you characterize the regulatory requirements servicers currently have to comply with regarding condition of their Federal Housing Administration (FHA) properties in preparation for conveyance?
Nackley: The new mortgagee letter changed the definition of conveyance condition, mandating remediation of insurable damages to the adjuster’s scope of loss. We work with mortgage servicers with damaged FHA properties in their default inventory that will inevitably need to be remediated in order to meet this new conveyance condition.
Regulation is stricter now than it has been in the past; the product of a number of issues that are currently being managed by HUD, FHA, and the Treasury department. As the economic situation that is faced by these agencies has changed, the guidelines have gotten stricter with regard to what is conveyance condition and how that standard will be managed by HUD and HUD’s M&M contractor. It’s certainly more stringent than it’s been in years past.
What are the most significant changes in the February 1st Mortgagee Letter on Preservation and Remediation Requirements and how do they impact servicers?
Nackley: The mortgagee letter is 26 pages long. It is quite detailed and there are a number of changes. Two of the most significant changes are the allowables going up and the change in the conveyance condition standard. HUD requires that general maintenance be completed at the property during the mortgagee’s possession. This requirement is proactive. In other words, servicers do not need to get permission to execute certain types of maintenance deliverables at the property (grass cuts and lawn care, winterizations, lock changes). There are HUD mandates for servicers to accomplish these things on their own, and servicers are provided an scheduled aggregate allowance to accomplish these tasks. The allowance had not changed for some time though. Increasing the allowance that servicers have in order to execute some of these property-level deliverables is quite significant. The new mortgagee letter provides a $5,000.00 allowable limit, up from $2,500.00.
The other significant change is to the definition of conveyance condition. That change requires properties that have suffered insurable damage to be remediated according to the adjusters scope of loss. That was not the case prior to the mortgagee letter. There are items that are included in a hazard claims settlement that were not necessarily part of conveyance condition prior to the letter. These things are often as granular as whether or not every single door in a home needs to be replaced or whether or not the trim inside a home needs to be replaced. But when you look at insurance adjuster’s scope, it is quite thorough and the scope will include all damaged items that were part of an insured “occurrence.” So it’s broadening the scope of what is conveyance condition and obviously that’s significant.
What steps can servicers take to ensure that they are in compliance with these new regulations?
Nackley: Obviously they must be much more proactive in addressing all the changes in such a broad and detailed mortgagee letter. One of the things we here at Superior Home Services focus on is programmatically addressing damages to the property with the hazard claim proceeds, with an idea of when the servicer is going to remediate. Many servicers are looking at a number of competing stressful items during the foreclosure process. They are looking at what are the obligations in a presale versus a post-sale environment: is the home owner-occupied or is the home occupied otherwise (may not be with an owner), what are the obligations in an occupied presale environment, does the servicer have to wait in order to execute on some of these mandates until completing the sale and/or eviction. If these variables are present, where does that put the servicer with regard to filing hazard claims, remediating the property, and keeping it in conveyance condition?
At Superior Home Services, we programmatically approach insured damages to FHA properties in default and we understand the HUD regulations, as well as theinsurance contracts, well enough to where we can help servicers strategically think about how they will remediate the damages using the hazard claim funds. This allows for a lot more flexibility for servicers in addressing their conveyance needs. When a servicer settles an insurableloss, the insurance company depreciates the value of that claim because the items that need to be remediated and/or replaced have a decrease in value based on age, decay, or wear and tear. Our company helps the servicer remediate the property to the adjuster’s scope of loss using the available hazard claim funds and offsets corporate expense by then claiming the benefits in the insurance policy: the recoverable depreciation and the overhead and profit. This fits directly with the new edict from HUD in the mortgagee letter.