John Vella is chief revenue officer of Altisource Portfolio
Solutions. The views and opinions expressed in this article
are those of the author and do not necessarily reflect the
official policy or position of Altisource or any other Altisource
business or entity. The foregoing content is not intended to
constitute, and in fact does not constitute, financial, investment, tax or legal advice by the author, Altisource or any
other business or entity. Reach Vella at (310) 756-8074.
Managing the FHA Landscape
Servicing Federal Housing Administration loans requires diligence
By John Vella
Federal Housing Administration (FHA) loan products have filled a void in the market- place for decades by offering financing to qualified borrowers who cannot afford the
large downpayments or don’t have high enough FICO
credit scores to secure conventional loans. In 2015 and
2016, FHA originations made up about 17 percent of
total residential purchase loans, according to the U.S.
Department of Housing and Urban Development.
This percentage is expected to increase in 2017.
This origination growth will bring an increase in FHA
loan servicing, making it even more important that
mortgage originators understand the complex FHA
servicing guidelines before matching borrowers up
with FHA products. Learning this information can help
originators answer borrowers’ questions about FHA
programs and protect their company’s bottom line.
Due to nuances in the FHA guidelines, servicing FHA
loans is very different than servicing loans sold to the
government-sponsored enterprises (GSEs). To meet
the demands and requirements that come with servicing a large FHA portfolio, proper training, testing,
compliance and reporting must be part of the loan
If a mortgage company does not service the loans
it originates, it should ensure that the servicer it uses
remains compliant with these requirements. The risk of
not complying with the guidelines could include penalties, curtailments, excess advancing, re-conveyance
and other demands — all of which add to the cost
of servicing FHA loans and can ultimately impact
servicers as well as their clients and companies.
Many of the risks of servicing FHA loans are centered on
adherence to delinquent-loan servicing requirements.
These include heightened property preservation guidelines, conveyance and re-conveyance timelines, and
If requirements related to these processes are not
properly managed, both the risk and the cost of servicing FHA loans will rise. For many servicers, a primary objective in managing delinquent loans is to avoid
the conveyance of assets back to FHA by leveraging
programs such as foreclosure and post-foreclosure
auctions. Both of these options are governed through
updates to the FHA’s guidelines for claims without
conveyance of title, or C WCOT.
During the default-servicing process, great care
must be given to bringing an asset into conveyance
condition. This requires meeting a detailed list of property conditions and title requirements. FHA requires
that all of these resolution activities occur within 120
days of the start of foreclosure.
On average, 65 percent to 75 percent of defaulted
assets are not conveyed back to FHA. The remaining
25 percent to 35 percent of assets that do not sell and
are conveyed to FHA can cost servicers more than
$5,000 per asset plus internal management costs.
Conveyed assets also carry additional risks because
of the complexity of the conveyance guidelines. Failure to follow the guidelines may allow FHA to reconvey
the asset back to the servicer with all expenses borne
directly by the servicer.
To mitigate these risks, it is becoming more common
for servicers to establish specialized FHA servicing
teams that are extensively trained and tested on
FHA guidelines and processes. These teams typically
manage third-party vendors as well as the internal
resources responsible for servicing the FHA portfolio.
Successful FHA servicing teams typically use rules
engines — software systems encoded with regulations — to track and trigger workflow tied to the
guidelines. The workflow also is distributed to the
vendor network to ensure that proper tasking and
data-integration controls are in place. This structure
supports proper exception reporting, service-level
agreement (SLA) monitoring and transparency
throughout the process.
A recent trend is to hire vendors who can supply a
bundled suite of FHA services leading up to the completion of a foreclosure sale. The right vendor should
be able handle title, valuation, property preservation,
marketing and auction services from 90 days before the
foreclosure sale date all the way through conveyance.
This bundled service offers easier integration between the servicer and the vendor, limits handoffs
and optimizes timelines while providing for consolidated oversight. The title can be cleansed, repairs
to the property can be made and appropriate bid
values and disposition strategies can be established
efficiently and completely prior to the foreclosure
sale. If effectively implemented, this approach will
help ensure FHA guideline compliance and minimize
the servicer’s cost.
n n n
With the expected continued growth of FHA originations and servicing portfolios, mortgage companies
that service their own loans need a proper infrastructure to manage the risks and costs associated
with servicing FHA loans. Dedicated teams, integrated technology and proper reporting are essential to
Hiring vendors that are properly staffed, trained
and capitalized can work just as well as a well-trained
internal team. With proper investments in infrastructure, careful vendor selection and consistent oversight, the industry will become better equipped to
manage the growth in FHA lending and servicing. n
At a Glance
Conveyance condition standards
At the time of conveyance to the U.S. Department of
Housing and Urban Development, a property must be
undamaged by fire, flood, earthquake, hurricane, tornado, or mortgagee neglect. In addition, the property must
be secured, the lawn maintained, winterized (as applicable), and interior and exterior debris must be removed
with the property’s interior maintained in broom-swept
condition. This includes the removal of any vehicles and
removal of any personal property in accordance with
local and state requirements. Mortgagees are responsible for the damage to, or destruction of, properties
because of their failure to take reasonable action to
secure, inspect, preserve and protect such properties.
Source: U. S. Department of Housing and Urban Development