#MBAServicing2020: MBA Releases Default Servicing Alignment White Paper

ORLANDO—The Mortgage Bankers Association released a white paper that analyzes federal foreclosure prevention programs and offers recommendations to better align and standardize those programs.

The paper, Improving Mortgage Default Servicing Processes: Opportunities for Alignment and Standardization (https://www.mba.org/advocacy-and-policy/residential-policy-issues/mortgage-servicing/servicing-government-loans), provides what MBA President and CEO Robert Broeksmit, CMB, describes as “an unprecedented review of the state of servicing policy.”

“It’s an important and comprehensive document,” Broeksmit said here at the MBA Servicing Solutions Conference & Expo. “The White Paper shows the path to a stronger, fairer, more efficient and more affordable servicing system. It is our to-do list for the next several years. And we’re already working to get this done, and done right.”

The white paper represents the work of MBA’s Residential Loan Administration Committee, which in 2019 embarked on an initiative to improve alignment in default servicing processes.

Workgroups consisting of 30-40 members representing 29 companies were formed to cover the entire delinquency cycle, including:

–Early intervention and home retention processes;

–Non-retention foreclosure alternatives;

–Standard foreclosure milestones and processes;

–Property preservation; and

–Disaster recovery.

Each workgroup compiled a comprehensive matrix of applicable requirements from Fannie Mae, Freddie Mac, FHA, the VA and the Department of Agriculture’s Rural Housing Service. They then compared servicing standards to identify areas where greater alignment or standardization could benefit borrowers or communities and/or improve servicing efficiencies, while reducing costs and mitigating losses for federal guarantors and insurers.

The paper makes a set of general observations:

–GSE default servicing policies are aligned in all material respects. The few areas where servicing policy differs, such as seasoning requirements for short sales and condemnation requirements, do not present significand operational challenges or impact borrower outcomes.

–Overall, VA and RHS guidance is far less prescriptive than FHA’s. This allows VA and RHS servicers to align broader industry best practices.

–Regarding short sales, the group recommended more alignment across all agencies with respect to minimum net proceeds and marketing days, although the group did not have a specific preference for which agency standard to align to.

–The most significant areas of misalignment involve FHA requirements. Specifically:

—-FHA borrower outreach requirements are the most prescriptive and present operational challenges. FHA’s unique face-to-face requirement imposes significant costs on servicers with little benefit to borrowers, as evidenced by the low take-up rate.

—-FHA imposes unnecessary barriers to loss mitigation in terms of documentation requirements, non-occupant borrower participation and requiring borrowers to sign Trial Payment Plans.

—-Unlike other programs, FHA lacks streamlined home retention options for severely delinquent borrowers. While FHA includes a streamlined process for short sales, it is only streamlined for borrowers who no longer live in the home.

—-FHA’s multiple foreclosure time frames and conveyance process are out of line with other programs and are significant drivers of higher FHA servicing costs.

—-FHA’s property preservation expenses have defined maximum amounts (in total and for each service), which requires servicers to seek FHA approval (often multiple times for a loan). This is inefficient for both servicers and FHA.

The paper notes FHA is “aware of these concerns” and has initiated efforts to review, update and, where possible, align its standards to those of the GSEs. However, MBA also observed that previous efforts by FHA on similar servicing reform initiatives “unfortunately stalled.

“No one will be surprised to hear that the most consistent source of misalignment was with FHA servicing policies,” Broeksmit said. “FHA knows there are issues, as well. The staff over there is working behind the scenes to move things in the right direction.

The white paper offers a set of recommendations that follow the delinquency cycle. Section One of the papers deals with inconsistencies in loss mitigation, home retention, foreclosure alternatives and standard milestones. Section Two deals with misalignments in the property preservation process. The third section deals with disaster recovery.

“Markets work best with certainty and common standards,” the paper says. “Improvement of the default servicing process through industry-wide alignment and standardization offers clarity and predictability to all parties and produces equitable outcomes for borrowers and communities that do not vary based on the particular investor or government insurer or guarantor. Greater uniformity in loss mitigation processes promotes transparency and accessibility of foreclosure alternatives and ensures borrowers with similar circumstances are given the same opportunities regardless of who owns or insures their loan. It also allows for increased operational efficiencies and reduced servicing costs, most significantly those associated with servicing delinquent loans. With housing markets stabilized and delinquencies back to pre-crisis levels, now is the time to address the remaining areas of misalignment.”

The paper also notes MBA stands ready to support these efforts through the administrative, rulemaking and legislative processes (where necessary). “MBA also believes that the more default servicing standards are aligned across the agency programs, the more likely it is that the private investors, the private-label securities market and portfolio lenders will adopt those standards in their servicing practices.”