ABA MBA Support FHA Action to Make Single Family Loan Sale Program Permanent

Ladies and Gentlemen,

The Mortgage Bankers Association (MBA) and the American Bankers Association (ABA) are jointly writing to provide feedback on FHA’s Single-Family Loan Sale Program (“SFLS” or the“Program”). We applaud FHA for its intention to transition the SFLS from a demonstrationprogram to a permanent one and appreciate the opportunity to provide recommendations on waysto improve and expand the Program. The SFLS program has helped stabilize communities andprovided tens of thousands of borrowers, for whom all FHA prescribed loss mitigation effortshave failed, a second chance to save their homes and avoid foreclosure while producing a betterfinancial outcome for taxpayers. The Program has placed limits on foreclosures following loansales and other borrower protections during the demonstration period to ensure that any loan saleprogram offers both benefits to the Mutual Mortgage Insurance Fund (the “Fund”) and to thecommunities served by FHA insurance. As FHA evaluates the Program going forward, it isimportant to strike an appropriate balance between protecting the Fund, the interests ofcommunities and the need to ensure borrowers are fairly treated.

SFLS reduces loss to the Fund by relieving FHA of the high costs of maintaining and marketingforeclosed properties. The program also allows the Fund to limit its losses on defaulted loans byselling them after all FHA foreclosure avoidance options have been exhausted. In its 2016Annual Report to Congress, HUD estimated that SFLS program sales saved the Fund anestimated $2.4 billion above the alternative REO program. Programs such as SFLS and Claimswithout Conveyance of Title provide a crucial alternative to the conveyance process – acomplicated process which is time consuming and expensive for both servicers and FHA. The FHA’s inefficient conveyance process causes properties to remain vacant longer, whichadversely affects neighborhoods and increases maintenance and repair costs. The higher propertypreservation costs then adversely impact the Fund as well as FHA servicers.

FHA can make changes to the SFLS to expand loan eligibility and encourage more servicerparticipation. Key obstacles to servicer participation include:

• Restrictive eligibility criteria that limit the number of loans eligible for participationwhich minimizes the effectiveness of the program,
• Administrative burdens incurred in responding to irregularly scheduled sales with shortresponse timeframes,
• Inability to obtain timely answers from FHA to questions that arise in assembling a loanpackage,
• Excessive costs due to:
  • high rates of loan fallout,
  • delays in receiving payment of interim servicing advances from purchasers, and
  • disputes over contract issues.

The following are our recommendations for improving the Program and expanding participation.These comments are based on the experiences of active participants in the SFLS program.

Recommendations

1. Establish a regular schedule of loan sales

Infrequent and irregular Program sales with short response timeframes strained both servicer andFHA resources. Servicers had to assemble teams quickly – taking resources away from otherareas – in order to review and prepare for such sales. FHA similarly had to divert resources inorder to support a loan sale which caused delays or an increased backlog in other areas. Forexample, participating servicers reported that their pending supplemental claims fell furtherbehind when FHA diverted claims staff to process claims related to loan sales.

If the program is formalized — as it should be given its benefit to borrowers and the Fund —FHA should maintain a consistent schedule for Program sales. This will increase predictabilityand provide servicers with sufficient time to identify eligible loan populations. A predictableschedule would help mitigate the costs and resources associated with assembling offers by,among other things, allowing for staff training and efficiencies in staffing allocation. Predictablesales would also serve to reduce the administrative burden on FHA and allow for betterallocation of staff resources.

2. Maintain consistent eligibility criteria across sales and lock qualified loans as of aspecific date

The SFLS demonstration program was inefficiently structured. Eligibility criteria changed fromsale to sale which made it more difficult for servicers to identify and screen loans within theshort response timeframe.

In addition, the substantial amount of time between identification of qualified loans and saleresulted in high fallout rates as many loans no longer met the eligibility criteria at the time ofsale. A participating servicer estimated that about 20% of loans submitted for inclusion in SFLSlater fell out of the eligible loan population. For loans that fall out or are not awarded in a sale,servicers report experiencing difficulty and delays in reinstating FHA insurance. To reduce fallout, the population of qualified loans should be locked as of a specific date. FHA should provideguidance for how changes that occur after that date (such as loss mitigation activity orsurchargeable damage) should be handled.

3. Expand loan eligibility criteria

Given the substantial cost savings to the Fund from a well-functioning asset sale program,eligibility criteria should be expanded to encourage broader participation. We suggest thefollowing changes:

• Expand eligibility to loans secured by properties with surchargable damage (provided thedamage is insured or the FHA claim is reduced by the estimated amount to repair), loanssecured by mobile homes, loans in bankruptcy and loans with resolved title claims.
• Eliminate or loosen the LTV and Maximum Missed Payment restrictions. The addition ofthese caps has materially decreased the number of loans that can participate in theProgram.
• Eliminate vacancy minimums.
• Eliminate Borrower Risk Scoring from the eligibility criteria

In addition, we recommend the following policy changes:

• Expand Broker Price Opinions (BPO) requirements to permit use of distressed propertycomparable to determine value
• Require a new valuation prior to sale if there is a material change to the condition of theproperty determined by monthly property inspection results.

4. Revise reps and warrants.

Participating servicers reported spending significant resources in lengthy and expensive conflictresolution over contractual representations/warranties (reps and warranties). Some reps andwarranties were not based on objective criteria and none of them contained a materialityprovision. Repurchase demands can be received years after a loan sale, even for technicalbreaches that did not materially affect the value of the loans.

FHA should modify the purchase agreements to:

• Include sunset date of six months for all representations and warranties,
• Limit repurchase demands only to breaches of representations and warranties thatmaterially and adversely affected the value of a mortgage loan, and
• Remove the representation/warranty regarding “surchargeable” damage, since it issubjective and not typical for non-performing loan sales.

5. Revise SFLS claims policies

We offer the following recommendations for claims policy:

• Reimburse BPO and due diligence expenses for offers that met eligibility criteria but arenot ultimately included in sale and for loans that fall out of eligibility.
• Provide automatic extensions to First Legal and Reasonable Diligence timeframes forloans that fallout or are not included on award list.
• Eliminate the requirement that the tax and insurance disbursements be prorated based onthe claim filing date. This requirement does not follow industry practices for nonperforming loan sales and creates significant challenges because different tax authoritieshave different tax periods.
• Extend payment of interest from 30 days following the eligible claim submission startdate to 60 days to align with the claim filing window.

6. Purchaser/Bidder Comments

We offer the following comments and feedback from the perspective of SFLSpurchasers/bidders:

• Larger pool sizes are preferred to minimize negative impact of fixed transaction costs onthe bid.
• Reduce the post-sale reporting period to 3 years.
• Modify Participating Servicer Agreements to clearly define requirements and timeframesas follows:
  • Establish a clear deadline for delivery of collateral files to the purchaser to include theendorsed Note or lost note affidavit if original Note not available, and executedAssignment of Mortgage.
  • Establish a clear deadline for the submission of trailing expenses by the prior servicerfor reimbursement
  • Provide clear transfer instructions with time limitations for submitting documentationand expense reimbursement.
  • Require documentation be updated for the interim servicing period to includeservicing notes and loss mitigation actions since the date of transfer.
  • Clarify violations that would trigger repurchase/re-conveyance.
  • Establish a servicing fee for award loans based on current market costs for the interimservicing period.

7. Recommendations for additional FHA resources

Additional FHA resources could improve the efficiency of the Program and make it easier forservicers to participate. For example:

• Provide dedicated, trained staff to respond timely to issues or questions from participants.
• Provide an automated process for supplemental claim submissions.
• Dedicate additional resources to assist with error code resolution and supplementalpayment processes.

Conclusion

The SFLS Program maximizes recoveries to the MMI Fund, reduces claim costs, minimizes thetime that assets are held by FHA, and helps keep borrowers—otherwise headed to foreclosure—in their home. FHA can enhance this important program and increase participation by revisingSFLS policies and expanding loan eligibility criteria. We thank FHA for the opportunity to offercomments and feedback and would welcome the opportunity to meet with FHA representativesto discuss our suggestions in more detail. If you have any questions regarding ourrecommendations, please feel free to contact MBA’s Sara Singhas, Director, LoanAdministration, at (202) 557-2826 and ABA’s Sharon Whitaker VP, Real Estate Lending, at(202) 663-5321.

Sincerely,

Pete Mills
Senior Vice President,
Residential Policy and
Member Engagement
Mortgage Bankers
Association

Rod J. Alba
Sr. Vice President,
Mortgage Finance
American Bankers
Association