Every mortgage loan servicer knows the importance of moving REO back into the market efficiently. Even today, when REO inventory is dropping and the foreclosure crisis is behind us, it is still critically important that costs are reduced and loss severity limited during this process.
In the wake of the subprime lending crisis, the Federal Housing Administration stepped up its efforts to ensure that low- to moderate-income homebuyers could still access the market. Today, FHA loans are among the most risky in the servicer’s portfolio. When these loans go into default, it’s in everyone’s best interests that they are moved back into the market as quickly as possible. To that end, FHA recently refocused attention on its “Claims Without Conveyance of Title” (CWCOT) program.
The CWCOT program, which has been in effect since 1987, serves to encourage third parties to purchase assets at courthouse foreclosure sales instead of having servicers convey the assets to FHA asset managers. By allowing bids that do not amount to the total debt owed on the asset, the program seeks to decrease the number of homes in the U.S. Department of Housing and Urban Development (HUD) inventory.
For a more complete description of the program and its requirements, see Mortgagee Letter 87-20, dated June 23, 198,7 and Mortgagee Letter 91-16, distributed on March 11, 1991. This material provides servicers with a comprehensive overview of the CWCOT program as well as the procedures for bidding and payment of claims under the Single Family FHA Mortgage Insurance program.
When the program was initiated in the late 80s, it was a disappointment. It was ineffective in its application to vacant and non-owner-occupied properties and the department incurred considerable losses from appraisal and advertising costs, as well as overhead expenses, to operate the program. Much has changed since that time.
With the FHA still under pressure to cut its carrying costs — primarily marketing and managing the assets — CWCOT will likely remain in effect for quite some time. However, this article is not intended to discuss the merits of the program, given that most servicers who are aware of it can easily see the value it offers if handled property.
The problem is that few if any servicers, particularly bank-owned firms, are staffed properly to execute the CWCOT program effectively.
The challenges for servicers
The CWCOT program offers significant cost savings to servicers who are freed from the difficult process of conveying real estate to FHA asset managers. Working with a number of the nation’s top 10 banks, we at Chronos are aware that monthly fees and penalties incurred by servicers related to missed timelines in the FHA loan conveyance process amount to many millions each month.
For the largest banks, the costs range from $15 to $35 million per month. Over the course of the year, the largest banks are faced with a $100+ million problem.
Unfortunately, the costs related to FHA properties in default begin to add up long before it’s time to convey the property. The government requires that the real estate be conveyed in good condition, which often requires extensive property preservation efforts. This involves inspections, field services and all of the vendor management that goes with it.
This is not the same property preservation process that servicers used during the initial years of the downturn. In fact, some servicers are surprised by just how difficult property maintenance and similar field services can be as they enter the CWCOT program.
Servicers attempting to comply with the CWCOT program have two options: they can attempt to manage the process internally in order to avoid conveyance to the FHA and its attendant problems, or they can outsource this work to outside vendors. Both options carry risk.
This work does not flow through the servicer’s shop evenly. This is a risk for servicers who attempt to manage this process internally. Attempting to staff for spikes in volume is incredibly expensive. Failure leads to missed deadlines and increased costs. The personnel required to handle this work are often more expensive than typical servicing employees as they require skills in legal procedure, compliance and vendor management.
Today, everything the servicer does during the foreclosure process is subject to regulatory oversight. The regulatory/legislative framework that sprung up to protect homeowners from unfair foreclosure practices in the wake of the downturn has also given rise to a tangled web of city ordinances, state regulations and federal rules affecting every foreclosed property. Managing the compliance process alone can require a tremendous number of resources and amount of expertise.
Even with an expert internal staff, servicers struggle with vendor management (e.g., property upkeep), title curative and deadline management. For firms that are not properly set up for such functions, the process can be time-consuming, costly and even error-riddled.
Title curative alone can be a challenge, as the process varies from state to state. Often, the foreclosing attorney fails to cure the title completely, leading to additional delays and costs if the servicer does not catch the mistake. HUD requires that any homeowner association obligations, such as liens and fees, be made current at the time of conveyance; yet, the challenge in locating such liens is significant.
Throughout this process, servicers must have a real-time flow of information coming back to them from their vendors in the field. This data must then be monitored by the servicer for exceptions in order to make the decisions necessary to protect statutory timelines. The inspection process alone, particularly for vacant properties, is an ongoing process that requires timely information coming back to the servicer. Failure to inspect regularly can result in unwelcome surprises in the form of unexpected tenants when the property is ready to be conveyed.
All of this prompts many servicers to consider outsourcing this work to a third party, but choosing the right partner is critical. Failure carries with it significant risks as the party ultimately responsible for all aspects of the servicer’s business remains the servicer itself. It’s easy to see why many banks are currently considering exiting the FHA loan program altogether.