U.S. Consumer Financial Services Alert
By Krista Cooley, Kathryn Baugher
If there is anything that galls servicers of government-insured loans, it is the forfeiture or curtailment of all accrued interest from mortgage insurance claims resulting from the failure to foreclose fast enough within artificially created state time lines. At first glance, the U.S. Department of Housing and Urban Development (“HUD” or the “Department”) listened to the complaints of servicers who argued that they should not be penalized for pursuing foreclosure avoidance options or experiencing delays in the legal system beyond their control. HUD’s proposed regulation regarding changes to the Federal Housing Administration’s (“FHA”) single-family mortgage insurance claim filing process includes proposals that pro rate the curtailment of interest based on actual delays caused by the servicer, proposing to eliminate the complete forfeiture of accrued interest for only one day of delay. So far, so good, but HUD did not stop there. HUD also proposed the complete extinguishment of an FHA insurance policy if the servicer does not complete foreclosure within a new set of artificial time lines. Read together, HUD’s reform is to provide servicers with more accrued interest if they do not foreclose fast enough, unless, of course, HUD invalidates the whole insurance policy—the loss of both principal and interest—by virtue of HUD’s subjective definition of unreasonable delays. Few servicers think that is progress.
This proposal raises significant questions and concerns for FHA mortgagees that hold and service FHA-insured loans, many of which could have a chilling effect on FHA lending and servicing activities if HUD were to implement the proposed claim filing deadline as proposed and without significant changes to HUD’s claim filing guidelines and procedures.
Below, we briefly summarize the proposed regulatory changes and discuss some of the key concerns and questions raised by the Department’s proposed regulation, with a focus on the issues raised by the proposed claim filing deadline. We note that HUD proposed a very similar regulatory change almost 25 years ago that would have terminated the FHA insurance contract based on conveyance delays related to property damage and/or title issues. Based on strong objections from mortgagees, HUD reconsidered its proposal and determined that insurance termination on such grounds would be “unnecessarily harsh.”1 Instead, the Department determined that it could protect the Mutual Mortgage Insurance Fund (“Insurance Fund”) through less drastic measures, such as curtailment of interest and costs. Hopefully, upon consideration of the concerns raised by this proposal, HUD will again conclude that unilateral termination of an FHA insurance policy based on delays that often are outside of a mortgagee’s control continues to be a draconian penalty that could negatively impact mortgagees’ participation in the FHA program and, ultimately, the access to housing opportunities for those borrowers served by the FHA program.