FHA Foreclosure Prevention Faltering
It used to be, way back in 2005, that if you were working with a borrower who was behind on payments, you smiled when you learned that it was an FHA loan, because you knew that HUD foreclosure prevention programs were solid and reliable.
And, if you knew the mortgagee letters better than the servicer, you could ensure that you were getting maximum advantage for the borrower. Worst case scenario, if the servicer was “punting” the file in order to collect on a claim, with the right contacts, you could get HUD to intervene and save the home from foreclosure.
Today, I am issuing this announcement:
FHA is no longer a leader in foreclosure prevention.
The land of loss mitigation is a parallel universe where up is down and right is wrong. Servicer requirements and investor guidelines swing violently from one end of the spectrum to the other: one day, it’s “We don’t do loan mods.” The next day it’s, “You also qualify for a rate reduction.”
Yesterday’s file requires just two paystubs, a financial statement and a hardship letter. Today, you also need the last two years’ tax returns AND the W-2’s, plus your shoe size and waist measurement.
While everything’s a bit of a blur in the world of foreclosure prevention, one thing is clear: FHA’s foreclosure prevention programs are outdated, and no longer “innovative.”
One of the biggest obstacles to foreclosure prevention on an FHA loan is the 12-month hard-cap requirement for their best workout solutions. The loan must be less than 12 months delinquent.
Now, you might ask: Why in the heck should a borrower who’s more than a year delinquent be allowed to prevent foreclosure on their home?”
My answer: personal catastrophe.
My second answer: the U.S. Bankruptcy system.
I’ll address the second issue first. A significant number of borrowers file Chapter 13 bankruptcy to prevent foreclosure. Unfortunately, the failure rate on Chapter 13 cases can be as high as 70-80%, depending on whose stats you want to believe.
One thing the Chapter 13 system IS proficient at is taking a small, manageable problem and making it even bigger.
I see people on a regular basis who are 12 to 18 to 20 or more months delinquent on their mortgage. In almost every case, they’ve filed a Chapter 13 case that’s later been dismissed.
Now, if you have a scenario like this with a sub-prime loan, we can work some real magic.
I recently worked with a borrower whose wife has brain, bone AND breast cancer and is clearly unable to work. We got their first mortgage knocked down from 11% to 3.5% an their second mortgage went from 9% down to just 0.5%. You can do these kinds of things with a sub-prime loan.
On the other hand, I’m working with an FHA borrower who’s faced similar- although less severe- circumstances. She’s recovered now, back to work, and can actually afford the full PITI payment on her loan at its current rate.
The problem? It’s an FHA loan and she’s 17 payments behind.
So, instead of having the flexibility needed to address this on a “case-by-case” basis, we’re forced due deal with imposed rigidity of FHA guidelines.
We will figure this out in the end, but no thanks to HUD.
So while HUD used to be the undisputed champion of foreclosure prevention, truly committed to keeping borrowers in homes, they have done little to address the needs of those experiencing legitimate, catastrophic hardship. It’s very clear that HUD is now a laggard in the foreclosure prevention industry.
I know there’s a lot of complaining about bailing out “irresponsible borrowers,” but I think that most would agree that there’s a short list of hardships that should receive special consideration: catastrophic illness, death of an income earner, etc.
At a Fed “Preventing Foreclosure” conference, I nudged the HUD official sitting next to me and asked, “Hey- are you guys offering H4H (Hope for Homeowners program) on HUD-insured loans?”
Of course, I was joking. But the irony is that while HUD is perfectly fine with investors taking a haircut on their bad loans, they’re not going to take a similar hit on the loans that they insure.
And while they’ve certainly offered real hope for homeowners to keep their home while most others in the industry were not, it’s now high time for them to review their policies and improve them to reflect the realities of today’s economic climate.
If you’re trying to prevent foreclosure on your home and you need help to navigate the system to ensure you can not only keep your home but stay in your home for the long haul, call our hotline: 888 327 5095.
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November 1st, 2008 at 11:01 am
It looks like it guarantees that FHA will not fail. Home Loan
November 3rd, 2008 at 7:45 pm
[It looks like it guarantees that FHA will not fail.]
Does it?
I don’t know.
A full claim might be costly, as well.
As I mentioned in other post, at some point, the “We want to keep people in their homes” will give way to the realities of managing a portfolio to minimize risk.