On July 25th, 2016 the U.S. Department of Treasury (Treasury), the U.S. Department of Housing and Urban Development (HUD), and the Federal Housing Finance Agency (FHFA) released a summary of “lessons learned” from the government’s crisis-era housing foreclosure prevention programs, with an eye towards the future of loss prevention programs in the post-crisis environment.
The agencies identified five foundational principals for any future loss mitigation program from the 10.5 million mortgage modifications completed under this program during the prior seven years. Those principles are: Accessibility, Affordability, Sustainability, Transparency, and Accountability.
With the Making Home Affordable Program (MHA) program set to expire at the end of the year, mortgage servicers will no longer be compelled to review homeowners for a standard mortgage modification outside of a few exceptions.
The principles are derived from numerous practices and experiences that have led to effective loan modifications. Mortgage servicers will benefit from consideration of lessons learned as they develop loss mitigation and loan modification programs, independent of the federal programs.
Accessibility means that homeowners are able to understand, participate, and be eligible for foreclosure alternative programs. Practices that were found to benefit accessibility include:
- Standardizing servicer methods of interacting with homeowners to address delinquent borrowers punctually and efficiently.
- Streamlining the modification process and documentation.
- Offering delinquent homeowners a broad range of modification options that meet the needs of all stakeholders including homeowners, servicers, and investors.
Affordability means that homeowners are able to achieve meaningful payment relief and that offered solutions meet the needs of their specific hardships. Affordability has been promoted through the following practices.
- A waterfall program for qualified mortgages that applies modification options in a specific order. These options progress from lesser to more intensive measures and include capitalization, interest rate adjustments, term extensions, and principal forbearance/forgiveness.
- A holistic approach that considers the homeowner’s complete financial picture to satisfy their specific situation.
Sustainability means that servicers offer solutions to homeowners that stop default and enable borrowers to make full payments for the duration of the mortgage. Practices that support sustainability include:
- Meaningful payment reductions that are significant enough to make future payments sustainable. Loan modifications with greater payments adjustments consistently outperform modifications with smaller payment reductions.
- Early intervention with borrowers. Modifications with early intervention have better future performance.
- Housing and financial counseling, which have greatly increased a homeowner’s ability to cure a serious delinquency. In an Urban Institute study, counseled homeowners were less likely to default and nearly three times as likely to receive a loan modification than non-counseled homeowners.
Transparency means that all stakeholders can find and understand information about loss mitigation. Tools and information used to create transparency include:
- The MHA.gov website that offers standardized application packages, evaluation tools, fraud prevention information, and other educational resources available to the public.
- Information in any communication about the terms of a loan modification that helps the borrower understand the modification such as:
- The amount and term of payment reduction.
- The amount of a balloon payment due at the end of the modification (if any).
- Other options available if payment reduction is not possible.
Accountability means that there is effective oversight of foreclosure prevention programs. These practices have been found to include:
- A compliance process that included loan level testing as well as process and controls testing to ensure that a loan servicer is correctly following modification guidelines.
- Public reporting of servicer performance. The FHFA’s foreclosure prevention report has promoted accountability and helped improve servicer performance.
Many of these programs and processes will expire at the end of the year with the retirement of MHA. The industry will have greater independence in working towards practical post-crisis loan modifications through proprietary loan modification and loss mitigation programs. This includes flexibility to establish new standards for documentation gathering, the creation of loan modification procedures and eligibility waterfalls, and the establishment of new compliance reporting procedures and public reporting procedures
The Loss Mitigation framework for a more stable economic environment will present new challenges. Successful organizations will create an effective loss mitigation and mortgage modification framework to prosper in this new environment.
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