With COVID-19 fueling an unprecedented economic crisis and a surge in unemployment, servicers are anticipating a wave of potential foreclosures beginning in 2021. For mortgages insured by the Federal Housing Administration (FHA), recent program changes could help get those properties sold more quickly, reducing costs to taxpayers, and potentially preventing blight in neighborhoods.
In July, the government updated rules to the Claims Without Conveyance of Title program, known as CWCOT. The program was introduced in 1987 to reduce the inventory of REO properties held by the Department of Housing and Urban Development (HUD) after borrower defaults on FHA-insured mortgages. “FHA has had significant success expanding access to mortgage credit, increasing homeownership among an estimated 45 to 50 million Americans and supporting the housing market through every economic cycle,” said Tim Rood, Head of Government Relations for SitusAMC. “FHA has had less success at minimizing losses.”
Protracted timelines and high costs involved in delinquency, default, foreclosure, conveyance and resale process made it difficult and expensive for HUD to shed conveyed assets. CWCOT allowed servicers to sell the property in an “as-is” condition, which should have meant less money spent in maintenance and repairs, reduced holding costs, and faster sales. But the program had complex, rigid requirements and cumbersome implementation, so it didn’t take off initially.
FHA adjusted its guidelines after the Great Financial Crisis to make the program more flexible. Servicers could utilize a HUD-approved discounted value, allowing them to accept offers for less than the full amount of the debt owed on the property. The program was updated again to allow buyers to purchase properties through traditional public foreclosure sales and online auctions. “Third-party sales with emphasis on online auctions presented FHA with one of best opportunities to dispose of these assets, reduce losses and help communities return the homes to their highest and best use,” Rood noted.
The more flexible guidelines bore fruit, and by 2017 a majority of FHA-insured homes were selling at an accelerated pace to third parties rather than being conveyed to HUD, saving taxpayers an estimated $3 billion in holding and management costs, according to DS News.
HUD’s Mortgagee Letter 2020-2021 released July 7, outlines additional changes to the CWCOT program. (The industry had the option to begin using the guidelines on July 7, but they become mandatory in all cases with foreclosure sale occurring on or after October 5.) Industry participants suggest that the changes will facilitate higher sales overall, but compliance is paramount. “While these enhancements increased flexibility, they do add complexity to the program,” Rood explained. “It’s critical to establish proper control frameworks for implementation and to abide by proscribed timelines; for example, understanding when you can start marketing pre-sale and working with vendors to do that.”
According to HUD’s summary of the changes, the agency is enhancing FHA’s CWCOT procedures by:
- providing for a second appraisal upon vacancy for a property that had an exterior-only appraisal, where an interior appraisal could not be obtained;
- allowing Mortgagees to submit eviction costs and certain eligible property preservation expenses incurred during Post-Foreclosure sales opportunities;
- updating the policy and allowable fee structure regarding independent third-party providers that conduct foreclosure sales or Post Foreclosure Sales Efforts under CWCOT procedures; and
- regularly updating discounts in FHA Connection and changing to tier based pricing factors. After the property’s appraised value has been established, employees of a Mortgagee authorized to access the CAFMV link in FHA Connection should visit https://entp.hud.gov/clas/index.cfm to determine a property’s CAFMV.
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