A new report from a government watchdog shows that mortgage servicers’ delays in foreclosing on properties and subsequent delays in the conveyance of those properties to the Federal Housing Administration may have cost the FHA as much as $2.23 billion in unnecessary payouts.
The report, issued late last week by the Department of Housing and Urban Development Office of Inspector General, found that HUD paid claims for an estimated 239,000 properties that servicers did not foreclose upon or convey on time.
And those delays cost the FHA an estimated $2.23 billion.
According to the HUD-OIG report, the watchdog reviewed a “statistical sample” of 90 claims by HUD out of nearly 250,000 loans that had indicators that they may have missed their deadlines during the past 5 years.
Of those 90 loans, 89 missed a foreclosure deadline, a conveyance deadline, or both, the HUD-OIG report showed.
Projecting that out over the roughly 250,000 loans that showed signs of a missed deadline means that HUD may have paid claims for 238,978 properties that servicers did not foreclose upon or convey on time.
According to the HUD-OIG report, HUD paid an estimated $141.9 million for servicers’ claims for “unreasonable and unnecessary debenture interest” that servicers incurred after missing a foreclosure or conveyance deadline.
The HUD-OIG report also showed that HUD paid out an estimated $2.09 billion for servicers’ claims for “unreasonable and unnecessary holding costs” that were incurred after the deadline to convey.
“While it was reasonable for servicers to pay costs to preserve the property and complete the foreclosure process, it was unnecessary and unreasonable for HUD to pay for such costs after the date the servicer was required to convey,” the HUD-OIG report states. “The claim would have been reduced if servicers conveyed on time and these funds would have been available for the needs of the FHA mortgage insurance fund.”
The report states that in many of the observed cases, servicers missed their deadlines to initiate foreclosure, finalize foreclosure and secure the properties, and convey the properties to HUD.
According to the report, the foreclosure and conveyance process is sequential, so when a servicer misses the foreclosure deadline, it is more likely to miss the conveyance deadline as well.
The HUD-OIG report states that in 56 of the 90 loans sampled, servicers were late initiating foreclosure by an average of 419 days, or approximately 14 months.
The longest delay was on a loan that missed this deadline by 1,862 days.
Additionally, the HUD-OIG report states 68 of the 90 loans reviewed, servicers were late foreclosing upon and securing the properties by an average of 523 days, or approximately 17 months. The longest delay was on a loan that missed this deadline by 1,779 days
The HUD-OIG report states that for 87 loans of the 90 loans reviewed, servicers were late conveying the properties to HUD by an average of 495 days, or approximately 17 months. The longest delay was on a loan that missed this deadline by 1,896 days.
According to the HUD-OIG report, the delays took place because HUD “did not have adequate controls to ensure that servicers complied with Federal regulations.”
The OIG report states that HUD has “few options” to force servicers to convey and file a claim.
“Program regulations allow HUD to disallow mortgage interest when a servicer misses a foreclosure deadline, but HUD has no further recourse to protect itself from servicers that have already missed a deadline but have yet to convey,” the OIG report states. “Therefore, if a servicer missed its deadline to initiate foreclosure, it had already forfeited its mortgage interest and had no further financial or regulatory incentives to meet its remaining deadlines.”
The OIG report also showed that HUD monitored only a small percentage of servicers after the claim had been paid.
According to the report, HUD had three staff members and a contractor to conduct post-claim servicer reviews. The three staff members had additional duties that took as much as 50% of their time away from conducting post-claim reviews, the OIG report stated.
“Since fiscal year 2014, the contractor had conducted 54 servicer reviews,” the report stated. “There are more than 1,800 FHA-approved servicers.”
The HUD-OIG suggests that HUD change its regulations to install a maximum time period for filing insurance claims and prevent repayment of expenses incurred beyond established timeframes.
The watchdog also suggests that HUD develop a strategic information technology plan to make significant operational changes to HUD’s monitoring of single-family conveyance claims to ensure that servicers comply with foreclosure and conveyance timeframes.
In an attached note of response, HUD states that it shares the OIG’s concern over the amount of money that may have been paid out unnecessarily and plans to introduce a new rule early next year that would install a maximum time period for filing insurance claims, just as the OIG suggested.