Proposed FHA Rule Could Signal Servicing, Ginnie Mae Challenges Ahead

A proposed rule by the Federal Housing Administration that went largely under the radar in early July could have major implications for loan servicers, as well as lenders that securitize loans through Ginnie Mae. 

The rule as it is written does not apply to reverse mortgages, but there is some hope that a similar rule may apply to reverse mortgages at some point in the future, as it would improve the process for those who service reverse mortgage loans. 

The National Reverse Mortgage Lenders Association weighed in on the rule to that effect last week. 

The proposal has two major components. It would limit the maximum time period for filing insurance claims with FHA, and it would change policies concerning curtailment of interest and disallowance of certain expenses incurred by servicers. 

The Urban Institute analyzed the proposal last week, finding that while the second provision is “on balance a modest improvement,” the first “would hamper access to credit for prospective FHA borrowers.” That’s because the rule would raise costs for servicers as well as uncertainty around servicing delinquent FHA loans, thus limiting access to consumers. Currently, the average time line for filing insurance claims is much longer than 12 months, and lenders and servicers are able to benefit from the flexibility allowed by not having a strict deadline. 

NRMLA is asking for a rule to apply explicitly to reverse mortgages in the context of the rule overall. 

“We respectfully request…that the proposed rule be clarified or revised to be made explicitly applicable to FHA-insured Home Equity Conversion Mortgage loans and that the rule apply to claims filed on or after its effective date, and not merely to claims filed on loans with case numbers on or after its effective date,” NRMLA wrote in a comment letter made available this week. 

Further, the Urban Institute says, the proposal is concerning for servicers and Ginnie Mae, as well as the entire mortgage market. 

“The aggressive time frame could have negative consequences for borrowers who could benefit from loan modifications late in the foreclosure process,” the Urban Institute writes in its analysis. “Currently, servicers can put foreclosures on hold to help borrowers stay in their homes. The new rules make the timelines so strict and the punishment so draconian that servicers may not be willing to review options late in the process.”

Further, risks to Ginnie Mae, as the securitization vehicle for FHA and VA loans, could arise given that servicers would be required to buy any loans out of Ginnie Mae pools according to the new time lines, without insurance or reimbursement to cover the expenses. Transfer of servicing also becomes more problematic for Ginnie Mae under the proposed rule, the Urban Institute finds. 

“These problems will feed back into the origination side of the business,” the report notes. “Originators already impose credit overlays on FHA loans. They often plan to hold the FHA MSRs in portfolio but know that they can sell the capital-intensive [mortgage servicing rights] if they need to free up capital or raise cash. This flexibility is very important to most institutions. The proposed rule is likely to significantly reduce the value of FHA MSRs for loans that carry any appreciable amount of insurance-termination risk.”

View the full analysis.

Written by Elizabeth Ecker

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