Servicing a troubled Federal Housing Administration-backed loan costs three times as much as a loan from government-sponsored enterprises (GSEs) — largely due to the FHA’s steep penalties for any missteps during the process.
In the last of three briefs for the
Over the 15 years, I’ve spent in the reverse mortgage world, I’ve tried to explain to my customers how FHA works and the challenges they place on the companies that service reverse mortgages. In a nutshell, it’s complicated. The brief explores the costs of servicing nonperforming FHA loans, including foreclosing and conveying properties to the US Department of Housing and Urban Development (HUD).
Quoting from the Urban Institute brief, “The data reveal that foreclosing and disposing of an FHA-insured loan is orders of magnitude more expensive than servicing loans backed by the GSEs (government-sponsored enterprises). Moreover, the data show that the two biggest drivers of FHA servicing costs are:
- an inflexible foreclosure timeline and penalty system that does not improve outcomes, and
- a property conveyance process that slows down
resolution, which causes properties to remain vacant longer, which can adversely affect neighborhoods and increase maintenance and repair costs.”
The key difference between FHA and GSE foreclosures lies in the timing of penalties. The FHA assesses fines for missed deadlines during the foreclosure process, which accrue until the property turns over to HUD — regardless of whether the individual mistakes actually held up the overall foreclosure process.
GSEs, meanwhile, don’t assess penalties for individual missed deadlines as long as the overall timeline is met.
“This approach grants servicers more flexibility to tailor their work to accommodate operational challenges or borrower circumstances,” the team wrote. “This flexibility is useful during periods of high delinquencies when servicing operations are already under duress.”
To remedy the situation, the Urban Institute researchers recommend that the FHA change its policies to “penalize only
“The FHA might benefit from encouraging or providing incentives for more voluntary liquidation options, such as short sales and streamlining those options to make them less cumbersome to execute,” the team wrote.