Servicing FHA Loans continues to be challenging and, in many instances, includes high losses on default liquidated loans. While FHA delinquencies have greatly improved compared to post crisis delinquency, there are still over 7.8 million outstanding FHA insured loans with delinquency rates that rose as high as 11.25 percent according to the FHA Single Family Loan Performance Trends report published by HUD this past January.
When working with FHA Loans in default, there are many key time frames that must be met in order to minimize losses, beginning as soon as the date the loan was last contractually current, and continuing throughout the claim filing process. In many cases just missing the start of a foreclosure action by one day can result in increased losses of thousands of dollars. Failure to meet all time frames will not only result in interest curtailments, but ultimately the curtailment of advances as well. These losses can be further exacerbated depending on the type of pool, the Servicer’s ability to limit interest rate spreads, and time required to resolve. Additionally, if there was a missed time frame, FHA will only pay debenture interest to the point of the interest curtailment. After the interest curtailment, HUD will no longer pay debenture interest on the Unpaid Principle Balance.
To put things in perspective, if an FHA loan has an Unpaid Principle Balance of $150,000 with an interest rate of 3.5 percent, and you miss the first legal action for foreclosure, and it takes an additional 24 months to convey, the Servicer stands to lose $10,500 in interest alone. In addition to interest curtailments, the Servicer must fully comply with the allowable fee schedule for all legal actions and property preservation expenses. Overhead costs as well as any fees or costs associated with clearing title issues are not reimbursable or recoverable through a claim to HUD.