Proposed FHA Deadline Could Put Servicers in a Bind

The Federal Housing Administration wants to set a hard deadline for servicers to file claims on soured mortgages. Industry executives say it should be manageable — unless foreclosures surge again.

Before the financial crisis, servicers customarily filed claims for reimbursement of loan losses within three months of seizing the collateral. But as the backlog of troubled mortgages mushroomed, later submissions became more and more common.

The delays have made processing claims harder on the FHA's end. So on Monday, the agency proposed requiring lenders to submit claims three months from the point at which they obtain marketable title to a foreclosure property or sell the property to a third party.

"It really isn't likely to impact the smaller mortgage companies but it would have a larger financial impact on the bigger mortgage companies that were handling significant amounts of foreclosures," said Justin Caplan, an executive vice president at Atlantic Bay Mortgage Group in Virginia Beach, Va.

For a midsized player, the proposed deadline is manageable under normal conditions, but in some situations even a smaller mortgage company might face challenges meeting it, said William Giambrone, the CEO at Platinum Home Mortgage in Rolling Meadows, Ill.

"It's probably a reasonable amount of time. But in a stressful situation, whether it be another crisis or a regional disruption, if something were to occur, I would think that would be a pretty tight time frame to make sure you audited your claim before you sent it," he said.

He suggested that the proposal, which is open for comment for 60 days from July 6, be modified to allow for a little flexibility so long as companies submit claims regularly rather than in large batches. As written, the proposal allows for delays in special circumstances, but discourages any delay longer than one year.

Mortgage companies and the third parties they outsource to need more time today to file claims in part because FHA lenders have been fearful of getting large fines for compliance errors. These worries, as well as high postcrisis foreclosure volumes, have contributed to longer claim processing timelines, Giambrone said.

The percentage of FHA claims filed more than 90 days out has steadily climbed each fiscal year since the 2008 downturn, when roughly 11% of claims took that long to file. Almost 40% of claims took more than 90 days to file in the last fiscal year and some have taken as long as two years, according to the Department of Housing and Urban Development (which oversees the FHA).

From the FHA's perspective, delayed filings make it harder to anticipate claims in the insurance fund budget. Also, the longer a servicer takes to file, the more expenses the agency must cover for things like property upkeep. And the longer a home sits unoccupied in a servicer's inventory, the greater the risk it will drop in value.

For all these reasons, lenders say it's understandable why the FHA now wants to hold servicers to a formal deadline.

"The initial reaction is it's a good thing because when you have a large number of foreclosures, the mortgage insurance pool is diminished," Caplan said.