The Department of Housing and Urban Development has been facing increased pressure to encourage servicers of government loans to use loss mitigation before foreclosing on seriously delinquent home mortgages.
So last week it revived a long-tabled effort to sharpen its enforcement teeth, requesting the power to force servicers - even those it does not consider underperforming - to pay a very high price for foreclosing without trying to work something out with the borrower.
Under a proposed rule published Wednesday in the
The department currently seeks no damages in such cases but can charge a penalty of $6,500 per violation, with a 12-month cap of $1.25 million. The proposal's treble damages - the loan's remaining principal and servicing expenses, times three - would not count toward that cap.
HUD promised to focus its disciplinary efforts on servicers that make little or no effort to avert foreclosures. These "Tier IV" servicers reported using loss mitigation in less than 15% of the cases where it had a choice between doing so and foreclosing.
Still, it left open the possibilities of seeking the damages against servicers in the top three tiers, and of revising the rating methodology. But it said, "The public will be apprised of any change to HUD's focus."
Loss mitigation techniques include forgiving missed payments, crafting special repayment plans, or accepting a deed in lieu of going through the foreclosure process.
Foreclosing instead can be cheaper for the servicer but costlier for the mortgage holder or insurer. This is why over the past decade HUD, Fannie Mae, Freddie Mac, and private investors have altered their guidelines to require servicers to do more to avoid foreclosure. HUD, which has changed more slowly than the other players, also now reimburses servicers for more types of loss mitigation efforts than it previously did.
HUD is also seeking authorization to insure no-down-payment loans; doing so would increase the FHA's risk.
Howard Glaser, a former HUD official who is now a Washington lobbyist, said the department has moved in "extreme bureaucratic slow motion" on the servicing proposal.
In 1998, Congress amended the National Housing Act to add treble damages to the civil money penalty system. HUD was authorized to implement the change in its 1999 budget. In December 2000 it published an advanced notice of proposed rulemaking.
As originally conceived, the conditions under which treble damages could be sought seemed "overly burdensome and potentially punitive to servicers," but it would have been bad public relations to soften the plan, Mr. Glaser said.
"For a time it appeared perhaps HUD would simply never issue a regulation."
Now there is more pressure on HUD, which traditionally has focused its enforcement on the origination side of the business, to crack down on consumer-unfriendly servicers.
"There's increased attention and concerns about delinquencies and foreclosures, and HUD wants to try to nip that in the bud," Mr. Glaser said.
Comments on the proposed rule, which HUD has tweaked in several ways since the 2000 advance notice, are due June 14.
Some lenders called the proposal a bit troubling.
Jack Case, an executive vice president of National City Corp., said that HUD has been "very cooperative in working with the industry." However, he also called the proposed rule dangerous, because it would authorize HUD to seek treble damages against any servicer, not just the underperformers it says it is targeting.
"It's a multibillion hit to the industry a year if fully taken to each and every opportunity," he said.
But William C. Apgar Jr., the former federal housing commissioner, said that during his tenure, some "major" servicers "didn't even have loss mitigation divisions that focused on" government loans. "If that servicer was driven out of business, the world would be a better place."
Mr. Apgar, now the executive director of Harvard University's Joint Center for Housing, said HUD should try to avoid penalizing servicers for "a small inadvertent error," as focusing on Tier IV would essentially do. "They have plenty of folks to go after before they get to close calls like that."
In the most recent rankings - for the year that ended Sept. 30, released Feb. 18 - there were 21 servicers in the underachieving Tier IV, including two that service between 10,000 and 100,000 loans.
Marion McDougall, the executive vice president of operations for First Tennessee National Corp.'s First Horizon Home Loans, said loss mitigation on government loans is usually a net expense for a servicer.
Some servicers see that "the cost of having a loss mitigation team is higher than having a loss moving through foreclosure," so they do not even try mitigation, she said.
But First Horizon values customer and investor relationships, she said. It considers even a delinquent borrower "a customer you can keep for life, rather than just moving them through the pike."
First Horizon's chief executive, Jerry Baker, said he supported cracking down on those that shirk loss mitigation.
"If FHA moves toward unacceptable losses, that program is probably going to become more restrictive and less valuable for customers," he said. "Every servicer has a responsibility to service the loans in accordance to investor guidelines."
Even with strong home price appreciation in most parts of the country, the mortgage investor is "going to take a loss on every" foreclosure, Mr. Baker said. In most cases, "you'd be better off keeping the people in their homes."
Mr. Apgar said he was "basically a hawk" on the issue, because the FHA program "has been abused in the past, and most of the abuse has come from a few which give the program a bad name." Some people "have got accustomed to the idea that they don't have to treat the FHA the same way they would treat a private servicing client."
