FHA Requests Authority to Transfer Servicing for Troubled Loans

The Federal Housing Administration (FHA) is seeking legislative authority to transfer FHA-insured mortgages to another servicer depending on the current servicer’s performance and the loan’s risk to the agency’s mutual mortgage insurance fund. 

In a written testimony submitted to the Senate Committee on Appropriations, FHA Commissioner Carol Galante proposed several legislative requests targeted at strengthening the FHA. 

Having the ability to transfer loan servicing would lead to more effective loss mitigation, Galante said in her testimony, and would apply to servicers who are at or below a service tier ranking score of III, or when the FHA secretary decides it’s necessary to protect the MMI Fund. 

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With congressional authority, FHA would be able to transfer servicing from the current servicer to a specialty servicer designated by the agency; require a servicer to enter into a sub-servicing arrangement with an FHA-identified entity; and/or require a servicer to engage a third-party contract to assist in some aspect of loss mitigation.

“Such authority would permit FHA to better avoid losses arising from poor servicing of FHA-insured loans, yielding better results for both borrowers and FHA,” said Galante in her written testimony. 

The testimony also included several other legislative requests meant to strengthen the FHA fund beyond steps that have already been taken, including indemnification authority for direct endorsement lenders, authority to terminate origination and underwriting approval, a revised compare ratio requirement, and authority to structurally change the HECM program through mortgage letter. 

A K&L Gates report on the testimony notes that FHA made “identical” requests in November and December of 2012, adding that it’s a proposal that should be “carefully considered” despite possible risks. 

“The risk of FHA forcing a transfer of servicing may dilute the value of the contract right to service, because the servicer may be forced into a distressed sale, particularly if the required time period for the transfer is short,” says the K&L Gates report. “While a requirement to transfer servicing is a less drastic alternative than the loss of FHA approval from the perspective of an approved mortgagee, the inability to realize fair market value for the mortgage servicing rights in question could have a significant adverse effect on a servicer.”

Access the testimony

Written by Alyssa Gerace

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