Mortgage lenders: FHA commissioner cites lack of public trust

by Karen Lawson
October 26th, 2010

In the wake of scandals involving fraudulent lending and questionable mortgage loan servicing practices, FHA commissioner David H Stevens notes that the mortgage lending industry is suffering from a lack of public trust. In a meeting with the Mortgage Bankers Association, Mr. Stevens said, “There’s a reflection in the media and a reflection in the industry that we’re not being held accountable enough.” FHA currently insures about 30 percent of US home loans, and its policies have major influence on mortgage lending practices and housing markets.

Mortgage lenders: Reluctant to participate in government foreclosure avoidance programs

Commissioner Stevens notes that mortgage lenders’ and servicing companies’ failure to participate in federal programs designed to save homes from foreclosure are adding to the negative perception of the mortgage lending industry. These programs include Making Home Affordable modifications and mortgage refinance programs, and the FHA short refinance program, which requires that mortgage lenders agree to reduce mortgage balances by a minimum of 10 percent. To date, mortgage lenders aren’t lining up to write down mortgage amounts as a method of preventing foreclosure. We’re wondering why mortgage lenders aren’t willing to avoid the costs and delays associated with mortgage foreclosure by participating in this program. Here’s why saving on foreclosure costs by reducing mortgage amounts by known amounts makes sense. There are a lot of what-ifs in the foreclosure process:

  • State law: Foreclosure proceedings are governed by state law, which determines whether a court of law or a non-judicial entity oversees foreclosure proceedings. Judicial proceedings require attorneys, and can take several months or longer. Non-judicial proceedings cost less and may take less time.
  • Bankruptcy filings: Homeowners may file bankruptcy immediately prior to a foreclosure sale or auction, which further delays a mortgage lender’s ability to take title to the affected property. Bankruptcy courts are experiencing backlogs, and mortgage lenders must hire attorneys to obtain permission to continue foreclosure.
  • Accruing interest: While homeowners in foreclosure continue living in their homes (or not) without making payments, mortgage lenders are losing interest on their mortgage loans.
  • Property maintenance: Distressed homeowners may abandon their homes. Vacant homes are frequently vandalized and can become magnets for crime. Depending on local law, mortgage lenders may be required to secure abandoned properties and abate nuisances and hazards that may occur during the foreclosure process.

There is no way to accurately estimate exactly how much foreclosing a home loan can cost, but mortgage lenders can estimate minimum costs based on the cost of an “uneventful” foreclosure that experiences no delays or extra expenses. Agreeing to write off less than the estimated amount and save the time and expense associated with foreclosing home loans.

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