Defaults on FHA-backed loans are anticipated to increase over the next several years, resulting in an increase in the number of properties that are sitting vacant. This means that maintenance costs for servicers and their third-party parnters will only continue to rise. So, how can servicers effectively limit their losses on FHA loans that go into default? And, how can they limit claims on these properties?
The risk of defaults on FHA loans is very high, but servicers can mitigate losses by establishing strong quality control procedures throughout the default resolution process. Servicers lose millions of dollars every year for what would otherwise be reimburseable collection expenses due to lack of documentation, over-allowable charges, etc. Instead, servicers must begin compiling their FHA claims upfront, for instance, when a loan first becomes delinquent.
When an advance has been made, transaction data and documents from the servicer must be immeditaly retrieved. The data can then be populated into the investor template and invoices stored in a secure, document management system. This way, the claim is built throughout the default resolution process, eliminating the “paper chase” and other errors that cause reconveyance issues and prevent the claim from being filed in a timely manner.
Of course, for all of this to take place, servicers must first significantly improve their understanding of the hazard insurance claims and investor claims processes. Servicers need to recognize the inextricable linkage between hazard claims and investor claims. Rather than siloed processes, they should be viewed as components of a connected ecosystem called Collateral Loss Mitigation.
The goal of hazard claims processing is to recover funds to be used in the repair and remediation of the collateral so that it can be liquidated. All too often, servicers’ conveyance processes are held up by ineffective approaches to hazard claims, and vice-versa. Instead, by taking a consolidated, end-to-end view of these processes, the funds to complete repairs are quickly recovered, the rehabilitation work is accomplished in a timely manner, the relevant documentation for the investor claim is more easily compiled and overall operational efficiencies are realized.
One way that servicers can avoid substantial fixed cost investments in technology, variable costs of highly skilled claims personnel and the compliance responsibility associated with their infrastructure and claims-related activities, is by outsourcing their claims management processes. Furthermore, the outsourcer should always recover more insurance and investor proceeds for the servicer, while eliminating curtailments. In short, that’s a Win-Win.
About The Author
Denis Brosnan is the president and chief executive officer of Dallas-based DIMONT, provider of specialty insurance and loan administration services for the residential and commercial financial industries in the United States. Additional information is available at www.dimont.com.