FHA plan to prevent loss could hit servicers

by Kelli Rogers25 Jun 2013
The Federal Housing Administration's plan to mitigate losses tied to poor servicing has been deemed risky.
The FHA wants Congressional authority to transfer an FHA-insured mortgage to another servicing shop whenever a loan poses a threat to FHA's mutual mortgage insurance fund, according to several reports.
But the plan, which FHA Commissioner Carol Galante proposed in written testimony before the Senate Committee on Appropriations, comes with a few 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,” K&L Gates attorneys Laurence Platt and Kathryn M. Baugher said in a report issued on the proposal.
Galante proposed that a transfer should occur when a servicer is either at or below a servicer-tier ranking score of III or when it’s necessary to preserve the mutual mortgage insurance fund.
In an effort to prevent the FHA from facing losses tied to poor servicing, Galante has asked that the FHA have the option of transferring a loan from one servicer to a specialty servicer or the ability to require a servicer to enter into a sub-servicing arrangement with an entity designated by the FHA. Another option would be requiring a servicer to contract with a third party to assist with loss mitigation issues.
Given the proposals potential impact on Ginnie Mae, K&L Gates suggested the plan should be considered carefully.
"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," K&L attorneys wrote.



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