modernized guidelines offer benefits to borrowers and servicers
HUD’s current proposal is a step in the right direction for modernizing communications between mortgage servicers and borrowers in default.
What’s on the table
Under current regulations, which were first codified in 1976, FHA mortgage servicers must attempt face-to-face conversations to discuss and facilitate loss mitigation options before a borrower has missed three full monthly payments and at least 30 days before commencing foreclosure. To demonstrate their “reasonable effort” to arrange a face-to-face meeting, servicers must send a minimum of one certified letter and make at least one attempt to reach the borrower in person. In other words, they must send someone to knock on the borrower’s door. Borrowers may decline to meet face-to-face, and as many as 99.9% of them do, according to data from the Mortgage Bankers Association. Even so, complying with the face-to-face requirement costs servicers an enormous amount of time and millions of dollars a year while helping relatively few borrowers in distress.
A proposed rule change, published in the Federal Register on July 31, 2023, would permit FHA mortgage servicers to contact customers who are behind on their mortgage payments using more modern communication methods including email, phone and video.
A lot has changed in the last 50 years
When the face-to-face meeting requirement was put in place back in 1976, the latest development in telephone technology was a 30-pound cell phone aptly nicknamed “the Brick.” But Americans no longer live, work or bank the way they did in the mid-1970s.
- Postal mail is not an effective, surefire method of communication as it once was; people get a lot of junk mail that they skim and toss, if they review it at all.
- Consumer communication preferences have evolved faster than mortgage servicing guidelines have been able to keep up. Just about everyone these days has a smartphone, and more than half of servicing customers who receive a paper bill opt to view their mortgage statement digitally.
- The mortgage servicing landscape has also changed dramatically. Under the 1976 rules, the face-to-face meeting requirement is waived if the borrower does not reside in the mortgaged property or if the servicer’s nearest office is more than 200 miles from the subject address. But as HUD’s proposal notes, since the 1990s, mortgage companies have increasingly opted to consolidate their servicing operations in national call centers. Recent decades have also seen a significant shift from in-house servicing to outsourcing as well as increased transfer activity in the U.S. market for mortgage servicing rights. All these trends increase the likelihood of a borrower and their servicer being more than 200 miles apart.
HUD has read the tea leaves
One positive outcome from the pandemic is knowing we can safely and effectively conduct business online. In March 2020, as a response to the COVID-19 pandemic, HUD partially waived its face-to-face meeting requirement. According to HUD’s proposal, the temporary waiver, which was subsequently extended through December 31, 2023, has allowed mortgage servicers to provide loss mitigation assistance to more than 1.5 million distressed borrowers via alternate methods of communication. (Read how mortgage servicers used Black Knight’s solutions during the pandemic to provide relief to borrowers in distress through a variety of channels, including self-service tools, during the pandemic.)
The proposal HUD is now considering would permanently empower FHA servicers to use the same communication channels that have proven effective during the pandemic with most borrowers. It would also eliminate the narrow scope of the face-to-face requirement while still requiring that servicers attempt to communicate with all distressed borrowers — even those who aren’t occupying the mortgaged property or who live more than 200 miles from the servicer’s closest office.
What comes next
The proposed changes are posted for review with formal comments due by September 29, 2023. We applaud HUD’s leadership in this modernization effort and encourage our industry colleagues to submit their views.
If adopted, we think the proposed changes would likely go into effect by late 2024. However, details of the policy are still pending. Specifically, HUD indicates that it will issue guidance detailing acceptable communication methods for conducting meetings with defaulted borrowers separately through a Mortgagee Letter or Handbook update. Ultimately, these details are critical to determine the complexity and cost of the solutions needed to comply with such a significant policy change.
We all want to support distressed homeowners — and this proposal should eliminate many concerns with in-person meeting requirements. It would also bring borrower communications up to par with the standards of everyday living in the 2020s and onward. Nevertheless, the rule should also strive to ease the burden on servicers so they can implement an alternative that is efficient, cost effective, and successful.