A federal audit of loss-mitigation services provided to borrowers with delinquent loans insured by the Federal Housing Administration has produced a disturbing conclusion.
According to two reports published Thursday by the Office of the Inspector General (OIG) for the U.S. Department of Housing and Urban Development (HUD), mortgage servicers nationwide failed to provide loss-mitigation assistance to about two-thirds of delinquent borrowers after their COVID-19 forbearance ended, and nearly half of the borrowers did not receive “the correct loss-mitigation assistance,” the report said.
A concurrent audit of Nationstar Mortgage LLC, which does business as Mr. Cooper, determined that it “did not provide proper loss-mitigation assistance to more than 80% of borrowers with delinquent FHA-insured loans after their COVID-19 forbearance ended.”
The OIG said it initiated the audit based on the large number of borrowers exiting forbearance, “because the loss-mitigation programs available to these borrowers were new and created a risk for both borrowers and the FHA insurance fund when servicers do not properly provide loss mitigation.”
The objective, the OIG said, was to determine whether servicers provided borrowers of FHA-insured loans proper loss-mitigation assistance after the COVID-19 forbearance ended.
Data produced by the audits clearly show that did not happen.
Only 25% Got The Correct Option
According to the overall audit report, a statistical sample drawn from 231,362 FHA-insured forward loans totaling $41 billion showed that servicers did not meet HUD requirements for providing loss-mitigation assistance to 155,297 borrowers (67.1%) with FHA-insured loans.
The report said nearly half of the borrowers did not receive the loss-mitigation option for which they were eligible; had their loss-mitigation option not calculated properly; or received a loss-mitigation option that did not reinstate arrearages, which refers to any amount needed to bring the borrower current.
Only about one-quarter of the borrowers received the correct loss-mitigation option, the report found, but servicers did not follow COVID-19 loss-mitigation guidance to help borrowers with payments that were missed during forbearance.
According to the audit of Nationstar (Mr. Cooper), a statistical sample drawn from a total of 4,288 FHA-insured forward loans totaling $767 million found that the company did not meet HUD’s requirements for providing assistance to an estimated 3,572. borrowers
Based on the loan sample projection, more than half of Nationstar’s borrowers received incorrect loss-mitigation assistance, the audit found.
“In these cases, Nationstar did not provide the loss-mitigation option for which borrowers were eligible; incorrectly calculated loss-mitigation options; did not reinstate arrearages; or declined loss mitigation in error.”
The OIG report said more than a third of the borrowers in its Nationstar sample projection received the correct loss-mitigation option, but Nationstar did not correctly follow COVID-19 loss-mitigation guidance for those borrowers.
The audit report included recommendations for HUD to:
- Review the sampled loans for which borrowers did not receive appropriate loss-mitigation options to ensure that the borrowers are remedied by the servicers;
- Engage with the servicers sampled to determine the reasons for noncompliance and develop a plan to mitigate it going forward;
- Provide additional guidance and training to servicers
- Update FHA “frequently asked questions” to clarify current loss-mitigation requirements;
- Develop a process to update the “Save Your Home —Tips to Avoid Foreclosure” brochure and require servicers to distribute it; and
- Design and implement a data-driven methodology to determine the appropriate mix of origination and servicing lender monitoring and desk reviews.
The audit report for Nationstar included similar recommendations:
- Review the sampled loans for which borrowers did not receive appropriate loss mitigation;
- Implement controls and provide employee training;
- Update and implement controls to the Nationstar internal system;
- Identify loans with COVID-19 recovery partial claims that were affected by the improper application of partial claim funds;
- Identify FHA borrowers who received a non-HUD-approved loss-mitigation option and ensure that they receive an updated, approved option; and
- Update the servicing script to include information related to the Homeowner Assistance Fund (HAF) program, identify borrowers who may benefit from HAF, and conduct outreach to those borrowers.
“It goes without saying that the COVID-19 pandemic was unprecedented in the ways in which it impacted Americans, including those with FHA-insured loans," said Inspector General Rae Oliver. "HUD’s efforts to address the crisis necessarily evolved over time and mortgage servicers struggled to adapt to those changes. These reports identify the challenges and provide a roadmap to assist HUD in avoiding similar difficulties in the future.”
'Unprecedented Volume'
In a memorandum included with the audit report, Julie A. Shaffer, acting deputy assistant secretary for Single-Family Housing, states that her unit “appreciates OIG’s work on this audit,” but added a cautionary note.
“While we do not disagree with any specific recommendations,” Shaffer wrote, “we believe the draft report does not fully capture the unprecedented volume and complexity of the policy and system changes that FHA implemented to sustain an anomalously high number of borrowers struggling to make their mortgage payments during the COVID-19 National Emergency.”
Shaffer noted that, between march 202 and October 2021 — the period from which OIG sampled loans – FHA issued “a total of 40 mortgage letters articulating new guidance and extensions of COVID-19 policies for lenders and servicers, along with numerous additional regulatory and policy waivers requiring process and system adaptations from industry partners.”
She added that the report also does not capture “the broadly successful homeowner outcomes achieved” during the pandemic. “More than 2 million FHA borrowers became delinquent during the national emergency, and more than 1.8 million borrowers took advantage of FHA’s COVID-19 mitigation plan to avoid foreclosure and retain their homes.”
Shaffer said another 655,000 borrowers “were cured or paid off their mortgage without the need for a loss-mitigation plan.”
Mr. Cooper: 'We Helped Thousands'
In a statement emailed to NMP by a spokesperson for Mr. Cooper, the company said it is "incredibly proud" of its response to the pandemic to support its customers, "and how our company stepped up to play a leadership role in the housing industry as the CARES Act and the COVID-19 pandemic mortgage forbearance program were implemented."
The statement continued, "Mr. Cooper helped thousands of FHA customers with timely solutions, and we are deeply disappointed that the HUD OIG report chose to focus more on strict adherence to what was at the time very recently published FHA guidance, rather than on the programs' ability to assist customers." In most cases, the company said, the OIG's findings "were very technical in nature and subject to differing interpretation."
Mr. Cooper said it is "confident" in its track record, and included a "detailed rebuttal" of the report's findings with its statement.
That rebuttal includes that OIG reviewed only a small sample size of 67 loans, and that of the 60 customers "alleged to have defects" in loss-mitigation assistance, 59 were offered a "permanent loss-mitigation solution that would bring their loans current, and 53 of those customers accepted such a solution."
The company also said that:
- 98% of customers in the loan sample were offered a solution that would bring their loan current, and 90% accepted.
- Of the remaining 10%, about 5% (3 loans) have paid their loans in full or are in active loss-mitigation review; about 3% (2 loans) have had servicing transferred; and less than 2% (1 loan) are not currently in active loss-mitigation review.
- It has not completed a foreclosure on any of the customers in the sample population.
"Given the extremely limited sample size, along with the positive outcomes for the customers in that population," the statement adds, "we believe that Mr. Cooper satisfied the program’s objectives and took the necessary steps to help our customers remain in their homes."
MBA: 'A Major Success Story'
Following the release of the audit reports, the Mortgage Bankers Association (MBA) issued a statement from its President and CEO Bob Broeksmit defending the servicers, calling the overall results of pandemic relief “a major success story.”
Broeksmit said the pandemic “presented unprecedented challenges to homeowners, servicers, and the federal agencies like HUD that administer loan-guarantee programs,” and noted that since the start of the pandemic in March 2020, mortgage servicers provided forbearance to nearly 8 million borrowers. He added that, currently, only about 255,000 borrowers “remain in forbearance, and delinquency rates are near historic lows.”
The OIG report, he said, highlights the difficulties HUD faced “in effectively communicating extensive and rapidly changing COVID-related loss-mitigation program requirements.” The difficulties, he said, were “understandable in light of the challenges faced by both HUD and servicers in an unprecedented and rapidly changing environment,” which were exacerbated by having to implement “new and evolving programs for a never-before-seen volume” of borrowers.
“A number of the technical faults that the report identifies were made by servicers in the spirit of helping COVID-affected borrowers exit forbearance and remain in their homes in the fastest, most efficient way possible,” Broeksmit said. “Others were the unfortunate outcome of confusing or conflicting program requirements and the inherent difficulties of quickly scaling such a massive borrower assistance effort.”
“But make no mistake,” he added, “by focusing on delivering positive outcomes for homeowners, servicers’ implementation of COVID-19 relief is a major success story.”
