VA and FHA Embark on Their Streamline Home Retention Journeys

The world of mortgage loss mitigation becomes ever more streamlined as VA (Veterans Affairs) joins FHA (Federal Housing Administration) in creating their new permanent Waterfall. VA just released the updated version of Chapter 5 in their servicing handbook. Part of the chapter lays out the requirements for the various types of loan modifications that are highlighted in Appendix F, which they posted last month. Compared with the now superseded version of Chapter 5, readers will catch that sections regarding financial review are absent.

The first bullet under the old Chapter 5 section for the Traditional Loan Modification states that the servicer must solicit a financial packet from the borrower to evaluate their ability to afford the new payments. In the general rules for loan modifications prior to this, the servicer handbook states that, “Household income must be able to support all financial obligations.”

The new Chapter 5 doesn’t have this condition or the requirement for financial review. The first bullet point under the Traditional Loan Modification instead reads, “When the borrower indicates they can afford the current mortgage payment…” Following FHA, workouts are now heavily dependent on the borrower’s own discretion. The selected workout is essentially driven by a phone call and the loan data.

VA’s previous workout hierarchy and temporary Covid-19 home retention options will be retired soon, succeeded by this more streamlined policy. FHA released their new Waterfall in February, and servicers can implement it now if they choose. Many in the mortgage industry are divided about whether the pros of offering loss mitigation to a greater range of people in a timelier manner outweighs the potential ramifications. Delinquency and foreclosure rates have been at historic lows, and the question is how these new home retention philosophies will affect these statistics down the line.

Finances or No Finances: Where are We Headed?

Fannie Mae just released a new training on home retention options, “Helping Delinquent Borrowers Understand Their Options.” In it, FNMA says, “The servicer must analyze each case carefully before determining which workout option is most appropriate.” The following bullet point continues, “To ensure that the final workout option agreed upon is realistic, the servicer must consider the borrower’s financial condition…”

Such a case-by-case approach that analyzes borrower’s financial conditions clearly dissents from the streamlined approach. The revolving door of streamlined options may not be sustainable, particularly for financially struggling borrowers. In an interview on the FNMA training, Donna Schmidt had this to say: “Unfortunately, the assistance spigot gets turned off at some point, and borrowers must confront the reality that they can no longer afford their home or current lifestyle, and “budget reckoning” takes place. When this happens, it’s up to servicers to analyze each borrower’s situation carefully and holistically before determining which path is the most realistic.”

If we are not careful about how it’s implemented, streamlined loss mitigation waterfalls will increasingly turn borrowers into sets of data to be churned through calculation programs. Large swaths of struggling homeowners then become pigeonholed into a workout predetermined by stricter and more complex waterfall hierarchies. Careful attention and analysis of borrowers’ needs on a case-by-case basis is lost. Without some form of borrower counseling, whether it be financial or thorough education of their home retention options, they may continue to struggle and fall behind, eating up the equity in their homes in the process and perhaps eventually losing them altogether.

The increasing complexity of these calculation programs may further have the side effect of eliminating the need for specialists to, well, specialize. The more the program handles the backend the less the individual servicer needs to know, rendering them paralyzed when talking to borrowers about their mortgage hardships and needs. Technology and the efficiency it brings may very well dull the expertise needed in this continually evolving industry.

2024 is the year of the Waterfall and time will tell the effects that these new ever complex home retention options will have and the political philosophies that drive them. Regardless of what happens, streamline or full financial application, the education of homeowners should be a central pillar to the loss mitigation process.