MReport March 2019

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TH E M R EP O RT | 45 SERVICING THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T or more expensive as compared to proceeding with foreclosure. However, that is not the case. In either situation, the inevitable is simply delayed and the home is foreclosed upon, eventually con- tinuing through conventional REO disposition channels. The delay of bankruptcy costs money and may have a detrimental effect on the value of the property, exposing the borrower to the potential for a de- ficiency judgment post-foreclosure and/or a scarred credit history. There is a better way. The Solution T he current system needs a new option in which mortgagees work hand-in-hand with bankruptcy trustees to find a solution in furtherance of their common interests, allowing them to agree on the disposition of properties while still within the confines of the bankruptcy estate. A potential solution for avoiding the delays could be a disposition strategy similar to FHA insured properties that closely aligns with HUD's revamped and successful Claims Without Conveyance Title (CWCOT) program. Although in existence since 1987, the CWCOT program has seen increased emphasis in recent years because it allows servicers to avoid the time-consuming and expensive process of conveying the property to HUD. Under the program, an "As-is" Federal Housing Administration (FHA) appraisal is utilized to determine the Commissioner's Adjusted Fair Market Value (CAFMV) for the property. The mortgage servicer must then bid at least as much as the CAFMV during the foreclosure auction, accepting a trade-off which requires them to make financial concessions on the sale of the property in exchange for lowers costs and preserved property value that results from an expedited sale when compared with REO dispositions. Currently, trustees may dispose of properties in bankruptcy in a manner that is very similar to the CWCOT process. Under the new system, the disposition of the property would take place via auction (online or otherwise) or a direct sale with a broker, where a reserve price is set at the CAFMV as determined via an appraisal of the property in accordance with HUD policy. Agreed-upon criteria such as the CAFMV would al- low mortgagees and trustees to better define the parameters of a "pre-approved" deal which can be utilized in any property disposi- tion, leading to fewer objections from the Mortgagee and decreasing the likelihood that a foreclosure will occur. Properties that can be sold through this option would have their disposition status resolved eight to 10 months sooner than they would be entering into a conventional foreclosure. Currently, HUD has about a 13 percent market share of origina- tions in the U.S. which means the potential exposure to loans in bankruptcy could be as high as 26,000 loans per year. The cost savings achieved by bring- ing bankruptcy properties under a CWCOT-like program would benefit not only the mortgagee and borrower but also HUD and the Mutual Mortgage Insurance Fund (MMI Fund). According to recent data taken from the FHA Single Family Loan Performance Trends Credit Risk Report, as of July 2018, HUD was losing $55,083 on each home sold through REO. In con- trast, the report's data highlighted that in 2018 CWCOT proved to be much more cost-effective than REO, saving FHA approximately $4,800 per disposition that other- wise would have been processed through REO. FHA has also ac- knowledged that the disposition of property through CWCOT places HUD in a more favorable position. Applying the savings projections to the quarter of chapter 7 bank- ruptcy estates with average savings applied could potentially save the MMI Fund hundreds of millions of dollars per year, strengthening the financial positioning of the fund and allowing borrowers to share in the savings. Making this option available to trustees and borrowers would go a long way toward alleviating the current shortcomings of a property disposition process in Chapter 7 Bankruptcies. From a servicer's perspective, every property sold through the proposed system would reduce the complexity of asset management, compliance risk, and liability. For trustees, agree- ing to this option would mean that they would be fulfilling their fiduciary duty to bring value to the estate they manage. In the end, it's the borrower who wins, allow- ing them to proceed more quickly through the process of rebuilding their financial health. ED DELGADO is President and CEO of the Five Star Institute, a leading mortgage banking association providing education and strategic services to the U.S. residential mortgage market. During his 25-year career, Delgado has held executive positions at Wells Fargo and Freddie Mac. While at Wells Fargo, Delgado played an integral role as a key representative to the U.S. Department of the Treasury, support- ing the Bush and Obama administrations' efforts to develop mortgage solutions de- signed to prevent residential foreclosures in the U.S. Delgado was elected Chairman of the Office of the Comptroller of Currency Advisory Council, an independent work- ing group, and is a current Board Member at Operation Homefront, a national 501(c) (3) nonprofit whose mission is to provide valued programs and aid to U.S. military veterans. In the end, it's the borrower who wins, allowing them to proceed more quickly through the process of rebuilding their financial health.

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