Fannie Mae Now Issuing Fines To Servicing Lenders Who Don't Foreclose In A "Timely Manner"!
On August 31, 2010, Fannie Mae released Announcement SVC-2010-12, "Foreclosure Time Frames And Compensatory Fees For Breach Of Servicing Obligations". This announcement acts as a supplement to the Servicing Guide, which gives servicing agencies the Fannie Mae "rules for foreclosure".
Over the past 60 days, we've noticed lenders who are servicing our Arizona pre foreclosure Fannie loans becoming more and more difficult to deal with, particularly when it comes to requests to extend the foreclosure auction date. Today, I think I figured out why these servicing agents are refusing to do it.
You see, Fannie has put in place a strict timeline that servicing entities must follow, or face "compensatory fees" (i.e., fines), as the title suggests. Below is a chart taken from the Servicing Guide:
Next, Fannie Mae demands that the foreclosure take place within the following time frames. Please note, the clock DOES NOT start upon receipt of an NOD (or Notice of Trustee Sale in AZ). According to the Servicing Guide, it starts when any Fannie loan is referred to an attorney or trustee for foreclosure proceedings. In addition, the Servicing Guide states that servicing entities are required to refer loans to an attorney or trustee between 30-34 days from sending out the Acceleration or Breach Letter (see above). So, in essence, Fannie is requiring those that service their loans to begin the "foreclosure clock" approximately 75 days after missing their first payment. From that point on, the following time frames apply:
From this point on, the lender is required to conduct the foreclosure before the "time limits" imposed by Fannie. If they don't get it done by this time, they will be fined by Fannie. In most cases, the fine is based on a percentage of the loan amount.
To use an Arizona pre foreclosure as an example, let's say that a borrower's payment is due on October 10th. According to the guidelines, the borrower is to receive an Acceleration or Breach Letter 45 days later, or roughly November 25th. Next, the case will be referred to an attorney or trustee for "foreclosure proceedings" 30 days later, or approximately December 25th (Merry Xmas). If I'm reading their Servicing Guide correctly, the foreclosure is to take place no later than 120 days later (in AZ), or April 25th. From the 1st day after payment was due, to the foreclosure date, this equates to approximately 195 days. As it currently stands in AZ, most lenders file a Notice of Trustee Sale after 3 missed payments, and the foreclosure auction takes place 90 days from then. So, the soonest you will ever see a foreclosure happen in AZ is 180 days (unless the home is vacated/vandalized, etc., in which case the lender can accelerate the foreclosure date). No big deal, right?
Here's where I have the problem. Put yourself in the shoes of the loan servicing company. Faced with fines and strict documentation requirements for exceeding the Fannie Mae imposed deadlines, would you rather:
A. Work with the homeowner to avoid foreclosure through a loan modification or short sale, taking the chance that something will go wrong (which it almost always does) and the short sale doesn't close before the auction date.
B. Forget about working with the homeowner, and place the responsibility of having the house foreclose on time with the attorney/trustee.
I think it's painfully obvious which solution works in their favor. The Servicing Guide specifically states that if the foreclosure is delayed by the attorney/trustee, sheriff, etc., that the servicing entity will not be fined for the delay.
The decisions that servicing agencies are making on behalf of Fannie Mae are in their own best interests. By simply allowing the home to go to foreclosure, they save themselves the hassle of negotiating with borrowers, and being fined by Fannie for missing their deadlines. The problem is, every time Fannie takes back a home and dumps it on the market, it hurts all of us.
So, to wrap up, the next time a servicing lender tells you that Fannie will not postpone a foreclosure auction date, you'll know the reason why. Chances are, Fannie never had any say in the matter, and the servicing company was just doing what they do best. Looking out for Number One.
Note: Only Sections 7 & 8 of the Servicing Guide are viewable online (over 300 pages), and this is where I got the information for this article. In order to read the entire guide, you need to order a hard copy from the Fannie website. If I'm missing something here, please feel free to read it and correct me.
Summit Home Consultants
Copyright © By Bob Hertzog 2010 *Fannie Mae Now Issuing Fines To Servicing Lenders Who Don't Foreclose In A "Timely Manner"!*