This white paper has been prepared by the U.S. Department of the Treasury (Treasury) in conjunction with the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Finance Agency (FHFA)—together the Agencies—to continue the collaborative efforts of the past seven years to stabilize the housing market and help struggling homeowners recover from the financial crisis. With the termination of crisis-era programs at the end of this year, the Agencies are working with stakeholders to maintain strong loss mitigation programs going forward. This white paper examines the evolution of loss mitigation programs administered by the Agencies, and discusses the lessons learned from such programs. The paper also lays out five guiding principles that should be a foundation for future loss mitigation programs: accessibility, affordability, sustainability, transparency, and accountability.

The financial crisis of 2008 revealed that the mortgage servicing industry was ill-equipped to adequately respond to the needs of struggling homeowners. Indeed, there was no standard approach among mortgage servicers and investors about how to respond to homeowners who wanted to continue making payments, but were in need of mortgage assistance. Most solutions offered by servicers simply added unpaid interest and fees to the mortgage balance, which often resulted in higher—and thereby less sustainable—payments for homeowners, regardless of a hardship.

In early 2009, a government-sponsored program—Making Home Affordable (MHA)—was established to provide foreclosure alternatives to homeowners impacted by the financial crisis. The Home Affordable Modification Program (HAMP), the first and largest program under MHA, provided a standard for mortgage modifications that crossed mortgage servicer and investor types, with the goal of reducing struggling homeowners’ monthly mortgage payments to an affordable and sustainable amount.

“We’re not just helping homeowners at risk of falling over the edge; we’re preventing their neighbors from being pulled over that edge, too – as defaults and foreclosures contribute to sinking home values, failing local businesses, and lost jobs.” ~ President Obama

As the needs of homeowners changed over time, the Agencies responded by expanding the options available under MHA and HAMP, and by introducing additional loss mitigation programs and standard practices for homeowner outreach and engagement. FHFA’s Servicing Alignment Initiative (SAI) and HUD’s expansion of options for mortgagees with mortgages insured by the Federal Housing Administration (FHA), provided additional assistance to struggling homeowners and furthered the promotion of common standards across mortgage servicers and investors.

In total, through government programs and private sector efforts, 10.5 million modification and mortgage assistance arrangements were completed between April 2009 and the end of May 2016. i The Agencies have also helped homeowners by creating a transparent process, setting standards for how modifications should be done, and prompting changes in industry procedures to mirror the standards established through MHA, SAI, and other programs administered by the Agencies.

As a result of the Agencies’ programs, regulatory actions, and private sector initiatives, steps taken by the mortgage servicing industry to improve practices over the past seven years have been encouraging. The industry is generally better prepared now to provide assistance to struggling homeowners than it was before the crisis. This is due, in part, to the adoption of certain homeowner engagement standards including continuity of contact, solicitation timeframes, and certain notice and appeal processes required by the Consumer Financial Protection Bureau (CFPB).

There is, however, more work to be done. Certain programs—e.g., MHA programs—introduced in response to the financial crisis were temporary and will end this year. With some exceptions, servicers will no longer be required to evaluate homeowners for a standard mortgage modification like HAMP. Instead, servicers and investors will need to utilize proprietary loss mitigation programs (either existing or new), and determine the appropriateness of such programs in a more economically stable, post-crisis environment. It is in this context that the Agencies intend to continue their collaborative efforts to help design a framework for the future of loss mitigation. Such a framework should incorporate—and modify as necessary—the best practices and guiding principles that have led to positive outcomes for all stakeholders, including homeowners, investors, and servicers.

Full paper here…