In the year since Making Home Affordable's (MHA) inception, servicers have repeatedly asked the same question: How do you comply with a program whose rules are in a constant state of flux?
The fundamental structure of MHA has seen many revisions, but servicers remain contractually obligated to the servicer participation agreements (SPAs) they first signed. Document collection guidelines and net present value (NPV) model parameters have taken on different shapes. Subprograms introduced subsequent to the original MHA announcement include voluntary initiatives (the second-lien program, to which only Bank of America has committed), but also mandatory ones (Home Affordable Foreclosure Alternatives, or HAFA).
At the Mortgage Bankers Association's National Servicing Conference and Expo, held last week in San Diego, members of Freddie Mac's MHA Compliance (MHA-C) division, while speaking about audit best practices, readily acknowledged the difficulties associated with MHA.
‘We've been out there, and we understand what's going on in operations – and [MHA is] not an easy program, either to implement or to test for compliance,’ said Vic O'Laughlen, vice president of servicer oversight for the division, which monitors shops that have signed SPAs.
The MHA-C unit samples borrower files, interviews shop management, and reviews NPV modeling and incentive payments. Its responsibilities include field audits to test servicers' controls and processes. On-site reviews are typically scheduled four weeks in advance. Unannounced visits, however, are fully permissible, per SPAs.
Portfolio size, previous audit results and the number of consumer complaints tied to a specific shop all help determine the frequency with which audits occur. A small but highly compliant shop might expect to host Freddie Mac auditors twice a year, whereas larger, high-profile operations that fail to respond to auditor recommendations could be audited as often as every 60 days.
‘The biggest takeaway I'd have for a servicer is to really understand the program, which is why I recommend having somebody in the organization who is the 'internal expert,'’ O'Laughlen said. ‘It will save you a bunch of time, if you do. We've seen varying experiences here, where servicers didn't really understand what's being expected and, as a result, end up out of compliance, and then we have to work to get them back in.’
Having staff dedicated to MHA will become all the more important as program spin-offs, such as HAFA, take effect, he mentioned.
‘You didn't know it when you signed the SPA, but once you signed the SPA, you're now required to look at foreclosure alternatives,’ O'Laughlen said.
Paul Heran, MHA-C program executive, suggested that servicers, in assessing their own MHA processes, look to Sarbanes-Oxley – the well-known federal accounting standard passed in 2002 – as the benchmark. The loan packages that Freddie Mac auditors expect to see should resemble the underwriting packages of years past, when ‘substantive due diligence’ was the norm, he said.
‘We're not sure, with what we're seeing, how these loans are going through much of an internal approval, let alone quality control process,’ Heran said. ‘It seems to me, if I'm pulling together documents and submitting them to somebody to review and approve, that reviewer's got to need a pretty slick package, because I can't imagine he's going to be tolerant of going through 14 different files looking for this piece of paper and that piece of paper.’
MHA-C assesses loan samples as part of its ‘second look’ reviews, which are for loans that pass the Home Affordable Modification Program (HAMP) waterfall but fail the NPV test, as well as its permanent modification reviews.
The second-look test was introduced last July to determine whether borrowers are being wrongly denied entry into HAMP. The purpose of auditing permanent modifications is to promote transparency, O'Laughlen said. Auditors pull permanent modification data off HAMP's main reporting system, IR2, and compare the data with underlying files provided by servicers. Heran described IR2 data as problematic.
‘Data integrity is probably something that needs to be worked onâ�¦you're probably hearing that from sources other than me,’ he said. ‘Anything you can do to clean up the IR2 data can make life easier when we do these reviews.’
Servicers in the audience argued that reporting requirements now interfere with their ability to modify loans. One servicer said her shop was straining to accommodate unpredictable file requests and short turn times. Heran said he would carry the message back to the Treasury.
‘The point is well takenâ�¦ and Treasury is actually very sensitive to the burden that's here,’ he said, adding, ‘We're trying to be reasonable. We've got to find a common ground.’
O'Laughlen again suggested that shops position staff in liaison-type roles.
‘We will work with that person to improve communication, make sure you understand what's being asked of you and clarify questions you have about compliance with specific guidelines,’ he said. ‘When that happens, things get better.’
(Please address all comments regarding this article to John Clapp, editor of Servicing Management, at email@example.com.)