Understanding the FHA’s Claims Without Conveyance of Title
September 7, 2023
The same housing market that experienced a 60 percent increase in real estate transactions in the 2000s sent the U.S. into an economic freefall in 2008. Since then, the real estate industry and the federal government have worked hard to bring new life into the housing market. One answer was a program called Claims Without Conveyance of Title (CWCOT).
Since the subprime lending crisis, governmental agencies like the Federal Housing Administration (FHA) have paid special attention to the participation of low- and middle-income families in the housing market. One of the ways the FHA encouraged first-time buyers to trust in the market again was by offering loans that fit their financial situations. FHA loans, which allowed buyers to put less than 20 percent down, were meant to make the process of saving for a home easier. These loans continue to be prevalent today.
The only problem? FHA loans are risky—very risky, as lower down payments mean there is a greater likelihood of default. When these loans go into default, the CWCOT program helps third parties purchase properties at foreclosure sales as an alternative to servicers conveying the assets to the FHA. This inventory can be moved back into the market quickly.
The nuts and bolts of CWCOT
Enacted in 1987, the CWCOT program was around for 20 years before the financial crisis. Yet the economic downturn shone a new light on this old option. Before the program, servicers only had two options when faced with foreclosure: convey the up-to-code property to the U.S. Department of Housing and Urban Development (HUD) or maintain the property and forfeit any mortgage insurance claim payments as a result of not conveying it to HUD.
CWCOT guidelines allowed for more flexibility once the market became flooded with foreclosed homes, and they also opened up a third option: preserve property ownership with a value-based HUD-approved price.
The Brookings Institute says that without FHA-supported programs such as CWCOT, “the [housing] crisis would have been much deeper and longer and the recovery much slower.” Let’s take a closer look.
CWCOT’s old and new challenges for servicers
The CWCOT program serves to encourage third parties to purchase assets at courthouse foreclosure sales or immediately afterwards, before having servicers convey the assets to FHA asset managers.
Due to the complexity of the CWCOT program, servicers face a bevy of current challenges. The results of Altisource’s 2018 “The State of the Servicer Industry” report showed that 86 percent of surveyed servicers said their organization currently services FHA loans. Nearly three-quarters (72 percent) expect their FHA loan portfolio to increase over the next 12 to 24 months and 77 percent expect the increase to be more than 25 percent. Although servicers benefit from significant cost savings on loans through CWCOT, they also require outsized resources in order to carry out proper property preservation.
A larger FHA workload presents other new challenges. For example, more loans mean a greater need for strong marketing platforms and CWCOT auction services—competencies that nearly nine out of every ten respondents of the survey cited as necessary.
Outsourcing is the answer
Successful CWCOT programs need expedited strategies, tightly managed internal controls and access to real-time analytics to function. Nevertheless, servicers often find themselves struggling with whether to build these skills in-house or outsource them in order to focus on their core competencies.
Although some servicers might be tempted to handle everything in-house, few have the resources or expertise necessary to successfully manage CWCOT programs. In-house staff would require specialized knowledge, and mistakes or delays carry the risk of penalties for missed deadlines.
Instead, many servicers opt for an outsourced CWCOT solution. With this approach, an expert vendor helps clients navigate complex compliance procedures, meet deadlines and manage data regarding the status of various properties using advanced modeling tools.
The CWCOT program in particular is very complicated. Rather than handling it internally, outsourcing connects servicers with experts who can provide effective asset management strategies and auction services.
To learn more about the current state of default servicers nationwide and what servicers say are the top ways to identify a good CWCOT vendor partner, download Altisource’s 2018 report, “The State of the Servicer Industry” here.