When Federal Housing Administration (FHA) loans go into default, it’s best to get them back on the market as soon as possible. The FHA’s Claims Without Conveyance of Title (CWCOT) Program, in effect since 1987, is crucial in returning REOs to the marketplace and reducing the number of homes in the U.S. Department of Housing and Urban Development (HUD) inventory.
CWCOT provides mortgagees with procedures for bidding and payment claims under the Single-Family FHA Mortgage Insurance Program. Rather than conveying assets to the FHA, the CWCOT program encourages servicers and third parties to purchase assets at courthouse foreclosure sales.
Following the housing crisis in 2008, HUD increased the flexibility of the CWCOT program’s guidelines. These revisions allowed servicers to accept offers less than the full debt owed on the loan. This value-based discount pricing strategy allowed sales to occur at or below a property’s market value. As a result, the CWCOT program has successfully facilitated the third-party sale of a much higher volume of homes, resulting in fewer properties conveyed to HUD.
Buying strategies have shifted from traditional REO to different types of distressed assets. There has been a sharp uptick in the sale of homes at foreclosure auctions across the country. Over 38 percent of the foreclosures completed at courthouse auctions were sales to third-party investors.
In compliance with the CWCOT program, servicers can either manage the process internally or outsource the work to third-party vendors. The CWCOT program offers significant savings to servicers who forgo utilizing FHA asset managers and processes. For servicers, selling a property to a third party eliminates the need for continued management costs as well as eliminates the complex requirements that must be satisfied when preparing a property for conveyance.
HUD’s rules for third-party transactions are as follows:
1. When a third party is the successful bidder at the foreclosure sale for an amount equal to or greater than the adjusted fair market value, the Mortgagee must submit its claim for insurance benefits.
When the claim is calculated, the proceeds of the sale shall be deducted from the outstanding principal balance of the mortgage, which was unpaid on the date of the foreclosure proceedings.
HUD will not reimburse the Mortgagee for eviction costs or expenses incurred to preserve and protect the property after the foreclosure sale.
2. When a third party is the successful bidder at the foreclosure sale for an amount less than the adjusted fair market value, the Mortgagee may not file a claim for any insurance benefits. In the event of a third-party purchase, HUD will not reimburse the Mortgagee for eviction costs or expenses incurred to preserve and protect the property after the sale.
These newly foreclosed homes are priced to sell, but aren’t intended for traditional homebuyers or novice investors, as they are often sold occupied or without thorough title research. Seasoned investors and real estate agents should know how to fix and flip properties like these or convert them into profitable rentals.
The government’s standards for property condition upon conveyance often necessitate extensive property preservation efforts, such as inspections, field services, and vendor management. The personnel needed to handle work related to the CWCOT program also require legal practice and regulatory compliance skills.
Servicers should consider a resource’s competency in implementing and managing an effective control framework when choosing a vendor. Qualified vendors should supply technologic and systemic workflow controls to ensure that no errors occur in this highly regulated and governed program.
When working with the CWCOT program, one of the most important factors affecting success is the real-time flow of information being communicated to servicers from vendors in the field. CWCOT as an alternative disposition channel presents an interesting investment opportunity for agents and brokers in the mortgage space moving forward.