FHA - Making an Impact on 2025

The Federal Administration (FHA) is geared up for 2025, releasing a number of meaningful changes that impact everyone from the loan officer taking an application to the analyst determining the purchase or sale of servicing rights.  At first look many of these changes are specific to servicing; however, in order to minimize related default scenarios, lenders need to promote loan reviews and quality control at time of origination…. through servicing. This means your Quality Control team needs to be ready to help ensure more detailed and complex requirements are being met throughout the loan lifecycle.

 

Starting January of this year, two recent Mortgagee Letters should have already captured your attention, ML 2024-24, “Modernization of Engagement with Borrowers in Default,” and ML 2025-01, “FHA Defect Taxonomy Updates for Servicing Loan Reviews”.  The first directive serves to enhance communication between mortgage servicers and borrowers.  The second introduces significant enhancements aimed at improving the quality assurance framework. 

 

Mortgagee Letter 2025-01, effective January 15, 2025.  The FHA communicated recent updates to the Defect Taxonomy to include servicing loan reviews. The introduction was updated along with tier definitions and the addition of a new servicing loan review section.  The benefits of these taxonomy modifications are as follows:

 

Enhanced Clarity and Transparency

The updated Defect Taxonomy provides a comprehensive and transparent framework for identifying and categorizing loan-level defects into the various tiers.  By including a more thorough introduction and expanding the taxonomy to encompass servicing loan reviews, FHA offers clearer guidance on compliance expectations throughout the loan's lifecycle. This clarity is designed to assist seller/servicers in understanding specific requirements and the implications of non-compliance, thereby facilitating effective risk management.

 

Comprehensive Coverage of Servicing Activities

Previously, the Defect Taxonomy focused primarily on underwriting loan reviews. The recent updates incorporate six new defect areas that cover a broad spectrum of servicing activities, including payment processing, loss mitigation, and foreclosure actions. This comprehensive approach ensures all critical aspects of loan underwriting and servicing are subject to consistent quality assurance standards, promoting uniformity and thoroughness in compliance, in particular loss mitigation activities.

 

Specific Examples of Severity Tiers

A notable enhancement in the updated taxonomy includes improved examples of what constitutes a Tier 1, 2, 3 or 4 defect.  Examples are referenced in the introduction, as well as throughout the section on severity tiers. These updated tier definitions allow for a more thorough evaluation of defects and more consistent alignment of remediation.  This level of specificity enables both the FHA and seller/servicers to readily prioritize defects and corrective actions based on the severity of the identified issues.

 

Incorporation of Stakeholder Feedback

The revisions to the Defect Taxonomy reflect public feedback received via FHA’s Single Family Drafting Table in October 2021 and July 2024.  In response, the FHA has developed a more robust and practical framework to address challenges faced by seller/servicers. This collaborative approach serves to enhance the effectiveness of the taxonomy in guiding compliance and quality control practices, and is reflective of industry input.  The only exception to this is the criteria whereby a finding “of noncompliance remedied by the Mortgagee prior to review by FHA” falls under Tier 3, which was welcomed by the industry.

 

Improved Risk Mitigation

By expanding the Defect Taxonomy to include servicing loan reviews, FHA strengthens its ability to identify and address defects that potentially pose risks to the Mutual Mortgage Insurance Fund (MMIF). The updated taxonomy  appropriately categorizes defects while effectively aligning remediation to the severity tiers.  Overall, the enhancements provide clearer guidance and a more structured approach to defect identification and remediation. These benefits contribute to improved compliance, to effective risk management, and to the overall industry.

 

Mortgagee Letter 2024-24, effective January 1, 2025.  FHA has updated the requirements for loss mitigation consultations, aiming to enhance communication between seller/servicers and borrowers facing default, as well as contributing benefits as follows:

 

Expanded Communication Methods: Seller/Servicers are now permitted to conduct loss mitigation consultations, not only through traditional face-to-face meetings, but also through electronic means, such as phone calls, emails, and video conferencing platforms. This flexibility acknowledges advancements in communication technology and more importantly meets current borrower preferences for remote interactions.

 

Inclusive of All Borrowers in Default: The updated communication policies for engaging borrowers in default also extends to those who do not reside in the mortgaged property or whose property is located more than 200 miles from the servicer’s office. This expansion ensures that additional borrowers have the opportunity to discuss their financial situations and explore available loss mitigation options in a less encumbered manner.

 

Interim Implementation Alternative: The provisions outlined in this letter are effective from January 1, 2025. Recognizing that some seller/servicers may require additional time to adapt to these changes, the FHA has provided alternative interim procedures for engaging borrowers, applicable through June 30, 2025.  Ultimately FHAs goal is to assist more individuals in bringing their mortgages current and preventing foreclosure. These updates also reflect their commitment to leveraging technological advancements to better serve borrowers' needs.

 

Queuing up to meet FHA Requirements

At QC Verify, our mission is to facilitate your identification, understanding, and implementation of these regulatory changes with the least amount of disruption possible.  Our approach to QC, audit, and verification of data are designed to mitigate risk, regardless of size, operational expertise, or technical prowess.  As we look at these recent Mortgagee Letters we know they impact each organization differently, yet reporting on compliance is not variable, necessitating a vendor partnership that understands QC from multiple perspectives.

 

Meeting ongoing operational change and regulatory guidance is a continuous challenge for lenders and servicers.  QC Verify understands the importance of having a QC partner who can assist you in understanding updates, fact-checking their application, identifying exceptions, and meeting corresponding investor QC requirements. Our innovative approach to quality control, due diligence, audit, and reverification will assist your organization in advancing both internal and external QC processes and requirements.  QC Verify truly transforms QC, audit, and reverification from tasks into modern business processes that reduce costs, help identify defects, and minimize operational risk.

 

Connect with QC Verify today and realize the positive impact FHA changes are making on industry risk mitigation, including defect management and borrower engagement, while enhancing your QC results.  Experience the distinction that an innovative QC provider can offer when the approach is automated and personalized – sophisticated technology with a human touch.