Industry collaboration leads to adoption of Best Practices

published in Servicing Management, June 2007

By Robert Klein, CEO, Safeguard Properties Inc.

The Department of Housing and Urban Development (HUD) recently issued HUD Mortgagee Letter 2007-03 (ML 2007-03). The Mortgagee Letter provided a revision to the Preservation and Protection Requirements and Cost Reimbursements for properties that serve as collateral for mortgages insured by the Federal Housing Administration (FHA). These requirements entitled, "General Requirements for Preservation and Protection of Properties Securing FHA Insured Mortgages". This guidance supersedes the policy requirements of ML 2002-10, ML 2003-05, ML 2004-07, and ML 2005-22, and parts of ML 2002-19. The revisions went into effect on April 30, 2007.

The issuance of ML 2007-03 was a culmination of a cross industry collaborative effort between HUD, Loan Servicer's and Field Service organizations. Building on the momentum created during the National Property and Preservation Conference in November 2006, HUD was extremely proactive in reaching out to the industry to discuss "best practices". The Conference Theme "Its About Time" provided the initial forum and framework for the Industry to discuss these best practices with a focus on creating an environment of efficiency and collaboration.

Many of the guideline revisions were as a result of a number of industry conference calls, issues raised at Industry conferences, and working groups formed to address guidelines that were in place. Within HUD ML 2007-03 , there are several changes that affect the way that the Industry is now expected to preserve and protect FHA properties. Highlights include:

• An overall increase in cost reimbursements for many P&P services and standard pricing for securing, boarding, and inspections;
• A definition of five different types of inspections;
• Triggering events that necessitate an inspection have expanded to include property conditions that may signal a non-monetary default;
• An increase in the maximum allowable securing fee to allow for the re-securing of a property without prior approval and a differentiation of the securing timeframes for pre and post-sale properties;
• Clarification of the distinction between temporary and permanent roof repairs, clear guidance when each is appropriate and an increased emergency roof allowable;
• Simplification of the winterization requirements
• Clarification of securing timing requirements for pre (15 days) and post-foreclosure (5 days) sale properties;
• Clarification of conditions under which HUD will accept conveyance of a property with mold;
• A new requirement for the use of digital photographs and a new flat-fee reimbursement;
• Revisions of the requirements surrounding initial grass cuts and an update allowing a Mortgagee to submit one bid per growing season for recurring lawn maintenance on an oversized lot rather than submitting new over-allowable requests each time the yard is mowed;
• Specific language that excludes normal household cleaning products from the definition of hazardous waste;
• Removal of the requirement for installation of the Reduced Pressure Zone (RPZ) device, except in areas where it is a state or local requirement;
• Instruction to immediatelyaddress damages upon discovery, such as flowing water and collapsed roof andapproval to submit an O/A request after the work has been completed;

Inspections

The Property Inspection and Servicing Requirements within HUD ML 2007-03 provided a definition of five (5) inspection types.  These include Occupancy Inspections, Initial Vacant Property Inspections, Vacant Property Inspections, Voluntary Pre - Conveyance Inspections, and Eviction Inspections.  The guidelines provide a succinct definition and requirement for each of these inspection types. The revised inspection guidelines also provided some additional requirements and clarifications.  In this regard:

• All inspections are now photo required;
• the Initial Vacant Property Inspection fee is now charged at the time of the initial secure;
• Interior inspections on vacant properties are now required on all visits following the initial secure;
• HUD now provides reimbursement for a total of 15 inspections within a calendar year;
• All inspections must be completed within 35 days of the completion of the last inspection;
• Reimbursement for Inspection Fees are now determined by the type of inspection (interior vs. exterior or gained access vs. did not gain access)
• The previously identified Hot Zones have been updated to include 13 zip codes in Chicago and 5 zips in Los Angeles.
• Properties deemed to be "Vacant but obviously being maintained" will no longer be secured

For years, the industry has lobbied for mandatory interior inspections to ensure early detection of issues that if not detected and mitigated, could lead to a material loss to the value of the property. Issues identified during these inspections often represent high risk matters that can, if not detected early, escalate and lead to a major loss to the property value. Common examples of issues identified during these interior inspections include new damage, worsening of previously reported damage, and the presence of a sump pump not properly maintained.  With the issuance of HUD ML 2007-03, Interior Inspections are now definitively required.

It has always been imperative that property condition be reported and documented with photos at the time of the initial secure.  The new Guidelines provided further clarification or requirements when an imminent source of property damage or a health and safety hazard is identified during an inspection. The following examples were provided by HUD but were not meant to be all inclusive: 

• Flowing water
• Collapsed roof
• Gas leak

In these (or similar) circumstances, the Mortgagee is required to take immediate action to remediate the damage or hazard following the receipt of emergency permission.  In instances where emergency permission cannot be obtained in advance, the mortgagee is instructed to submit and over allowable request immediately following the remediation action and must substantiate the emergency nature of repairs.

Winterizations

The Guideline revision clarified that wet/radiant heating systems are no longer required be up and running allowing for a material cost and time savings for the Industry.  Specific guidance was provided to define the requirements for each system type when performing winterizations.  New allowables were established for:

• Replacement/installation of electric and gas water heaters.
• Installation of an RPZ valve if required by local code
• Repair/installation of heating equipment if required to properly winterize the system.

A number of guideline revisions were addressed as well.  These include

• Mortgagees are no longer permitted to disconnect water meters
• Winterization steps have been clarified by system type; and
• Winterization season has been changed in several states

Debris and Hazard Waste Removal

HUD ML 2007-03 included a number of revisions and clarifications as to the requirements for the removal of debris and hazard waste. Interior debris removal is no longer permitted in Florida and Oregon.  Allowables were also established for large appliance removal, tire removal, and bug/pest infestation removal in order to improve efficiencies and eliminate bids. Importantly, debris removal allowables have changed. and a debris removal cost schedule by state has been provided.

HUD has also clarified the definition of hazard waste to eliminate "normal household" items. Specifically, the guidelines established that the following products, if found in quantities consistent with normal household use, are not considered hazardous waste for purposes of debris removal under this section.

• Non-flammable materials including reasonable quantities of paper and fabrics (unless stored near flammable chemicals),
• Common cleaning products and household chemicals such as insect repellent,
• Up to five gallons of paint and paint products,
• Lawn and garden products and fertilizers,
• Pool chemicals.

Bids to remove these items are not necessary but it is still required to report the presence of these items on updates submitted.

The issuance of HUD Mortgagee Letter 2007-03 provided evidence that Industry collaboration and cooperation is working.