At the 2006 MBA National Conference, held Feb 14-17, Robert Klein participated as a panelist on the "Next Steps: Industry Response in the Aftermath of Hurricane Katrina" and the Property Preservation session.
 
The Hurricane Katrina session was a daylong Default Management workshop filled with presentations from HUD, VA, Fannie Mae, Freddie Mac, USDA, and Ellen Lee, Deputy Executive Assistant for Neighborhood Development for the city of New Orleans.  Presentations and statistics were also shared by representatives from the National Flood Insurance Program, Balboa Insurance Group, National City Mortgage, Countrywide Bank, Wells Fargo, and Safeguard Properties. 
 
Ellen Lee led the workshop with her presentation, "...and then the Levee Broke," describing New Orleans pre-Katrina population and city plans, post-Katrina population, and plans for recovery.  Ms. Lee's presentation was thorough in its review of the city's immediate shortterm issues, longterm plans for recovery, revenue sources, legislative efforts, longterm and temporary housing plans, and city service restorations to encourage the return of the population and neighborhoods.
 
Ms. Lee shared her presentation in effort to encourage servicers to help borrowers retain homeownership.  Homeowners are looking for special assurances that help and assistance will be provided to those that want to return to New Orleans and rebuild.
 
The presentations of the investors shared a common theme regarding the number of affected borrowers, the level of damages affecting properties, and their efforts to preserve homeownership and assist with the recovery initiatives.  In response to the magnitude of the hurricane disaster, the investors also implemented procedures to assist the servicers in contacting borrowers and developing efficient methods to help borrowers.  In addition, the investors have decided to exclude loans in the FEMA-declared areas from servicer evaluations and scorecards.
 
Bob Englestad, Vice President of Policy & Standards with Fannie Mae, reviewed the lender letters released to the servicers with instructions for servicing the loans in the disaster areas.  Forbearance provisions allow the lender to custom-tailor plans for repayment with individual borrowers.  There is no specified expiration date for the forbearance period; however, forbearance can be extended to a maximum of 18 months.

Fannie Mae Lender Letter 01-06 Hurricane-Related Special Relief Measures was released focusing on forbearance, loan modification, repayment plans, and insurance settlements.  The letter provides servicers with additional means to locate and make contact with delinquent borrowers.  The letter also requires foreclosure guidance and review by Fannie Mae to ensure a clear message of "assistance" is delivered to the homeowners. 

Mr. Englestad closed his presentation noting that the hurricane disaster has brought heightened awareness to the industry that servicers need standardization between the investors.  Standardization would increase servicing efficiencies and help reduce the legal and accounting constraints within the servicing entities.

Bill Merrill, Director of Non-Performing Loans with Freddie Mac, discussed their four-pronged approach to offering homeowner assistance and contributing to the recovery efforts.  Their approach includes the consideration of philanthropy, housing and shelter needs, homeowner assistance, and lender and servicer support. 

Freddie Mac released several letters in response to the needs of borrowers and servicers following the hurricanes.  The letters were designed to ease underwriting and delivery requirements to bring liquidity to the market, expedite the release of insurance funds to borrowers, offer forbearance, and stop derogatory credit reporting for affected borrowers. 

Freddie Mac's February 17th Bulletin was issued to further support the efforts to preserve homeownership.  The letter provides servicers with loan modification options for borrowers, mortgage relief to affected members of the National Guard, and additional reimbursements to servicers for property inspections completed.  Additionally, the letter defined foreclosure actions for each of the three zones characterized by the level of damages sustained in the listed counties.

Joe McCloskey, Director of Single-Family Asset Management with the Department of HUD, discussed their initiatives to preserve homeownership and build confidence for the borrowers and servicers, which is difficult with so many unanswered questions.  HUD released several mortgagee letters in response to the hurricane disaster and the highlight of the releases is HUD's Mortgage Assistance Initiative described in HUD ML 2005-46.  The Mortgage Assistance Initiative is the first time HUD has granted servicers the ability to combine loan modifications with the use of partial claims to assist homeowners in retaining their homes. 

Mr. McCloskey discussed other initiatives within the department to assist in the recovery efforts, including the issuance of $11.5 billion for redevelopment or repair of properties and mortgages, revised property preservation guidelines with the release of HUD ML 2005-41, and providing FEMA with more than 2,400 properties for immediate occupancy by displaced victims. 

In an effort to assist servicers, HUD is reviewing options to accept hurricane-damaged properties from servicers at conveyance, but will need approval and funding authority from Congress.  Ultimately, HUD's longterm goal is to develop a partnership with the servicers and gain their confidence.  A partnership is needed to gather the necessary information to be provided to Congress, including borrower status and commitment to return and rebuild, and flood insurance coverage and requirements.

Carl Wasson, Supervisory Loan Specialist with the Department of VA, also reviewed their releases following the hurricanes encouraging servicers to be thorough in their case review and offer forbearance when applicable.  VA also issue a moratorium on initiating foreclosures in the disaster areas.  The moratorium was further extended with the release of their Circular 26-06-3. 

VA is reviewing extending reimbursement to servicers for damaged properties when the insurance proceeds are not enough to repair the property or pay off the balance of the loan.

Mr. Wasson shared his concern that affected borrowers were confused regarding the definitions of default and forbearance and the notices they received from servicers and the Department of VA.  There was consensus among the panelists and participants of the session that letters and notices sent from the lenders, servicers, and investors caused confusion for the affected homeowners.  The participants concurred that in the future, more efforts need to be made to educate the homeowners through face-to-face meetings, informational pamphlets, and phone contact from customer service call centers.

Ed Pasterick of FEMA provided an overview of the National Flood Insurance Program (NFIP), emphasizing the coverage differences from the standard hazard insurance policy.  The NFIP policy only requires coverage for the balance of the loan, not for replacement costs.  NFIP offers a maximum benefit of $30,000 to cover the cost of elevating homes, the single-largest factor of safety. 

The NFIP was reformed in the 60s, 80s, and the 90s, and as a result of this disaster, insurance carriers, servicers, politicians, and many others are calling for additional reform of the program.  Proposals have included extending mandatory coverage to properties in the 500-year flood plains, converting the program to a national catastrophe plan to spread the costs, and removing subsidized properties in the program.  The main goal of reform is to bring more income to the program without creating a financial burden to the homeowner. 

Many affected homeowners were uninformed of the coverage provided by their flood policy and the available options to purchase private flood insurance.  Private flood insurance policies are only available to homeowners with existing NFIP policies in place, and the private flood insurance policy only pays a benefit when the damages amount to more than the coverage from the NFIP.  Furthermore, possible licensing issues prevent insurance carriers from selling private flood insurance to homeowners when national flood insurance is not required. 

Several servicers shared the best practices they implemented to address the borrowers' concerns and immediate needs.  Best practices included adding customer service staff and extending the hours of operation for the customer service call centers, sending out monthly mailers to attempt contact with borrowers, initiating inspection services early, eliminating pre-payment penalties, taking advantage of REMIC rules, and offering repayment plans and work-outs with affected borrowers.  Several servicers also opened and staffed offices in the damaged areas to provide face-to-face support, information, and convenience to the affected borrowers. 

Servicers shared their challenges, including stopping the automatic programming in their systems that generates inspection orders, fees to borrowers, credit reporting, and foreclosure notices.  The automatic flags in the servicers' systems caused unfavorable media coverage.  Another challenge for the servicers was the timing of investor guideline releases, which were not in conjunction with each other or released timely.  And finally, the challenge of explaining the role of the investor to the borrowers when they called into the customer service centers presented a challenge for many servicers.  As a result, servicers are reviewing their call center scripts and making adjustments for future disaster calls.

Robert Klein presented an overview of the activity on the ground in the heavily damaged areas.  Accessibility has not been an issue for the past few months, because there may be temporary inaccessibility, but the areas are primarily open for inspections, preservation, and repairs.  The largest area of concern is addressing properties that have not been secured due to fear of lawsuits from borrowers citing illegal trespass and negative press from the media.  However, as a result of no securing and preservation measures being taken at the property, Safeguard has seen many properties deteriorate between the first field inspection and subsequent inspections completed only weeks apart. 

In addition to the damages worsening, field service providers have been unable to accurately asses the level of damages at many of the properties because of performing an exterior inspection only.  Interior damages not addressed in a timely manner will deteriorate the property faster and may result in denied hazard insurance claims, specifically mold damage.  Mold will continue to grow and spread throughout the property at a rapid rate when not addressed.

Insurance claims are being settled and checks are being sent to borrowers co-payable to the mortgagee.  However, servicers have several examples of funds released to borrowers and repairs not being completed.  There are also reports of repairs not being completed by professional, licensed contractors and resulting in unfinished and substandard repair work. 

The session concluded with a general consensus and understanding that the servicers, investors, field service providers, and insurance carriers all learned from this disaster and are reviewing internal policies and procedures to develop more efficient processes in preparation for future disasters of this magnitude.  It was suggested that consumer groups begin developing a process to address foreclosures in disaster areas without causing negative review of the servicers from the media.