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62 Wall Street Reform and Consumer Protection Act helped steer our economy back in the right direction. More stringent lending regulations, such as the creation of the CFPB, rising home prices, and improvements to the job market have set the market on a healthier path, with foreclosures na- tionwide meandering back down to single-digit rates. Moreover, delinquency rates—the number of homeowners behind on mortgage payments but not yet in the foreclosure process—have fallen to a 17-year low. Before the subprime and exotic mortgage boom, Federal Housing Administration (FHA) loans enabled first-time homebuyers and oth- ers with a credit score of just 580 and down payments as low as 3.5 percent to achieve the American Dream. ose with credit scores between 500 and 579 who shelled out just 10 percent for a down payment were able to become homeowners. THE TROUBLE WITH FHA LOANS Originally enacted by the National Housing Act of 1934 to assist homebuyers after the Great Depression, FHA loans have always bred inher- ent risk because loan requirements are eased in comparison to traditional ones. Since 2001, FHA-originated mortgages have hovered in the 20 percent range, with a large spike in 2009 of more than 43 percent. Despite the higher lending practices being enacted by both lenders and regulators, FHA loans are three times as likely to be defaulted upon than traditional loans. As of the summer of 2016, approximately 11 percent of all FHA loans were delinquent, compared with the 3 to 4 percent percent range of traditional GSE products. e fourth quarter of 2016 saw the first increase in delinquency rates for FHA loans after continuous, quarter- after-quarter improvement stretching back to 2006. Nevertheless, FHA loans and their late- pay rates have always walked hand-in-hand with housing market woes, though the continued improvements to these types of programs have seen the overall REO inventory reduce. FYI'S ON CWCOT Claims Without Conveyance to Title (CWCOT) has a direct correlation to the FHA mortgage market. Foreclosed FHA loans fall into the CWCOT realm in various ways. e CWCOT program through the U.S. Depart- ment of Housing and Urban Development (HUD) has existed for upwards of 30 years but only recently has experienced resurgence in vi- ability following the downturn of the foreclosure crisis. e program encourages third parties to buy assets at the courthouse steps instead of servicers having to convey the assets to FHA asset managers. With the goal being to slash the number of properties in HUD's inventory, programs nationwide—like that of auction company ServiceLink Auction powered by Hudson & Marshall—offer brokers, agents, and investors an opportunity to access these newly foreclosed properties. Surging initiatives like these assist servicers by reducing loss severity and opera- tional expenses related to the post-foreclosure process, all the while helping reduce the number of properties servicers must convey to HUD. e entire process can be simplified in three easy steps. First, a property goes into default and then goes into a foreclosure sale. Next, if the property isn't sold at the sale, it reverts to the bank or the servicer. Finally, the property then has an opportunity for a Second Chance sale with an auction vendor. Second Chance assets sold in the auction format are usually done via public auction in a ballroom or online. e auction environment truly broadens exposure from intimate set- tings to a full online presence with thousands of prospective bidders. e technology ensures that only properties that are cleared for sale are auctioned; buyers are automatically notified of postponements and cancellations. Investors can search specific areas to locate properties to pur- chase, and, as a result, the objective of success- fully completing sales to third-party buyers and expanding buying opportunities is met. CWCOT assets go through two main steps in the selling process. First up is the foreclo- sure sale, or TPS (third-party sale), which is the sale at the courthouse steps. If the bidding instructions for a property were prepared under CWCOT guidelines at the foreclosure sale and it reverts to the bank at that sale, then the property is eligible for a program known as Second Chance. is is when an auction vendor gets involved. Servicers can use third-party auction vendors to help sell the properties in hopes of ridding the assets from their inventory. HUD wants the properties to sell so servicers don't convey them back to HUD, which increases HUD's inven- tory. HUD typically releases a haircut sched- ule—a discount on a state-by-state basis—that is applied to the appraisal value done at the time of foreclosure. Now buyers can purchase these properties in most states below market value. In some states, the haircut value increases once an auction vendor is involved. It is to the seller's advantage to sell proper- ties in Second Chance with the auction vendor so they can file their claim with HUD and don't have to worry about getting the property in conveyance condition. Servicers run the risk of conveying a property to HUD and HUD then sending the property back to them because the property isn't in conveyance condition. In this case, servicers aren't always able to file their claim with HUD if they've already tried to convey the asset. Also, auction vendors will market the property and the servicers don't have to pay for it. ere is an auction fee involved, but the servicers can include that in their claim to HUD. WHY THEY'RE NOT REOS CWCOT assets differ from regular REOs in various ways. While both are distressed fore- closed asset classes, the differences have made the CWCOT program hugely popular. REO properties are valued after the fore- closure date, typically using recent comparable properties to set pricing. Since there's no chance of the GSE filing a claim for the property, this asset type is more like a retail property sale than a CWCOT asset. CWCOT properties have an appraisal com- pleted at the time of the foreclosure sale, and the price for these properties is set using a predeter- mined amount based on the competitive or non- competitive state haircut. While both programs sell on an as-is, where-is basis, CWCOT prop- erties are sold with no back taxes or liens and with the foreclosure deed recorded for transfer to the new buyer. Unlike many government-backed REO sellers, CWCOT properties do not have a predetermined timeframe for properties to be flipped, making this program prime for investor clients. While the REO inventory continues to subside, the prime mortgage market strength- ens, and the high number of FHA-backed mortgages becomes delinquent and foreclosed, the CWCOT inventory has, quite contrarily, continued to rise. Proactive and creative auction companies with a fine-tuned pulse for the market and the direction it's headed can efficiently maintain CWCOT programs and help communities flourish in this ever-growing sector. Given healthier market conditions and the decrease of REOs nationwide, well-run CWCOT programs are currently the most efficient form of inventory disbursement and will be a viable program for years to come.

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