CWCOT, ‘Second Chance’ programs offer mortgage servicers paths to reducing risk

Conveyance Without Clearance of Title (CWCOT) and “Second Chance” are alternative property disposition strategies created by the U.S. Department of Housing and Urban Development (HUD). CWCOT means that the property sold at time of foreclosure to a third party. This was initiated back in the late 1980s, and was not fully utilized at that time.

About 3 years ago the industry rediscovered this disposition strategy with the help of some of the auction companies in the mortgage servicing space who started to sell the simplicity and potential loss avoidance of going this route.

“Second Chance” is a program that kicks in if the property does not sell third party at foreclosure. The auction company will continue to list the property and try to find a buyer. When a property is actively being marketed at auction, HUD will grant two sequential 60-day extension approvals to give the servicer more time to either get the property in conveyance condition (ICC) or to sell via auction. That is a primary incentive in having an auction program — it automatically grants 120 days to the post-foreclosure sale process.

Some mortgage servicers prefer to sell via auction to avoid the complexities of going the traditional “Part A” path of conveying the property to HUD REO and having them sell the property via normal channels. The Part A path runs the risk of “reconveyance” if convey condition standards are not met. And if the conveyance deadline is missed there are issues with getting all expenditures reimbursed by HUD.

CWCOT and Second Chance are the paths to avoid these risks.

There are limitations on which properties are eligible for auction (they cannot have surchargable damage, for example). And if the reserve price is not met when selling a property via auction, servicers come out of pocket to cover the delta.