97-29374. Single Family Mortgage InsuranceLoss Mitigation Procedures  

  • [Federal Register Volume 62, Number 215 (Thursday, November 6, 1997)]
    [Rules and Regulations]
    [Pages 60124-60130]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 97-29374]
    
    
    
    [[Page 60123]]
    
    _______________________________________________________________________
    
    Part II
    
    
    
    
    
    Department of Housing and Urban Development
    
    
    
    
    
    _______________________________________________________________________
    
    
    
    24 CFR Parts 203 and 206
    
    
    
    Single Family Mortgage Insurance--Loss Mitigation Procedures; Final 
    Rule
    
    Federal Register / Vol. 62, No. 215 / Thursday, November 6, 1997 / 
    Rules and Regulations
    
    [[Page 60124]]
    
    
    
    DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
    
    24 CFR Parts 203 and 206
    
    [Docket No. FR-4032-F-04]
    RIN 2502-AG72
    
    
    Single Family Mortgage Insurance--Loss Mitigation Procedures
    
    AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
    Commissioner, HUD.
    
    ACTION: Final rule.
    
    -----------------------------------------------------------------------
    
    SUMMARY: This rule implements as final an interim rule that amends 24 
    CFR part 203 to eliminate the Mortgage Assignment Program and to 
    provide that HUD may: Recompense mortgagees for using mortgage 
    foreclosure alternatives, such as special forbearance, loan 
    modifications, and deeds in lieu of foreclosure; pay the mortgagee a 
    partial claim which would be applied to the arrearage of a defaulted 
    mortgage; and accept assignment of a mortgage which the mortgagee has 
    modified to cure the default.
    
    EFFECTIVE DATE: February 1, 1998.
    
    FOR FURTHER INFORMATION CONTACT: Joseph McCloskey, Director, Single 
    Family Servicing Division, Room 9178, Department of Housing and Urban 
    Development, 451 7th Street, SW., Washington, DC 20410, (202) 708-1672, 
    or, TTY for hearing and speech impaired, (202) 708-4594. (These are not 
    toll-free numbers.)
    
    SUPPLEMENTARY INFORMATION:
    
    I. Paperwork Reduction Act Statement
    
        This rule's information collection requirements have been submitted 
    for approval to the Office of Management and Budget under the Paperwork 
    Reduction Act of 1995 (44 U.S.C. 3501-3520). An OMB control number, 
    when assigned, will be published in the Federal Register. An agency may 
    not conduct or sponsor, and a person is not required to respond to, a 
    collection of information unless the collection displays a valid 
    control number.
    
    II. Background
    
        On July 3, 1996 (61 FR 35014) the Department published an interim 
    rule to implement loss mitigation procedures under section 407 of The 
    Balanced Budget Downpayment Act, I (Pub. L. 104-99, approved January 
    26, 1996) (Downpayment Act). Public comments on the interim rule were 
    invited for a period of 60 days, until September 3, 1996. Delayed 
    implementation dates of March 1, 1997, were included for provisions in 
    two sections of the interim rule (24 CFR 203.355(a) and 203.402(f)) so 
    that the Department would be able to consider any public comments on 
    these provisions before making them effective in a final rule. The 
    March 1, 1997 implementation date for these sections was suspended 
    until the issuance of a final rule by an amendment published on March 
    5, 1997 (62 FR 9930). On November 12, 1996, HUD issued Mortgagee Letter 
    96-61. This letter provides information regarding changes to special 
    forbearance, mortgage modification, pre-foreclosure sales procedures 
    and deeds-in-lieu of foreclosure, and introduces the use of partial 
    claims, measurement of lender performance and provisions for incentive 
    payments and reimbursements. Included as attachments to the mortgagee 
    letter are a checklist of eligibility criteria for each of the loss 
    mitigation procedures and instructions required to file a claim. HUD 
    also issued Mortgagee Letter 97-17, May 1, 1997, regarding loss 
    mitigation clarification of procedures, and Mortgagee Letter 97-21, May 
    16, 1997, regarding Performance Scores.
    
    III. Changes in the Final Rule
    
        A number of changes from the interim rule are made in this final 
    rule. They are described briefly below in this section, and more fully 
    in section IV. of this preamble, in the discussion of the public 
    comments received on the interim rule.
    
    --The final rule has added a new Sec. 203.341 to explicitly state that 
    mortgage insurance remains in force after payment of a partial claim.
    --The titles of Secs. 203.342 and 203.616 are changed from ``Recasting 
    of mortgage'' to ``Mortgage modifications.''
    --HUD has amended the final rule at Sec. 203.355(a) to clarify that the 
    loss mitigation provisions may be used in combination.
    --HUD has rewritten Sec. 203.355(g), (h) and (i) to provide 90 days for 
    the lender to try another loss mitigation tool or to proceed to 
    foreclosure after the failure of any loss mitigation tool.
    --The effective dates of the foreclosure timing and cost reimbursement 
    provisions in Secs. 203.355 and 203.402, respectively, are changed to 
    February 1, 1998.
    --To be consistent with the other paragraphs under Sec. 203.371(b), the 
    reference to ``The mortgage'' in paragraph (b)(1) is changed to read 
    ``the mortgagor''. The reference in paragraph (b)(5) to ``financially 
    able'' is clarified to ``financially qualified'' to reflect more 
    accurately instances in which a mortgagor may have the funds but not 
    the equity to support a modification.
    --The words ``accumulated during the forbearance period'' are deleted 
    from Sec. 203.414(a) to more accurately reflect the authorizing statute 
    and avoid a potential technical limit on the amount recoverable under a 
    partial claim.
    --Section 203.552 is also clarified to provide that mortgagees may 
    collect fees from mortgagors to the extent not reimbursed by HUD.
    
    IV. Response to Public Comments
    
        Thirteen comments were received in response to the July 3, 1996 
    interim rule. Four of the comments were from mortgagees; four were from 
    public interest groups; two were from State housing finance agencies; 
    two were from individuals; and one was from an industry association. 
    HUD has reviewed the comments received in response to the interim rule 
    and decided that some changes should be made in the final rule. The 
    following discussion addresses the changes or additions to the rule and 
    the administrative issuances, in response to the public comments 
    received on the Loss Mitigation (``LM'') interim rule. The discussion 
    is organized by the section of the interim rule that is being commented 
    on, with specific subject headings under each rule section, as 
    warranted.
    
    Section 203.342 Recasting of Mortgage
    
        One comment observed the rule does not define, here and in 
    Sec. 203.471, ``circumstances beyond the control.''
        Response: Please note the response to this comment in the 
    discussion under Sec. 203.471, below.
    
    Section 203.350 Assignment of Mortgage
    
        Assignment Program Grace Period. Two comments stated a grace period 
    needs to be implemented between the termination of the Assignment 
    Program on April 26, 1996, and the implementation of alternative 
    procedures.
        Response: The statute established April 26, 1996 as the ending date 
    for the Assignment Program and provided for processing of applications 
    submitted before that date. HUD continues to process all assignment 
    applications received prior to April 26, 1996.
        Assignment of modified mortgage. One comment stated HUD should 
    positively commit to accepting assignment of a mortgage upon 
    fulfillment of the requirements of Sec. 203.350.
    
    [[Page 60125]]
    
        Response: The statement that HUD ``may'' accept an assignment in 
    paragraph (a) of this section repeats the statutory language, which 
    establishes the circumstances under which HUD is permitted to accept 
    the assignment of a mortgage. Since HUD has worked with GNMA to change 
    the repooling requirements (see Mortgagee Letter 96-32, June 28, 1996) 
    HUD foresees no occasion when a mortgage will not be able to be 
    repooled or when assignment to HUD will be necessary. Nevertheless, the 
    authority to accept assignments in rare and unforeseen circumstances 
    remains available.
    
    Section 203.355 Acquisition of Property
    
        Lender's Final Determination and Needs of Mortgagors. One comment 
    stated that the over-arching flaw of these alternatives is that their 
    use is left entirely to the discretion of lenders. Another comment 
    argued that lenders who hold HUD-insured mortgages have no significant 
    incentives to work with homeowners to avoid foreclosure, and they do 
    not do so. This comment went on to say the regulations fall short in 
    designing a reasonable response to the needs of low-income homeowners 
    for foreclosure prevention and relief.
        Response: Under the Loss Mitigation program the lender will have 
    the final determination on the use of LM measures and will have 
    incentives to try to use them where appropriate. Unlike the Assignment 
    Program, none of these LM measures is an entitlement, and thus the 
    lender has more discretion with regard to administering these measures. 
    Lenders must use their judgement in deciding which LM measure is 
    appropriate for a particular mortgagor. The language that the interim 
    rule adds to Sec. 203.501 and Mortgagee Letter 96-61 provides a process 
    through which a borrower's eligibility for loss mitigation is 
    determined. The statute provides that the lender will be given the 
    discretion to decide which LM measures will be used in a particular 
    case.
        FHA programs are meant to be self-sustaining, and an essential 
    element of these loss mitigation measures is that they must decrease 
    the insurance funds' prospective losses (or at least not increase the 
    funds' prospective losses). Thus, HUD must balance the needs of 
    mortgagors with the need to mitigate losses to the mortgage insurance 
    funds. These measures are designed for mortgagors who prospectively can 
    recover from their financial difficulties. If the mortgagor has not 
    recovered financially within 18 months, HUD analysis and experience 
    indicate that the prospects for recovery are poor. Two reasons for a 
    cap on the term of forbearance are to limit the level of losses to the 
    insurance fund and to prevent borrowers from getting too deeply into 
    arrears.
        Training Lenders and Housing Counseling Agencies in LM Program. One 
    comment noted that without better training programs, manuals, and 
    instructions, coupled with meaningful FHA oversight, the benefits of 
    these alternatives will not be realized by either HUD or homeowners. 
    Another comment strongly recommended that, with HUD implementing these 
    changes, more training be provided to Housing Counselors across the 
    country.
        Response: HUD will promote mortgagee participation in LM, and 
    provide training to lenders and monitor their performance. HUD has 
    already provided Loss Mitigation training to some lenders and housing 
    counseling agencies and will provide additional training in the near 
    future.
        Shorter Foreclosure Initiation Period. Three comments supported the 
    reduction of the foreclosure initiation period from nine to six months 
    as realistic and consistent with conventional loan servicing 
    procedures. One of these comments was pleased that the implementation 
    of the reduced period was delayed in the interim rule. Three other 
    comments opposed reducing the time frame of foreclosure to six months 
    as too short to allow mortgagors to work out plans with mortgagees and 
    resolve circumstances.
        One comment argued the requirement in Sec. 203.355(h) to initiate 
    foreclosure within 90 days of a borrower's failure to meet the terms of 
    a special forbearance agreement is not a sufficient time period, given 
    that mortgagees may not proceed with foreclosure until a borrower's 
    failure has continued for 60 days. Sixty days from the 60-day failure, 
    a total of 120 days, would be more workable. Another comment on this 
    section recommended Sec. 203.355(h) should clarify that foreclosure 
    must be initiated within the time period of paragraph (a)--nine or six 
    months from the date of default--or within 90 (or 120) after the 
    borrower's failure to meet the special forbearance requirements, 
    whichever is later.
        Response: HUD considers the six-month period for initiating 
    foreclosure to be adequate. The industry standard is four months. If 
    HUD continues to use a nine-month period, the Department will incur 
    additional expense. Also, the longer foreclosure is delayed, the less 
    likely it is that a mortgage will be cured. The final rule is being 
    amended by adding a new paragraph (i) at Sec. 203.355 to clarify that 
    if a lender enters into a loss mitigation relief measure and it fails, 
    the six-month requirement is extended by an additional ninety days to 
    allow the lender to try another loss mitigation tool or go to 
    foreclosure. It is also to be expected that if after six months no loss 
    mitigation measure is workable, then foreclosure is inevitable.
        HUD believes that the ``window'' for initiating foreclosure 
    provides the lender with adequate time in special forbearance cases. 
    The lender determines when LM fails or no other LM tool is applicable. 
    In each instance, the lender must initiate foreclosure within 90 days. 
    There is no need to expand this 90-day deadline in the rule, since the 
    lender is able, in any case where additional time would facilitate 
    mitigating loss, to request an extension from HUD.
        Simultaneously Considering LM and Pursuing Foreclosure. The 
    preamble to the interim rule states that HUD will ``generally'' permit 
    mortgagees simultaneously to consider loss mitigation actions and to 
    proceed with foreclosure to meet the new six-month time period. One 
    comment requested HUD to clarify its use of the term ``generally,'' 
    because mortgagees need to understand the specific circumstances under 
    which HUD would find it appropriate and acceptable to stop or delay 
    foreclosure for mortgagors who are actively negotiating or paying under 
    a loss mitigation plan.
        Response: The final rule at Sec. 203.355 has clarified that lenders 
    may use loss mitigation tools and take foreclosure action in 
    combination. The prospect of foreclosure is an effective incentive to 
    borrowers in negotiating workouts and the rule is intended to allow 
    flexibility in this interrelationship. As stated in the preamble to the 
    interim rule (at 61 FR 35015, column 2 and 3), HUD believes that early 
    intervention--before six months of delinquent payments--is necessary 
    for effective LM, and the lender may make timely preparations for 
    initiation of foreclosure while pursuing LM actions. In addition, on a 
    case-by-case basis, the lender may request an extension to the 6-month 
    deadline from the field office.
        HUD has rewritten Sec. 203.355(g) and (h) to provide 90 days to try 
    another loss mitigation tool or to proceed to foreclosure after the 
    failure of any loss mitigation tool.
        Using LM tools in combination. One comment requested that the 
    regulation be explicit in informing lenders and homeowners that the 
    loss mitigation tools may be used singly or in combination. Although 
    the preamble explains that the servicing actions or strategies may be 
    used in combination, Sec. 203.355(a) implies just the opposite by
    
    [[Page 60126]]
    
    saying that ``the mortgagee shall take one of the following actions 
    within [nine or] six months of the date of default . . .''
        Response: The LM provisions may be used in combination and HUD has 
    amended the final rule at Sec. 203.355(a) accordingly. This is 
    discussed on page 2 of Mortgagee Letter 96-61, where HUD says that the 
    LM strategies ``may be used singly or in combination, as required on a 
    case-by-case basis.'' In accordance with the explicit legislative 
    intent, HUD will defer to the discretion of the lender in applying loss 
    mitigation measures.
    
    Section 203.371 Partial claim
    
        Partial Claim and Special Forbearance. One comment asked if the 
    forbearance agreement at Sec. 203.371(a) must meet the requirements of 
    a ``special'' forbearance agreement.
        Response: The forbearance discussed in Sec. 203.371(a) need not be 
    ``special forbearance'' under Sec. 203.471 to qualify for a partial 
    claim.
        Special Forbearance Period of 18 Months. One comment argued the 
    planned 18 month limit on special forbearance is an arbitrary period of 
    time and is too short. HUD has put all authority to provide assistance 
    in the hands of the mortgagee. Only if the mortgagee decides to provide 
    special forbearance (which HUD intends to limit to 18 months), and the 
    homeowner is then able to make full mortgage payments, will HUD provide 
    a partial claim to the mortgagee at the end of the special forbearance 
    period.
        Response: HUD has determined that an 18-month period for special 
    forbearance is sufficient to allow the mortgagor to recover 
    financially. In addition, this limit is reasonable in view of the 
    statutory limit (amended Sec. 230(a) of the National Housing Act, 12 
    U.S.C. 1715u(a)) that partial claims may not exceed 12 monthly mortgage 
    payments (PITI) and any costs related to default that are approved by 
    HUD.
        Partial Claim Filing. A comment asked if the mortgagee may choose 
    when to file a partial claim under Sec. 203.371(b)(1) after the 
    mandated default period has passed.
        Response: Mortgagee Letter 96-61, in the claims instructions for 
    partial claims, specifies the window of time for filing the claim, 
    namely, between the time the subordinate lien to HUD has been executed 
    and 60 days after it has been recorded.
        Repooling Modified Loans. One comment stated the rule does not 
    indicate whether GNMA or non-GNMA investors have approved or considered 
    the requirement that to file a partial claim, the mortgagor must not be 
    able to support monthly mortgage payments for a modified loan in which 
    the total arrearage is included. If investors prohibit loan 
    modification under circumstances in which the rule requires such 
    activity, servicers could be caught in the middle. HUD should establish 
    underwriting criteria for eligibility of mortgagors for the proposed 
    loan modification program. Another comment asked if HUD will provide 
    definitive guidelines for making determinations of a borrower's 
    financial capacity under Sec. 203.371(b) (4) and (5) to refinance or 
    support a modified mortgage.
        Response: HUD has worked out an understanding with GNMA for revised 
    pooling requirements to assure repooling and minimize this problem. HUD 
    expects that in almost all cases, mortgage modifications can be 
    effected in such a way as to be repoolable, that is, at an interest 
    rate and with a new term (e.g., 360 months) that will meet GNMA pooling 
    requirements. Nevertheless, in the limited circumstances where a 
    modified mortgage cannot be repooled, HUD will establish criteria for 
    accepting a modified mortgage for assignment, and provide guidance in a 
    future Mortgagee Letter.
        Servicing the HUD-held Second Mortgage. Three comments recommended 
    the rule should state that a mortgagee is entitled to a fee for 
    servicing when HUD accepts assignment and requires a mortgagee to 
    continue servicing the loan under Sec. 203.371(d). One of these 
    comments argued that given the low balances, a percentage based 
    servicing fee would not be sufficient. Another comment stated the vast 
    majority of mortgagees are not experienced in servicing ``soft 
    seconds,'' the subordinate lien arising from payment of a partial 
    claim, and most computer systems are not programmed to handle such 
    unique debt instruments. This comment recommended that HUD solicit a 
    limited number of servicers to service the subordinate liens on behalf 
    of HUD. On a related issue, one comment recommended that the guidelines 
    should make clear that the subordinate mortgage may call for repayment 
    of the partial claim amount at a future date or at the time of transfer 
    of property or payoff of the insured mortgage. HUD should also specify 
    that subordinate mortgages will be at zero percent interest.
        Response: HUD intends to continue to reserve the right to require 
    lenders to service second mortgages executed in connection with partial 
    claims. However, as noted in Mortgagee Letter 96-61, since the 
    subordinate mortgage carries no interest or monthly payments and is due 
    only when the first mortgage is paid in full, foreclosed, or when the 
    borrower no longer occupies the property, HUD has decided to hold and 
    service these mortgages at this time.
        Mortgagee Advances--Reimbursement in the settlement of the Partial 
    Claim. One comment asked if a partial claim payment will include 
    mortgagee advances on behalf of the borrower.
        Response: Mortgagees will be reimbursed, in accordance with 
    Mortgagee Letter 96-61 instructions for Item 107 in the claims 
    instructions for a Partial Claim. Item 107 provides for reimbursement 
    of the total arrearage that accumulated during the forbearance period, 
    including PITI and necessary advances for assessments, but excluding 
    late fees and foreclosure costs.
        Loan Insurance After a Partial Claim. One comment stated the rule 
    should clarify that if a default occurs after payment of a partial 
    claim, the full amount of remaining principal, advances and accrued 
    debenture interest with applicable costs is payable in a subsequent 
    foreclosure and conveyance claim.
        Response: After a partial claim, the remaining loan remains 
    insured. The final rule has added a new Sec. 203.341 to explicitly 
    state that mortgage insurance remains in force after payment of a 
    partial claim, as is already done in existing LM actions such as 
    special forbearance and loan modification.
        Using the Partial Claim Procedure to Erase Excess of Debt Over 
    Current Market Value. One comment suggested HUD might consider using 
    the partial claim process to pay out insurance coverage on any gap 
    between the loan balance and the market value. This would pay down the 
    debt to a market value, make the lender whole, and allow the mortgage 
    payments to be reduced to a lower amount on the net balance of the 
    remaining rate and term.
        Response: FHA mortgages, even when LM is to be considered, are not 
    meant to be ``shared-depreciation mortgages.'' While the Pre-
    Foreclosure Sale procedure accomplishes something similar to this 
    (although the mortgagor necessarily loses the property), the negative 
    equity position is not an appropriate reason for using the Partial 
    Claims procedure. The mortgagor remains liable for the full amount of 
    the debt even if there is negative equity, just as the mortgagor would 
    benefit if the property were to appreciate in value.
    
    [[Page 60127]]
    
    Section 203.402  Items Included in Payment
    
        Tying Reimbursement to LM Success Rates. A number of comments 
    stated they were opposed to the change that would permit HUD to vary 
    the percentage of foreclosure and acquisition expenses through an 
    administrative issuance rather than through the rulemaking process. 
    Setting the reimbursement levels for these costs is important enough to 
    be addressed through a notice and comment rulemaking process rather 
    than administrative issuance. One comment suggested that the rule 
    should specify a level of reimbursement (e.g., up to 100 percent and 
    not less than 50 percent) for foreclosure costs or costs of acquiring 
    the property, rather than state that the percentage reimbursed will be 
    determined by HUD. Another comment argued HUD should not tie the 
    reimbursement of foreclosure fees and costs to loss mitigation 
    performance, because loss mitigation success is influenced by a number 
    of factors, such as the age of the portfolio, geography, and whether 
    the loan was acquired, that are independent of mortgagee efforts. The 
    level of reimbursement should take into consideration the percentage of 
    loss mitigation cures versus the percentage of foreclosures, 
    reinstatements, servicing acquisitions and peer performance. HUD should 
    work with the mortgage industry to develop a fair and equitable 
    performance model. Another comment also questioned the ability to 
    develop a fair and equitable calculation methodology that would 
    accurately measure mortgagee performance without incorporating factors 
    over which mortgagees have little or no control. The comment concluded 
    that even the best of loss mitigators cannot overcome origination and 
    underwriting deficiencies.
        Response: In the interim rule, HUD specifically requested public 
    comment and provided for a delayed implementation date to allow for 
    consideration of comments received for both the foreclosure timing and 
    cost reimbursement provisions in Secs. 203.355 and 203.402, 
    respectively. With the March 5, 1997 publication of the suspension of 
    these provisions, they will not take effect until a minimum of sixty 
    days after publication of this final rule in the Federal Register. The 
    rule satisfies the concerns expressed in relation to reimbursement 
    reductions, since the lowered rate of reimbursement for foreclosure 
    costs at Sec. 203.402(f), will apply only to mortgages endorsed on or 
    after February 1, 1998. Lenders have had an opportunity to comment on 
    this point, and these provisions are not going into effect without the 
    opportunity for prior notice and comment. The other changes to 
    Sec. 203.402 do not constitute reductions.
        HUD has undertaken an effort to streamline its rules, and that 
    policy is being followed in this rule. Minimizing the detail put into 
    the rule will give HUD the flexibility to make appropriate amendments 
    in a timely manner in response to the experience of lenders and HUD 
    with LM procedures, and to vary the reimbursement for LM measures 
    according to lender performance. HUD will address the reimbursement of 
    foreclosure costs in future mortgagee letters.
        HUD's ranking model was announced in Mortgagee Letter 97-21, May 
    16, 1997. In developing this model, HUD considered these comments, met 
    with industry representatives, and adopted some of the comments. As a 
    result, HUD believes the model provides a fair basis for ranking 
    lenders.
        HUD contends that LM has a significant impact upon losses to FHA 
    insurance funds based on foreclosure avoidance. HUD has and will 
    continue to work with industry to provide equitable performance 
    measurements. HUD is creating an incentive for lenders to intervene 
    early in the default cycle to address delinquencies.
        Tying the foreclosure cost reimbursement to lender performance is 
    part of the LM incentive structure. Not only do lenders receive cash 
    incentives for performing LM, but lenders must accept some risk, in the 
    form of absorbing foreclosure costs, for their LM decisions or failure 
    to use LM tools. Mortgagee Letter 97-21, on page 2, provides that 
    lenders in the top 25% of each of the performance groups (high, medium 
    and low volume) will receive 75% reimbursement of foreclosure costs.
        HUD believes that LM is a win-win-win proposition for borrowers, 
    lenders and HUD. Borrowers get an opportunity to retain home ownership; 
    lenders can better manage their inventory losses through early default 
    intervention; and HUD can better protect the insurance funds to 
    continue providing affordable housing opportunities.
        How Reimbursement for LM Will be Made. One comment stated the rule 
    needs to clarify if HUD will reimburse for loss mitigation efforts in 
    the event a mortgage insurance claim is filed or whether a separate 
    transaction driven claim process is envisioned.
        Response: Mortgagee Letter 96-61 and the claims instructions 
    attachments explain how the reimbursement is accomplished. Generally, 
    lenders may submit a claim for each LM tool when it is put in place. 
    Should the loan go to foreclosure despite the lender's LM efforts, the 
    lender may file a claim for the insurance benefits.
        Mortgagee Monitoring by HUD. One comment recommended that in 
    reimbursing mortgagees for foreclosure and acquisition costs, and in 
    the payment of partial claims, HUD should closely monitor mortgagees to 
    make sure they are making good faith efforts to bring accounts current 
    before initiating foreclosure on mortgagors.
        Response: HUD realizes that mortgagees will need to be monitored on 
    their implementation of LM, and HUD has allocated staff and modified 
    automated procedures to accomplish this. HUD is monitoring lenders' 
    performance and will take necessary enforcement actions to assure 
    compliance with servicing requirements.
    
    Section 203.412  Payment for Foreclosure Alternative Actions
    
        Lender Incentives. One comment stated payment of insurance benefits 
    for loss mitigation activities, if adequate, will provide a near-term 
    benefit that could balance the cost of employing loss mitigation 
    techniques. If HUD wishes to avoid the costs associated with default 
    and foreclosures, it must be willing to pay a reasonable amount to the 
    lender and the borrower.
        Response: HUD believes that lenders will have sufficient incentive 
    to employ LM measures. While the reimbursements and incentives provided 
    by HUD may not by themselves be decisive, lenders and servicers are in 
    business to make money holding and servicing loans that perform. To the 
    extent that LM actions result in mortgagors' retention of their homes, 
    mortgagees retain their business. In addition, when a lender conveys a 
    property to HUD, the lender, under the final rule, has to absorb one 
    third or more of the foreclosure costs and forego substantial interest 
    revenue. Thus, if the lender refuses to consider loss mitigation, the 
    lender will certainly lose. Mortgage insurance continues after the LM 
    is undertaken, whether successfully or not. The authorizing statute is 
    explicit in directing HUD to give the mortgagees latitude to exercise 
    their discretion in deciding upon using Loss Mitigation measures. The 
    rule requires mortgagees to review each case monthly and determine 
    which LM tool to utilize.
        Fees (including attorney fees) Incurred in LM Actions. One comment 
    suggested that in addition to reimbursement for any title examination
    
    [[Page 60128]]
    
    and/or title insurance policy endorsement, mortgagees should be 
    reimbursed for their legal costs incurred in connection with a mortgage 
    modification or recasting.
        Response: The claims instructions issued in Mortgagee Letter 96-61 
    provide for payments to partially offset ``administrative fees'' (Item 
    129 on the claim) for special forbearance, loan modification, deed in 
    lieu and partial claim to offset the lender's costs and thereby provide 
    an incentive to undertake LM measures. The Department considers these 
    fees adequate. In addition, HUD provides a payment for consideration to 
    mortgagors in pre-foreclosure sale and deed-in-lieu cases.
    
    Section 203.414  Amount of Payment--Partial Claims
    
        Arrearage. Two comments recommended the rule should clarify that 
    arrearage includes principal, interest, late charges, taxes, and other 
    fees (inspection fees, attorney's fees, bankruptcy and foreclosure 
    fees, insufficient check fees, late charges) necessary to bring the 
    loan current.
        Response: Mortgagee Letter 96-61 clarified ``mortgage payment'' to 
    consist of PITI. The arrearage includes only PITI; no other costs are 
    eligible for reimbursement under a partial claim, although the lender 
    will also receive a flat administrative fee and will be reimbursed 
    recordation costs.
    
    Section 203.471  Special Forbearance
    
        Circumstances Beyond the Mortgagor's Control. One comment observed 
    HUD has not defined, here and in Sec. 203.342, ``circumstances beyond 
    the control.'' This leaves servicers open to being second-guessed.
        Response: HUD does not intend to second-guess lenders who 
    reasonably provide for the use of LM tools. HUD defined 
    ``circumstances'' in an objective manner in Mortgagee Letter 96-61 to 
    address a broad audience of homeowners. The Letter indicates that 
    ``Homeowners may be considered for special forbearance provided they 
    have recently experienced (1) an involuntary reduction in income or an 
    increase in living expenses and (2) the lender determines the borrower 
    has a reasonable ability to pay under the terms of the forbearance plan 
    to eliminate the arrearage.''
        Non-hardship Forbearance. One comment claimed the concept of 
    penalizing the lender by not reimbursing those forbearance 
    delinquencies which are not caused by hardship will stifle the 
    incentive of the lenders to forbear.
        Response: HUD's loss mitigation program does not have a 
    ``hardship'' test. As noted immediately above, FHA has broadened the 
    basis for when special forbearance and mortgage modification may be 
    considered as available loss mitigation tools. The lender must now 
    confirm that the homeowner has experienced a loss of income or an 
    increase of expenses to qualify for special forbearance.
    
    Section 203.552  Fees and Charges after Endorsement
    
        Elimination of Regulatory Control of Post-endorsement Fees and 
    Charges. One comment stated HUD needs to be moving towards eliminating 
    regulatory control over post endorsement fees and charges.
        Response: The setting of post endorsement fees and charges by the 
    Department provides consistency where needed and allows regional 
    differences where HUD deems appropriate. Releasing or withdrawing any 
    oversight in setting those fees would lead to far more disparate 
    treatment of mortgagors than is done currently.
    
    Section 203.605  Loss Mitigation Evaluation
    
        When the Mortgagor Does Not Qualify or is Uncooperative. One 
    comment recommended no further evaluations should be necessary once a 
    determination is made that the mortgagor does not qualify or is 
    uncooperative. Another comment requested that to help assure that 
    lenders are not at risk for allegations of fair lending violations, HUD 
    should establish specific standards for actions that mortgagees should 
    take to determine a defaulted borrower's eligibility for loss 
    mitigation measures. Such standards would address the issue of 
    borrowers whose circumstances would qualify them for loss mitigation, 
    but who do not seek out the mortgagee for such assistance.
        Response: Mortgagee Letter 96-61 and the checklists in Attachment A 
    to the Letter describe the qualifications for LM and also state that LM 
    should be used where ``appropriate.'' After review and consideration of 
    all LM tools and all the facts of the case, the lender can decide to 
    decline to grant LM to an uncooperative mortgagor in accordance with 
    this general principle of appropriateness.
        Under the pre-foreclosure sale (PFS) procedure, the mortgagor's 
    good-faith efforts are required and monitored. Besides PFS, the 
    cooperativeness of the mortgagor would be relevant to special 
    forbearance, partial claim and loan modification. Mortgagee Letter 96-
    61 requires that, in these cases, the mortgagor should have ``a 
    commitment to remain in'' the home (see checklists in Attachment A). 
    The cooperative participation of the borrower is implicit in this 
    criterion.
        Loss mitigation does not add new requirements related to Fair 
    Housing. HUD expects lenders will comply fully with existing fair 
    lending laws and will continue to ensure compliance with those laws. 
    The object of LM is to avoid foreclosure, and lenders must justify use 
    or non-use of all LM tools and reevaluate monthly. In this respect, 
    lenders are directed to HUD's Mortgagee Letter 96-61, page 3, and 
    Sec. 203.605 of this final rule.
    
    Section 203.606  Pre-Foreclosure Review
    
        Notice to the Mortgagor of the Consequences of Default. One comment 
    stated that although the rule states the required notification to the 
    mortgagor of default and the mortgagee's intent to foreclose will be in 
    ``a format prescribed by the Secretary,'' the industry would welcome 
    the opportunity to comment on the content of the notice. The notice 
    should be firm in explaining the consequences of inaction, while also 
    being informative and consumer-friendly to encourage communication with 
    the mortgagee.
        Response: HUD will seek comments relative to possible modifications 
    of mortgagor notification required by Sec. 203.606.
        Use of HUD-approved Housing Counseling Agencies. One comment 
    suggested that the use of Housing Counseling Agencies should be a part 
    of all mortgagee letters to mortgagors when requesting payments and/or 
    information. Another comment stated that HUD should strongly recommend 
    that mortgagees provide donations to counseling agencies in their 
    communities.
        Response: Regarding the use of housing counseling agencies, HUD's 
    current practice, in accordance with the requirements of Sec. 203.602, 
    is that the lender must send the mortgagor a delinquency notice 
    (currently in the form of the ``Avoiding foreclosure'' pamphlet) during 
    the second month of delinquency (see Handbook 4330.1 REV-5, Par. 7-7G 
    and Appendix 19). This notice includes a recommendation to contact a 
    HUD-approved housing counseling agency.
        Some lenders already sponsor or form partnerships with counseling 
    agencies. However, it would be inappropriate for HUD to recommend that 
    mortgagees make donations to counseling agencies.
    
    [[Page 60129]]
    
    Section 203.616  Recasting of Mortgage
    
        Time for lenders to implement the recasting requirement. One 
    comment noted that mortgagees generally do not have established 
    procedures and documents for modifications and recasting of insured 
    loans. Mortgagees will have to establish such procedures after 
    reviewing detailed underwriting standards yet to be set by HUD. March 
    1, 1997, is too soon to implement the recasting requirement.
        Response: HUD believes that with the issuance of Mortgagee Letter 
    96-61, November 12, 1996, and Mortgagee Letter 97-17, May 1, 1997, the 
    lenders have sufficient time to gear up for this procedure.
        Scope of recasting. One comment noted the regulation is currently 
    written as if recasting the unpaid amount due over the remaining term 
    of the mortgage is the only option available. Language should be added 
    to allow specifically for modification such as an interest rate 
    reduction, or conversion from an ARM to a fixed rate mortgage. In 
    addition, the comment recommended the heading for this section should 
    read: Modifying/Recasting of mortgage.
        Response: HUD acknowledges the potential ambiguity of the rule 
    language pointed out by this comment and has clarified the rule to 
    indicate that adjustments to both term and interest rate are permitted. 
    There is no prohibition of reduction of interest rate or conversion 
    from ARM to fixed. In addition, HUD is changing the titles of 
    Secs. 203.342 and 203.616 to ``Mortgage Modifications.''
        Recasting Current Loans and Fair-lending Complaints. HUD should 
    reconsider whether to provide for recasting of a current loan, because 
    of the small population of loans that would be served by this 
    provision, which may, nonetheless, give rise to complaints based on 
    fair housing or other grounds.
        Response: The LM tools represent a spectrum of foreclosure-
    avoidance techniques, not all of which can be applied to particular 
    buyers, but which as a whole represent substantial opportunities for 
    FHA borrowers to maintain home ownership. As stated in the response 
    under Sec. 203.605, above, loss mitigation does not add new 
    requirements related to Fair Housing; HUD expects lenders will comply 
    fully with existing fair lending laws and will continue to ensure 
    compliance with those laws.
    
    V. Findings and Certifications
    
    Environmental Impact
    
        At the time of publication of the interim rule, a Finding of No 
    Significant Impact with respect to the environment was made in 
    accordance with HUD regulations in 24 CFR part 50 that implement 
    section 102(2)(C) of the National Environmental Policy Act of 1969 (42 
    U.S.C. 4332). The interim rule is adopted by this final rule without 
    significant change. Accordingly, the initial Finding of No Significant 
    Impact remains applicable, and is available for public inspection 
    between 7:30 a.m. and 5:30 p.m. weekdays in the office of the Rules 
    Docket Clerk at the above address.
    
    Congressional Review of Major Final Rules
    
        This rule is a ``major rule'' as defined in the Administrative 
    Procedure Act (5 U.S.C. 804(2)), and will be submitted to the Congress 
    for review in accordance with the statutory procedure.
    
    Regulatory Flexibility Act
    
        The Secretary, in accordance with provisions of the Regulatory 
    Flexibility Act (5 U.S.C. 605(b)), has reviewed this rule before 
    publication and by approving it certifies that it will not have a 
    significant economic impact on a substantial number of small entities. 
    Most of the economic impact of the rule will affect the Department, 
    which stands to benefit from the successful implementation of the loss 
    mitigation techniques addressed by the rule.
    
    Executive Order 12612, Federalism
    
        HUD has determined, in accordance with Executive Order 12612, 
    Federalism, that this rule will not have a substantial, direct effect 
    on the States or on the relationship between the Federal government and 
    the States, or on the distribution of power or responsibilities among 
    the various levels of government, since the rule involves primarily 
    relationships between the Department and private entities.
    
    Executive Order 13045, Protection of Children from Environmental Health 
    Risks and Safety Risks
    
        This rule will not pose an environmental health risk or safety risk 
    on children.
        The Catalog of Federal Domestic Assistance Number for Single Family 
    HOME Insurance is 14.117.
    
    List of Subjects
    
    24 CFR Part 203
    
        Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
    housing and community development, Mortgage insurance, Reporting and 
    recordkeeping requirements, Solar energy.
    
    24 CFR Part 206
    
        Aged, Condominiums, Loan programs--housing and community 
    development, Mortgage insurance, Reporting and recordkeeping 
    requirements.
    
        Accordingly, for the reasons stated in the preamble, parts 203 and 
    206 of title 24 of the Code of Federal Regulations are amended by 
    adopting the interim rule published in the Federal Register on July 3, 
    1996 (61 FR 35014) as final with the following changes:
    
    PART 203--SINGLE FAMILY MORTGAGE INSURANCE
    
        1. The authority citation for part 203 continues to read as 
    follows:
    
        Authority: 12 U.S.C. 1709, 1710, 1715b, and 1715u; 42 U.S.C. 
    3535(d).
    
        2. A new Sec. 203.341 is added to read as follows:
    
    
    Sec. 203.341  Partial claim.
    
        If the conditions of Sec. 203.371 are met and a partial claim is 
    paid pursuant to that section, the contract of insurance shall continue 
    in force, except as otherwise provided in this subpart.
        3. Section 203.342 is revised to read as follows:
    
    
    Sec. 203.342  Mortgage modification.
    
        If a mortgage is recast pursuant to Sec. 203.616, the principal 
    amount of the mortgage, as modified, shall be considered to be the 
    ``original principal balance of the mortgage'' as that term is used in 
    Sec. 203.401.
        4. In Sec. 203.355, paragraphs (a), (c), (g) introductory text, and 
    (h) are revised and a new paragraph (i) is added to read as follows:
    
    
    Sec. 203.355  Acquisition of property.
    
        (a) In general. Upon default of a mortgage, except as provided in 
    paragraphs (b) through (i) of this section, the mortgagee shall take 
    one of the following actions within nine months from the date of 
    default, or within any additional time approved by the Secretary or 
    authorized by Secs. 203.345 or 203.346. For mortgages where the date of 
    default is on or after February 1, 1998, the mortgagee shall take one 
    or a combination of the following actions within six months of the date 
    of default or within such additional time approved by HUD or authorized 
    by Secs. 203.345 or 203.346:
        (1) Obtain a deed-in-lieu of foreclosure (see Secs. 203.357, 
    203.389 and
    
    [[Page 60130]]
    
    203.402(f) of this part) with title being taken in the name of the 
    mortgagee or the Secretary;
        (2) Commence foreclosure;
        (3) Enter into a special forbearance agreement under Sec. 203.614;
        (4) Complete a modification of the mortgage under Sec. 203.616;
        (5) Complete a refinance of the mortgage under Sec. 203.43(c);
        (6) Complete an assumption under Sec. 203.512;
        (7) File a partial claim under Sec. 203.371; or
        (8) Initiate a pre-foreclosure sale under Sec. 203.370.
    * * * * *
        (c) Prohibition of foreclosure within time limits. If the laws of 
    the State in which the mortgaged property is located, or Federal 
    bankruptcy law:
        (1) Do not permit the commencement of foreclosure within the time 
    limits described in paragraphs (a), (b), (g), (h) and (i) of this 
    section, the mortgagee must commence foreclosure within 90 days after 
    the expiration of the time during which foreclosure is prohibited; or
        (2) Require the prosecution of a foreclosure to be discontinued, 
    the mortgagee must recommence the foreclosure within 90 days after the 
    expiration of the time during which foreclosure is prohibited.
    * * * * *
        (g) Pre-foreclosure sale procedure. Within 90 days of the end of a 
    mortgagor's participation in the pre-foreclosure sale procedure, or 
    within the time limit described in paragraph (a) of this section, 
    whichever is later, if no closing of an approved pre-foreclosure sale 
    has occurred, the mortgagee must obtain a deed in lieu of foreclosure, 
    with title being taken in the name of the mortgagee or the Secretary, 
    or undertake one of the actions listed at Sec. 203.355(a). The end-of-
    participation date is defined as:
    * * * * *
        (h) Special forbearance. If the mortgagor fails to meet the 
    requirements of a special forbearance under Sec. 203.614 and the 
    failure continues for 60 days, the mortgagee must undertake one of the 
    actions listed at Sec. 203.355(a) within the time limit described in 
    paragraph (a) of this section or 90 days after the mortgagor's failure 
    to meet the special forbearance requirements, whichever is later.
        (i) Modification under Sec. 203.616, refinance under 
    Sec. 203.43(c), or assumption under Sec. 203.512. Provided that the 
    mortgagee has established the mortgagor's eligibility within the time 
    frame provided in Sec. 203.355(a), if a mortgagee enters into a loss 
    mitigation relief measure (i.e., modification under Sec. 203.616, 
    refinance under Sec. 203.43(c), or assumption under Sec. 203.512) and 
    it fails, the six-month period provided in Sec. 203.355(a) is extended 
    by an additional 90 days to allow the mortgagee to try another loss 
    mitigation tool or go to foreclosure.
        5. In Sec. 203.371, paragraphs (b)(1) and (b)(5) are revised to 
    read as follows:
    
    
    Sec. 203.371  Partial claim.
    
    * * * * *
        (b) * * *
        (1) The mortgagor has been delinquent for at least 4 months or such 
    other time prescribed by HUD;
    * * * * *
        (5) The mortgagor is not financially qualified to support monthly 
    mortgage payments on a modified mortgage or on a refinanced mortgage in 
    which the total arrearage is included.
    * * * * *
        6. In Sec. 203.402, paragraph (f) is revised to read as follows:
    
    
    Sec. 203.402  Items included in payment--conveyed and non-conveyed 
    properties.
    
    * * * * *
        (f) Foreclosure costs or costs of acquiring the property otherwise 
    (including costs of acquiring the property by the mortgagee and of 
    conveying and evidencing title to the property to HUD, but not 
    including any costs borne by the mortgagee to correct title defects) 
    actually paid by the mortgagee and approved by HUD, in an amount not in 
    excess of two-thirds of such costs or $75, whichever is the greater. 
    For mortgages insured on or after February 1, 1998, the Secretary will 
    reimburse a percentage of foreclosure costs or costs of acquiring the 
    property, which percentage shall be determined in accordance with such 
    conditions as the Secretary shall prescribe. Where the foreclosure 
    involves a mortgage sold by the Secretary on or after August 1, 1969, 
    or a mortgage executed in connection with the sale of property by the 
    Secretary on or after such date, the mortgagee shall be reimbursed (in 
    addition to the amount determined under the foregoing) for any extra 
    costs incurred in the foreclosure as a result of a defect in the 
    mortgage instrument, or a defect in the mortgage transaction or a 
    defect in title which existed at or prior to the time the mortgage (or 
    its assignment by the Secretary) was filed for record, if the mortgagee 
    establishes to the satisfaction of the Commissioner that such extra 
    costs are over and above those customarily incurred in the area.
    * * * * *
        7. In Sec. 203.414, paragraph (a) is revised to read as follows:
    
    
    Sec. 203.414  Amount of payment--partial claims.
    
        (a) Claim Amount. Where a claim for partial insurance benefits is 
    filed in accordance with Sec. 203.371, the amount of the insurance 
    benefits shall consist of the arrearage not to exceed an amount 
    equivalent to 12 monthly mortgage payments, and any costs prescribed by 
    HUD related to the default.
    * * * * *
        8. In Sec. 203.552, paragraph (a) introductory text is revised to 
    read as follows:
    
    
    Sec. 203.552  Fees and charges after endorsement.
    
        (a) The mortgagee may collect reasonable and customary fees and 
    charges from the mortgagor after insurance endorsement only as provided 
    below. The mortgagee may collect these fees or charges from the 
    mortgagor only to the extent that the mortgagee is not reimbursed for 
    such fees by HUD.
    * * * * *
        9. Section 203.616 is revised to read as follows:
    
    
    Sec. 203.616  Mortgage modification.
    
        The mortgagee may modify a mortgage for the purpose of changing the 
    amortization provisions by recasting the total unpaid amount due for a 
    term not exceeding 360 months. The mortgagee must notify HUD of such 
    modification in a format prescribed by HUD within 30 days of the 
    execution of the modification agreement.
    
        Dated: September 16, 1997.
    Stephanie A. Smith,
    General Deputy Assistant Secretary for Housing, Federal Housing 
    Commissioner.
    [FR Doc. 97-29374 Filed 11-5-97; 8:45 am]
    BILLING CODE 4210-27-P
    
    
    

Document Information

Effective Date:
2/1/1998
Published:
11/06/1997
Department:
Housing and Urban Development Department
Entry Type:
Rule
Action:
Final rule.
Document Number:
97-29374
Dates:
February 1, 1998.
Pages:
60124-60130 (7 pages)
Docket Numbers:
Docket No. FR-4032-F-04
RINs:
2502-AG72: Loss Mitigation--Single Family (FR-4032)
RIN Links:
https://www.federalregister.gov/regulations/2502-AG72/loss-mitigation-single-family-fr-4032-
PDF File:
97-29374.pdf
CFR: (10)
24 CFR 203.43(c)
24 CFR 203.341
24 CFR 203.342
24 CFR 203.355
24 CFR 203.371
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