[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