As stated in Chapter 7 of HUD Handbook 4330.1, REV-5, Administration of Insured Home Mortgages (Handbook), the purpose of all collection efforts is to bring a delinquent mortgage current in as short a time as possible. The Handbook describes minimum default servicing requirements to accomplish this objective and expects that the vast majority of one or two payment delinquencies will be addressed by either voluntary reinstatement by mortgagors, or through traditional collection methods outlined in the Handbook, including informal forbearance plans, assumptions, and delinquent refinance.

The Loss Mitigation Program was designed to address serious defaults, those that continue for 90 days or more. However, all efforts taken by a lender in addressing delinquent loans contribute to HUD's goal of home ownership retention and protection of the insurance funds. Many of the most effective loss mitigation actions take place in the early stages of collection.

A. Early Intervention

 To meet the procedural requirements of the Loss Mitigation Program (24 CFR 203.355), lenders must become proactive early in the default. The earlier that the lender establishes contact with the borrower, identifies the cause of default and begins to discuss reinstatement options, the more likely it is that the default will be cured and the mortgagor will be able to retain home ownership. Efforts to assist the borrower should begin as soon as the loan becomes delinquent. Mortgagees must make all decisions, particularly discretionary decisions, consistent with Fair Housing and Lending principles.

HUD's minimum collection requirements for borrower contact, described in Chapter 7 of the Handbook, have not changed. However, the time to complete these activities has been compressed due to an acceleration of the foreclosure initiation time limit which, under the revised rule (24 CFR 203.355), has been reduced from nine to six months from the date of default.

  B. Cause of Default

HUD does not have a “hardship” test. Lenders may offer FHA relief options to homeowners who have experienced a verifiable loss of income or increase in living expenses to the point where the mortgage payments are no longer sustainable. HUD encourages lenders to develop collection techniques that seek to identify the underlying cause of the default at the earliest stages of borrower contact, primarily to determine if the financial problem is permanent or temporary. Borrowers whose ability to support the mortgage debt has been permanently reduced, for example through death, divorce, or permanent disability, are unlikely to reinstate through repayment plans. They should be considered for either loan modification which could provide a permanent reduction in the mortgage payment, or for pre-foreclosure sale which allows borrowers to transition to more affordable housing.

Borrowers who may require credit, legal or employment assistance to resolve temporary financial problems should be referred to housing counseling as quickly as possible.

C. Default Counseling

Borrowers who receive counseling early are much more likely to bring their loans current. Lenders are strongly encouraged to recommend counseling to borrowers and establish working relationships with counseling agencies. At a minimum, the lender must provide the borrower with a copy of the HUD publication PA 426-H, May 19, 1997, How to Avoid Foreclosure , no later than the end of the second month of delinquency (24 CFR 203.602). Lenders may make an exception to this requirement if the borrower has filed bankruptcy and, in the opinion of the lender's legal counsel, providing a copy of the HUD pamphlet would be a violation of the bankruptcy stay. This exception must be documented in the servicing file.

  D. Informal Forbearance Plans

A verbal repayment agreement with a duration of 3 months or less is considered to be an informal forbearance plan. An informal forbearance plan is the first and best means to ensure that a one or two month delinquency does not escalate beyond the mortgagor's ability to cure. Lenders should avoid use of standard repayment terms, such as requiring all borrowers to make 1 ½ payments per month until reinstatement. Rather, FHA requires lenders to review each mortgagor's financial situation and arrange payment terms consistent with the borrower's ability to pay.

E. Delinquent Refinance

HUD recognizes that there are situations where mortgagors more than two months behind in their payments could cure their default if they were able to refinance the mortgage using their equity to pay off the unpaid balance plus any arrearage. HUD permits lenders to refinance these mortgages under certain circumstances.

Under the Delinquent Refinance Program, the lender must provide an amount equal to one month's mortgage payment, principal, interest, taxes and insurance (“PITI”) of the mortgage being refinanced. For detailed instruction regarding delinquent refinances, refer to Mortgagee letter 94-30, dated June 28, 1994, Refinances of Delinquent Mortgages—Special Instructions .

  F. Sale of the Property

Borrowers who do not have either the ability or willingness to reinstate, but who have sufficient equity to sell their property and use the sale proceeds to repay the arrearage, should be encouraged and assisted by the lender. This assistance may include the additional time provided by an agreement which provides a short term reduction or suspension of payments pending the closing of a sale or loan assumption. Lenders are reminded that any mortgage delinquency must be cured no later than at closing. FHA requirements for assumptions are described in Chapter 6 of the Handbook.