Both lenders and borrowers have responsibilities under the Loss Mitigation Program. While each option has specific eligibility requirements, there are some policies that apply to all of the options, and some lender requirements which must be met whether or not any of the loss mitigation strategies are used. This section describes these general policies, recommended procedures, and minimum eligibility requirements.

  A. Default Status of the Loan

Loss mitigation options are intended to provide relief for borrowers who are currently in default which is defined in 24 CFR 203.330, and in the Handbook as, “… a mortgagor's failure to perform under any covenant of the mortgage and the failure continues for 30 days.” The lender may make reinstatement options (special forbearance agreements loan modifications and partial claims) available to borrowers whose failure to perform continues for at least 90 days (120 days for partial claims). Disposition options (pre-foreclosure sales and deeds-in lieu of foreclosure) are available immediately upon default, if the cause of the default is incurable, i.e. the borrower has no realistic opportunity to replace the lost income or reduce expenses sufficiently to meet the mortgage obligation.

Any attempt to utilize loss mitigation options by deliberately manufacturing or misrepresenting pertinent facts about a mortgagor's financial or other qualifying status, shall be considered “willful abuse”, will disqualify a mortgagor from participation, and could lead to sanctions if perpetrated by a lender.

  B. Owner Occupancy

The borrower must occupy the property as a principal residence to be eligible for any of the reinstatement options (special forbearance, loan modification or partial claim). Lenders are authorized to grant reasonable exceptions to non-occupant borrowers seeking relief through pre-foreclosure sale (PFS), or deed-in-lieu of foreclosure (DIL) when it is clear that the subject property was not purchased as a rental investment, or used as a rental for more than 12 months. Justification for the above exceptions must be documented in the claim review file.

If the borrower is a corporation or partnership, a written request for approval must be submitted to:

U.S. Department of Housing and Urban Development
Servicing and Loss Mitigation Division
500 W. Main Street, Suite 400
Oklahoma City, OK 73102

  C. Prohibition on Other FHA Loans

The mortgagor may not own other real estate subject to FHA insurance, or have been the mortgagor on prior loans on which an FHA claim has been paid within the past three years. The Credit Alert Interactive Response Systems (CAIVRS) must be used to assist in this determination, prior to use of any of the loss mitigation options.

Lenders are authorized to make reasonable exceptions, for mortgagors who have acquired FHA insured property through inheritance, or for mortgagors who co-signed FHA insured loans to enhance the credit of another borrower. Justification for any exceptions must be documented.

D. Other Eligibility Requirements

FHA has established the following general eligibility restrictions:

•  With the exception of special forbearance, loss mitigation options are not available on co-insured loans until the 60 th payment has been received.

•  Borrowers who have filed bankruptcy are not eligible for any loss mitigation option except partial claim as more fully explained in Section B, page 25. Borrowers who have had a bankruptcy discharged or dismissed may be considered for loss mitigation options including pre-foreclosure sale.

•  Loans secured by vacant or abandoned properties are not eligible for reinstatement options, though disposition options may be utilized when properties have been recently vacated by circumstances related to the default, such as job transfer or death. Such circumstances must be documented by the lender in the claim review file.

  E. 90 Day Review Requirement

No later than when 3 full monthly installments are due and unpaid, lenders must evaluate each defaulted loan and consider all loss mitigation techniques to determine which, if any, are appropriate (24 CFR 203.605). In order to comply with this 90 day evaluation requirement, lenders must already have contacted the borrower and gathered sufficient information about the borrower's circumstances, intentions and financial condition. Given the normal reticence of most borrowers in financial distress, lenders must be proactive early in the default in order to meet this 90 day deadline. While the lender cannot be responsible if a borrower fails to respond to repeated contacts, claim review files must clearly document aggressive efforts to reach each borrower in default well in advance of the 90 day deadline.

When the cause of the default is curable and the borrower is committed to remaining in the home, HUD expects lenders to consider reinstatement options in the following order:

•  Special forbearance
•  Loan modification
•  Partial claim

When the cause of the default is not curable and/or the borrower is not committed to remaining in the home, HUD expects lenders to consider disposition options in the following order:

•  Pre-foreclosure sale
•  Deed-in-lieu

 F. Option Priority

HUD has established its order of option priority in order to minimize losses to the insurance funds. For example, both a partial claim and a special forbearance will avert a foreclosure and reduce the potential loss to the funds. However, borrower funded reinstatement through a special forbearance plan, is less costly to HUD than a partial claim reinstatement which is funded by FHA. Therefore, HUD requires that lenders determine that a special forbearance is not the best option prior to considering the use of a modification, and that a determination be made that a modification is not the best option prior to considering the use of a partial claim.

However, there will be some situations where a loan modification is clearly the best option, especially when the reduction of the interest rate and/or extension of the loan term yield a sizable reduction of the mortgagor's monthly payment. In these situations, modifications will be preferred over special forbearance. Lenders shall document the reasons why the specific loss mitigation option was chosen in the claim review file.

For the same goal of minimizing loses to HUD's insurance funds, pre-foreclosure sale (“PFS”) is preferable to a deed in lieu (“DIL”) of foreclosure. In most cases mortgagors are expected to attempt to market the collateral property under the PFS program prior to acceptance of a DIL by the mortgagor.

G. Monthly Evaluation Requirement

As long as the account remains delinquent, the lender must reevaluate the status of each loan monthly following the 90 day review, and is required to maintain documentation of the evaluations. This evaluation may be as simple as noting that the mortgagor is making payments as scheduled if the account is under special forbearance.

  H. Evaluation of the Borrower's Financial Condition

To be considered for any of the loss mitigation options, the borrower must provide detailed financial information to the lender. The lender may request that this information be submitted on Form HUD-92068 F, Request for Financial Information, or on a similar form provided by the lender. The Department has no objection to situations where a cooperative mortgagor provides complete financial information during a telephone interview. Regardless of how the mortgagor's financial information was secured, the lender must independently verify the financial information by obtaining a credit report, and any other forms of verification the lender deems appropriate.

Regardless of the option under consideration, the lender must analyze the borrower's current and future ability to meet the monthly mortgage obligation, by estimating the borrower's assets and surplus income in the following manner:

•  Estimate the borrower's normal monthly living expenses (food, utilities,. etc.) including debt service on the mortgage and other scheduled obligations. Make necessary adjustments to reflect increased or decreased expenses for each month of the proposed special forbearance agreement, or in the case of all other options, for a minimum of three months.

•  Estimate the borrower's anticipated monthly net income for the same period, making necessary adjustments for income fluctuations.

•  Subtract expenses from income to determine the amount of surplus income available each month.

•  Divide surplus income by total monthly expenses to determine the surplus income percentage .

The lender must use good business judgment to ensure that the workout option selected reasonably reflects the borrower's ability to pay. Borrowers with sufficient surplus income, and/or other assets, must be required to reinstate the debt through a repayment option.

For those situations where the mortgagee's evaluation indicates that the borrower is not eligible for any loss mitigation alternative, and the information relied upon in making this decision was secured from the borrower in a telephone interview, the lender shall advise the borrower in writing of this decision. The lender shall explain the reason for denial and allow the mortgagor at least seven calendar days to submit additional information that may impact upon the mortgagee's evaluation.

In the event a claim for loss is submitted to HUD, the lender must retain the financial analysis and supporting documentation in the claim review file.

  I. Combining Options

The loss mitigation options may be used alone or in combination to resolve an existing default, although there are some limitations.

•  Special forbearance may be combined with any reinstatement option including delinquent refinance. The combination of options will be sequential, not simultaneous.

•  Special forbearance may be used to reinstate a loan prior to an assumption.

•  Pre-foreclosure may be combined with a deed-in-lieu provision in the event the property does not sell within the time required.

•  Modification may not be combined with a partial claim.

FHA strongly encourages lenders to combine special forbearance plans with modification, or special forbearance plans with partial claim whenever there is any doubt about a borrower's long term income stability. By requiring a borrower to make at least three full monthly payments prior to execution of a modification or partial claim, borrowers demonstrate their ability to support the debt, and FHA is further protected from the risk of workout failure. While this trial period is no guarantee against future default, a borrower's ability to make the first three payments is a strong indication that this is a long term workout option, and not a costly quick-fix.

J. Foreclosure

Lenders may not initiate foreclosure until all loss mitigation options have been considered. Written documentation of this review must be available in all conveyance claim review files (24 CFR 203.605). If the case meets one of the exceptions noted in 24 CFR 203.606, such as abandonment, loss mitigation does not have to be considered prior to initiating foreclosure. However, the claim review file must provide documentation of this finding.

K. Time Requirement to Initiate Action

Lenders must utilize one of the loss mitigation options or initiate foreclosure within six months of the date of default for all mortgages with a default date on or after February 1, 1998 (24 CFR 203.355). FHA considers the lender to have satisfied this requirement if, within the six month time frame, any of the following actions has taken place.

•  The loan is reinstated or paid off.
•  The borrower executes a special forbearance agreement.
•  The loan is modified.
•  The loan is reinstated through a partial claim.
•  The borrower executes a pre-foreclosure sale agreement.
•  The lender executes a deed-in-lieu of foreclosure.
•  The lender initiates the first legal action to begin foreclosure.

Lenders must report the action through SFDMS in the month the action occurs or, if after the monthly cut-off date, in the next reporting cycle.

  •  Automatic Extensions

  If a lender has initiated, but is unable to complete a special forbearance, modification, or partial claim within the six month time limit, the lender is entitled to a 90 day extension of the foreclosure deadline provided the initiative was begun prior to the expiration of the initial six months. Therefore, if there have been no other intervening delays (such as bankruptcy) this “automatic” extension will extend the six month deadline to initiate foreclosure by 90 days. To qualify for the automatic extension, the mortgagee must have completed the loss mitigation evaluation required by 24 CFR 203.605 and have documentation of this analysis in the claim review file. In addition the loss mitigation initiative must be reported on SFDMS, using the appropriate status code. All extensions of time to initiate foreclosure including “automatic extensions” must be properly identified on form HUD-27011, Block 19 on the conveyance claim.

There is no automatic extension provided for completion of a deed-in-lieu, although an extension of time may be requested from the Servicing and Loss Mitigation Office in Oklahoma City. There is also no “automatic extension for attempting a repayment plan (not special forbearance), a delinquent refinance or an assumption. Lenders must request this extension of time before the expiration of the existing time frame and must explain why an extension of time is necessary.

  M. Option Failure

Foreclosure action is suspended during special forbearance and pre-foreclosure sale periods. In the event that these options fail, an additional 90 day extension is provided in which the lender must commence or recommence foreclosure or initiate another loss mitigation option. Failure is defined as:

•  Special forbearance - mortgagor fails to perform under the terms of the written special forbearance agreement and the failure continues for 60 days.

•  Pre-foreclosure Sale - Either, 4 months from the date of the PFS Agreement (6 months for lenders in the top 25 th percentile) if there is no signed contract of sale; or 6 months from the date of the PFS Agreement (8 months for lenders in the top 25 th percentile) if there is a signed contract of sale but settlement has not occurred; or the date the lender is notified of the mortgagor's withdrawal; or the date of the letter from the lender to the mortgagor notifying them that participation as been terminated.

N. File Documentation

For each claim filed, the lender must maintain in the claim review file, evidence of compliance with all requirements of the Loss Mitigation Program, as well as supporting documentation including all communication with any HUD office. The mortgagee's regular servicing files should also contain evidence of compliance with the counseling, 90 day review and other requirements of the program for those loans which do not result in a claim.

O. Customer Service

HUD has consolidated all responsibility and authority for management of the Loss Mitigation Program at its Oklahoma City Office. FHA staff in Oklahoma are available to provide customer service to lenders, servicers, counselors and borrowers relative to loss mitigation issues. They have established a toll free number, 888-297-8685 for all inquiries. Written inquiries may be directed to:

U.S. Department of Housing and Urban Development
Servicing and Loss Mitigation Division
500 W. Main Street, Suite 400
Oklahoma City, OK 73102

P. Extensions and Variances

Lenders may request an additional extension of time from the HUD Office in Oklahoma. Each extension request must be submitted on Form HUD-50012, and must be accompanied by a valid justification for the extension.

Additionally, in the new procedures HUD has provided lenders with great flexibility to make exceptions to Department policy when exceptions are deemed to be in the best interest of the Department and the mortgagor. However, if circumstances require a variance not delegated to lenders, written requests should be mailed to the address above.

Q. Option Checklists

any lenders requested that FHA provide teaching tools to assist in the training of staff unfamiliar with the requirements of the Loss Mitigation Program. In response, FHA has updated the Option Checklists originally published in ML 96-61. The revised checklists, included in the Appendix, highlight the most important eligibility requirements for each loss mitigation option in a convenient, easy to understand format. Use of the checklists is optional. There is no requirement that checklists be delivered to HUD with claims.