The FHA Loss Mitigation Program delegates to lenders both the authority and the responsibility to utilize actions and strategies to assist borrowers in default in retaining their homes, and/or in reducing losses to FHA's insurance funds. HUD believes that the lender is best positioned to determine which, if any, loss mitigation strategies are appropriate in a given circumstance. Without HUD approval, lenders may, in their sole discretion, utilize any of the loss mitigation options, within the guidelines provided in this document or determined by the Secretary.

Though lenders have great latitude in selecting the loss mitigation strategy appropriate for each borrower, it is critical to understand that participation in the loss mitigation program is not optional . Lenders are required to:

•  Consider all reasonable means to address delinquency at the earliest possible moment.

 •  Inform borrowers of available loss mitigation options and the availability of housing counseling within the second month of delinquency.

 •  Evaluate each delinquent loan no later than the 90th day of delinquency to determine which loss mitigation option is appropriate.

 •  Utilize loss mitigation whenever feasible to avoid foreclosure.

•  Re-evaluate each loan monthly until reinstatement or foreclosure.

 •  Report loss mitigation actions through the Single Family Default Monitoring System (SFDMS), (refer to Mortgage Letter 99-9).

 •  Initiate foreclosure within six months of default unless a loss mitigation option is being pursued and ensure that all actions taken are documented.

 •  Retain a complete audit trail confirming compliance with all loss mitigation requirements.

Failure to comply with the provisions of the Loss Mitigation Program may result in the loss of incentive compensation and other benefits; reduced reimbursement of foreclosure and acquisition costs; and interest curtailment related to foreclosure delays.

Also, depending upon the severity of the non-compliance, the Department may also refer the lender to the Mortgagee Review Board (MRB) whose sanctions include civil money penalties, indemnification and the termination of the mortgagee's approval to participate in HUD programs.

A. Incentive Fees

In recognition of the effort and administrative expense involved in full implementation of loss mitigation, HUD provides financial incentives to mortgagees who utilize any of the 5 loss mitigation options listed below.

( Reinstatement Options )

Special Forbearance $ 100 ($200 for lenders with performance scores in the top 25%)

Loan Modification $ 500

Partial Claim $ 250

( Disposition Options )

Pre-Foreclosure Sale $ 1,000

Deed-In-Lieu of Foreclosure $ 250

Additionally, use of any of the options except deed in lieu, extends the time frame requirement to initiate foreclosure or otherwise meet the time frame requirement of 24 CFR 203.355 in the event the workout fails. Use of special forbearance also provides the mortgagee with greater protections against subsequent foreclosure by allowing interest to be calculated more favorably. These benefits are fully described under each option.

B. Performance Measurement

FHA has created a tool to measure lender utilization of the Loss Mitigation Program, and to provide performance-based incentives to mortgagees. The Department intends to score lender performance on an annual basis. Lender performance score results will be used to determine eligibility for some incentive benefits and in selecting lenders for quality assurance reviews. They may also affect a mortgagee's percentage reimbursement for foreclosure expenses. More information on performance scoring is found in Mortgagee Letters 97-21, 98-9 and 99-6.