A special forbearance is a written repayment agreement between a lender and a mortgagor which contains a plan to reinstate a loan that has been delinquent for at least 90 days. To qualify as a special forbearance and entitle the lender to the incentives afforded under this section, the agreement must provide the mortgagor with relief not typically afforded under an informal forbearance plan (Section D, page 5). Examples of the types of provisions which may be included in a special forbearance agreement include a repayment term of 4 or more months; suspension or reduction of payments for one or more months to allow the borrower to recover from the cause of default; and/or an agreement to allow the borrower to resume making full monthly payments while delaying repayment of the arrearage.
While special forbearance plans have no maximum duration, at no time may the maximum arrearage due under a special forbearance plan exceed the equivalent of 12 months of principal, interest, taxes and insurance (“PITI”).
Special forbearance plans must lead to reinstatement of the loan, either by gradually increasing monthly payments in an amount sufficient to repay the arrearage over time, or through resumption of normal payments for a period of time (generally 3 or more months) followed by a loan modification or partial claim. HUD will pay lenders a cash incentive for entering into a special forbearance plan, regardless of the outcome. As an additional incentive, HUD provides increased claim benefits related to the calculation of claimable interest in the event a special forbearance plan fails and a conveyance claim is filed.
To enable lenders to better utilize this option, FHA has reduced its minimum delinquency requirement from 4 months to 90 days. This and other special forbearance requirements are listed below.
A. Loan Default
The loan must be more than 3 months (90 days), but not more than 12 months (365 days) delinquent, and may not be in foreclosure when the special forbearance agreement is executed. Loans that had previously been referred to foreclosure may be removed from foreclosure status prior to execution of a special forbearance. On advice of lender's legal counsel, foreclosure may be suspended subject to the borrower's performance under the terms of the special forbearance agreement, if the suspension, is stipulated in writing in the agreement.
B. Borrower Qualifications
Special forbearance may be offered to borrowers who have recently experienced a verifiable loss of income or increase in living expenses, but who will have sufficient monthly income to correct the delinquency and reinstate the loan within the duration of the plan either through gradual repayment of the arrearage, or through a combination of repayment and modification or partial claim.
The borrower must be an owner occupant, committed to occupy the property as a primary residence during the term of the special forbearance agreement. However, unlike modification and partial claim which require that the borrower have a long term commitment to the home, special forbearance may be used to reinstate a loan to facilitate the eventual sale, or assumption of the property.
C. Property Condition
The lender must conduct any review it deems necessary to verify that the property has no physical conditions which adversely impact the borrower's continued use or ability to support the debt. A borrower will not be able to support payments under a special forbearance plan if the property is in such a deteriorated condition that repairs drain the borrower's monthly resources. An analysis of the borrower's surplus income should consider obvious property maintenance expenses.
If significant deferred maintenance contributed to the cause of the default, it may be appropriate that the special forbearance plan provide a period of mortgage forbearance during which repairs specified in the agreement will be completed at the borrower's expense. If the mortgagee's review identifies a property in extremely poor physical condition, a special forbearance plan, especially one that allows reduction or suspension of payments not tied directly to property repair, may not offer a permanent resolution to the default. Lenders must use good business judgment relative to property condition.
D. Financial Analysis
The lender is required to assess the borrower's ability to repay the default as described in Section H, page 10. HUD expects the lender to project the borrower's surplus monthly income for the duration of the special forbearance period, and to propose repayment terms consistent with the borrower's ability to pay.
The lender must exercise good business judgment to determine that the borrower has the capacity to resume full monthly payments, and eventually reinstate the loan under the terms of the plan. If the financial analysis determines that the borrower does not or will not, in the foreseeable future, have the ability to resume full monthly payments, special forbearance should not be used. The lender should consider other loss mitigation options in the priority detailed in Section F, page 10.
E. Combining Options
Special forbearance may be utilized as a stand alone tool, or combined with a loan modification or partial claim. For example, a borrower may be expected to recover from the cause of the default and resume making full monthly payments, but will not have adequate surplus income to repay the arrearage. In this case, the lender might establish a special forbearance agreement which allows the borrower to demonstrate that he has recovered from the financial problem by making full mortgage payments for a period of 3 or 4 months, at which time the delinquent amount could be capitalized into a modified loan, or paid off through a partial claim promissory note.
F. Required Documentation
A written agreement must be executed by the mortgagor and lender, which clearly defines the term, frequency of payments, and amounts due under the forbearance plan. The agreement must acknowledge previously missed mortgage payments and provide notice that failure to comply with the terms of the special forbearance agreement can result in initiation of foreclosure.
FHA does not dictate a specific format for the agreement, however at a minimum it:
Must provide the borrower with relief not typically available under an informal forbearance plan.
Must fully reinstate the loan, except if combined with mortgage modification or partial claim, as in paragraph E, above.
May not at any time allow the total amount of the arrearage to exceed the equivalent of 12 months PITI. (ARMS, GPMS, and GEMS will be calculated by multiplying 12 times the monthly payment due on the date of default.)
May not allow for late fees to be assessed while the mortgagor is performing under the terms of a special forbearance plan.
May allow reasonable foreclosure costs and late fees accrued prior to the execution of the special forbearance agreement to be included as part of the repayment schedule. However, they may only be collected after the loan has been reinstated through payment of all principal, interest, and escrow advances. At no time shall the loan be considered delinquent solely because the borrower has not paid late fees or other foreclosure costs.
If the special forbearance plan culminates in a modification or partial claim, foreclosure costs and fees may only be collected in accordance with the requirements applicable to those options.
There is no maximum duration requirement for special forbearance agreements. Lender's are encouraged to allow as much time as is reasonable based on the borrower's ability to repay.
G. Review and Re-negotiation
Lenders must review the status of forbearance plans each month and take appropriate action if the borrower is not complying with the terms of the plan. Plans may be re-negotiated if the borrower's financial circumstances change, however, re-negotiated plans may not exceed HUD's requirement that the loan be no more than 12 months delinquent. Lenders will not be entitled to file a claim for additional special forbearance incentives in the event a plan is re-negotiated.
H. Lender Incentives
FHA believes that well structured special forbearance agreements will resolve the majority of curable loan delinquencies. The Department strongly encourages use of this option and has provided attractive lender incentives.
First, for every special forbearance agreement executed by a lender, regardless of the outcome, FHA will pay a $100 incentive fee. Lenders, whose overall loss mitigation performance is ranked in the top 25 th percentile, will be eligible for incentive payments of $200 per claim.
Second, when a special forbearance has been utilized and failed, and a conveyance claim is filed, lenders are entitled to collect unpaid interest at the note rate rather than debenture rate of interest.
Finally, the number of months of interest that may be claimed is computed from the earliest of several dates as provided in 24 CFR 203.402a. This computation generally allows two additional months of interest, than would be payable on a conveyance claim where special forbearance had not been utilized.
These are significant claim benefits, intended to reduce the risk to lenders of offering reduced or suspended payments, and/or longer than normal repayment terms. These incentives are not available with any other loss mitigation option, and, with the exception of the incentive fees, do not apply if the lender files a claim for reimbursement as a result of a modification or partial claim.
I. Filing For Incentive Payment
The lender must file the claim for incentive payment within 60 days of the date of execution of the special forbearance agreement. It is not necessary to submit a copy of the special forbearance agreement or checklist. However, all documentation pertaining to the special forbearance must be retained in the claim review file.
f special forbearance is combined with any other option, the lender is entitled to file a claim for the special forbearance incentive fee, and file a subsequent claim when the other loss mitigation action is finalized.