III.A.2.j. HUD’s Loss Mitigation Program (03/14/16)

© HUD Single Family Housing Policy Handbook 4000.1

Included in this section are:

i. Definitions

ii. Standard

iii. HUD’s Loss Mitigation Option Priority Waterfall

iv. Required Documentation

i. Definitions

A Loss Mitigation Option is one of the following strategies under FHA’s Loss Mitigation Program requirements intended to minimize economic impact to the MMIF and to avoid foreclosure, if possible:

Special Forbearances-Unemployment
Loan Modifications
FHA - Home Affordable Modification Program (FHA-HAMP) Loan Modifications, Partial Claims, and Combination Loan Modification/Partial Claims
Pre-Foreclosure Sales (PFS)
Deeds-in-Lieu (DIL) of Foreclosure

ii. Standard

Mortgagees are required to evaluate all Defaulted Mortgages for Loss Mitigation Options.

In implementing HUD’s Loss Mitigation Program, the Mortgagee must:

consider all reasonable means to address delinquency at the earliest possible time;
adhere to the requirements for communication with Borrowers in Default as set out in the Collection Communication Timeline;
utilize HUD’s Loss Mitigation Options to avoid foreclosure, when feasible;
initiate foreclosure within six months of Default; and
re-evaluate each Delinquent Mortgage monthly for loss mitigation eligibility until reinstatement or completion of a Home Disposition Option, foreclosure, or Single Family Loan Sale (SFLS).

(A) Mortgage Status The Mortgagee must review for Loss Mitigation Options those Borrowers who are in Default or in Imminent Default. When reviewing Borrowers for Loss Mitigation Options, a streamlined or refinanced Mortgage on the same Property and by the same Borrowers is not considered a new Mortgage for seasoning requirements. The Mortgagee may offer eligible Borrowers Loss Mitigation Options in accordance with program-specific procedures for:

Section 203(q) Mortgages, Mortgages on Property in Allegany Reservation of Seneca Indians;
Section 248 Mortgages on Indian Land insured pursuant to Section 248 of the National Housing Act; and
Section 247 Mortgages, Mortgages on Hawaiian Home Lands insured pursuant to Section 247 of the National Housing Act.

(B) Owner Occupancy

(1) Definitions An Owner-Occupant Borrower is a Borrower residing in the Property secured by the FHA-insured Mortgage as a Principal Residence. A Non-Occupant Borrower is a Borrower on a Mortgage securing a Property that is not occupied by any Borrower.

(2) Standard for Non-Occupant Borrowers The Mortgagee may consider Non-Occupant Borrowers for:

Home Disposition Options when the subject Property was not purchased as a rental investment or used as a rental for more than 18 months; or
Informal or Formal Forbearances.

(3) Required Documentation The Mortgagee must document in the Claim Review File the justification for approval of any Non-Occupant Borrowers for Loss Mitigation Options and, if applicable, retain a copy of the Request for Variance received from the NSC via EVARS.

(4) Exceptions to Owner Occupancy Requirements

(a) Borrowers with Multiple FHA-Insured Mortgages

(i) Standard The Mortgagee may consider Loss Mitigation Options other than the Deed-in-Lieu (DIL) Option for those Borrowers who meet the eligibility requirements for policy exceptions listed in the Exceptions to the FHA Policy Limiting the Number of Mortgages per Borrower section.

(ii) Required Documentation The Mortgagee must document in the Claim Review File the justification for any exceptions for Borrowers with multiple FHA-insured Mortgages.

(b) Non-Borrowers who Acquired Title through an Exempted Transfer The Mortgagee may consider for Home Retention Options a non-borrower who acquires title to a Property securing an FHA-insured Mortgage if the mortgage is not due and payable pursuant to the Garn-St. Germain Depository Institutions Act, and that the non-borrower:

will occupy the home as a Principal Residence;
submits to a credit review;
meets financial criteria for loss mitigation assistance; and
is willing to assume personal liability for repayment of the Mortgage in accordance with the agreed loss mitigation terms.

(c) Non-Borrowers who Acquired Title not through an Exempted Transfer The Mortgagee may consider for loss mitigation a non-borrower who is not covered by an exempted transfer under the Garn-St. Germain Depository Institutions Act and who acquired title but does not hold sole title to the Property as follows:

the non-borrower will be added as a Borrower; and
the non-borrower will be considered for loss mitigation with the cooperation and approval of the existing Borrowers.

(d) Co-Insured Mortgages The Mortgagee must not offer any Loss Mitigation Option other than the Informal or Formal Forbearance or SFB-Unemployment Options on co-insured Mortgages until the 60th payment has been received.

(e) Vacant or Abandoned Properties

(i) Standard The Mortgagee may consider Non-Occupant Borrowers for Home Disposition Options only when the Properties have been recently vacated by circumstances related to the Default.

(ii) Required Documentation The Mortgagee must document these circumstances relating to the vacancy in the Claim Review File.

(C) Eligibility to Participate in HUD Programs

(1) Standard The Mortgagee must verify that the Borrowers are eligible to participate in HUD’s Loss Mitigation Program. As a part of determining eligibility, the Mortgagee must utilize the appropriate system to determine if the Borrower is excluded from HUD’s Loss Mitigation Program. The Credit Alert Interactive Reporting System (CAIVRS) must be used when determining the Borrower’s eligibility for the following Loss Mitigation Options:

Special Forbearance
Loan Modification
Pre-foreclosure Sale Program
Deed-in-Lieu of Foreclosure

HUD’s Limited Denial of Participation (LDP) and the System for Award Management (SAM) exclusion lists must be used when determining the Borrower’s eligibility for FHA-HAMP.

(2) Required Documentation The Mortgagee must retain in its Claim Review File documentation evidencing that the Borrower is eligible to participate in an FHA transaction.

iii. HUD’s Loss Mitigation Option Priority Waterfall [This section must be implemented no later than March 1, 2017]

The Mortgagee must evaluate Owner-Occupant Borrowers utilizing the process in the Loss Mitigation Home Retention Option Priority Waterfall below to determine which, if any, Home Retention Options are appropriate in accordance with HUD guidance.

The Mortgagee must not condition the use of a Loss Mitigation Option on the receipt of a Borrower’s cash contribution or Borrower’s payment of fees or charges.

Loss Mitigation Home Retention Waterfall Options
Step	Decision Point	Yes	No
1	Household or Borrower(s) has experienced a verified loss of income or increase in living expenses?	Step 2	Informal or Formal Forbearance/repayment plan workout tools
2	One or more Borrowers receive Continuous Income in the form of Employment Income (e.g., wages, salary, or self-employment earnings), Social Security, disability, veteran’s benefits, Child Support, survivor benefits, and/or Pensions?	Step 3	Special Forbearance
3	Front-end ratio is at or less than 31%?	Step 4	FHA-HAMP (Step 5)
4	85% of surplus income is sufficient to cure arrears within 6 months?	Formal Forbearance/repayment plan for no more than 6 months.	FHA-HAMP (Step 5)
5	FHA-HAMP Loan Modification2 (Requires Successful Completion of Trial Payment Plan)
5	The use of an FHA-HAMP Option is to both alleviate the Borrower’s burden of immediate repayment of arrears and to adjust monthly payments to a level sustainable by the household’s current income. The FHA-HAMP Option may or may not include a Partial Claim. Partial Claim: The total amount available is the lesser of: (1) the unpaid principal balance as of the date of Default associated with the initial Partial Claim, if applicable, multiplied by 30%, less any previous Partial Claim(s) paid on this Mortgage; (2) if there are no previous Partial Claim(s), the unpaid principal balance as of the date of the current Default multiplied by 30%; or (3) the total amount required to meet the target payment. The Partial Claim amount may include: arrearages; legal fees and foreclosure costs related to a canceled foreclosure action; and principal deferment (per below calculation). Loan Modification: 1. Calculate the target monthly payment: A. Calculate 31% of gross income B. Calculate 80% of current Mortgage Payment C. Calculate 25% of gross income D. Take the greater of B and C E. Take the lesser of A and D 2. Calculate PITI monthly payment on the total outstanding debt to be resolved at the market interest rate3 and 360 months’ term. 3. If the result of Step 2 is at or below the result from Step 1E, then the Borrower is eligible for an FHA-HAMP Standalone Loan Modification only at the market interest rate; otherwise, go to Step 4. 4. Calculate amount required to meet target payment. A. Reduce loan balance used in Step 2 until calculated Mortgage Payment reaches target amount from Step 1 or else the maximum allowable principal deferment is reached per amount available as calculated above per instructions in the “Partial Claim” section. B. If the final Mortgage Payment is greater than 40% of current income, and the unemployment status is verifiable, then the Borrower is eligible for a reduced payment option under the Special Forbearance. C. If there is no verifiable unemployment status and the Borrower has already been reviewed for retention options under the waterfall but does not qualify for any (i.e., the Borrower does not have sufficient surplus income or other assets that could repay the indebtedness), then the Borrower is eligible for FHA’s non-retention options.

2 An FHA-HAMP Standalone Loan Modification is required if a Mortgage Payment at or below the target payment can be achieved by re-amortizing the Mortgage/outstanding debt for 360 months at the Market Rate. An FHA-HAMP Standalone Partial Claim is required if the Borrower’s (i) current interest rate is at or below Market Rate; (ii) the Borrower’s current Mortgage Payment with re-analyzed escrow is at or below the target payment; and (iii) the Borrower is not eligible for an FHA-HAMP Standalone Loan Modification.

3 Pursuant to HUD Handbook 4000.1, “Market Rate” is defined as a rate that is no more than 25 basis points greater than the most recent Freddie Mac Weekly Primary Mortgage Market Survey (PMMS) Rate for 30-year fixed-rate conforming mortgages (U.S. average), rounded to the nearest one-eighth of one percent (0.125%), as of the date a Trial Payment Plan is offered to a Borrower. The Weekly PMMS results are published on the Freddie Mac website at http://www.freddiemac.com/pmms/, and the Federal Reserve Board includes the average 30-year survey rate in the list of Selected Interest Rates published weekly in its Statistical Release H.15 at http://www.federalreserve.gov/releases/h15/.

iv. Required Documentation

The Mortgagee must document its implementation of HUD’s Loss Mitigation Program by:

reporting loss mitigation actions through SFDMS;
documenting in the Claim Review File all loss mitigation actions, including all efforts to contact the Borrowers; and
retaining all documentation used to analyze and make loss mitigation determinations and to confirm compliance with loss mitigation requirements.