Single Family Mortgage InsuranceSpecial Forbearance Procedures

SUMMARY: This final rule permits the mortgagee and the mortgagor to

enter into a special forbearance agreement without obtaining the prior

approval of HUD requiring the payment of the arrearage before maturity

of the mortgage. It also eliminates the present gap in reimbursement of

debenture interest that occurs if the mortgagor files a petition in

bankruptcy after entering into a special forbearance agreement. The

purpose of this change is to encourage mortgagees to make greater use

of special forbearance procedures when the mortgagor is temporarily

unable to make full regular mortgage payments. When special forbearance

agreements are utilized, but subsequently fail, mortgagees are entitled

to collect all unpaid interest on their claim, from the oldest unpaid

installment to foreclosure initiation. Generally this provides for

inclusion of at least two additional months of interest on the

insurance claim reimbursement.

EFFECTIVE DATE: This final rule is effective on December 18, 1995.

FOR FURTHER INFORMATION CONTACT: Joseph McCloskey, Director, Single

Family Servicing Division, Room 9178, Department of Housing and Urban

Development, 451 Seventh Street, SW., Washington, DC 20410, (202) 708-

1672, or, for hearing and speech impaired, (202) 708-4594. (These are

not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This rule revises current HUD regulations governing forbearance

procedures in the context of the servicing of FHA insured single-family

home mortgage loans. HUD currently has two special forbearance

procedures. Under 24 CFR 203.614(a), the mortgagee must obtain prior

approval from HUD for the special forbearance agreement to be valid. A

special forbearance agreement with HUD approval may require increased

payments prior to mortgage maturity. Under 24 CFR 203.614(b), the

mortgagee may reduce or suspend the mortgagor's required payments

during the forbearance period without HUD approval, but may not

increase payments to recover arrearage until after mortgage maturity.

This rule adds a new paragraph (c) to Sec. 203.614, which will permit

the mortgagee to reduce the required payments to an amount not less

than 50% of the regular mortgage payments for a forbearance period of

up to nine (9) months. On expiration of the forbearance period, but no

sooner than four (4) months after the execution of the agreement, the

mortgagee may, without HUD approval, increase the required payments to

not more than one and one-half (1\1/2\) times the regular payment

amount until all arrearages are repaid.

Limitations

The new procedure contains several limitations to keep arrearages

from accumulating to an amount that the mortgagor cannot reasonably be

expected to repay before loan maturity. These limitations include:

The agreement must be executed not later than the due date

of the seventh unpaid monthly installment;

The monthly payments may be reduced but not suspended;

The period of reduced payments may not exceed nine (9)

months;

The increase in payments may not be required earlier than

four (4) months after execution of the agreement;

The first payment may be any amount mutually agreed upon

by the mortgagor and mortgagee, and must be due within 30 days of

execution of the agreement; and

The agreement is not considered a valid special

forbearance agreement until the first required payment under the terms

of the agreement is made.

If greater forbearance relief is needed, the mortgagee can utilize

the existing forbearance procedures, or can provide a less restrictive

work out plan under which the mortgagee may not be entitled to the

payment of additional note interest on that portion of the claim

covered by the special forbearance.

Conditions for New Procedures

The conditions for granting the new form of special forbearance

relief are as follows:

(1) As under the existing regulations, the mortgagor must establish

to the satisfaction of the mortgagee that the mortgagor does not own

other property subject to an FHA-insured mortgage and that the default

was caused by circumstances beyond the control of the mortgagor.

(2) During the forbearance period, the forbearance agreement must

provide for payment of not less than 50 percent of the regular mortgage

payments, nor more than the regular mortgage payments. The Secretary,

by administrative instruction, may permit a different required minimum

percentage, but in no event will it be more than 100 percent of the

regular mortgage payment.

(3) The period of reduced payments may not exceed nine (9) monthly

payments after execution of the forbearance agreement.

(4) The agreement must provide for an increase in payments, in

order to recover arrearage accruing prior to and during the forbearance

period. The increase in the payments is to begin no earlier than four

(4) months after execution of the agreement.

(5) The increased payments may not exceed one and one-half (1\1/2\)

times the regular mortgage installments.

(6) The agreement must provide for resumption of the regular

mortgage payments after the total amount of arrearage is repaid.

(7) The agreement must be executed no later than the due date of

the seventh full unpaid monthly payment.

(8) The agreement must require that the first payment is due within

30 days of the execution of the agreement.

(9) The agreement is not a valid special forbearance agreement

until the first required payment under the terms of the agreement is

made.

Other Changes

Current regulations have the effect that if State law, bankruptcy,

or assignment considerations preclude a mortgagee from initiating

foreclosure within 90 days after the mortgagor fails to meet the

requirements of a special forbearance agreement, then neither mortgage

nor debenture interest is paid on the insurance claim for the period

from 90 days after the date of the mortgagor's failure to meet the

requirements of a special forbearance agreement until the date

foreclosure is initiated (Secs. 203.402a and 203.410(a)(3)). This rule

eliminates this lapse in interest payments by revising

Sec. 203.410(a)(3) to provide that debenture interest payments begin

the day after the date to which mortgage interest is computed.

In addition, current regulations do not specifically identify

mortgage assignment consideration as a possible reason for delaying

foreclosure

[[Page 57677]]

initiation; this rule has been expanded to do so.

Section 203.355 has been amended to add paragraph (h), which

requires that, if the mortgagor fails to meet the requirements of a

special forbearance agreement and the failure continues for a period of

60 days, the mortgagee must initiate foreclosure within the later of

nine (9) months after the date of default, or 90 days following the

mortgagor's failure to meet the special forbearance requirements.

Finally, the rule makes a conforming revision to Sec. 203.355(c).

This section currently requires mortgagees to commence foreclosure

within 60 days after the expiration of any prohibition on foreclosure

that is found in State law or Federal bankruptcy law when such

prohibition did not permit commencement of foreclosure within

prescribed time requirements. The rule also applies this 60-day

requirement when such prohibitions do not permit the commencement of

foreclosure after the mortgagor's failure to meet the requirements of a

special forbearance agreement.

Public Comments

The Department published a proposed rule on January 23, 1995 at 60

FR 4391.

Six commenters responded to the proposed rule: one association,

three mortgage lenders, one consultant and one provider of legal

services. Three of the six generally supported the rule, but

recommended certain changes. Another commenter fully agreed with the

rule as proposed. Two of the comments took issue with the need for any

amendment to the rule, indicating that the existing regulation already

authorized some of the proposed rule's features. The Department is

persuaded by those comments indicating that the proposed rule may have

been too restrictive to encourage widespread use. Consequently, the

final rule contains several revisions.

Below is a listing of the comments received and the Department's

responses.

1. Two commenters indicated that any ``reasonable'' arrangement

that would be acceptable to the mortgagee should qualify as a special

forbearance, and the test of whether the agreement was ``reasonable''

should rest with a subsequent review of the file. HUD acknowledges that

a mortgagee should and does have the flexibility to enter into any

reasonable arrangement that is acceptable to that mortgagee to cure a

default. However, with respect to such arrangement qualifying as a

``special forbearance'' agreement entitling the mortgagee to

significant additional amounts on a claim payment, HUD has a

responsibility to place such restrictions as are deemed appropriate to

safeguard against the possibility of overpayments from the Insurance

Funds. With regard to evaluating the appropriateness of the agreement

through a post-claim review of the file, the rule is specifically

intended to avoid this. If all the requirements of this new special

forbearance rule are met, HUD does not intend to second-guess the

mortgagee's decision after the fact.

2. One commenter indicated that the criterion requiring payments

under the agreement to be not less than 50% had no intrinsic value and

therefore should be modified. As the rule specifically provides for the

ability of the Commissioner to adjust this criterion at any time

through administrative instruction, HUD does not agree that this

criterion should be removed. After the Department has had some

practical experience with this regulation, a decision will be made as

to whether an adjustment to the minimum acceptable payment is

advisable.

3. One commenter indicated that requiring the execution of the

agreement within four (4) months of delinquency may prove to be too

restrictive and therefore counterproductive. The Department is

persuaded by this argument and this criterion has been liberalized in

the final rule. Agreements which are executed by the due date of the

seventh unpaid monthly installment will meet the criteria for a valid

special forbearance agreement.

4. One commenter indicated that the period during which reduced

payments are allowed was too short and did not provide the mortgagee

with sufficient flexibility. The Department is persuaded by this

comment and has revised the final rule to extend the allowable period

of reduced payments from six (6) to nine (9) months.

5. Several commenters indicated in general comments that the final

rule could be made more useful if the eligibility criteria were revised

to be less restrictive. As indicated above, the Department is persuaded

by this general observation as evidenced by language contained in the

final rule that eases some of the criteria contained in the proposed

rule.

The following is a summary of the revisions contained in the final

rule.

(1) The period within which an agreement may be entered has been

extended from four (4) months to the due date of the seventh full

unpaid installment.

(2) The period the mortgagee may provide forbearance has been

extended from six (6) months to nine (9) months.

(3) The period of time the mortgagee must wait after executing the

agreement before it can require increased payments has been reduced

from six (6) months to four (4) months.

(4) The agreement can allow up to 30 days after execution before

the initial payment is required, rather than requiring payment to be

made at the time the agreement is executed.

6. Two of the commenters disagreed with the need for this rule,

indicating that the existing regulation already enables mortgagees to

increase payments under special forbearance agreements without HUD

approval. In addition, both of these commenters indicated that the

proposed rule would adversely affect the interest of mortgagees with

respect to mortgages already insured or approved for insurance, and

therefore should be prospective only, under the provisions of

Sec. 203.499. HUD has made a determination that the current regulation

does not authorize the mortgagee to increase payments under a special

forbearance agreement prior to the maturity date without HUD approval.

HUD, therefore, disagrees that this rulemaking is unnecessary, and HUD

maintains its position that this change is necessary to enable the

mortgagee to increase payments under an agreement that qualifies as a

``special forbearance'' agreement, prior to the loan maturity date. HUD

disagrees with the assertion that this rule would have a negative

impact on loans already insured. The use of this additional special

forbearance provision is completely elective on the part of the

mortgagee; furthermore, HUD sees no adverse effect on loans currently

insured. To the contrary, HUD believes this additional special

forbearance provision provides a significant benefit to the mortgagee.

Therefore, it is HUD's position that the prospectivity requirement of

Sec. 203.499 is not applicable to this rule.

Other Matters

Environmental Impact

In accordance with 40 CFR 1508.4 of the regulations of the Council

on Environmental Quality and 24 CFR 50.20 (a) and (l) of the HUD

regulations, the policies and procedures contained in this rule relate

only to loan terms and individual actions involving single-family

housing and, therefore, are categorically excluded from the

requirements of the National Environmental Policy Act.

[[Page 57678]]

Executive Order 12612, Federalism

The General Counsel, as the Designated Official under section 6(a)

of Executive Order 12612, Federalism, has determined that the policies

contained in this rule would not have substantial direct effects on

States or their political subdivisions, or the relationship between the

Federal government and the States, or on the distribution of power and

responsibilities among the various levels of government. As a result,

the rule is not subject to review under the Order. Specifically, the

requirements of this rule are directed to lenders and do not impinge

upon the relationship between the Federal government and State and

local governments.

Executive Order 12606, The Family

The General Counsel, as the Designated Official under Executive

order 12606, The Family, has determined that this rule would not have

potential for significant impact on family formation, maintenance, and

general well-being, and, thus, is not subject to review under the

Order. No significant change in existing HUD policies or programs would

result from promulgation of this rule, as those policies and programs

relate to family concerns.

Impact on Small Entities

The Secretary, in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)), has reviewed and approved this proposed rule, and in so

doing certifies that this rule would not have a significant economic

impact on a substantial number of small entities. The rule would

permit, but would not require, use of a special forbearance procedure

by mortgagees. In addition, the number of cases to which the procedure

would apply is limited.

Catalog of Federal Domestic Assistance.

The Catalog of Federal Domestic Assistance program number is

14.117.

List of Subjects in 24 CFR Part 203

Hawaiian Natives, Home improvement, Loan programs--housing and

community development, Mortgage insurance, Reporting and record keeping

requirements, Solar energy.

Accordingly, part 203 of title 24 of the Code of Federal

Regulations is amended as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

1. The authority citation for part 203 continues to read as

follows:

Authority: 12 U.S.C. 1709, 1710, 1715b and 1715u; 42 U.S.C.

3535(d).

2. In Sec. 203.355, the introductory text of paragraph (a) and

paragraph (c) are revised and new paragraph (h) is added, to read as

follows:

Sec. 203.355 Acquisition of property.

(a) In general. Except as provided in paragraphs (b) through (h) of

this section, upon default of a mortgage the mortgagee shall take one

of the following actions. Such action shall be taken within nine (9)

months from the date of default, or within any additional time approved

by the Secretary or authorized by Secs. 203.345, 203.346, or

Secs. 203.650 through 203.660:

* * * * *

(c) Prohibiting of foreclosure within time limits. If assignment

consideration under Secs. 203.650 through 203.660, the laws of the

State in which the mortgaged property is located, or Federal bankruptcy

law:

(1) Do not permit the commencement of foreclosure within the time

limits described in paragraphs (a), (b), (g), and (h) of this section,

the mortgagee must commence foreclosure within 60 days after the

expiration of the time during which foreclosure is prohibited; or

(2) Require the prosecution of a foreclosure to be discontinued,

the mortgagee must recommence the foreclosure within 60 days after the

expiration of the time during which foreclosure is prohibited.

* * * * *

(h) Special Forbearance. If the mortgagor fails to meet the

requirements of a special forbearance under Sec. 203.614 and the

failure continues for 60 days, the mortgagee must commence foreclosure

within the later of nine (9) months after the date of default or 90

days after the mortgagor's failure to meet the special forbearance

requirements.

3. Section 203.402a is revised to read as follows:

Sec. 203.402a Reimbursement for uncollected interest.

The mortgagee shall be entitled to receive an allowance in the

insurance settlement for unpaid mortgage interest if the mortgagor

fails to meet the requirements of a forbearance agreement entered into

pursuant to Sec. 203.614 and this failure continues for a period of 60

days. The interest allowance shall be computed to:

(a) The earliest of the applicable following dates, except as

provided in paragraph (b) of this section:

(1) The date of the initiation of foreclosure;

(2) The date of the acquisition of the property by the mortgagee by

means other than foreclosure;

(3) The date the property was acquired by the Commissioner under a

direct conveyance from the mortgagor;

(4) Ninety days following the date the mortgagor fails to meet the

requirements of the forbearance agreement, or such other date as the

Commissioner may approve in writing prior to the expiration of the 90-

day period; or

(5) The date the mortgagee sends the mortgagor notice of

eligibility to participate in the Pre-Foreclosure Sale procedure; or

(b) The date foreclosure is initiated or a deed in lieu is

obtained, or the date such actions were required by Sec. 203.355(c),

whichever is earlier, if the commencement of foreclosure within the

time limits described in Sec. 203.355(a), (b), (g), or (h) is precluded

by:

(1) Assignment consideration under Secs. 203.650-203.660;

(2) The laws of the State in which the mortgaged property is

located; or

(3) Federal bankruptcy law.

4. In Sec. 203.410, the heading of paragraph (a) is revised and

paragraph (a)(3) is revised to read as follows:

Sec. 203.410 Issue date of debentures.

(a) Conveyed properties, claims without conveyance, pre-foreclosure

sales--* * *

(3) As of the day after the date to which mortgage interest is

computed as specified in Sec. 203.402a, if the insurance settlement

includes an allowance for uncollected interest in connection with a

special forbearance.

* * * * *

5. In Sec. 203.614, a new paragraph (c) is added, to read as

follows:

Sec. 203.614 Conditions of special forbearance.

* * * * *

(c) The mortgagee may grant special forbearance relief providing

for increased mortgage payments without the approval of the Secretary,

subject to the following conditions:

(1) The conditions of paragraph (b)(1) of this section are met;

(2) The agreement is executed not later than the due date of the

seventh full unpaid monthly payment;

(3) Within 30 days after the date of the execution of the

agreement, the mortgagor must pay an amount agreed upon by the

mortgagor and the mortgagee, but not less than the first monthly

installment due under the agreement;

(4) The agreement is not valid until the full initial payment is

made under the terms of the agreement.

[[Page 57679]]

(5) The written special forbearance agreement shall:

(i) Provide for the payment for a period not to exceed nine (9)

months after execution of the agreement, of:

(A) Not less than 50 percent of the regular mortgage payments, but

not more than the regular mortgage payment; or

(B) Such other percentage as the Secretary, by administrative

instruction, may determine, but in no event more than the regular

mortgage payment;

(ii) Provide for an increase of payments to not more than one and

one-half (1\1/2\) times the regular mortgage payments, commencing no

sooner than four (4) months after execution of the agreement; and

(iii) Provide for resumption of the regular mortgage payments after

the total unpaid amount accruing prior to and during the forbearance

period is repaid.

Dated: November 8, 1995.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 95-28306 Filed 11-15-95; 8:45 am]

BILLING CODE 4210-27-P