Office of the Assistant Secretary for Housing-Federal Housing Commissioner; Single Family Mortgage InsuranceLoss Mitigation Procedures

SUMMARY: This interim rule amends 24 CFR part 203 to eliminate the

Mortgage Assignment Program and to provide that HUD may: recompense

mortgagees for using mortgage foreclosure alternatives, such as special

forbearance, loan modifications, and deeds in lieu of foreclosure; pay

the mortgagee a partial claim which would be applied to the arrearage

of a defaulted mortgage; and accept assignment of a mortgage which the

mortgagee has modified to cure the default.

DATES: Effective Date: August 2, 1996. Comments due date: September 3,

1996.

ADDRESSES: Interested persons are invited to submit comments regarding

this interim rule to the Rules Docket Clerk, Office of General Counsel,

Room 10278, Department of Housing and Urban Development, 451 Seventh

Street, S.W., Washington, D.C. 20410. Communications should refer to

the above docket number and title. A copy of each communication

submitted will be available for public inspection and copying between

7:30 a.m. and 5:30 p.m. weekdays at the above address. FAXED comments

will not be accepted.

FOR FURTHER INFORMATION CONTACT: Joseph McCloskey, Director, Single

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

Development, 451 7th Street, SW., Washington, DC 20410, (202) 708-1672,

or, TTY for hearing and speech impaired, (202) 708-4594. (These are not

toll-free numbers.)

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act Statement

The Department is seeking approval of the information collection

requirements contained in Sec. 203.605 by the Office of Management and

Budget in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3501-3520). The OMB control number will be published in the

Federal Register upon approval. An agency may not conduct or sponsor,

and a person is not required to respond to, a collection of information

unless the collection displays a valid control number.

II. Background

Summary of Legislative Changes

This interim rule implements section 407 of The Balanced Budget

Downpayment Act, I (Pub. L. 104-99, approved January 26, 1996)

(Downpayment Act), which amended sections 204 and 230 of the National

Housing Act. The amendment of section 230 eliminated the current HUD

programs for Temporary Mortgage Assistance Payments and Assignment of

Mortgages at Secs. 203.640 - 203.660 of 24 CFR. This amendment did not

become effective until the passage of The Omnibus Consolidated

Rescissions and Appropriations Act of 1996 (Pub. L. 104-134, approved

April 26, 1996). However, this Appropriations Act provided that

mortgagors who had applied for relief under the Assignment Program

before April 26, 1996 will be governed by the requirements of section

230 before the amendments made by the Downpayment Act.

To continue to provide foreclosure alternatives for mortgagors, the

Downpayment Act amended sections 204 and 230 of the National Housing

Act to promote foreclosure alternatives and loss mitigation tools to be

used by mortgagees. Section 204 was amended to provide that the

Secretary may recompense mortgagees for their actions to provide

mortgage foreclosure alternatives, such as special forbearance, loan

modifications, and deeds in lieu of foreclosure. Section 230 was

amended to provide that the Secretary may pay the mortgagee a partial

claim which would be applied to the arrearage of a defaulted mortgage.

In addition, Section 230 was amended to provide that the Secretary may

accept assignment of a mortgage which the mortgagee has modified to

cure the default and where repooling of the loan is not possible. This

procedure is to be distinguished from forbearance relief for defaulted

loans, as well as from the former Mortgage Assignment Program. It

should be noted that the Downpayment Act permitted, but did not

require, the Secretary to establish these partial claim and assignment

procedures. Further, the Downpayment Act provided that no decision by

the Secretary to exercise or forego exercising his authority under

section 230 and the new authority under section 204 shall be subject to

judicial review.

Overview of HUD's Approach

The techniques to be employed under HUD's new foreclosure

alternatives/loss mitigation approach implemented by this rule will

include special forbearance plans, loan modifications, partial claims,

preforeclosure sales, deeds in lieu of foreclosure, and similar tools.

These approaches generally fall into two broad categories--(a) those

which (if utilized successfully) would result in curing the default and

retaining homeownership, and (b) those which would result in the

relinquishment of homeownership, by means of a sale to a third party or

by a voluntary conveyance of the property by deed in lieu of

foreclosure.

The Department has decided to implement a comprehensive approach

toward promoting alternatives to foreclosure, as well as loss

mitigation, which enhances lender flexibility in dealing with the

circumstances in which homeowners find themselves. This approach

describes a series of servicing actions and strategies that may be used

singly or in combination to meet those objectives; provides insurance

benefits to lenders that evaluate mortgagors with delinquent and

defaulted loans and choose appropriate steps which--when successful--

result in outcomes other than foreclosure of the mortgage; and

establishes the groundwork for Departmental monitoring of lenders'

efforts.

End of Assignment Program

In October, 1995, the General Accounting Office (GAO) issued a

report to Congress regarding HUD's Mortgage Assignment Program. After

analyzing over 68,000 mortgages assigned to HUD since 1989, the GAO

estimated that the loss to FHA per assigned mortgage would be $49,000,

compared to the estimated $27,000 FHA would have lost had the loan not

entered the Assignment Program. The GAO noted that to offset these

losses, FHA was required to charge higher mortgage insurance premiums

to new mortgagors. As a result of the GAO report, Congress, as

discussed above, has amended section 230 of the National Housing Act to

end the Mortgage Assignment Program with respect to the intake of new

applicants into that program. Therefore, references to the Assignment

Program are amended or removed accordingly in the following sections:

203.350, 203.355, 203.402a, 203.438, 203.500, 203.604, 203.606,

203.640-203.660, and 203.664-203.666.

[[Page 35015]]

Early Default Counseling

The Department emphasizes that early intervention coupled with the

use of default counseling are effective techniques for curing defaulted

mortgages. A successful servicing strategy by a mortgagee takes into

consideration each defaulted mortgage individually. Based on the

circumstances involved, the mortgagee executes a plan which will

eliminate the default and prevent a foreclosure. In an effort to

clarify misunderstandings of various alternatives available to

homeowners whose mortgages are in a defaulted status, and to reduce

delays in obtaining assistance, HUD Handbook 4330.1 REV-5,

Administration of Insured Home Mortgages, continues to require lenders

to refer those homeowners to HUD-approved housing counseling agencies

early in the default period.

Actions To Promote Foreclosure Alternatives/Loss Mitigation

Section 407(a) of the Downpayment Act amended section 204(a) of the

National Housing Act to provide that HUD may pay insurance benefits to

the mortgagee to recompense the mortgagee for its actions to provide an

alternative to the foreclosure of a mortgage that is in default. These

actions may include special forbearance, loan modification, and/or

deeds in lieu of foreclosure, all upon terms and conditions as the

mortgagee shall determine in the mortgagee's sole discretion, within

guidelines provided by HUD.

The current regulations already provide for most of these

foreclosure alternative or loss mitigation actions. Therefore,

Sec. 203.501 of the regulations, governing loss mitigation, is amended

to provide cross references to these various foreclosure alternative

actions available to mortgagees. To clarify that the claim file

requirements at Sec. 203.365(c) include claims involving these loss

mitigation actions, a new Sec. 203.605 is added to specify that

mortgagees must document that they have considered--beginning no later

than when three full monthly installments due on the mortgage are

unpaid, and continuing with monthly reevaluations while the loan

remains in default--all loss mitigation options to determine which, if

any, are appropriate before initiating foreclosure. In addition, a new

Sec. 203.412 is added to the regulations to provide that the Secretary

may pay insurance benefits to encourage mortgagees to pursue these loss

mitigation techniques.

Some of the provisions to promote loss mitigation are given a

delayed implementation date in the text of this interim rule to enable

the Department to consider any comments before making them effective in

a final rule. Thus, the reduction from nine to six months for taking

action upon default of a mortgage in Sec. 203.355, and the amendment to

the provision in Sec. 203.402(f) for varying the percentage of

foreclosure costs or the costs of acquiring a property that are

reimbursed, are made to apply only after March 1, 1997. Each of these

changes is discussed below in this preamble.

In certain cases foreclosure may be avoided where the mortgagor's

sale of the property is facilitated by the assumption of the mortgage

by a credit-worthy, owner-occupant purchaser. Although not included in

this interim rule, procedures to facilitate the use of assumptions as a

type of ``preforeclosure sale'' are being considered by HUD for future

implementation. Finally, this rule amends the regulations to provide

for the increased flexibility in the use of these foreclosure

alternative tools, as described below.

Reduction of Time for Taking Action

Concerning the reduction of the foreclosure initiation time frame

from nine months to six months, in 1991 the Department proposed to

reduce the time frame for lenders to initiate foreclosure from twelve

months to six months (56 Fed. Reg. 19212, April 25, 1991). Public

comments received indicated that the six-month deadline could not

reasonably be met due to several reasons including compliance with the

HUD Assignment Program, administrative matters, State law requirements

regarding notice, and the desire to encourage workout or forbearance

agreements with mortgagors.

The Department believes that the biggest obstacle to initiating

foreclosure within six months was the requirement to process borrower

applications for acceptance into the HUD Assignment Program. Since the

Assignment Program is no longer an option for those mortgagors who did

not apply for assignment relief on or before April 25, 1996, HUD now

believes that a shortened time frame is workable. As evidenced by this

rule, HUD also desires to encourage workout and forbearance agreements

with mortgagors. However, HUD believes that early intervention is

necessary for effective loss mitigation and that a workout must be

established before six months of arrearage has accumulated, wherever

possible.

With regard to State legal notice requirements, there should not be

a problem meeting the six month time frame, because under the new

procedures, HUD will generally permit mortgagees to make timely

preparations to initiate foreclosure, even while simultaneously

considering the various loss mitigation tools. Also, under current

regulations the foreclosure initiation time frame is stayed when the

mortgagor has entered into a special forbearance agreement or has

commenced participation in the pre-foreclosure sales procedure.

The Department specifically requests public comments on this

proposed time frame. The rule expressly provides for a delayed

implementation of the six-month time limit to permit notice and comment

on this change.

Varying the Percentage of Costs Reimbursed

Section 203.402(f) currently provides for \2/3\ reimbursement of

foreclosure and acquisition costs on mortgage insurance claims. This

regulation would amend that section to allow HUD to vary the percentage

of reimbursement by administrative issuance such as a Mortgagee Letter.

The percentage may be based on individual mortgagee performance in

mitigating loss. The Department specifically requests public comments

on this proposed change in reimbursement for foreclosure costs. The

rule has expressly provided for a delayed implementation of the

amendment in order to provide for notice and comment on this change.

The same change has also been incorporated into the Home Equity

Conversion Mortgage (HECM) rule at Sec. 206.129(d)(2)(ii).

1. Special Forbearance

Section 203.614 currently provides the conditions under which

mortgagees may enter into special forbearance agreements with

mortgagors. This interim rule amends Sec. 203.614 to provide lenders

with more flexibility in administering special forbearance, with the

exception that partial claims will not be permitted when forbearance is

extended for more than 18 months. Rather than including requirements in

the rule, HUD will provide special forbearance guidelines in Mortgagee

Letters and handbooks. A statutory requirement remains, pursuant to

section 204(a) of the National Housing Act, that a default must be due

to circumstances beyond the mortgagor's control for additional note

rate interest to be paid should a mortgage insurance claim be filed

after an unsuccessful special forbearance agreement.

In addition, Sec. 203.471, which provides for the conditions under

which mortgagees may enter into special forbearance agreements in the

case of 203(k) rehabilitation loans, is amended to be consistent with

the amendment to

[[Page 35016]]

Sec. 203.614. Finally, as noted above, a new Sec. 203.412 is added to

the regulations to provide, among other things, that HUD may pay the

mortgagee for its actions in entering into special forbearance

agreements under Sec. 203.614. At this time, HUD intends to issue a

Mortgagee Letter specifying that this amount will be $100.

2. Partial Claims

Section 407(b) of the Downpayment Act amended section 230(a) of the

National Housing Act to provide that the Secretary may establish a

program for payment of a partial claim to a mortgagee that agrees to

apply the claim amount to payment of a defaulted single family

mortgage. The amended section 230(a) provides that such payment shall

be in an amount determined by the Secretary, and shall not exceed an

amount equivalent to 12 monthly mortgage payments plus any costs

related to the default that are approved by the Secretary. In addition,

the amended section 230(a) provides that the mortgagor shall agree to

repay this amount to the Secretary, and that the Secretary may pay the

mortgagee in connection with any activities that the mortgagee is

required to undertake concerning repayment by the mortgagor of the

amount owed to the Secretary.

New Secs. 203.371 and 203.414 are added to the regulations to

provide that the mortgagee may apply for a partial claim after a period

of forbearance. The partial claim will be in the amount of the

arrearage accumulated during the forbearance period. The lender shall

apply this amount to the mortgage to bring it current and the mortgagor

shall be required to execute a subordinate mortgage in favor of the

Secretary in the amount of the partial claim. The forbearance period

may be extended until the arrearage equals the equivalent of 12 monthly

mortgage payments. The equivalent of twelve monthly payments for

mortgages with varying monthly payments, such as adjustable rate

mortgages (ARMS), graduated payment mortgages (GPMS) and growing equity

mortgages (GEMS), will be calculated by multiplying 12 times the

monthly mortgage payment due on the date of default. The Department

expects to issue guidelines to assure that such forbearances do not

extend beyond 18 calendar months. Similarly, guidelines will provide

that mortgagees may file a partial claim only after the borrower has

been delinquent for at least 4 months. Mitigation of losses through

forbearance with a subordinate mortgage would not be available to

borrowers who had the financial capacity to modify the mortgage or

obtain a new refinanced mortgage. Nor would this approach be available

to a mortgagor who could not make at least a full monthly mortgage

payment after the forbearance period.

It is expected that repayment terms of the subordinate mortgage

will vary depending on the income and debts of the mortgagor. The

subordinate mortgage may call for repayment commencing at a future date

before maturity of the insured mortgage, or may not require repayment

until a transfer of ownership of the property or payoff of the insured

mortgage. HUD guidelines will likely specify that subordinate mortgages

must be interest free.

Mortgagees can file for a partial claim under the new Sec. 203.414

if the mortgagor is able to resume full monthly payments, but not pay

off the arrearage. The claim amount will be the amount of the payments

in arrears, including costs related to the default as established by

HUD. The new regulation also permits the Secretary to require the

mortgagee to be responsible for servicing the subordinate mortgage and

provides that servicing mortgagees may be compensated for activities

that they perform on behalf of the Secretary.

3. Modifications/Recastings

Mortgagees currently have the authority under Sec. 203.616 of the

regulations to modify defaulted mortgages, in certain cases, for the

purpose of changing the amortization provisions by recasting the total

unpaid amount due over the remaining term of the mortgage, or over a

term extending not more than 10 years beyond the original maturity

date. In most cases, mortgagees cannot utilize this authority because

of secondary mortgage market restrictions. Approximately 95% of FHA-

insured mortgages are pooled in Government National Mortgage

Association (Ginnie Mae) mortgage backed securities. The pool

requirements prevent the mortgagee from keeping the mortgage in the

pool if the terms of the mortgage are modified. Thus, to modify the

terms of the mortgage, Ginnie Mae issuers must buy the mortgage out of

the Ginnie Mae pool.

Ginnie Mae requirements generally have prevented the repooling of a

modified mortgage if more than 24 months have elapsed since the date of

the first scheduled payment under the mortgage. To facilitate FHA's

loss mitigation efforts, Ginnie Mae has agreed to permit the removal of

mortgages that are 90 days or more past due from Ginnie Mae pools so

that the mortgages can be modified and repooled using the date of

modification of the mortgages as the origination date. Ginnie Mae will

provide its issuers with specific instructions and requirements for

this process. Therefore, HUD encourages mortgagees to make increased

use of loan modifications or recastings to avoid foreclosure and will

shortly provide detailed guidance in a Mortgagee Letter. A new

Sec. 203.412 is added to the regulations to provide, among other

things, that HUD may pay the mortgagee for its actions in modifying or

recasting the mortgage and repooling it. The payment would include

reimbursement for any necessary title examination and/or title

insurance policy endorsement.

In addition, Sec. 203.616 of the regulations is being amended to

allow recasting of mortgages even where the mortgage is not in default,

by agreement of the parties, although loss mitigation claims are

permitted only with respect to mortgages in default. This amendment

will allow willing mortgagees, especially state or local housing

authorities or portfolio lenders, to recast a mortgage where there may

be an imminent default if the mortgage is not recast, but where no

default has yet occurred. This procedure, in turn, can prevent adverse

impacts on mortgagors' credit ratings. A conforming amendment is made

to Sec. 203.342. The authority to allow recasting of mortgages where

the mortgage is not in default is based on the Secretary's inherent

broad authority to operate the insurance programs, and is not based on

the authority contained in sections 204 or 230 of the National Housing

Act, as amended. Those two sections generally refer only to mortgages

in default. It should be noted that, pursuant to the National Housing

Act, if a mortgage insurance claim is eventually filed, the unpaid

principal balance paid on the claim will be based on the modified

amount only where there had been a default caused by circumstances

beyond the mortgagor's control, as defined by the Secretary.

In rare circumstances, the mortgagee may not be able to repool the

modified or recast mortgage. In such situations, HUD will now be able

to approve the assignment to HUD of a mortgage modified after default.

Section 407(b) of the Downpayment Act amended section 230(b) of the

National Housing Act to provide that HUD may accept assignment of a

mortgage if the mortgage was in default and the mortgagee has modified

the mortgage to cure the default and to provide for mortgage payments

within the reasonable ability of the mortgagor to pay, at interest

rates not exceeding current market interest rates. HUD is also required

to arrange for servicing of the assigned mortgage by

[[Page 35017]]

a mortgagee, which may include the assigning mortgagee.

Section 203.350 of the regulations is amended to provide for

assignment of mortgages under the requirements just noted, and

Sec. 203.404 of the regulations is amended to provide for the amounts

the mortgagee will be reimbursed on such an assignment claim.

4. Pre-foreclosure Sales

Section 203.370 of the regulations, which provides for pre-

foreclosure sales, is amended to remove the reference to the now

obsolete Assignment Program. Section 203.402 of the regulations

currently provides in paragraphs (l) and (s) that HUD will reimburse

the mortgagee for the costs of an appraisal and a title search. Section

203.402(t) provides HUD will pay the mortgagee an administrative fee,

as authorized by the Secretary, for the mortgagee's role in

facilitating a successful pre-foreclosure sale. Presently, HUD is

reimbursing mortgagees for reasonable and customary costs of the

appraisal and title search, and $1,000 as the administrative fee for

each successful pre-foreclosure sale. The selling mortgagor is also

paid a consideration from gross sales proceeds of up to $1,000,

depending on the length of time it takes to close the sale. HUD intends

to continue these reimbursement amounts for the present, although they

are subject to change in the future.

5. Deeds in Lieu of Foreclosure

Section 203.402(p) of the regulations currently provides that in a

conveyance claim the Secretary will reimburse the mortgagee an amount

approved by the Secretary that was paid to the mortgagor as

consideration for the execution of a deed in lieu of foreclosure. This

amount is currently a maximum of $500. This interim rule amends

Sec. 203.402(p) to provide that the Secretary may also pay the

mortgagee an administrative fee for its role in facilitating a

successful deed in lieu of foreclosure. HUD intends to issue a

Mortgagee Letter specifying that this amount shall not exceed $250.

Also, this rule amends Sec. 203.402(s) to clarify that, as part of a

conveyance claim, HUD will reimburse the mortgagee for the cost of a

title search involved in determining whether it is feasible to accept a

deed in lieu of foreclosure. HUD intends to issue a Mortgagee Letter

specifying that this amount shall not exceed $250. This rule also

amends the Home Equity Conversion Mortgage (HECM) rule at

Sec. 206.129(d)(2)(i) to conform to the revised language of

Sec. 203.402(s).

III. Other Matters

Regulatory Planning and Review

This interim rule has been reviewed in accordance with Executive

Order 12866, issued by the President on September 30, 1993 (58 FR

51735, October 4, 1993). Any changes to the rule resulting from this

review are available for public inspection between 7:30 a.m. and 5:30

p.m. weekdays in the Office of the Rules Docket Clerk.

Environmental Impact

A Finding of No Significant Impact with respect to the environment

has been made in accordance with HUD regulations at 24 CFR part 50,

which implement section 102(2)(C) of the National Environmental Policy

Act of 1969. The Finding of No Significant Impact is available for

public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the

Office of the Rules Docket Clerk.

Regulatory Flexibility Act

The Secretary, in accordance with provisions of the Regulatory

Flexibility Act (5 U.S.C. 605(b)), has reviewed this interim rule

before publication and by approving it certifies that it will not have

a significant economic impact on a substantial number of small

entities. Most of the economic impact of the interim rule will affect

the Department, which stands to benefit from the successful

implementation of the loss mitigation techniques addressed by the

interim rule.

Executive Order 12612, Federalism

HUD has determined, in accordance with Executive Order 12612,

Federalism, that this interim rule will not have a substantial, direct

effect on the States or on the relationship between the Federal

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

responsibilities among the various levels of government, since the

interim rule involves primarily relationships between the Department

and private entities.

Executive Order 12606, The Family

HUD has determined that this interim rule would have only an

indirect impact on family formation, maintenance, and general well-

being within the meaning of Executive Order 12606, The Family, because

it would assist mortgagors in maintaining ownership of their

properties. To the extent such mortgagors consist of families, the

impact would be beneficial. As such, no further review is necessary.

Justification for Interim Rulemaking

The Omnibus Consolidated Rescissions and Appropriations Act of 1996

(the Act) directs the Department to issue interim regulations to

implement section 407 of the Downpayment Act within 30 days of the date

of enactment of the Act.

List of Subjects

24 CFR Part 203

Hawaiian Natives, Home improvement, Indians--lands, Loan programs--

housing and community development, Mortgage insurance, Reporting and

recordkeeping requirements, Solar energy.

24 CFR Part 206

Aged, Condominiums, Loan programs--housing and community

development, Mortgage insurance, Reporting and recordkeeping

requirements.

Accordingly, parts 203 and 206 of title 24 of the Code of Federal

Regulations are amended as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

1. The authority citation for part 203 is revised to read as

follows:

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

3535(d).

2. Section 203.342 is revised to read as follows:

Sec. 203.342 Recasting of mortgage.

If a mortgage is recast pursuant to Sec. 203.616 subsequent to a

finding by the mortgagee that the default was due to circumstances

beyond the mortgagor's control, as defined by HUD, the principal amount

of the mortgage, as modified, shall be considered to be the ``original

principal balance of the mortgage'' as that term is used in

Sec. 203.401.

Sec. 203.350 [Removed]

3. In Sec. 203.350, the following are removed:

a. The ``Effective Date Note (1);

b. The ``Effective Date Note (2)'';

c. The second undesignated center heading ``ASSIGNMENT OF

MORTGAGE'';

d. The ``Effective Date Note (3);

e. All text of the second version of Sec. 203.350, which includes

paragraphs (a) through (d) and the information collection

parenthetical; and

f. The FR source ``[52 FR 6914, Mar. 5, 1987].

3a. In the remaining Sec. 203.350, the section heading and

paragraph (a) are revised, to read as follows:

[[Page 35018]]

Sec. 203.350 Assignment of mortgage.

(a) Assignment of modified mortgages pursuant to section 230,

National Housing Act. HUD may accept an assignment of any mortgage

covering a one-to-four family residence if the following requirements

are met:

(1) The mortgage was in default;

(2) The mortgagee has modified the mortgage under Sec. 203.616 to

cure the default and to provide for mortgage payments within the

reasonable ability of the mortgagor to pay, at an interest rate not

exceeding current market interest rates; and

(3) Such other conditions that HUD may prescribe, which may include

the requirement that the mortgagee continue to be responsible for

servicing the mortgage.

* * * * *

4. In Sec. 203.355:

a. The introductory text of paragraph (a) and paragraph (a)(2) are

revised;

b. Paragraphs (a)(3) through (a)(6) are added; and

c. Paragraphs (b), the introductory text of paragraph (c) and the

introductory text of paragraph (g) are revised; and

d. Paragraph (h) is added, to read as follows:

Sec. 203.355 Acquisition of property.

(a) In general. Upon default of a mortgage, except as provided in

paragraphs (b) through (h) of this section, the mortgagee shall take

one of the following actions within nine months from the date of

default, or within any additional time approved by the Secretary or

authorized by Secs. 203.345 or 203.346. For mortgages where the date of

default is on or after March 1, 1997, the mortgagee shall take one of

the following actions within six months of the date of default or

within such additional time approved by HUD or authorized by

Secs. 203.345 or 203.346:

* * * * *

(2) Enter into a special forbearance agreement under Sec. 203.614;

(3) Complete a refinance of the mortgage under Sec. 203.43(c);

(4) Complete a modification of the mortgage under Sec. 203.616;

(5) Complete an assumption under Sec. 203.512; or

(6) Commence foreclosure.

(b) Vacant or abandoned property. With respect to defaulted

mortgages on vacant or abandoned property, if the mortgagee discovers,

or should have discovered, that the property is vacant or abandoned,

the mortgagee must commence foreclosure within the later of 120 days

after the date the property became vacant, or 60 days after the date

the property is discovered, or should have been discovered, to be

vacant or abandoned; but no later than the number of months from the

date of default as provided in paragraph (a) of this section. The

mortgagee must not delay foreclosure on vacant or abandoned property

because of the requirements of Sec. 203.606.

(c) Prohibition of foreclosure within time limits. If the laws of

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

bankruptcy law:

* * * * *

(g) Pre-foreclosure sale procedure. Within 60 days of the end of a

mortgagor's participation in the pre-foreclosure sale procedure, or

within the time limit described in paragraph (a) of this section,

whichever is later, if no closing of an approved pre-foreclosure sale

has occurred, the mortgagee must obtain a deed in lieu of foreclosure,

with title being taken in the name of the mortgagee or the Secretary,

or commence foreclosure. The end-of-participation date is defined as:

* * * * *

(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 time limit described in paragraph (a) of this section or 90

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

requirements.

Sec. 203.370 [Amended]

5. In Sec. 203.370, paragraph (c)(3) is removed, and paragraphs

(c)(4) and (c)(5) are redesignated as paragraphs (c)(3) and (c)(4).

6. A new Sec. 203.371 is added before the undesignated center

heading ``CONDITION OF PROPERTY'', to read as follows:

Sec. 203.371 Partial claim.

(a) General. Notwithstanding the conveyance, sale or assignment

requirements for payment of a claim elsewhere in this part, HUD will

pay partial FHA insurance benefits to mortgagees after a period of

forbearance, the maximum length of which HUD will prescribe, and in

accordance with this section.

(b) Requirements. The following conditions must be met for payment

of a partial claim:

(1) The mortgage has been delinquent for at least 4 months or such

other time prescribed by HUD;

(2) The amount of the arrearage has not exceeded the equivalent of

12 monthly mortgage payments;

(3) The mortgagor is able to resume making full monthly mortgage

payments;

(4) The mortgagor is not financially able to make sufficient

additional payments to repay the arrearage within a time specified by

HUD; and

(5) The mortgagor is not financially able to support monthly

mortgage payments on a modified mortgage or on a refinanced mortgage in

which the total arrearage is included.

(c) Repayment of the subordinate lien. The mortgagor must execute a

mortgage in favor of HUD with terms and conditions acceptable to HUD

for the amount of the partial claim under Sec. 203.414(a). HUD may

require the mortgagee to be responsible for servicing the subordinate

mortgage on behalf of HUD.

(d) Application for insurance benefits. Along with the prescribed

application for partial claim insurance benefits, the mortgagee shall

forward to HUD the original credit and security instruments required by

paragraph (c) of this section.

7. In Sec. 203.402, paragraphs (f), (p) and (s) are revised to read

as follows:

Sec. 203.402 Items included in payment--conveyed and non-conveyed

properties.

* * * * *

(f) Foreclosure costs or costs of acquiring the property otherwise

(including costs of acquiring the property by the mortgagee and of

conveying and evidencing title to the property to HUD, but not

including any costs borne by the mortgagee to correct title defects)

actually paid by the mortgagee and approved by HUD, in an amount not in

excess of two-thirds of such costs or $75, whichever is the greater.

For mortgages insured on or after March 1, 1997, the Secretary will

reimburse a percentage of foreclosure costs or costs of acquiring the

property, which percentage shall be determined in accordance with such

conditions as the Secretary shall prescribe. Where the foreclosure

involves a mortgage sold by the Secretary on or after August 1, 1969,

or a mortgage executed in connection with the sale of property by the

Secretary on or after such date, the mortgagee shall be reimbursed (in

addition to the amount determined under the foregoing) for any extra

costs incurred in the foreclosure as a result of a defect in the

mortgage instrument, or a defect in the mortgage transaction or a

defect in title which existed at or prior to the time the mortgage (or

its assignment by the Secretary) was filed for record, if the mortgagee

establishes to the satisfaction of the Commissioner

[[Page 35019]]

that such extra costs are over and above those customarily incurred in

the area.

* * * * *

(p) An amount approved by HUD and paid to the mortgagor as

consideration for the execution of a deed in lieu of foreclosure and,

if authorized by HUD, an administrative fee approved by HUD paid to the

mortgagee for its role in facilitating a successful deed in lieu of

foreclosure, not to be subject to the payment of debenture interest

thereon.

* * * * *

(s) Reasonable costs of the title search ordered by the mortgagee,

in accordance with procedures prescribed by HUD, to determine the

status of a mortgagor meeting all other criteria for approval to

participate in the pre-foreclosure sale procedure, or to determine if a

mortgagor meets the criteria for approval of the mortgagee's acceptance

of a deed in lieu of foreclosure.

* * * * *

Sec. 203.402a [Amended]

8. In Sec. 203.402a, paragraph (b)(1) is removed and paragraphs

(b)(2) and (b)(3) are redesignated as paragraphs (b)(1) and (b)(2).

9. In Sec. 203.404, paragraph (a)(3) is revised, and new paragraphs

(a)(5) and (a)(6) are added, to read as follows:

Sec. 203.404 Amount of payment--assigned mortgages.

* * * * *

(a) * * *

(3) Reimbursement for such costs and attorney's fees as HUD finds

were properly incurred in connection with the defaulted mortgage and

its modification and assignment to HUD.

* * * * *

(5) An administrative fee to the mortgagee for modifying the

mortgage.

(6) A fee for servicing the mortgage assigned to HUD, if HUD

requires such servicing.

* * * * *

10-11. New Secs. 203.412 and 203.414 are added before the

undesignated center heading ``CERTIFICATE OF CLAIM'', and Sec. 203.413

is reserved, to read as follows:

Sec. 203.412 Payment for foreclosure alternative actions.

Notwithstanding the conveyance, sale, or assignment requirements

for payment of a claim elsewhere in this part, HUD may pay the

mortgagee, in accordance with procedures prescribed by HUD, for the

following foreclosure alternative actions, in such amounts as HUD

determines:

(a) Assumptions under Sec. 203.512;

(b) Special forbearance under Secs. 203.471 and 203.614;

(c) Recasting or modification of defaulted mortgages under

Sec. 203.616, where the mortgagee is not reimbursed under

Sec. 203.405(a);

(d) Refinancing under Sec. 203.43(c).

Sec. 203.413 [Reserved]

Sec. 203.414 Amount of payment--partial claims.

(a) Claim amount. Where a claim for partial insurance benefits is

filed in accordance with Sec. 203.371, the amount of the insurance

benefits shall consist of the arrearage accumulated during the

forbearance period, not to exceed an amount equivalent to 12 monthly

mortgage payments, and any costs prescribed by HUD related to the

default.

(b) Servicing fee. The claim may also include a payment for

activities, such as servicing the subordinate mortgage, which HUD may

require.

12. In Sec. 203.438, paragraph (c) is revised to read as follows:

Sec. 203.438 Mortgages on Indian land insured pursuant to section 248

of the National Housing Act.

* * * * *

(c) Foreclosure by HUD. HUD may initiate foreclosure proceedings

with respect to any mortgage acquired under this section in a tribal

court, a court of competent jurisdiction or Federal district court. If

the mortgagor remains on the property following foreclosure, HUD may

seek an eviction order from the court hearing the foreclosure action.

13. Section 203.471 is revised to read as follows:

Sec. 203.471 Special forbearance.

If the mortgagee finds that a default is due to circumstances

beyond the mortgagor's control, as defined by the Secretary, the

mortgagee may grant special forbearance relief to the mortgagor in

accordance with the conditions prescribed by the Secretary.

14. In Sec. 203.473 paragraph (a) is revised to read as follows:

Sec. 203.473 Claim procedure.

(a) A claim for insurance benefits on a loan secured by a first

mortgage shall be made, and insurance benefits shall be paid, as

provided in Secs. 203.350 through 203.414.

* * * * *

15. Section 203.500 is revised to read as follows:

Sec. 203.500 Mortgage servicing generally.

This subpart identifies servicing practices of lending institutions

that HUD considers acceptable for mortgages insured by HUD. Failure to

comply with this subpart shall not be a basis for denial of insurance

benefits, but a pattern of refusal or failure to comply will be cause

for withdrawal of HUD's approval of a mortgagee. It is the intent of

the Department that no mortgagee commence foreclosure or acquisition of

a property until the requirements of this subpart have been followed.

16. Section 203.501 is amended by adding at the end of the section

the following two sentences:

Sec. 203.501 Loss mitigation.

* * * Such actions include, but are not limited to, deeds in lieu

of foreclosure under Sec. 203.357, pre-foreclosure sales under

Sec. 203.370, partial claims under Sec. 203.414, assumptions under

Sec. 203.512, special forbearance under Secs. 203.471 and 203.614, and

recasting of mortgages under Sec. 203.616. HUD may prescribe conditions

and requirements for the appropriate use of these loss mitigation

actions, concerning such matters as owner-occupancy, extent of previous

defaults, prior use of loss mitigation, and evaluation of the

mortgagor's income, credit and property.

17. In Sec. 203.552, paragraph (a) introductory text is revised to

read as follows:

Sec. 203.552 Fees and charges after endorsement.

(a) The mortgagee may collect reasonable and customary fees and

charges from the mortgagor after insurance endorsement only as provided

in this paragraph (a). The mortgagee may not collect these fees or

charges from the mortgagor if the mortgagee has been or will be

reimbursed by the Secretary for the services for which the fees or

charges are assessed.

* * * * *

Sec. 203.604 [Amended]

18. In Sec. 203.604, paragraphs (e)(2) (iii) and (iv) are removed,

and paragraph (e)(2)(v) is redesignated as paragraph (e)(2)(iii).

19. A new Sec. 203.605 is added to read as follows:

Sec. 203.605 Loss mitigation evaluation.

No later than when three full monthly installments due on the

mortgage are unpaid, the mortgagee shall evaluate all of the loss

mitigation techniques provided at Sec. 203.501 to determine which, if

any, are appropriate, and shall reevaluate monthly thereafter. The

mortgagee shall maintain documentation of such evaluations. Should a

claim for mortgage insurance benefits later be filed, the mortgagee

shall maintain this documentation in

[[Page 35020]]

the claim file under the requirements of Sec. 203.365(c).

20. In Sec. 203.606, paragraph (a) is amended by adding at the end

the following sentence, and the introductory text of paragraph (b) is

revised, to read as follows:

Sec. 203.606 Pre-foreclosure review.

(a) * * * In addition, prior to initiating any action required by

law to foreclose the mortgage, the mortgagee shall notify the mortgagor

in a format prescribed by the Secretary that the mortgagor is in

default and the mortgagee intends to foreclose unless the mortgagor

cures the default.

(b) If the mortgagee determines that any of the following

conditions has been met, the mortgagee may initiate foreclosure without

the delay in foreclosure required by paragraph (a) of this section:

* * * * *

21. Section 203.614 is revised to read as follows:

Sec. 203.614 Special forbearance.

If the mortgagee finds that a default is due to circumstances

beyond the mortgagor's control, as defined by HUD, the mortgagee may

grant special forbearance relief to the mortgagor in accordance with

the conditions prescribed by HUD.

22. Section 203.616 is revised to read as follows:

Sec. 203.616 Recasting of mortgage.

The mortgagee may modify a mortgage for the purpose of changing the

amortization provisions by recasting the total unpaid amount due over

the remaining term of the mortgage or a term not exceeding 360 months.

The mortgagee must notify HUD of such modification in a format

prescribed by HUD within 30 days of the execution of the modification

agreement.

Secs. 203.640 through 203.660 [Removed]

23. All versions of Secs. 203.640 through 203.660 are removed.

24. Section 203.664 is revised to read as follows:

Sec. 203.664 Processing defaulted mortgages on property located on

Indian land.

Before a mortgagee requests that the Secretary accept assignment

under Sec. 203.350(b) of a mortgage insured pursuant to section 248 of

the National Housing Act (Sec. 203.43h), the mortgagee must submit

documents showing that the requirements of Sec. 203.604 have been met.

25. Section 203.665 is revised to read as follows:

Sec. 203.665 Processing defaulted mortgages on property located on

Hawaiian home lands.

Before a mortgagee requests the Secretary to accept assignment

under Sec. 203.350(c) of a mortgage insured pursuant to section 247 of

the National Housing Act (Sec. 203.43i), the mortgagee must submit

documents showing that the requirements of Sec. 203.604 have been met.

26. In Sec. 203.666 paragraph (b) is revised, and paragraphs (c)

and (d) are removed, to read as follows:

Sec. 203.666 Processing defaulted mortgages on property in Allegany

Reservation of Seneca Nation of Indians.

* * * * *

(b) Claims through assignment. Before a mortgagee requests the

Secretary to accept assignment under Sec. 203.350(d) the mortgagee must

submit documents showing that the requirements of Sec. 203.604 have

been met.

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

27. The authority citation for part 206 continues to read as

follows:

Authority: 12 U.S. C. 1715b, 1715z-1720; 42 U.S.C. 3535(d).

28. In Sec. 206.129, paragraphs (d)(2)(i) and (d)(2)(ii) are

revised to read as follows:

Sec. 206.129 Payment of claim.

* * * * *

(d) * * *

(2)(i) Items listed in Sec. 203.402 (a), (b), (c), (d), (e), (g),

(j), and (s), and Sec. 204.322(l) of this chapter.

(ii) Foreclosure costs or costs of acquiring the property actually

paid by the mortgagee and approved by HUD, in an amount not in excess

of two-thirds of such costs or $75, whichever is the greater. For

mortgages insured after March 1, 1997, HUD may reimburse a percentage

of foreclosure costs or costs of acquiring the property, which

percentage shall be determined in accordance with such conditions as

HUD shall prescribe.

* * * * *

Dated: June 5, 1996.

Nicolas P. Retsinas,

Assistant Secretary for Housing-Federal Housing Commissioner.

[FR Doc. 96-16869 Filed 7-2-96; 8:45 am]

BILLING CODE 4210-27-P