Single Family Mortgage InsuranceLoss Mitigation Procedures

SUMMARY: This rule implements as final an interim rule that 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.

EFFECTIVE DATE: February 1, 1998.

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

This rule's information collection requirements have been submitted

for approval to the Office of Management and Budget under the Paperwork

Reduction Act of 1995 (44 U.S.C. 3501-3520). An OMB control number,

when assigned, will be published in the Federal Register. 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

On July 3, 1996 (61 FR 35014) the Department published an interim

rule to implement loss mitigation procedures under section 407 of The

Balanced Budget Downpayment Act, I (Pub. L. 104-99, approved January

26, 1996) (Downpayment Act). Public comments on the interim rule were

invited for a period of 60 days, until September 3, 1996. Delayed

implementation dates of March 1, 1997, were included for provisions in

two sections of the interim rule (24 CFR 203.355(a) and 203.402(f)) so

that the Department would be able to consider any public comments on

these provisions before making them effective in a final rule. The

March 1, 1997 implementation date for these sections was suspended

until the issuance of a final rule by an amendment published on March

5, 1997 (62 FR 9930). On November 12, 1996, HUD issued Mortgagee Letter

96-61. This letter provides information regarding changes to special

forbearance, mortgage modification, pre-foreclosure sales procedures

and deeds-in-lieu of foreclosure, and introduces the use of partial

claims, measurement of lender performance and provisions for incentive

payments and reimbursements. Included as attachments to the mortgagee

letter are a checklist of eligibility criteria for each of the loss

mitigation procedures and instructions required to file a claim. HUD

also issued Mortgagee Letter 97-17, May 1, 1997, regarding loss

mitigation clarification of procedures, and Mortgagee Letter 97-21, May

16, 1997, regarding Performance Scores.

III. Changes in the Final Rule

A number of changes from the interim rule are made in this final

rule. They are described briefly below in this section, and more fully

in section IV. of this preamble, in the discussion of the public

comments received on the interim rule.

--The final rule has added a new Sec. 203.341 to explicitly state that

mortgage insurance remains in force after payment of a partial claim.

--The titles of Secs. 203.342 and 203.616 are changed from ``Recasting

of mortgage'' to ``Mortgage modifications.''

--HUD has amended the final rule at Sec. 203.355(a) to clarify that the

loss mitigation provisions may be used in combination.

--HUD has rewritten Sec. 203.355(g), (h) and (i) to provide 90 days for

the lender to try another loss mitigation tool or to proceed to

foreclosure after the failure of any loss mitigation tool.

--The effective dates of the foreclosure timing and cost reimbursement

provisions in Secs. 203.355 and 203.402, respectively, are changed to

February 1, 1998.

--To be consistent with the other paragraphs under Sec. 203.371(b), the

reference to ``The mortgage'' in paragraph (b)(1) is changed to read

``the mortgagor''. The reference in paragraph (b)(5) to ``financially

able'' is clarified to ``financially qualified'' to reflect more

accurately instances in which a mortgagor may have the funds but not

the equity to support a modification.

--The words ``accumulated during the forbearance period'' are deleted

from Sec. 203.414(a) to more accurately reflect the authorizing statute

and avoid a potential technical limit on the amount recoverable under a

partial claim.

--Section 203.552 is also clarified to provide that mortgagees may

collect fees from mortgagors to the extent not reimbursed by HUD.

IV. Response to Public Comments

Thirteen comments were received in response to the July 3, 1996

interim rule. Four of the comments were from mortgagees; four were from

public interest groups; two were from State housing finance agencies;

two were from individuals; and one was from an industry association.

HUD has reviewed the comments received in response to the interim rule

and decided that some changes should be made in the final rule. The

following discussion addresses the changes or additions to the rule and

the administrative issuances, in response to the public comments

received on the Loss Mitigation (``LM'') interim rule. The discussion

is organized by the section of the interim rule that is being commented

on, with specific subject headings under each rule section, as

warranted.

Section 203.342 Recasting of Mortgage

One comment observed the rule does not define, here and in

Sec. 203.471, ``circumstances beyond the control.''

Response: Please note the response to this comment in the

discussion under Sec. 203.471, below.

Section 203.350 Assignment of Mortgage

Assignment Program Grace Period. Two comments stated a grace period

needs to be implemented between the termination of the Assignment

Program on April 26, 1996, and the implementation of alternative

procedures.

Response: The statute established April 26, 1996 as the ending date

for the Assignment Program and provided for processing of applications

submitted before that date. HUD continues to process all assignment

applications received prior to April 26, 1996.

Assignment of modified mortgage. One comment stated HUD should

positively commit to accepting assignment of a mortgage upon

fulfillment of the requirements of Sec. 203.350.

[[Page 60125]]

Response: The statement that HUD ``may'' accept an assignment in

paragraph (a) of this section repeats the statutory language, which

establishes the circumstances under which HUD is permitted to accept

the assignment of a mortgage. Since HUD has worked with GNMA to change

the repooling requirements (see Mortgagee Letter 96-32, June 28, 1996)

HUD foresees no occasion when a mortgage will not be able to be

repooled or when assignment to HUD will be necessary. Nevertheless, the

authority to accept assignments in rare and unforeseen circumstances

remains available.

Section 203.355 Acquisition of Property

Lender's Final Determination and Needs of Mortgagors. One comment

stated that the over-arching flaw of these alternatives is that their

use is left entirely to the discretion of lenders. Another comment

argued that lenders who hold HUD-insured mortgages have no significant

incentives to work with homeowners to avoid foreclosure, and they do

not do so. This comment went on to say the regulations fall short in

designing a reasonable response to the needs of low-income homeowners

for foreclosure prevention and relief.

Response: Under the Loss Mitigation program the lender will have

the final determination on the use of LM measures and will have

incentives to try to use them where appropriate. Unlike the Assignment

Program, none of these LM measures is an entitlement, and thus the

lender has more discretion with regard to administering these measures.

Lenders must use their judgement in deciding which LM measure is

appropriate for a particular mortgagor. The language that the interim

rule adds to Sec. 203.501 and Mortgagee Letter 96-61 provides a process

through which a borrower's eligibility for loss mitigation is

determined. The statute provides that the lender will be given the

discretion to decide which LM measures will be used in a particular

case.

FHA programs are meant to be self-sustaining, and an essential

element of these loss mitigation measures is that they must decrease

the insurance funds' prospective losses (or at least not increase the

funds' prospective losses). Thus, HUD must balance the needs of

mortgagors with the need to mitigate losses to the mortgage insurance

funds. These measures are designed for mortgagors who prospectively can

recover from their financial difficulties. If the mortgagor has not

recovered financially within 18 months, HUD analysis and experience

indicate that the prospects for recovery are poor. Two reasons for a

cap on the term of forbearance are to limit the level of losses to the

insurance fund and to prevent borrowers from getting too deeply into

arrears.

Training Lenders and Housing Counseling Agencies in LM Program. One

comment noted that without better training programs, manuals, and

instructions, coupled with meaningful FHA oversight, the benefits of

these alternatives will not be realized by either HUD or homeowners.

Another comment strongly recommended that, with HUD implementing these

changes, more training be provided to Housing Counselors across the

country.

Response: HUD will promote mortgagee participation in LM, and

provide training to lenders and monitor their performance. HUD has

already provided Loss Mitigation training to some lenders and housing

counseling agencies and will provide additional training in the near

future.

Shorter Foreclosure Initiation Period. Three comments supported the

reduction of the foreclosure initiation period from nine to six months

as realistic and consistent with conventional loan servicing

procedures. One of these comments was pleased that the implementation

of the reduced period was delayed in the interim rule. Three other

comments opposed reducing the time frame of foreclosure to six months

as too short to allow mortgagors to work out plans with mortgagees and

resolve circumstances.

One comment argued the requirement in Sec. 203.355(h) to initiate

foreclosure within 90 days of a borrower's failure to meet the terms of

a special forbearance agreement is not a sufficient time period, given

that mortgagees may not proceed with foreclosure until a borrower's

failure has continued for 60 days. Sixty days from the 60-day failure,

a total of 120 days, would be more workable. Another comment on this

section recommended Sec. 203.355(h) should clarify that foreclosure

must be initiated within the time period of paragraph (a)--nine or six

months from the date of default--or within 90 (or 120) after the

borrower's failure to meet the special forbearance requirements,

whichever is later.

Response: HUD considers the six-month period for initiating

foreclosure to be adequate. The industry standard is four months. If

HUD continues to use a nine-month period, the Department will incur

additional expense. Also, the longer foreclosure is delayed, the less

likely it is that a mortgage will be cured. The final rule is being

amended by adding a new paragraph (i) at Sec. 203.355 to clarify that

if a lender enters into a loss mitigation relief measure and it fails,

the six-month requirement is extended by an additional ninety days to

allow the lender to try another loss mitigation tool or go to

foreclosure. It is also to be expected that if after six months no loss

mitigation measure is workable, then foreclosure is inevitable.

HUD believes that the ``window'' for initiating foreclosure

provides the lender with adequate time in special forbearance cases.

The lender determines when LM fails or no other LM tool is applicable.

In each instance, the lender must initiate foreclosure within 90 days.

There is no need to expand this 90-day deadline in the rule, since the

lender is able, in any case where additional time would facilitate

mitigating loss, to request an extension from HUD.

Simultaneously Considering LM and Pursuing Foreclosure. The

preamble to the interim rule states that HUD will ``generally'' permit

mortgagees simultaneously to consider loss mitigation actions and to

proceed with foreclosure to meet the new six-month time period. One

comment requested HUD to clarify its use of the term ``generally,''

because mortgagees need to understand the specific circumstances under

which HUD would find it appropriate and acceptable to stop or delay

foreclosure for mortgagors who are actively negotiating or paying under

a loss mitigation plan.

Response: The final rule at Sec. 203.355 has clarified that lenders

may use loss mitigation tools and take foreclosure action in

combination. The prospect of foreclosure is an effective incentive to

borrowers in negotiating workouts and the rule is intended to allow

flexibility in this interrelationship. As stated in the preamble to the

interim rule (at 61 FR 35015, column 2 and 3), HUD believes that early

intervention--before six months of delinquent payments--is necessary

for effective LM, and the lender may make timely preparations for

initiation of foreclosure while pursuing LM actions. In addition, on a

case-by-case basis, the lender may request an extension to the 6-month

deadline from the field office.

HUD has rewritten Sec. 203.355(g) and (h) to provide 90 days to try

another loss mitigation tool or to proceed to foreclosure after the

failure of any loss mitigation tool.

Using LM tools in combination. One comment requested that the

regulation be explicit in informing lenders and homeowners that the

loss mitigation tools may be used singly or in combination. Although

the preamble explains that the servicing actions or strategies may be

used in combination, Sec. 203.355(a) implies just the opposite by

[[Page 60126]]

saying that ``the mortgagee shall take one of the following actions

within [nine or] six months of the date of default . . .''

Response: The LM provisions may be used in combination and HUD has

amended the final rule at Sec. 203.355(a) accordingly. This is

discussed on page 2 of Mortgagee Letter 96-61, where HUD says that the

LM strategies ``may be used singly or in combination, as required on a

case-by-case basis.'' In accordance with the explicit legislative

intent, HUD will defer to the discretion of the lender in applying loss

mitigation measures.

Section 203.371 Partial claim

Partial Claim and Special Forbearance. One comment asked if the

forbearance agreement at Sec. 203.371(a) must meet the requirements of

a ``special'' forbearance agreement.

Response: The forbearance discussed in Sec. 203.371(a) need not be

``special forbearance'' under Sec. 203.471 to qualify for a partial

claim.

Special Forbearance Period of 18 Months. One comment argued the

planned 18 month limit on special forbearance is an arbitrary period of

time and is too short. HUD has put all authority to provide assistance

in the hands of the mortgagee. Only if the mortgagee decides to provide

special forbearance (which HUD intends to limit to 18 months), and the

homeowner is then able to make full mortgage payments, will HUD provide

a partial claim to the mortgagee at the end of the special forbearance

period.

Response: HUD has determined that an 18-month period for special

forbearance is sufficient to allow the mortgagor to recover

financially. In addition, this limit is reasonable in view of the

statutory limit (amended Sec. 230(a) of the National Housing Act, 12

U.S.C. 1715u(a)) that partial claims may not exceed 12 monthly mortgage

payments (PITI) and any costs related to default that are approved by

HUD.

Partial Claim Filing. A comment asked if the mortgagee may choose

when to file a partial claim under Sec. 203.371(b)(1) after the

mandated default period has passed.

Response: Mortgagee Letter 96-61, in the claims instructions for

partial claims, specifies the window of time for filing the claim,

namely, between the time the subordinate lien to HUD has been executed

and 60 days after it has been recorded.

Repooling Modified Loans. One comment stated the rule does not

indicate whether GNMA or non-GNMA investors have approved or considered

the requirement that to file a partial claim, the mortgagor must not be

able to support monthly mortgage payments for a modified loan in which

the total arrearage is included. If investors prohibit loan

modification under circumstances in which the rule requires such

activity, servicers could be caught in the middle. HUD should establish

underwriting criteria for eligibility of mortgagors for the proposed

loan modification program. Another comment asked if HUD will provide

definitive guidelines for making determinations of a borrower's

financial capacity under Sec. 203.371(b) (4) and (5) to refinance or

support a modified mortgage.

Response: HUD has worked out an understanding with GNMA for revised

pooling requirements to assure repooling and minimize this problem. HUD

expects that in almost all cases, mortgage modifications can be

effected in such a way as to be repoolable, that is, at an interest

rate and with a new term (e.g., 360 months) that will meet GNMA pooling

requirements. Nevertheless, in the limited circumstances where a

modified mortgage cannot be repooled, HUD will establish criteria for

accepting a modified mortgage for assignment, and provide guidance in a

future Mortgagee Letter.

Servicing the HUD-held Second Mortgage. Three comments recommended

the rule should state that a mortgagee is entitled to a fee for

servicing when HUD accepts assignment and requires a mortgagee to

continue servicing the loan under Sec. 203.371(d). One of these

comments argued that given the low balances, a percentage based

servicing fee would not be sufficient. Another comment stated the vast

majority of mortgagees are not experienced in servicing ``soft

seconds,'' the subordinate lien arising from payment of a partial

claim, and most computer systems are not programmed to handle such

unique debt instruments. This comment recommended that HUD solicit a

limited number of servicers to service the subordinate liens on behalf

of HUD. On a related issue, one comment recommended that the guidelines

should make clear that the subordinate mortgage may call for repayment

of the partial claim amount at a future date or at the time of transfer

of property or payoff of the insured mortgage. HUD should also specify

that subordinate mortgages will be at zero percent interest.

Response: HUD intends to continue to reserve the right to require

lenders to service second mortgages executed in connection with partial

claims. However, as noted in Mortgagee Letter 96-61, since the

subordinate mortgage carries no interest or monthly payments and is due

only when the first mortgage is paid in full, foreclosed, or when the

borrower no longer occupies the property, HUD has decided to hold and

service these mortgages at this time.

Mortgagee Advances--Reimbursement in the settlement of the Partial

Claim. One comment asked if a partial claim payment will include

mortgagee advances on behalf of the borrower.

Response: Mortgagees will be reimbursed, in accordance with

Mortgagee Letter 96-61 instructions for Item 107 in the claims

instructions for a Partial Claim. Item 107 provides for reimbursement

of the total arrearage that accumulated during the forbearance period,

including PITI and necessary advances for assessments, but excluding

late fees and foreclosure costs.

Loan Insurance After a Partial Claim. One comment stated the rule

should clarify that if a default occurs after payment of a partial

claim, the full amount of remaining principal, advances and accrued

debenture interest with applicable costs is payable in a subsequent

foreclosure and conveyance claim.

Response: After a partial claim, the remaining loan remains

insured. The final rule has added a new Sec. 203.341 to explicitly

state that mortgage insurance remains in force after payment of a

partial claim, as is already done in existing LM actions such as

special forbearance and loan modification.

Using the Partial Claim Procedure to Erase Excess of Debt Over

Current Market Value. One comment suggested HUD might consider using

the partial claim process to pay out insurance coverage on any gap

between the loan balance and the market value. This would pay down the

debt to a market value, make the lender whole, and allow the mortgage

payments to be reduced to a lower amount on the net balance of the

remaining rate and term.

Response: FHA mortgages, even when LM is to be considered, are not

meant to be ``shared-depreciation mortgages.'' While the Pre-

Foreclosure Sale procedure accomplishes something similar to this

(although the mortgagor necessarily loses the property), the negative

equity position is not an appropriate reason for using the Partial

Claims procedure. The mortgagor remains liable for the full amount of

the debt even if there is negative equity, just as the mortgagor would

benefit if the property were to appreciate in value.

[[Page 60127]]

Section 203.402 Items Included in Payment

Tying Reimbursement to LM Success Rates. A number of comments

stated they were opposed to the change that would permit HUD to vary

the percentage of foreclosure and acquisition expenses through an

administrative issuance rather than through the rulemaking process.

Setting the reimbursement levels for these costs is important enough to

be addressed through a notice and comment rulemaking process rather

than administrative issuance. One comment suggested that the rule

should specify a level of reimbursement (e.g., up to 100 percent and

not less than 50 percent) for foreclosure costs or costs of acquiring

the property, rather than state that the percentage reimbursed will be

determined by HUD. Another comment argued HUD should not tie the

reimbursement of foreclosure fees and costs to loss mitigation

performance, because loss mitigation success is influenced by a number

of factors, such as the age of the portfolio, geography, and whether

the loan was acquired, that are independent of mortgagee efforts. The

level of reimbursement should take into consideration the percentage of

loss mitigation cures versus the percentage of foreclosures,

reinstatements, servicing acquisitions and peer performance. HUD should

work with the mortgage industry to develop a fair and equitable

performance model. Another comment also questioned the ability to

develop a fair and equitable calculation methodology that would

accurately measure mortgagee performance without incorporating factors

over which mortgagees have little or no control. The comment concluded

that even the best of loss mitigators cannot overcome origination and

underwriting deficiencies.

Response: In the interim rule, HUD specifically requested public

comment and provided for a delayed implementation date to allow for

consideration of comments received for both the foreclosure timing and

cost reimbursement provisions in Secs. 203.355 and 203.402,

respectively. With the March 5, 1997 publication of the suspension of

these provisions, they will not take effect until a minimum of sixty

days after publication of this final rule in the Federal Register. The

rule satisfies the concerns expressed in relation to reimbursement

reductions, since the lowered rate of reimbursement for foreclosure

costs at Sec. 203.402(f), will apply only to mortgages endorsed on or

after February 1, 1998. Lenders have had an opportunity to comment on

this point, and these provisions are not going into effect without the

opportunity for prior notice and comment. The other changes to

Sec. 203.402 do not constitute reductions.

HUD has undertaken an effort to streamline its rules, and that

policy is being followed in this rule. Minimizing the detail put into

the rule will give HUD the flexibility to make appropriate amendments

in a timely manner in response to the experience of lenders and HUD

with LM procedures, and to vary the reimbursement for LM measures

according to lender performance. HUD will address the reimbursement of

foreclosure costs in future mortgagee letters.

HUD's ranking model was announced in Mortgagee Letter 97-21, May

16, 1997. In developing this model, HUD considered these comments, met

with industry representatives, and adopted some of the comments. As a

result, HUD believes the model provides a fair basis for ranking

lenders.

HUD contends that LM has a significant impact upon losses to FHA

insurance funds based on foreclosure avoidance. HUD has and will

continue to work with industry to provide equitable performance

measurements. HUD is creating an incentive for lenders to intervene

early in the default cycle to address delinquencies.

Tying the foreclosure cost reimbursement to lender performance is

part of the LM incentive structure. Not only do lenders receive cash

incentives for performing LM, but lenders must accept some risk, in the

form of absorbing foreclosure costs, for their LM decisions or failure

to use LM tools. Mortgagee Letter 97-21, on page 2, provides that

lenders in the top 25% of each of the performance groups (high, medium

and low volume) will receive 75% reimbursement of foreclosure costs.

HUD believes that LM is a win-win-win proposition for borrowers,

lenders and HUD. Borrowers get an opportunity to retain home ownership;

lenders can better manage their inventory losses through early default

intervention; and HUD can better protect the insurance funds to

continue providing affordable housing opportunities.

How Reimbursement for LM Will be Made. One comment stated the rule

needs to clarify if HUD will reimburse for loss mitigation efforts in

the event a mortgage insurance claim is filed or whether a separate

transaction driven claim process is envisioned.

Response: Mortgagee Letter 96-61 and the claims instructions

attachments explain how the reimbursement is accomplished. Generally,

lenders may submit a claim for each LM tool when it is put in place.

Should the loan go to foreclosure despite the lender's LM efforts, the

lender may file a claim for the insurance benefits.

Mortgagee Monitoring by HUD. One comment recommended that in

reimbursing mortgagees for foreclosure and acquisition costs, and in

the payment of partial claims, HUD should closely monitor mortgagees to

make sure they are making good faith efforts to bring accounts current

before initiating foreclosure on mortgagors.

Response: HUD realizes that mortgagees will need to be monitored on

their implementation of LM, and HUD has allocated staff and modified

automated procedures to accomplish this. HUD is monitoring lenders'

performance and will take necessary enforcement actions to assure

compliance with servicing requirements.

Section 203.412 Payment for Foreclosure Alternative Actions

Lender Incentives. One comment stated payment of insurance benefits

for loss mitigation activities, if adequate, will provide a near-term

benefit that could balance the cost of employing loss mitigation

techniques. If HUD wishes to avoid the costs associated with default

and foreclosures, it must be willing to pay a reasonable amount to the

lender and the borrower.

Response: HUD believes that lenders will have sufficient incentive

to employ LM measures. While the reimbursements and incentives provided

by HUD may not by themselves be decisive, lenders and servicers are in

business to make money holding and servicing loans that perform. To the

extent that LM actions result in mortgagors' retention of their homes,

mortgagees retain their business. In addition, when a lender conveys a

property to HUD, the lender, under the final rule, has to absorb one

third or more of the foreclosure costs and forego substantial interest

revenue. Thus, if the lender refuses to consider loss mitigation, the

lender will certainly lose. Mortgage insurance continues after the LM

is undertaken, whether successfully or not. The authorizing statute is

explicit in directing HUD to give the mortgagees latitude to exercise

their discretion in deciding upon using Loss Mitigation measures. The

rule requires mortgagees to review each case monthly and determine

which LM tool to utilize.

Fees (including attorney fees) Incurred in LM Actions. One comment

suggested that in addition to reimbursement for any title examination

[[Page 60128]]

and/or title insurance policy endorsement, mortgagees should be

reimbursed for their legal costs incurred in connection with a mortgage

modification or recasting.

Response: The claims instructions issued in Mortgagee Letter 96-61

provide for payments to partially offset ``administrative fees'' (Item

129 on the claim) for special forbearance, loan modification, deed in

lieu and partial claim to offset the lender's costs and thereby provide

an incentive to undertake LM measures. The Department considers these

fees adequate. In addition, HUD provides a payment for consideration to

mortgagors in pre-foreclosure sale and deed-in-lieu cases.

Section 203.414 Amount of Payment--Partial Claims

Arrearage. Two comments recommended the rule should clarify that

arrearage includes principal, interest, late charges, taxes, and other

fees (inspection fees, attorney's fees, bankruptcy and foreclosure

fees, insufficient check fees, late charges) necessary to bring the

loan current.

Response: Mortgagee Letter 96-61 clarified ``mortgage payment'' to

consist of PITI. The arrearage includes only PITI; no other costs are

eligible for reimbursement under a partial claim, although the lender

will also receive a flat administrative fee and will be reimbursed

recordation costs.

Section 203.471 Special Forbearance

Circumstances Beyond the Mortgagor's Control. One comment observed

HUD has not defined, here and in Sec. 203.342, ``circumstances beyond

the control.'' This leaves servicers open to being second-guessed.

Response: HUD does not intend to second-guess lenders who

reasonably provide for the use of LM tools. HUD defined

``circumstances'' in an objective manner in Mortgagee Letter 96-61 to

address a broad audience of homeowners. The Letter indicates that

``Homeowners may be considered for special forbearance provided they

have recently experienced (1) an involuntary reduction in income or an

increase in living expenses and (2) the lender determines the borrower

has a reasonable ability to pay under the terms of the forbearance plan

to eliminate the arrearage.''

Non-hardship Forbearance. One comment claimed the concept of

penalizing the lender by not reimbursing those forbearance

delinquencies which are not caused by hardship will stifle the

incentive of the lenders to forbear.

Response: HUD's loss mitigation program does not have a

``hardship'' test. As noted immediately above, FHA has broadened the

basis for when special forbearance and mortgage modification may be

considered as available loss mitigation tools. The lender must now

confirm that the homeowner has experienced a loss of income or an

increase of expenses to qualify for special forbearance.

Section 203.552 Fees and Charges after Endorsement

Elimination of Regulatory Control of Post-endorsement Fees and

Charges. One comment stated HUD needs to be moving towards eliminating

regulatory control over post endorsement fees and charges.

Response: The setting of post endorsement fees and charges by the

Department provides consistency where needed and allows regional

differences where HUD deems appropriate. Releasing or withdrawing any

oversight in setting those fees would lead to far more disparate

treatment of mortgagors than is done currently.

Section 203.605 Loss Mitigation Evaluation

When the Mortgagor Does Not Qualify or is Uncooperative. One

comment recommended no further evaluations should be necessary once a

determination is made that the mortgagor does not qualify or is

uncooperative. Another comment requested that to help assure that

lenders are not at risk for allegations of fair lending violations, HUD

should establish specific standards for actions that mortgagees should

take to determine a defaulted borrower's eligibility for loss

mitigation measures. Such standards would address the issue of

borrowers whose circumstances would qualify them for loss mitigation,

but who do not seek out the mortgagee for such assistance.

Response: Mortgagee Letter 96-61 and the checklists in Attachment A

to the Letter describe the qualifications for LM and also state that LM

should be used where ``appropriate.'' After review and consideration of

all LM tools and all the facts of the case, the lender can decide to

decline to grant LM to an uncooperative mortgagor in accordance with

this general principle of appropriateness.

Under the pre-foreclosure sale (PFS) procedure, the mortgagor's

good-faith efforts are required and monitored. Besides PFS, the

cooperativeness of the mortgagor would be relevant to special

forbearance, partial claim and loan modification. Mortgagee Letter 96-

61 requires that, in these cases, the mortgagor should have ``a

commitment to remain in'' the home (see checklists in Attachment A).

The cooperative participation of the borrower is implicit in this

criterion.

Loss mitigation does not add new requirements related to Fair

Housing. HUD expects lenders will comply fully with existing fair

lending laws and will continue to ensure compliance with those laws.

The object of LM is to avoid foreclosure, and lenders must justify use

or non-use of all LM tools and reevaluate monthly. In this respect,

lenders are directed to HUD's Mortgagee Letter 96-61, page 3, and

Sec. 203.605 of this final rule.

Section 203.606 Pre-Foreclosure Review

Notice to the Mortgagor of the Consequences of Default. One comment

stated that although the rule states the required notification to the

mortgagor of default and the mortgagee's intent to foreclose will be in

``a format prescribed by the Secretary,'' the industry would welcome

the opportunity to comment on the content of the notice. The notice

should be firm in explaining the consequences of inaction, while also

being informative and consumer-friendly to encourage communication with

the mortgagee.

Response: HUD will seek comments relative to possible modifications

of mortgagor notification required by Sec. 203.606.

Use of HUD-approved Housing Counseling Agencies. One comment

suggested that the use of Housing Counseling Agencies should be a part

of all mortgagee letters to mortgagors when requesting payments and/or

information. Another comment stated that HUD should strongly recommend

that mortgagees provide donations to counseling agencies in their

communities.

Response: Regarding the use of housing counseling agencies, HUD's

current practice, in accordance with the requirements of Sec. 203.602,

is that the lender must send the mortgagor a delinquency notice

(currently in the form of the ``Avoiding foreclosure'' pamphlet) during

the second month of delinquency (see Handbook 4330.1 REV-5, Par. 7-7G

and Appendix 19). This notice includes a recommendation to contact a

HUD-approved housing counseling agency.

Some lenders already sponsor or form partnerships with counseling

agencies. However, it would be inappropriate for HUD to recommend that

mortgagees make donations to counseling agencies.

[[Page 60129]]

Section 203.616 Recasting of Mortgage

Time for lenders to implement the recasting requirement. One

comment noted that mortgagees generally do not have established

procedures and documents for modifications and recasting of insured

loans. Mortgagees will have to establish such procedures after

reviewing detailed underwriting standards yet to be set by HUD. March

1, 1997, is too soon to implement the recasting requirement.

Response: HUD believes that with the issuance of Mortgagee Letter

96-61, November 12, 1996, and Mortgagee Letter 97-17, May 1, 1997, the

lenders have sufficient time to gear up for this procedure.

Scope of recasting. One comment noted the regulation is currently

written as if recasting the unpaid amount due over the remaining term

of the mortgage is the only option available. Language should be added

to allow specifically for modification such as an interest rate

reduction, or conversion from an ARM to a fixed rate mortgage. In

addition, the comment recommended the heading for this section should

read: Modifying/Recasting of mortgage.

Response: HUD acknowledges the potential ambiguity of the rule

language pointed out by this comment and has clarified the rule to

indicate that adjustments to both term and interest rate are permitted.

There is no prohibition of reduction of interest rate or conversion

from ARM to fixed. In addition, HUD is changing the titles of

Secs. 203.342 and 203.616 to ``Mortgage Modifications.''

Recasting Current Loans and Fair-lending Complaints. HUD should

reconsider whether to provide for recasting of a current loan, because

of the small population of loans that would be served by this

provision, which may, nonetheless, give rise to complaints based on

fair housing or other grounds.

Response: The LM tools represent a spectrum of foreclosure-

avoidance techniques, not all of which can be applied to particular

buyers, but which as a whole represent substantial opportunities for

FHA borrowers to maintain home ownership. As stated in the response

under Sec. 203.605, above, loss mitigation does not add new

requirements related to Fair Housing; HUD expects lenders will comply

fully with existing fair lending laws and will continue to ensure

compliance with those laws.

V. Findings and Certifications

Environmental Impact

At the time of publication of the interim rule, a Finding of No

Significant Impact with respect to the environment was made in

accordance with HUD regulations in 24 CFR part 50 that implement

section 102(2)(C) of the National Environmental Policy Act of 1969 (42

U.S.C. 4332). The interim rule is adopted by this final rule without

significant change. Accordingly, the initial Finding of No Significant

Impact remains applicable, and is available for public inspection

between 7:30 a.m. and 5:30 p.m. weekdays in the office of the Rules

Docket Clerk at the above address.

Congressional Review of Major Final Rules

This rule is a ``major rule'' as defined in the Administrative

Procedure Act (5 U.S.C. 804(2)), and will be submitted to the Congress

for review in accordance with the statutory procedure.

Regulatory Flexibility Act

The Secretary, in accordance with provisions of the Regulatory

Flexibility Act (5 U.S.C. 605(b)), has reviewed this 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 rule will affect the Department,

which stands to benefit from the successful implementation of the loss

mitigation techniques addressed by the rule.

Executive Order 12612, Federalism

HUD has determined, in accordance with Executive Order 12612,

Federalism, that this 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 rule involves primarily

relationships between the Department and private entities.

Executive Order 13045, Protection of Children from Environmental Health

Risks and Safety Risks

This rule will not pose an environmental health risk or safety risk

on children.

The Catalog of Federal Domestic Assistance Number for Single Family

HOME Insurance is 14.117.

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, for the reasons stated in the preamble, parts 203 and

206 of title 24 of the Code of Federal Regulations are amended by

adopting the interim rule published in the Federal Register on July 3,

1996 (61 FR 35014) as final with the following changes:

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. A new Sec. 203.341 is added to read as follows:

Sec. 203.341 Partial claim.

If the conditions of Sec. 203.371 are met and a partial claim is

paid pursuant to that section, the contract of insurance shall continue

in force, except as otherwise provided in this subpart.

3. Section 203.342 is revised to read as follows:

Sec. 203.342 Mortgage modification.

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

4. In Sec. 203.355, paragraphs (a), (c), (g) introductory text, and

(h) are revised and a new paragraph (i) 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 (i) 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 February 1, 1998, the mortgagee shall take one

or a combination 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:

(1) Obtain a deed-in-lieu of foreclosure (see Secs. 203.357,

203.389 and

[[Page 60130]]

203.402(f) of this part) with title being taken in the name of the

mortgagee or the Secretary;

(2) Commence foreclosure;

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

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

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

(6) Complete an assumption under Sec. 203.512;

(7) File a partial claim under Sec. 203.371; or

(8) Initiate a pre-foreclosure sale under Sec. 203.370.

* * * * *

(c) Prohibition of foreclosure within time limits. If 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), (h) and (i) of this

section, the mortgagee must commence foreclosure within 90 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 90 days after the

expiration of the time during which foreclosure is prohibited.

* * * * *

(g) Pre-foreclosure sale procedure. Within 90 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 undertake one of the actions listed at Sec. 203.355(a). 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 undertake one of the

actions listed at Sec. 203.355(a) 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, whichever is later.

(i) Modification under Sec. 203.616, refinance under

Sec. 203.43(c), or assumption under Sec. 203.512. Provided that the

mortgagee has established the mortgagor's eligibility within the time

frame provided in Sec. 203.355(a), if a mortgagee enters into a loss

mitigation relief measure (i.e., modification under Sec. 203.616,

refinance under Sec. 203.43(c), or assumption under Sec. 203.512) and

it fails, the six-month period provided in Sec. 203.355(a) is extended

by an additional 90 days to allow the mortgagee to try another loss

mitigation tool or go to foreclosure.

5. In Sec. 203.371, paragraphs (b)(1) and (b)(5) are revised to

read as follows:

Sec. 203.371 Partial claim.

* * * * *

(b) * * *

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

other time prescribed by HUD;

* * * * *

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

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

which the total arrearage is included.

* * * * *

6. In Sec. 203.402, paragraph (f) is 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 February 1, 1998, 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 that such extra

costs are over and above those customarily incurred in the area.

* * * * *

7. In Sec. 203.414, paragraph (a) is revised to read as follows:

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 not to exceed an amount

equivalent to 12 monthly mortgage payments, and any costs prescribed by

HUD related to the default.

* * * * *

8. 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

below. The mortgagee may collect these fees or charges from the

mortgagor only to the extent that the mortgagee is not reimbursed for

such fees by HUD.

* * * * *

9. Section 203.616 is revised to read as follows:

Sec. 203.616 Mortgage modification.

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

amortization provisions by recasting the total unpaid amount due for 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.

Dated: September 16, 1997.

Stephanie A. Smith,

General Deputy Assistant Secretary for Housing, Federal Housing

Commissioner.

[FR Doc. 97-29374 Filed 11-5-97; 8:45 am]

BILLING CODE 4210-27-P