HUD Clarifies Loss Mitigation During Foreclosure Process
by: Anna DeSimone
November 1, 2013 HUD issued Mortgagee Letter 2013-40 to clarify the Department’s requirements delineated in 24 CFR 203.502 and to communicate expectations for servicers who are engaging in loss mitigation during the foreclosure process. Mortgagees must implement the requirements in this Mortgagee Letter by January 1, 2014.
The policies set forth in the Mortgagee Letter modify or supersede, where there is conflict, HUD Handbook 4330.1, Rev-5, and clarify parts of Mortgagee Letter 2000-05.
Notice to Borrower after Loss Mitigation Review
Pursuant to 24 CFR 203.605, servicers are to evaluate on a monthly basis all loss mitigation tools available for delinquent borrowers and document their evaluations. Servicers must timely evaluate and respond to complete loss mitigation requests. A loss mitigation request is considered complete when it contains all information required by the servicer from the borrower in order to evaluate him/her for available loss mitigation retention and non-retention options.
Lenders should refer to ML 2012-11 for updated information on FHA’s Loss Mitigation home retention option; refer to ML-2013-23 for updated information on FHA’s non-retention loss mitigation options and ML 2013-23 for information regarding documents to be included in a complete mortgagor workout packet for non-retention loss mitigation options.
After its timely review of a borrower’s loss mitigation request, the servicer must send a written notice to the borrower which indicates:
- whether or not he/she qualifies for a loss mitigation option;
- the actual reason(s) he/she has been denied for any loss mitigation option; and
- the servicer’s points of contact and process for appeals or the escalation of cases.
FHA emphasizes that effective communication with borrowers is an important aspect of proper servicing. In this regard, servicers should be mindful of persons with disabilities and persons with limited English proficiencies, and take extra care to ensure that the appropriate communication tools are available for them. Providing thorough explanations and information about appeal or escalation processes may reduce instances of challenges to foreclosure actions, and in some instances, may reveal additional circumstances under which some mortgage loans may be brought current, thus precluding mortgage insurance claims. In these instances, the servicer is continuing to mitigate losses that FHA, as the mortgage insurer, might otherwise incur. Servicers are expected to comply with all applicable federal laws regarding loss mitigation appeals, including 12 CFR 1024.41 when it becomes effective.
Loss Mitigation and Initiation of Foreclosure
Pursuant to 24 CFR 203.606(a), a foreclosure may not be commenced for monetary defaults unless at least three consecutive monthly payments are unpaid. In addition, servicers are required to consider borrowers for each appropriate loss mitigation option prior to initiating foreclosure, unless the property has been abandoned or vacant for more than 60 days. Servicers are expected to comply with all applicable federal laws when initiating foreclosure, including 12 CFR 1024.41 when it becomes effective. After at least three consecutive monthly payments are due but unpaid, a servicer may initiate a foreclosure for monetary default if one of the following conditions is met:
- The servicer has completed its review of the borrower’s loss mitigation request, determined that the borrower does not qualify for a loss mitigation option, properly notified the borrower of this decision, and rejected any available appeal by the borrower;
- The borrower has failed to perform under an agreement on a loss mitigation option, and the servicer has determined that the borrower is ineligible for other loss mitigation options; or
- The servicer has been unable to make a determination of the borrower’s eligibility for any loss mitigation option due to the borrower not responding to the servicer’s efforts to contact the borrower.
- A servicer may initiate foreclosure on a delinquent mortgage, regardless of whether three consecutive monthly payments under the mortgage are due but unpaid, if one of the following conditions is met,:
- The servicer has determined that the property has been abandoned or vacant for more than 60 days; or
- The borrower, after being clearly advised of the options available for relief (including a pre-foreclosure sale and a deed in lieu of foreclosure), has clearly stated to the mortgagee in writing that he/she has no intention of fulfilling his/her obligation under the mortgage.
- Servicers must clearly document reasons for not proceeding with loss mitigation activity prior to initiating foreclosure. Please refer to the Mortgagee Letter for additional important information.
About the Author:
Anna DeSimone is President and Founder of Bankers Advisory, Inc. She can be reached at anna@bankersadvisory.com
Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.
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