NCLC eReports December 2012 #15

Foreclosures and Servicing

 

            Background on FHA's loss mitigation requirements and FHA-HAMP can be found at NCLC eReports, at www.nclc.org/webaccess.  This article presupposes a general familiarity with that information.  This article also is available at NCLC eReports, with live links to all cited HUD Mortgagee Letters.

 

HUD Mortgagee Letter 2012-22—Overview

 

            HUD Mortgagee Letter 2012-22, issued November 16, 2012, announces changes to the loss mitigation protocol that servicers must follow before they may foreclose upon an FHA-insured loan.[1]  Some changes are minor, while those affecting FHA-HAMP are more significant, removing some major barriers to FHA-HAMP eligibility. They also allow for alternative formulas for calculating the target payment for a FHA-HAMP modification. These changes should increase participation rates for FHA-HAMP and allow for more sustainable modifications for homeowners who receive them. The letter states that servicers must begin to assess homeowners in default under these new guidelines no later than 90 days after the letter's issuance date.[2] 

 

            FHA has always relied upon a sequential evaluation protocol for loss mitigation. Servicers must evaluate homeowners in default for a series of loss mitigation options in a specific order.[3] Mortgagee Letter 2012-22 distills the current evaluation steps into a one-page chart, "FHA Loss Mitigation Home Retention Option Priority Order Waterfall," included as Attachment A to the letter. Understanding FHA's current loss mitigation guidelines will require a working familiarity with the steps outlined in this chart.  Unfortunately, within the confines of Mortgagee Letter 2012-22 FHA did not provide a detailed explanation of all aspects of the protocol reflected in the chart.  In addition, in order to follow the steps outlined by the grid, it may necessary to cross reference prior HUD Mortgagee Letters on key servicing issues.[4]

 

            Reliance on a grid or chart with set formulas to define the flow of loss mitigation review has its advantages and disadvantages. Formulas can be rigid and inflexible, excluding large groups of individuals from a benefit based on a numerical formula. On the other hand, the steps outlined in the protocol are objective. Availability of this protocol can facilitate oversight of servicers, both by FHA and by homeowners and their advocates.

 

            The terms of FHA mortgages and HUD regulations require that owners of the insured loans follow FHA guidelines as a condition to a valid foreclosure.[5]  Courts in judicial and non-judicial foreclosure states have barred foreclosures on the basis of failure to comply with the contractual terms of FHA loan documents and violations of FHA regulations.[6]  FHA-HAMP has been formally adopted into FHA's loss mitigation standards. Servicers cannot lawfully foreclose unless they have reviewed the homeowner for FHA-HAMP and made an appropriate modification if the homeowner is eligible.[7] Advocates should become familiar with FHA's current loss mitigation protocol and use the specificity of these new guidelines in fashioning discovery requests and in defending against foreclosures of FHA-insured loans.[8]

 

Changes to FHA-HAMP Eligibility

 

            Mortgagee Letter 2012-22 removes the requirement that arrears for no more than twelve months' principal, interest, taxes, and insurance can be included in the partial claim component of an FHA-HAMP modification. Homeowners more than twelve months in arrears no longer can be denied FHA-HAMP eligibility solely on that basis.[9] Nor need the homeowner's back-end debt-to-income ratio be less than 55%.[10]

 

Changes to FHA-HAMP Affordable Payments

 

            The waterfall calculation under the original 2009 FHA-HAMP guidelines[11] targeted an affordable payment level of 31% of the homeowner's gross household income. The calculation began with capitalization of arrears, reduced the interest rate, and set the loan repayment term at thirty years. Departing from the standard FHA loan modification steps, the original FHA-HAMP waterfall then allowed for further payment reduction through principal forbearance to achieve the target payment of 31% of income. The FHA partial claim served as the vehicle to create the principal forbearance. Under both the old and the revised versions of FHA-HAMP, the amount of the partial claim cannot exceed 30% of the outstanding principal balance as of the date of default. 

 

            New Mortgagee Letter 2012-22 retains the option to achieve a 31% of income monthly payment through this same waterfall calculation. However, in a new development, Mortgagee Letter 2012-22 creates an alternative payment calculation that may provide for lower payments than those available under the original FHA-HAMP model.

 

            Mortgagee Letter 2012-22 requires that servicers reviewing a homeowner for FHA-HAMP consider a new alternative formula for determining the modified payment. If the alternative formula produces a payment that is lower than the one reached under the original FHA-HAMP waterfall, the modified loan must incorporate the lower payment. Under the new guidelines, the servicer must modify the loan so that the homeowner pays the lower of either (a) 31% of gross household income or (b) the greater of 80% of current payment or 25% of gross income.[12]  For certain homeowners, this will allow a greater percentage reduction in payments than solely targeting a payment of 31% of gross income.

 

            Mortgagee Letter 2012-22 gives an example of application of the alternative payment calculation.[13]  Here, the homeowner has a gross monthly income of $3,000 and a current total monthly mortgage payment of $1,000.  The modified monthly payment set at 31% of gross monthly income would be $930 ($3,000 gross monthly income x .31).  However, applying the alternative calculation, a payment that reduces the same homeowner's current payment by 20% would create a new monthly payment of $800 (current payment of $1,000 x .80) and a monthly payment at 25% of gross household income would be $750. The greater of these latter two figures is $800. Because this $800 figure is less than the 31% of income result ($930), the modified payment will be $800. The original FHA-HAMP formula would have required that the modified payment be set at $930, a monthly payment reduction of 7%.  Under the new alternative calculation the payment is reduced by 20%.[14] 

 

Other Loss Mitigation Changes

 

            Modification Eligibility After Prior Trial Plan Failure.  Homeowners who failed to complete a prior trial modification plan, either under FHA's standard modification or under FHA-HAMP, may re-apply for either form of modification if their financial situation changed since the earlier application.[15] Under either program, a homeowner is limited to one permanent loan modification every two years.

 

            Unemployed Homeowners.  Over the past three years the Treasury Department and the GSEs moved to exclude unemployed homeowners from certain loss mitigation options, particularly loan modifications. FHA has moved in the same direction. Under Mortgagee Letter 2012-22, only homeowners with employment income may qualify for certain forbearance plans and for any type of loan modification.[16] FHA now directs unemployed homeowners into a special forbearance option.[17]  The special forbearance for unemployed borrowers does not aim directly at reinstatement of the loan. Instead, after a minimum of twelve months of reduced or suspended payments, the homeowner must be evaluated for further options. These options include a loan modification or repayment plan, depending on the homeowner's financial circumstances at the future time.

 

            "Surplus Income."  Certain FHA loss mitigation options, such as formal forbearance plans and the standard (non-FHA-HAMP) loan modification, require that homeowners have "surplus income."  FHA defines surplus income as the monthly amount left over after the homeowner pays "normal monthly living expenses (food, utilities, etc.) including debt service on the mortgage and other scheduled obligations."[18]  Prior to Mortgagee Letter 2012-22, FHA allowed servicers some discretion in determining the requisite amount of surplus income needed for eligibility for a particular loss mitigation option. The new guidelines formalize surplus income determinations. For example, for the standard FHA loan modification the homeowner must have surplus income that is at least the greater of $300 or 15% of net income. Many homeowners facing foreclosure will simply not have surplus income of this kind. For this reason, the standard FHA loan modification will not be an option for many delinquent homeowners.  However, homeowners without surplus income are eligible to be considered for the FHA-HAMP options.[19] 

 

            "Stand-Alone" Modification or Partial Claim Under FHA-HAMP.  In a departure from prior guidelines, a homeowner who has no need for a partial claim to cure a default may now qualify for a stand-alone FHA-HAMP loan modification.[20] This option potentially assists homeowners without surplus income and facing imminent default to obtain an affordable modified payment. Similarly, a homeowner may now qualify for a stand-alone FHA-HAMP partial claim—without a contemporaneous loan modification.[21] To be eligible, the homeowner must already have loan terms equivalent to those available through an FHA-HAMP modification, but require only a partial claim to reinstate a loan in default. These stand-alone options fit unique situations, but may assist those homeowners who find themselves in them.

 

 

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[1] http://portal.hud.gov/hudportal/HUD?src=/program_offices/

administration/hudclips/letters/mortgagee.  A direct link to the letter is found in this article at NCLC eReports, www.nclc.org/webaccess.

[2] The letter also contains a "Re-assessment Requirement" under which a homeowners must be reassessed under these new guidelines prior to scheduling a foreclosure sale "[i]f a foreclosure sale date is not within 30 days from the Issuance Date of this Mortgagee Letter." ML 2012-22, at 6.

[3] 24 C.F.R. §§ 203.605(a), 203.501.

[4] In particular, advocates may need to cross-reference the following: Mortgagee Letter 2000-05 (FHA's general loss mitigation guidelines and protocols); Mortgagee Letter 2009-23 (original design for FHA-HAMP); Mortgagee Letters 2002-17 and 2011-23 ("special forbearance" for unemployed homeowners); Mortgagee Letter 2009-35 (amendments to standard FHA loan modification terms); Mortgagee Letter 2011-28 (trial modification plans); Mortgagee Letter 2008-21 (foreclosure fees and costs); and Mortgagee Letter 2010-04 (FHA's "imminent default" standard).

[5] HUD/FHA Standard Mortgage ¶ 9(D), Standard Note ¶ 6(B).

[6] See, e.g., Lacy-McKinney v. Taylor, Bean, & Whitaker, 937 N.E.2d 853 (Ind. Ct. App. 2010); Wells Fargo Home Mortgage, Inc. v. Neal, 922 A.2d 538 (Md. 2007) (rejecting breach of contract claim, but holding violation of FHA loss mitigation rules may be equitable defense to non-judicial foreclosure); Wells Fargo v. Phillabaum, 950 N.E.2d 245 (Ohio Ct. App. 2011); Matthews v. PHH Mortgage Corp., 724 S.E.2d 196 (Va. 2012) (upholding breach of contact claim asserted as ground to preclude valid trustee's sale).  See generally NCLC's Foreclosures § 3.2.2 (4th ed. 2012).

[7] 23 C.F.R. §§ 203.605(a), 203.606(a). Mortgagee Letter 2012-22 does not supersede Mortgagee Letter 2009-23, which set out the essential requirements that servicers review for FHA-HAMP.  The earlier Mortgagee Letter unambiguously recognized a requirement to review for FHA-HAMP during the pendency of foreclosure:  "to ensure that a mortgagor currently in the process of foreclosure has the opportunity to apply, Mortgagees shall not proceed with the foreclosure sale until the mortgagor has been evaluated for the program and, if eligible, an offer to participate in the FHA-HAMP has been made. Mortgagee Letter 2009-23 Attachment, at 4.

[8] FHA regulations set out a clear requirement that servicers document their reviews of borrowers for all loss mitigation options. 24 C.F.R. § 203.605(a) (servicer must have completed loss mitigation review before loan is four months delinquent).  The servicer must be able to document monthly reviews throughout the foreclosure process: "As long as the account remains delinquent, the lender must reevaluate the status of each loan monthly following the 90 day review, and is required to maintain documentation of the evaluation."  HUD Mortgagee Letter 2000-05, at 10.  Documented reviews must take place at regular intervals.

[9] The twelve-month limitation never applied to FHA's standard (non-FHA-HAMP) loan modification.

[10] The 55% back-end debt-to-income ratio threshold never applied to FHA's standard (non-FHA-HAMP) loan modification.

[11] HUD Mortgagee Letter 2009-23.

[12] HUD Mortgagee Letter 2012-22 Attachment A (Step 6).

[13] HUD Mortgagee Letter 2012-22, Example 3(b).

[14] The FHA partial claim limit to no more than 30% of the unpaid principal balance would apply under either calculation.

[15] HUD Mortgagee Letter 2012-22, at 5-6.

[16] Id. at 2-4.

[17] HUD Mortgagee Letter 2011-23 and Mortgagee Letter 2012-22, at 3.

[18] Mortgagee Letter 00-05, at 11.

[19] HUD Mortgagee Letter 2012-22 Attachment A (Step 3).

[20] Id. at 4.

[21] Ibid.