www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 September 24, 1997 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER MORTGAGEE LETTER 97-43 MEMORANDUM FOR: ALL APPROVED MORTGAGEES ATTENTION: SINGLE FAMILY SERVICING MANAGERS SUBJECT: FHA Loss Mitigation - Mortgage Modification Clarifications This Mortgagee Letter is sixth in a series addressing FHA's loss mitigation procedures. (All of the previously issued Mortgagee Letters focused on FHA's ongoing loss mitigation efforts and may be retrieved from FHA's website on the Internet at www.hud.gov/library.html.) This letter will provide additional information, in a question and answer format, relating to the use of mortgage modification as a loss mitigation tool. It will also provide clarifications to issues raised after publication of Mortgagee Letter 96-32 , (Loss Mitigation - Mortgage Modification, dated June 28, 1996), which addressed repooling of FHA modified mortgages. QUESTION: Once a loan has been removed from the GNMA pool, is there a minimum time-frame the loan must remain outside the pool? ANSWER: FHA has no specific restrictions related to pools. This question should appropriately be addressed to GNMA and similar questions directed to the specific agency where a loan may be pooled. QUESTION: For a mortgage modification, must the loan be more than 120 days delinquent? What if the loan is only one month delinquent? ANSWER: To modify a mortgage without HUD approval and be eligible for loss mitigation incentive payments, three or more full monthly mortgage payments must be due and unpaid. QUESTION: Married borrowers divorce and one borrower is granted possession of the property in the divorce settlement. The loan is current at this time, however, household income is not sufficient to continue paying the current full monthly payment. Can this mortgage be modified? 2 ANSWER: If the loan is current but faces imminent default and the borrower will qualify under current FHA underwriting guidelines, the best option would be a streamlined refinance transaction. [See Mortgage Credit Analysis for Mortgage Insurance on One-to-Four Family Properties, Handbook 4155.1 Rev-4 Chg 1 Chapter 1, para.1-12] Mortgage modification is a less desirable second option because it would not be eligible for loss mitigation incentives. Also, there are other issues requiring consideration in this scenario. One involves the agency that securitized the mortgage. If this mortgage is held in a GNMA pool, current requirements would not allow it to be removed and then repooled after modification. Another issue deals with the impact on a mortgage insurance claim filed on the case if the mortgage is modified. Pursuant to the National Housing Act, if a mortgage insurance claim were eventually filed, the unpaid principal balance paid on the claim would be based on the modified amount only where the default was a result of the borrower experiencing an involuntary reduction in income or an increase in living expenses. In addition, this loan would not qualify for possible assignment to the Department. (24 CFR 203-616) QUESTION: Would there be any problem with increasing the interest rate if the loan rate was lower than today's prevailing rates and the term extension kept the payment within the borrower's ability to pay? ANSWER: Under current revision of HUD Handbook 4330.1 , Rev-5, Chapter 3-2, this increase in interest rate is not permitted. QUESTION: If the borrowers are in default and placed their mortgage delinquency in bankruptcy, can this mortgage be modified? ANSWER: No. In this case, the borrower's mortgage arrearage is being addressed through payments to the Bankruptcy Court. QUESTION: In some areas of the country, the local governments have very aggressive demolition programs. If a property that was a principal residence is totally demolished, but the borrower still wants to pay, can a mortgage modification be done on the vacant properly and save a claim? 3 ANSWER: There is no provision allowing the modification of a mortgage where the security has changed from an occupied property to vacant land. QUESTION: Since late fees cannot be capitalized, can the first payment be used to pay late fees? ANSWER: No, payments must be applied to the loan according to the terms of the original mortgage. QUESTION: If the loan is over 15 years old, can lenders still do a modification? A modification will extend the loan over the 360 month mark from the original loan origination date. ANSWER: Yes, 24 CFR 203.616 allows modification 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 modification may extend the term to the lesser of: (a) 30 years from the month the modification is effective, or (b) no more than 1 0 years beyond the original maturity date of the mortgage. Example 1: If the mortgage modification is effective in the 25th month of amortization, then the term can be extended by 24 months making it a term of 32 years in total. Example 2: If the mortgage is modified in at the 180th month [1 5 year anniversary], then the term can be extended only 120 months making it a term of 40 years in total. At this time the reporting requirement in the regulation [24 CFR 203.616] may be met by entering the mortgage modification in the Single Family Default Monitoring System in the month the modification is effective. The lender must maintain a copy of the recorded mortgage modification in the collateral file for review and audit purposes. It will be requested in the event a claim for insurance benefits is submitted to the Department. QUESTION: Can foreclosure fees be capitalized into a modification? ANSWER: No. Legal fees, late charges and administrative costs are not allowed to be included in the new principal balance. As is true in Special Forbearance and Partial Claims, loans removed from the foreclosure process due to an improvement in the borrower's circumstances can be considered for mortgage modification. 4 Although foreclosure costs cannot be capitalized, the costs may be collected in a lump sum from the borrower or through a repayment plan executed prior to the mortgage modification and serviced outside of the mortgage modification. QUESTION: Will the lender be reimbursed for costs (for example, Broker's Price Opinion) over and above the incentives they may receive based on the loss mitigation tool they use? ANSWER: The lender incentives are flat fees as set forth in Mortgagee Letter 96-61 , dated November 12, 1996. The expenses do not need to be itemized on a claim form. We will pay the incentive whether or not the actual (excluding title search) expenses are, less than, equal to or exceed the incentive. We do not require an interior BPO, however, we do encourage lenders to select both the BPO firm and type of inspection which have historically ensured accurate estimates for their specific location. In addition, lenders will be reimbursed up to $250 for the title search. Reimbursement on this item is based on the ACTUAL expense to the lender. FHA makes this distinction because of the wide variance across the nation for the costs of a title search. More questions and answers covering other foreclosure avoidance tools will be published in forthcoming Mortgagee Letters. For clarifications on any loss mitigation issue, lenders may call our loss mitigation team at 1-800-697-6967, or contact us via the Internet at hsg-lossmit@hud.gov. Sincerely yours, Nicolas P. Retsinas Assistant Secretary for Housing- Federal Housing Commissioner