HUD Addresses FHA COVID-19 Loss Mitigation Options

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In Mortgagee Letter 2020-22, dated July 8, 2020, the U.S. Department of Housing and Urban Development (HUD) addresses the COVID-19 Loss Mitigation Options for FHA Title II single-family, forward mortgage loans. The Options are available to borrowers affected by the COVID-19 national emergency who were current or less than 30 days past due as of March 1, 2020. Servicers must offer eligible borrowers the COVID-19 Loss Mitigation Options no later than 90 days from the date of the Mortgagee Letter, but may begin offering the new options immediately.

The Mortgagee Letter updates the guidance in Mortgagee Letter 2020-06 and will be incorporated into HUD Handbook 4000.1. HUD notes that in Mortgagee Letter 2020-06 it announced the COVID-19 forbearance based on the CARES Act and the COVID-19 Standalone Partial Claim. HUD now is building on such measures by establishing the following COVID-19 Home Retention and Disposition Options:

  • COVID-19 Owner-Occupant Loan Modification
  • COVID-19 Combination Partial Claim and Loan Modification
  • COVID-19 FHA-Home Affordable Mortgage Program (FHA-HAMP) Combination Loan Modification and Partial Claim with Reduced Documentation (which may include principal deferment and requires income documentation)
  • COVID-19 Non-Occupant Loan Modification
  • COVID-19 Pre-Foreclosure Sale (PFS)
  • COVID-19 Deed-in-Lieu (DIL) of Foreclosure

The COVID-19 Home Retention options are intended to provide methods to reinstate a mortgage after the expiration of the COVID-19 forbearance period. The COVID-19 Standalone Partial Claim and the first three options listed above are available for eligible owner-occupant borrowers able to resume the monthly mortgage payment, or a modified payment. The COVID-19 Non-Occupant Loan Modification is available for eligible non-occupant borrowers able to resume the monthly mortgage payment, or a modified payment. The use of a COVID-19 Home Retention Option does not count against a borrower’s limit of one FHA-HAMP agreement within 24 months. The last two options—the Home Disposition Options—are available for eligible owner-occupant and non-occupant borrowers who are unable to reinstate the mortgage.

For eligible borrowers, servicers must complete a Loss Mitigation Option no later than 90 days from the earlier of the completion or expiration of the COVID-19 forbearance. For the Home Disposition Options, a signed Agreement to Participate (ATP) Agreement or signed DIL Agreement will meet this requirement.

For borrowers who are participating in a COVID-19 forbearance, servicers are granted an automatic 90-day extension of the first legal deadline date, from the earlier of the completion or expiration of the COVID-19 forbearance, to complete a Loss Mitigation Option or to commence or re-commence foreclosure.

Home Retention Loss Mitigation Options

A trial payment plan is not required for a borrower to be eligible for a COVID-19 Loss Mitigation Option.

COVID-19 Standalone Partial Claim. Borrowers who receive a COVID-19 forbearance must be evaluated for the COVID-19 Standalone Partial Claim no later than the end of the forbearance period. The servicer must confirm that (1) the borrower was current or less than 30 days past due as of March 1, 2020, (2) the borrower indicates that they have the ability to resume making on-time mortgage payments, and (3) the property is owner-occupied. The terms of the COVID-19 Standalone Partial Claim are that:

  • The borrower’s accumulated late charges, fees and penalties are waived;
  • The COVID-19 Standalone Partial Claim amount includes only arrearages that consist of principal, interest, taxes and insurance;
  • The COVID-19 Standalone Partial Claim does not exceed the 30% maximum statutory value of all partial claims for an FHA insured mortgage; and
  • The borrower may receive only one permanent COVID-19 Home Retention Option.

COVID-19 Owner-Occupant Loan Modification. For borrowers who do not qualify for a COVID-19 Standalone Partial Claim, the servicer must review the borrower for a COVID-19 Owner-Occupant Loan Modification, which modifies the rate and term of the mortgage at the end of a COVID-19 forbearance period. The servicer must confirm that (1) the borrower was current or less than 30 days past due as of March 1, 2020, (2) the borrower indicates that they have the ability to make the modified mortgage payment, and (3) the property is owner-occupied. The terms of the COVID-19 Owner-Occupant Loan Modification are that:

  • All accumulated late charges, fees and penalties must be waived;
  • Only arrearages for unpaid accrued interest and servicer advances for escrowed items may be capitalized;
  • The COVID-19 Owner-Occupant Loan Modification must fully reinstate the mortgage;
  • The modified mortgage, including adjustable rate mortgage loans, graduated payment mortgage loans, and growing equity mortgage loans, must be a fixed rate mortgage;
  • The interest rate must be no more than the market rate, as defined by HUD;
  • The term for the modified mortgage is 360 months, or less if requested by the borrower;
  • The principal and interest payment may not increase, unless the borrower has exhausted the 30% maximum statutory value of all partial claims for an FHA insured mortgage;
  • The FHA insured mortgage must remain in a first lien position and be legally enforceable (HUD does not provide model documents for a COVID-19 Loan Modification); and
  • The borrower may receive only one permanent COVID-19 Home Retention Option.

HUD defines the “market rate” as a rate that is no more than 25 basis points greater than the most recent Freddie Mac Weekly Primary Mortgage Market Survey (PMMS) Rate for 30-year fixed-rate conforming mortgages (U.S. average), rounded to the nearest one-eighth of 1 percent (0.125 percent), as of the date the loan modification is approved.

COVID-19 Combination Partial Claim and Loan Modification. The servicer must review an owner-occupant borrower for a COVID-19 Combination Partial Claim and Loan Modification if (1) the modified monthly mortgage payment will increase utilizing the COVID-19 Owner-Occupant Loan Modification, and (2) the borrower is unable to bring the mortgage current through the COVID-19 Standalone Partial Claim because (a) the total arrearage exceeds the available portion of the statutory maximum for partial claims and the available portion of the statutory maximum for the mortgage has not been fully exhausted, or (b) the borrower cannot resume their existing monthly mortgage payments with a COVID-19 Standalone Partial Claim. The servicer must confirm that (1) the borrower was current or less than 30 days past due as of March 1, 2020, (2) the borrower has not exceeded the 30% statutory maximum value of all partial claims for an FHA insured mortgage, (3) the borrower indicates that they have the ability to make the modified mortgage payment, and (4) the property is owner-occupied.

The terms of the COVID-19 Combination Partial Claim and Loan Modification are that:

  • All accumulated late charges, fees and penalties must be waived;
  • Only arrearages for unpaid accrued interest and servicer advances for escrowed items may be capitalized;
  • The servicer must determine the maximum partial claim amount available that does not exceed the 30% maximum statutory value of all partial claims for an FHA insured mortgage, and must apply any remaining available partial claim amount toward the arrearage first, and then capitalize the remaining arrearage into the modified mortgage;
  • The COVID-19 Combination Partial Claim and Loan Modification must fully reinstate the mortgage;
  • The modified mortgage, including adjustable rate mortgage loans, graduated payment mortgage loans, and growing equity mortgage loans, must be a fixed rate mortgage;
  • The interest rate must be no more than the market rate, as defined by HUD;
  • The term for the modified mortgage is 360 months, or less if requested by the borrower;
  • The total monthly mortgage payment may increase;
  • The FHA insured mortgage must remain in a first lien position and be legally enforceable (HUD does not provide model documents for a COVID-19 Loan Modification); and
  • The borrower may receive only one permanent COVID-19 Home Retention Option.

COVID-19 FHA-HAMP Combination Loan Modification and Partial Claim with Reduced Documentation. A borrower may provide income documentation to a servicer to be reviewed for an affordable monthly payment under a COVID-19 FHA-HAMP Combination Loan Modification and Partial Claim with Reduced Documentation, which may include a principal deferment. The servicer must confirm that (1) the borrower was current or less than 30 days past due as of March 1, 2020, (2) the borrower has not exhausted the 30% statutory maximum value of all partial claims for an FHA insured mortgage, (3) the borrower is not eligible for the COVID-19 Home Retention Options due to the following (a) the borrower is not eligible for the COVID-19 Standalone Partial Claim because the borrower indicates they are unable to resume the existing monthly mortgage payments after the COVID-19 forbearance or (b) the borrower is not eligible for the COVID-19 Combination Partial Claim and Loan Modification because the borrower indicates they are unable to make the modified monthly mortgage payment under the COVID-19 Combination Partial Claim and Loan Modification, and (4) the property is owner-occupied.

The servicer must review the borrower for an affordable monthly payment using the FHA-HAMP calculations in Step 5 of the Loss Mitigation Home Retention Waterfall Options. As noted, if required a principal deferment may be utilized. No portion of the partial claim may be used to bring the modified total monthly mortgage payment below the targeted payment. The following reduced income documentation requirements are acceptable for the review of the borrower:

  • The borrower’s most recent pay stub for wage income reflecting year-to-date earnings; or
  • The borrower’s most recent bank statement reflecting deposits of income amounts from applicable sources; or
  • Other documentation (e.g., monthly statement of Social Security benefits, monthly pension statement) reflecting the amount of income.

COVID-19 Non-Occupant Loan Modification. At the expiration of a COVID-19 forbearance period, the servicer must review non-occupant borrowers for a COVID-19 Non-Occupant Loan Modification, which modifies the rate and term of the mortgage. The servicer must confirm that (1) the borrower was current or less than 30 days past due as of March 1, 2020, (2) the borrower indicates that they have the ability to make the modified mortgage payment, and (3) the property is not owner-occupied (the property can be used as rental property, a second home or a vacation home). The terms of the Non-Occupant Loan Modification are that:

  • All accumulated late charges, fees and penalties must be waived;
  • Only arrearages for unpaid accrued interest and servicer advances for escrowed items may be capitalized;
  • The COVID-19 Non-Occupant Loan Modification must fully reinstate the mortgage;
  • The modified mortgage, including adjustable rate mortgage loans, graduated payment mortgage loans, and growing equity mortgage loans, must be a fixed rate mortgage;
  • The interest rate must be no more than the market rate, as defined by HUD;
  • The term for the modified mortgage is 360 months, or less if requested by the borrower;
  • The total monthly mortgage payment may increase;
  • The FHA insured mortgage must remain in a first lien position and be legally enforceable (HUD does not provide model documents for a COVID-19 Loan Modification); and
  • The borrower may receive only one permanent COVID-19 Home Retention Option.

The Mortgagee Letter also addresses the evaluation of borrowers for a COVID-19 Pre-Foreclosure Sale and COVID-19 Deed-in-Lieu of Foreclosure, and for standard Loss Mitigation Home Retention Options if the borrower does not qualify for the COVID-19 Home Retention or Home Deposition Options. Additionally, the Mortgagee Letter addresses documentation requirements for the Loss Mitigation Options, and reporting requirements for borrowers affected by the COVID-19 national emergency. HUD welcomes feedback on the Mortgagee Letter for 30 days from the date of the letter.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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