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1.5.5.4 Loss Mitigation and Loan Modification

Significant Law Change

Although loss mitigation for FHA home loans usually requires occupancy in the home, in cases of loss mitigation in Presidentially Declared Major Disaster Areas (PDMDA) the rules can be different, since homes may not be immediately inhabitable in the wake of the disaster.179 The HUD Handbook provides that a mortgagee must not deny a borrower any loss mitigation option solely for failure to occupy a mortgaged property if the following conditions are met:

  • 1. The property is located within a disaster area;
  • 2. The dwelling was the borrower’s principal residence immediately prior to the disaster;
  • 3. The borrower intends to reoccupy the property upon restoration of the home to habitable condition; and
  • 4. The total accumulated mortgage arrearages have not exceeded the equivalent of twelve months of PITI.180

A homeowner may be eligible to apply for certain kinds of loss mitigation that do not require a financial evaluation. The mortgagee must ensure that borrowers and their FHA-insured mortgages meet the following eligibility requirements for a loan modification without a financial evaluation:

  • 1. The mortgage was current or fewer than thirty days past due as of the date of the disaster declaration;
  • 2. The mortgagee obtains a verification of employment (VOE) confirming that the borrower’s employment status is the same as prior to the disaster;
  • 3. Home damages have been repaired; and
  • 4. The dwelling is owner-occupied.181

The mortgagee must modify the mortgage as follows:

  • 1. The total PITI on the modified mortgage must be less than or equal to the existing payment on the FHA-insured mortgage;
  • 2. The borrower must successfully complete a three-month Trial Payment Plan (TPP);
  • 3. The mortgagee must capitalize into a modified mortgage balance (the accumulated arrearages for unpaid accrued interest; and eligible unreimbursed mortgagee advances and related fees and costs chargeable to the mortgage);
  • 4. The mortgagee waives late fees if the borrower satisfies all conditions of the TPP;
  • 5. The mortgagee extends the term of the mortgage to 360 months from the modification effective date;
  • 6. The mortgagee sets the interest rate at the market rate as defined by HUD;182 and
  • 7. The mortgagee must ensure that the borrower repairs the home damages and occupies the dwelling as an owner-occupant before completing the loan modification.183

The mortgagee must evaluate other loss mitigation home retention options for borrowers who meet one of the following criteria:

  • ● They are not eligible for the “Loan Modification without a Financial Evaluation” option;
  • ● They are eligible for “Loan Modification without a Financial Evaluation” and experiencing a continuation of lower income or higher living expenses following the disaster; or
  • ● They are eligible for “Loan Modification without a Financial Evaluation,” but have not successfully completed the required TPP.

Borrowers who do not have an increase in living expenses, but are delinquent due to a forbearance received following a disaster declaration, are deemed to satisfy the eligibility conditions for FHA loss mitigation options.184

The servicer must ensure that the borrower repairs the home damage and occupies the dwelling as an owner-occupant before completing the loan modification.

The mortgagee must suspend reporting of delinquencies to consumer reporting agencies for a borrower who is granted disaster-related mortgage payment relief and is otherwise performing as agreed, unless such reporting is required for a loan modification.185

The mortgagee must waive late charges if the borrower is on a forbearance plan or paying as agreed on a loss mitigation option.186

Footnotes

  • 179 Bruce Reichstein, FHA News and Views, FHA Loans and Natural Disasters: What You Should Know (Aug. 30, 2017), available at https://www.fhanewsblog.com.

  • 180 U.S. Dep’t of Hous. & Urban Dev., FHA Single Family Housing Policy Handbook 4000.1, § III.A.3.iv(A).

  • 181 U.S. Dep’t of Hous. & Urban Dev., FHA Single Family Housing Policy Handbook 4000.1, § III.A.3.c.iv(C).

  • 182 U.S. Dep’t of Hous. & Urban Dev., FHA Single Family Housing Policy Handbook 4000.1, § III.A.3.c.iv(C).

  • 183 U.S. Dep’t of Hous. & Urban Dev., FHA Single Family Housing Policy Handbook 4000.1, § III.A.3.c.iv(D).

  • 184 U.S. Dep’t of Hous. & Urban Dev., FHA Single Family Housing Policy Handbook 4000.1, § III.A.3.c.iv(D).

  • 185 U.S. Dep’t of Hous. & Urban Dev., FHA Single Family Housing Policy Handbook 4000.1, § III.A.3.c.iv(F).

  • 186 U.S. Dep’t of Hous. & Urban Dev., FHA Single Family Housing Policy Handbook 4000.1, § III.A.3.c.iv(G).