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Mortgage Servicing and Loan Modifications: 7.3.2 Payment Deferral

In March of 2020, the GSEs announced the creation of a new payment deferral option to assist borrowers with short-term defaults who cannot afford a payment plan.134 Subsequently, the GSEs announced deferrals for pandemic and disaster related defaults, which are distinct from the general payment deferral and are covered elsewhere.135 The GSEs created the payment deferral in order to assist borrowers who have recovered from short-term hardships and who can afford to restart their pre-hardship

Mortgage Servicing and Loan Modifications: 7.3.2 Payment Deferral

In March of 2020, the GSEs announced the creation of a new payment deferral option to assist borrowers with short-term defaults who cannot afford a payment plan.135 Subsequently, the GSEs announced deferrals for pandemic and disaster related defaults, which are distinct from the general payment deferral and are covered elsewhere.136 The GSEs created the payment deferral in order to assist borrowers who have recovered from short-term hardships and who can afford to restart their pre-hardship paym

Mortgage Servicing and Loan Modifications: 7.5.4 Relief Options

Relief options allow borrowers to gradually pay back delinquent amounts or temporarily reduce the amount of the mortgage payment or temporarily stop making mortgage payments. All relief options must result in the borrower bringing their mortgage current or paying the mortgage in full. Freddie Mac will consider proposals from servicers on behalf of borrowers who do not meet the eligibility requirements for a proposed relief option if the relief option is the best possible solution to cure the delinquency.263

Mortgage Servicing and Loan Modifications: 9.2.1 Overview

The Department of Veterans Affairs (VA) Home Loan Guaranty Program2 allows eligible servicemembers and veterans to purchase homes without any down payment at relatively low interest rates. The VA guarantees the loans made by private lenders.

Mortgage Servicing and Loan Modifications: 9.2.2.1 Generally

The VA requires servicers to consider all possible loss mitigation or alternative options before pursuing foreclosure.5 Generally, loss mitigation is pursued for loans that are sixty-one or more days delinquent, though borrowers facing imminent default may qualify for some options.

Mortgage Servicing and Loan Modifications: 9.2.2.2 Repayment Plan

A repayment plan is a written agreement between the borrower and the lender to reinstate a loan that is at least sixty-one days delinquent, by paying the regular monthly payment plus a partial payment toward the delinquency each month.34 The repayment plan must last at least three months in order for servicers to receive an incentive. The period of repayment is not limited. Plans may be renegotiated at any time.

Mortgage Servicing and Loan Modifications: 9.2.2.3 Special Forbearance

With a special forbearance, the mortgage holder agrees to suspend payments or accept reduced payments for one or more months.35 Loans that are at least sixty-one days delinquent are eligible. The period of forbearance is followed by repayment of the arrears in a lump-sum repayment or through a payment plan.

Mortgage Servicing and Loan Modifications: 9.2.2.4 Modification

Servicers of VA-guaranteed loans may offer borrowers several types of loan modification options. These options include a streamline modification, with reduced documentation requirements; a traditional modification; and the VA Affordable Modification.38 A lender may modify a VA-guaranteed loan by changing one or more of the terms of the loan, including the interest rate or term, and reamortizing the balance due.

Mortgage Servicing and Loan Modifications: 9.2.2.5 Compromise Sale

A compromise sale is a sale of the property to a third party for an amount that is insufficient to pay off the loan.57 The servicer must agree to release the lien in exchange for the proceeds of the sale. The servicer may file a claim with the VA to recoup the debt owed by the borrower. Borrowers are not required to submit a loss mitigation application or other financial information to qualify for this option if the loan is sixty days or more delinquent.

Mortgage Servicing and Loan Modifications: 9.2.2.6 Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is a voluntary transfer of the property to the holder of the VA-guaranteed loan.59 Servicers are required to consider other workout options, including a compromise sale, before accepting a deed in lieu of foreclosure. Borrowers are not required to submit a loss mitigation application or other financial information to qualify for this option if the loan is sixty days or more delinquent. The deed in lieu of foreclosure will usually not be accepted if there are any junior liens on the property.

Mortgage Servicing and Loan Modifications: 9.2.2.7 Assumption

If a workout is unsuccessful, a lender may grant a borrower forbearance for a reasonable period of time to permit the sale or transfer of the property. For loans made on or after March 1, 1988, VA approval is needed for an assumption of the loan.61 Approval of the assumption releases the borrower from any future liability to the VA, including liability for any loss resulting from the default of the purchaser or subsequent owner of the home.

Mortgage Servicing and Loan Modifications: 9.2.2.9 Refinancing

A borrower may refinance a high-interest-rate loan at a current, lower rate with the VA’s interest rate reduction refinancing loan.74 The new loan could also be used to obtain a shorter term or a fixed interest rate or to fund energy efficiency improvements. However, the term of the refinance loan may not exceed the term of the original loan plus ten years, or thirty years altogether, whichever is shorter. If the current loan is delinquent or if foreclosure is imminent, VA approval is necessary to refinance.

Mortgage Servicing and Loan Modifications: 9.3.1 RHS Mortgages

Two different mortgage loan programs are administered by the Rural Housing Service (RHS), an agency of the United States Department of Agriculture (USDA).75 The Rural Housing Service was briefly named the Rural Housing and Community Development Service (RHCDS) and is the successor agency to the Farmers Home Administration (FmHA), which was eliminated in 1994 when the USDA was reorganized.

Mortgage Servicing and Loan Modifications: 9.3.2.1 Generally

The Section 502 Single Family Housing Program provides for direct loans from the RHS to very low income and low income individuals for the purchase, construction, or rehabilitation of single-family homes located in rural areas. The RHS, with some assistance from local rural development field offices, services section 502 direct loans through its Centralized Servicing Center in St. Louis, Missouri.81 There is no third-party servicer.

Mortgage Servicing and Loan Modifications: 9.3.2.2.1 Introduction

Homeowners may be offered one or more options, which RHS calls special servicing, to reinstate a loan.82 Generally, the homeowner will be deemed ineligible for the reinstatement options once the loan account is accelerated, although court decisions have challenged the agency’s position on post-acceleration relief.83 The agency may also approve a short sale or deed in lieu of foreclosure for eligible borrowers.84 The options offered to delinquent homeowne

Mortgage Servicing and Loan Modifications: 9.3.2.2.2 Interest credit, payment assistance, and other subsidies

The RHS offers three types of payment subsidies to section 502 direct loan homeowners under its interest credit and payment assistance options (also referred to as the interest credit option, payment assistance method 1, and payment assistance method 2).85 Many borrowers receive these subsidies at the time the loan is initially made and may continue to receive the subsidies throughout the life of the loan, if they remain eligible.

Mortgage Servicing and Loan Modifications: 9.3.2.2.3 Payment moratorium

A payment moratorium is available when a borrower can show that, due to circumstances beyond their control, the borrower is unable to continue making payments of principal and interest when due without “unduly impairing his [or her] standard of living.”106 Before being considered for a payment moratorium, the borrower must first be considered for a payment subsidy or, if currently receiving a subsidy, an increase in such assistance.107

Mortgage Servicing and Loan Modifications: 9.3.2.2.5 Protective advances

The RHS also has the ability to advance funds to cover the cost of taxes, insurance, and emergency repairs necessary to protect the government’s interest in the property.124 The payments are then charged to the borrower’s account. Repayment terms are to be consistent with the borrower’s ability to repay, or the loan can be reamortized to include the amount of the advance.