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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.

Mortgage Servicing and Loan Modifications: 9.3.2.2.6 Reamortization

Reamortization of the outstanding balance is usually used to repay the principal and interest accrued and advances made during a moratorium and in conjunction with a delinquency workout agreement.125 The loan may also be reamortized to bring a delinquent account current before an assumption, to repay assistance that was impermissibly given to borrower due to inaccurate information, or to bring an account current when an appeal is resolved in the borrower’s favor.

Mortgage Servicing and Loan Modifications: 9.3.2.2.7 Short sale

Generally, the RHS will consent to a sale of the property for less than the amount due on the loan if the property is sold at fair market value. If the proposed sales price is less than fair market value, the agency will compare the expected net proceeds from the sale with the cost of foreclosing on the property.127 To make this determination, the agency will request a copy of the sales contract, appraisal, and list of sales expenses. The local field office, rather than the Centralized Servicing Center, will make this determination.

Mortgage Servicing and Loan Modifications: 9.3.2.2.8 Deed in lieu of foreclosure

The RHS may accept a deed in lieu of foreclosure after the loan is accelerated if the agency determines that it can expect to recover more of the property’s value by accepting title to the property than would be obtained in foreclosure, after considering the costs of liquidating, holding, and selling the property.129 The borrower will be required to satisfy any liens, real estate taxes, or assessments before conveying the property to the agency.

Mortgage Servicing and Loan Modifications: 9.3.3.1 Generally

The Rural Housing Service’s Section 502 Single Family Housing Guaranteed Loan Program provides loans, through private lenders, to eligible low-income and moderate-income borrowers in rural areas.132 The status of a loan as participating in the RHS guaranteed loan program is often not obvious. The loan documents and recent account statements may not reflect the guarantee status. It may be necessary to review loan closing documents, particularly the borrower’s HUD-1 statement, for reference to RHS insurance coverage.

Mortgage Servicing and Loan Modifications: 9.3.3.2.1 Introduction

The RHS has a loss mitigation program designed to address serious defaults—generally those loans ninety or more days past due. In addition to the statute and regulation, the agency’s guidelines, published in the USDA Loss Mitigation Guide, outline the RHS’s workout options and policies.133 The guide, as well as additional information on the servicing of defaulted loans, is included as an attachment to chapter 18 of the RHS’s HB-1-3555: Single Family Housing (SFH) Guaranteed Loan Program Technical Handbook.

Mortgage Servicing and Loan Modifications: 9.3.3.2.2 Special forbearance

A special forbearance is a written agreement to cure the mortgage arrears.153 The agreement may include a plan to reduce or suspend payments for one or more months in order to allow the borrower to recover from the cause of the default, or an agreement to allow the borrower to resume making full monthly payments while delaying repayment of the arrears. The period of reduced or suspended payment is followed by a repayment plan and may be combined with a loan modification.

Mortgage Servicing and Loan Modifications: 9.3.3.2.3 Modification

A modification is a permanent change in one or more terms of the loan. A modification is appropriate for borrowers who have experienced a permanent or long-term reduction in income or an increase in expenses, or who have recovered from the cause of the default but do not have sufficient surplus income to repay the arrears through a repayment plan. A loan that is not delinquent but is in imminent danger of default can be modified.157

Mortgage Servicing and Loan Modifications: 9.3.3.2.4 Special loan servicing

The special loan servicing option was created in August 2010, as the RHS’s implementation of its own version of the Department of the Treasury’s then-existing HAMP program.163 Special loan servicing applies only to guaranteed loans. RHS direct loans are not eligible for the special loan servicing modification or mortgage recovery advance options.

Mortgage Servicing and Loan Modifications: 9.3.3.2.6 Deed in lieu of foreclosure

A deed in lieu of foreclosure allows the borrower to voluntarily transfer the property in exchange for a release from obligations under the mortgage.181 Other loss mitigation options should be considered, including marketing the property through a preforeclosure sale process. The loan need only be more than thirty days delinquent. As with any deed in lieu of foreclosure, there should be no junior liens on the property, or the junior liens must be discharged.

Mortgage Servicing and Loan Modifications: 9.4 Debts Owed to the Federal Government

When loans guaranteed by the VA or the RHS are foreclosed, borrowers typically end up with a debt owed to the federal agency that originated the loan or paid out the insurance claim to a private lender. These debts can be for significant sums. The RHS, for example, typically adds to the deficiency debt sums for the “recapture” of subsidies for interest reduction it paid out during the life of the loan.183 Debts owed to federal agencies can be assigned to the Treasury Department for further collection action.

Mortgage Servicing and Loan Modifications: 9.5.1 Overview

The VA and the USDA (including Rural Development and the RHS) have implemented specific guidelines to assist homeowners impacted by natural or man-made disasters. Typically the agencies impose a moratorium on the initiation or continuation of foreclosures immediately after the disaster. Each agency then issues specific disaster-related guidance or may update the loss mitigation options or other requirements regarding the servicing of the loans. This section gives a broad overview of each agency’s guidance or policy regarding recent natural disasters.

Mortgage Servicing and Loan Modifications: 9.5.2.2 Mortgage Forbearance

The VA “encourages holders of guaranteed loans to extend forbearance to borrowers in distress as a result of the disaster.”189 Servicers are advised to refer to 38 C.F.R. § 36.4311, which allows the reapplication of prepayments to cure or prevent a default, and to 38 C.F.R. § 36.4315, which allows the terms of any guaranteed loan to be modified without the prior approval of the VA, provided that the conditions in the regulation are satisfied.190

Mortgage Servicing and Loan Modifications: 9.5.3.1 Generally

The USDA’s website has a page entitled Rural Development Disaster Assistance.199 This page lists the various types of assistance available for borrowers who are impacted by a disaster and have either a Rural Development or RHS Single Family Housing direct loan or guaranteed loan.

Mortgage Servicing and Loan Modifications: 9.5.3.2 Moratorium

Rural Development direct loan borrowers who face loss of income or increased expenses that impair their ability to make regularly scheduled payments may be eligible for a moratorium on payments. To qualify for a moratorium, borrowers must show that they face a hardship due to circumstances beyond their control. A natural disaster should easily meet this standard.

Mortgage Servicing and Loan Modifications: 9.5.3.3 Payment Assistance

Payment assistance is another option that can provide substantial payment relief to Rural Development direct loan borrowers facing a natural disaster. Payment assistance provides a subsidy that reduces monthly payments to a level that is affordable based on the borrowers’ income. Borrowers enter into payment assistance contracts annually. However, when unforeseen events occur, borrowers can seek adjustments to their subsidy at any time during the contract year. Reduced income as a consequence of a natural disaster would certainly be a basis to request a downward adjustment in payments.