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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.

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.