www.hudclips.org 


U. S. Department of Housing and Urban Development
Washington, D.C. 20410-8000

May 8, 1996
 
MORTGAGEE LETTER 96-25
 
TO:  ALL APPROVED MORTGAGEES
 
ATTENTION: Single Family Servicing Managers
 
SUBJECT:  Existing Alternatives to Foreclosure - Loss Mitigation
 
     In Mortgagee Letter 96-24, dated May 1, 1996, the Department
announced that the statutory authority for the Single Family
Mortgage Assignment Program as it existed prior to April 26,
1996, ended on that date for mortgagors who had not applied for
assignment relief on or before April 25, 1996.  Borrowers already
in assignment as well as those who have applied before April 26,
1996 and are determined to be eligible will get full benefits of
the assignment program as it existed before that date.
 
     Recognizing that the assignment program is no longer
available for borrowers who did not apply before that date, it is
important that each servicing lender conscientiously review the
existing loss mitigation and borrower assistance measures which
the Department has available.  This review should be undertaken
with the intent of making the best use possible of these tools to
accomplish our shared goals of assisting delinquent mortgagors to
retain homeownership and avoiding the expenses associated with
foreclosure.  Congress also has authorized additional tools which
should be available by interim regulations early this summer.
Those regulations also will enhance the use of existing tools.
 
     In the interim, however, lenders have available, under
existing regulations and guidance, a variety of foreclosure
avoidance/loss mitigation tools to reduce FHA foreclosure costs
and help address the needs of borrowers facing temporary
financial hardship.
 
     --  Special Forbearance -- Lenders may allow borrowers up
to nine months of suspended or reduced payments and an additional
nine months to repay the arrearage on their delinquent mortgage.
(See HUD Handbook 4330.1, REV.5, September 29, 1994, Chapter 8
HUD-Approved Relief Provisions, Paragraph 8-4.)
 
     --  Mortgage Modification -- FHA allows lenders to modify
FHA-insured mortgages to lower interest rates or extend mortgage
terms in order to finance repayment of arrearage.  Use of this
 
option requires that the mortgage be repurchased from the Ginnie
Mae securities pool.  See Handbook 4330.1, REV 5, September 29,
1994, Chapter 8, HUD Approved Relief Provisions, Paragraph 8-6.)
     --  Streamline Refinancing of Mortgages --  FHA permits
streamline refinancing of mortgages that are no more than two
months delinquent at the time of the refinance.  (See HUD
Handbook 4155.1 REV 4, Chg. 1, paragraph 12D(7).)
 
     --  Refinancing of Seriously Delinquent Mortgages --  FHA
allows lenders to refinance in a new FHA mortgage arrearages of
three months or more if the mortgagor has resolved the temporary
financial hardship which has caused the default.  (See Mortgagee
Letter 94-30, dated June 28, 1994.)
 
     --  Pre-Foreclosure Sale -- FHA reimburses lenders' expenses
for the sale of a property to a third party in lieu of
foreclosure.  FHA will approve a pre-foreclosure sale where the
proceeds of the sale equal at least 87% of the value of the
property.  A pre-foreclosure sale provides the borrower with an
opportunity to limit the negative consequences which are normally
associated with a foreclosure.  (See Mortgagee Letter 94-45,
dated September 30, 1994.)
 
     --  Deeds-in-Lieu of Foreclosure --  FHA through the lender
pays an incentive to borrowers to encourage borrowers facing
inevitable foreclosure to transfer the deed to their property to
the lender or FHA in lieu of foreclosure.  Like the pre-
foreclosure sales process, a deed-in-lieu also enables the
borrower to avoid adverse consequences associated with
foreclosure.
 
     Utilizing alternatives to foreclosure is a positive action
which benefits lenders, homeowners, and FHA.  Lenders are
expected to review individual accounts in default to determine
which available foreclosure avoidance/loss mitigation tools might
be appropriate.  Special forbearance is often enough to cure a
default; however at other times more long-term solutions such as
refinancing or mortgage modification are appropriate.  The
Department considers these appropriate approaches for assisting
certain defaulted mortgagors.  FHA expects lenders to seriously
evaluate their use.  Such measures must be considered and
discussed with the mortgagor.
 
     Lenders are expected to perform their servicing activities
with a proactive approach to assisting homeowners in default.
These tools, when used in a positive and creative manner, can be
helpful in assisting distressed mortgagors save their homes and
to avoid foreclosure.  Good servicing practices dictate that
lenders begin intensive servicing efforts as early as
 
possible in the delinquency since these measures become less
viable the longer the delinquency continues.
 
     No longer can lenders rely on the assignment program as the
primary source of foreclosure relief for delinquent mortgagors.
The Department will be monitoring lenders to determine if they
are making a conscientious effort to utilize these measures and
will take appropriate action where it has been determined that
lenders are not working with defaulted mortgagors.
 
     Pursuant to the new loss mitigation authority recently
provided by the Congress, the Department will be promulgating
regulations in the near future.  These regulations will authorize
new loss mitigation tools which we anticipate being available
within the next several months.
 
Sincerely yours,
 

Nicolas P. Retsinas
Assistant Secretary for Housing-
Federal Housing Commissioner