### April 26, 2005

### 

### Mortgagee Letter 2005-18

## TO: ALL APPROVED MORTGAGEES

**ATTENTION: Single Family Servicing Managers**

SUBJECT: Success of Loss Mitigation and Increase in Incentive Payments

HUD initiated its loss mitigation program in 1996 in an effort to
provide maximum opportunities for Federal Housing Administration (FHA)
insured borrowers to retain homeownership. The program delegates loss
mitigation responsibility and authority to lenders and cannot be
successful without their full participation and cooperation.

Since that time, HUD has seen usage of loss mitigation grow
exponentially, especially with home retention options including special
forbearance, mortgage modification and partial claim. In fiscal year
2004, the Department paid 84,222 total loss mitigation claims, 78,528 of
which were home retention claims. This exceeds the number of foreclosure
claims paid during the same period and is a clear indication that FHA
lenders are fully committed to curing mortgage default and preventing
foreclosure.

Effective use of loss mitigation not only allows families to retain
homeownership, it also significantly reduces the financial impact of
foreclosure claims against the FHA Insurance Funds. The savings realized
through loss mitigation are substantial and ultimately reduce the
mortgage insurance premiums paid by all FHA-insured borrowers.

As described in Mortgagee Letter
[2000-05](http://www.hudclips.org/sub_nonhud/html/pdfforms/00-05.doc),
*Loss Mitigation Program -- Comprehensive Clarification of Policy and
Notice of Procedural Changes*, HUD provides reimbursement of certain
costs incurred by lenders in executing loan modification and partial
claim loss mitigation options and also provides additional financial
incentives for all loss mitigation options. In recognition of the
increased costs lenders experience when providing effective default
servicing and the savings realized by HUD from this program, the
Department is announcing an increase in its loss mitigation incentives
and will make these increased incentives available to all lenders that
utilize HUD's most powerful home retention options; loan modification
and partial claim.

Therefore, effective for loan modifications and partial claims received
by HUD on or after June 1, 2005, all lenders will be entitled to claim
an additional financial incentive of \$250 when submitting a claim type
32 for mortgage modifications, and an additional incentive of \$250 when
submitting a claim type 33 for partial claims. The total financial
incentive that will be payable is \$750 for mortgage modifications and
\$500 for partial claims.

This is in addition to reimbursement of actual allowable expenses, such
as the cost of a title search or recording fees, up to the limits
provided in Mortgagee Letter
[2000-05](http://www.hudclips.org/sub_nonhud/html/pdfforms/00-05.doc).
Reimbursements and incentives for other loss mitigation options remain
unchanged at this time.

In addition, the Department is announcing another change that will
permit more lenders to become eligible for the additional special
forbearance and other incentives that lenders have been eligible for
based upon their performance. The Department plans to begin using the
Loss Mitigation Tier Ranking System (TRS) rather than the Loss
Mitigation Performance Assessment (LMPA) as the basis for payment of
these additional incentives following the release of TRS Round 20
scores. A subsequent Mortgagee Letter will be issued to advise those
lenders scoring in Tier One when they may begin requesting the increased
incentives and taking advantage of the other, non-monetary incentives.

Since 1997, HUD has been using the LMPA to measure the loss mitigation
performance of lenders and has provided additional loss mitigation
incentive payments, certain claim reimbursements, and delegated program
authorities to those lenders who scored in the top 25^th^ percentile of
this annual performance measure. The Department believes that the
information provided by the LMPA is an important measure of lender
performance and it will continue to conduct this analysis and publish
LMPA scores annually.

The next assessment for the purpose of providing the additional
incentives will be tied to the publication of TRS Round 20 scores. This
shift to the use of TRS rather than LMPA scores will not penalize any
mortgagee that is currently receiving the increased incentives, as the
current scoring will continue through the end of the fiscal year.

After publication of TRS Round 20 scores, lenders who rank in Tier One
will receive:

> 1\. An additional \$100 payment for each Special Forbearance Agreement
> executed on or after the effective date to be announced by HUD;
>
> 2\. Pre-foreclosure sale time frames may be extended an additional two
> months without prior HUD approval; and
>
> 3\. For loans endorsed on or after February 1, 1998, lenders will be
> able to claim reimbursement of 75 percent for foreclosure costs (an
> increase from the current allowance of 66 percent). For loans endorsed
> prior to February 1, 1998, all lenders will continue to be reimbursed
> two thirds of the foreclosure costs.

The identity of Tier One lenders in TRS Round 20 will be posted by HUD
on its website. The specific site will be announced in a future
mortgagee letter but will be accessible through
<http://www.hud.gov/offices/hsg/sfh/nsc/nschome.cfm>.

The Department will continue to publish TRS scores quarterly, but
eligibility for performance incentives will be determined on an annual
basis using the TRS scores published near the end of each fiscal year.
TRS performance scores represent lender performance for the

12-month period prior to issuance.

HUD will continue to use both LMPA and TRS scores in selecting lenders
for Quality Assurance reviews. While these scores do not define all
aspects related to loss mitigation performance, HUD is confident that
they both identify opportunities for improvement in lender performance.

Questions regarding this announcement may be directed to HUD's National
Servicing Center toll free at 1-(888) 297-8685.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

John C. Weicher

Assistant Secretary for Housing-

Federal Housing Commissioner