May 23, 2001

MORTGAGEE LETTER 2001-14

**TO: ALL APPROVED MORTGAGEES**

**ATTENTION: Single Family Servicing Managers**

**SUBJECT: FHA Loss Mitigation**

> **Clarification of Time Frames**

The purpose of this Mortgagee Letter is to clarify the time frame
requirements for the FHA Loss Mitigation initiatives. This clarification
will address reinstatement loss mitigation claims specifically and will
identify several minor procedural changes. These procedural changes
shall be applicable for all reinstatement Loss Mitigation claims filed
on or after the date of this Mortgagee Letter.

**Special Forbearance and Modification**

In Mortgagee Letter 00-05, dated January 19, 2000, HUD identified the
minimum delinquency for use of both Special Forbearance and Loan
Modification as three months. In

the discussion regarding Special Forbearance, the Department had also
given reference to a minimum delinquency of 90 days. Depending upon
interpretation, these instructions appear

to be in conflict.

Effective on the date of this Mortgagee Letter, HUD will define the
minimum delinquency for both the Special Forbearance initiative and the
Loan Modification initiative

as three months. Simply stated, **[three payments must be due and
unpaid]{.underline}**. An example is included in the attachment.

A second problem involving the proper use of Special Forbearance is the
maximum delinquency. The change in the maximum delinquency from seven
months (as noted in Mortgagee Letter 96-61, dated November 12, 1996) to
that of twelve months (as noted in Mortgagee Letter 00-05) was not
intended as an automatic extension of the requirement of

24 CFR 203.355. Mortgagees must still take one of the actions required
by 24 CFR 203.355 before six months from the date of default to avoid
interest curtailment.

The maximum delinquency allowance of twelve months was provided to
expand the use of the Special Forbearance initiative. In many cases,
mortgagees were barred from initiating foreclosure (or otherwise
fulfilling the requirements of 24 CFR 203.355) because of bankruptcy
actions. Upon release of bankruptcy, many of those mortgagors had
sufficient resources to begin making at least a full mortgage payment,
but had arrearages in excess of seven months. By allowing the use of
Special Forbearance for such cases, mortgagees would be able to assist
more borrowers in saving their homes. An example of this requirement is
also included in the attachment.

For cases where the mortgagee was not barred from initiating foreclosure
(or otherwise meeting the requirements of 24 CFR 203.355) within six
months from the date of default (and no extension was approved),
interest will be curtailed on any subsequent conveyance to six months
from the date of default regardless of any subsequent Special
Forbearance that may have been executed.

An additional issue regarding the maximum time frame relates to accounts
where the mortgagee waited until after the first day of the 12^th^ month
of delinquency to execute a special forbearance. This situation created
both procedural and system related problems as the arrearage appeared to
exceed the 12 month maximum. Therefore those Special Forbearance claims
could not be processed.

To ensure that all Special Forbearance incentive claims may be processed
in a timely manner, the Department will be requesting additional
documentation including a copy of the executed forbearance agreement to
support those Special Forbearance plans that are executed between the
first and the last day of the 12^th^ month of delinquency. These
procedures will affect those Special Forbearance claims filed on or
after the date of this Mortgagee Letter.

Mortgagees shall continue to file the Special Forbearance claims,
preferably via the

FHA Connection. As the Department begins processing of the claim, a
request will be sent by Claims for the mortgagee to forward supporting
documentation (including a copy of the Special Forbearance Agreement and
a copy of the loan history). Upon receipt, the claims representative
will confirm that the Special Forbearance agreement does not allow the
mortgage arrearage to exceed twelve months. **Do not forward any
supporting documentation unless requested**. This procedure will ensure
that the documentation can be directed to the specific individual that
is processing the case.

**Partial Claims**

In Mortgagee Letter 00-05, dated January 19, 2000, HUD identified the
minimum delinquency for a partial claim as four months. In the
discussion regarding Partial Claims, the Department had also given
reference to a minimum delinquency of 120 days. Depending upon
interpretation, these instructions appear to be in conflict.

Effective on the date of this Mortgagee Letter, HUD will define the
minimum delinquency for the Partial Claim initiative as four months.
**Simply stated, four payments**

**must be due and unpaid**. An example is included in the attachment.

Questions regarding this Mortgagee Letter should be directed to our
National Servicing Center at (888) 297-8685.

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

> Sean G. Cassidy

General Deputy Assistant Secretary for Housing-

Deputy Federal Housing Commissioner

**Attachment**

**[For all examples assume the mortgagor paid the December 1999,
installment and failed to make all subsequent payments]{.underline}**:

**[Example 1: Special Forbearance -Minimum Time
Requirement]{.underline}**

It is now March 2, 2000, and the mortgagor has furnished proof of the
job layoff that

created a decrease in income. He has also furnished verification from
his employer as to when

he will return to work full time. Including the March 2000, installment,
the account is now three payments due and unpaid. If the borrower is
cooperative and returns all requested documentation, the mortgagee need
not wait until the last day of the month to enter into a special
forbearance with the mortgagor as the account is three payments due and
unpaid.

**[Example 2: Special Forbearance -Maximum Time
Requirement]{.underline}**

It is now November 2, 2000, and the mortgagor was just released from
bankruptcy. The mortgagor filed the bankruptcy in early February 2000,
and the mortgagee could not take any action to initiate foreclosure
pending the release of bankruptcy. Since being laid off in January 2000,
the mortgagor returned to work full time in late October 2000, and may
now make a full mortgage payment at a minimum each month. The mortgagee
received all required documentation and established a Special
Forbearance plan requiring a full payment for the months of January 2001
through March 2001, and a payment and a quarter payment beginning April
1, 2001, until such time as the account is current. This plan would be
acceptable because it does not allow the account to become more than 12
payments due and unpaid.

**[Example 3: Special Forbearance -Maximum Time
Requirement]{.underline}**

It is now November 2, 2000, and the loan has been sold several times. No
servicer took any action to engage in loss mitigation nor did any of the
previous servicers request an extension of time. The "ABC" mortgage
company just completed an acquisition and found this loan. Upon contact
from ABC, the mortgagor was eager to discuss his options.

The mortgagor had encountered several setbacks including a medical
emergency involving his child which contributed to an increase in his
expenses. He has just begun a new job with good prospects and a raise
scheduled for January 1, 2001. It was determined that a Special
Forbearance was appropriate because the mortgagor could begin making
full monthly mortgage payments in December 2000, with increased payment
of one and a quarter payments beginning in February 2001.

This plan would be acceptable because it does not allow the account to
become more than 12 payments due and unpaid. However, should this
account not reinstate, and it later becomes necessary to foreclose and
file a conveyance claim, interest would be curtailed to six months from
the date of the original date of default.

**[Exhibit 4: Partial Claim Time Requirement]{.underline}**

It is now April 6, 2000, and the mortgagor furnished documentation of
the medical emergency that created both an increase in expenses and a
decrease in income. He has also furnished verification from his employer
as to when he will begin receiving workman's compensation, which
including some supplemental benefits, will provide him with 90% of his
former salary for a period of six months during his rehabilitation. His
documentation also indicates that he would return to his former position
at the end of his rehabilitation. His income will be sufficient to meet
a full monthly mortgage payment, but will not be sufficient for any
additional to be applied to the arrearage.

A partial claim is appropriate because the account is 4 payments due and
unpaid, the mortgagor can begin making regular mortgage payments, but
cannot offer any additional sums to be applied towards the arrearage. If
the mortgagee is able to complete the partial claim before the end of
April, it need not wait until after April 30, 2000, to submit the
mortgage insurance claim for the Partial Claim incentive.