U. S. Department of Housing and Urban Development

Washington, D.C. 20410-8000

January 27, 1998

OFFICE OF THE ASSISTANT SECRETARY

FOR HOUSING-FEDERAL HOUSING COMMISSIONER

**MORTGAGEE LETTER 98-7**

TO: ALL APPROVED MORTGAGEES

ATTENTION: Single Family Servicing Managers

**SUBJECT**: FHA Loss Mitigation Program Policy and Procedural Updates

The purpose of this Mortgagee Letter is to provide guidance for several
policy and procedural changes contained in the Loss Mitigation
Procedures Final Rule. HUD\'s Final Rule on Loss Mitigation Procedures
was issued on November 6, 1997.

Background

On July 3, 1996, the Department published interim regulations governing
the implementation of new loss mitigation procedures. Included in the
interim rule was a provision to amend 24 CFR 203.355 to reduce the time
frame provided to mortgagees to

initiate foreclosure from nine months to six months. This change was
initially intended to become effective for all mortgages where the date
of default was on or after March 1, 1997.

The interim rule also provided for variable reimbursement of foreclosure
and acquisition costs based upon HUD\'s evaluation of the mortgagee\'s
loss mitigation performance (24 CFR 203.402). These changes were
intended to become effective for all mortgages insured on or after March
1, 1997.

The Department decided to suspend both changes until the final rule on
loss mitigation could be issued and provided notice of this suspension
in the Federal Register on March 5, 1997. The Final Rule has now been
issued and guidance for implementation is

provided below.

1\. 203.355, Acquisition of Property

The final rule now requires that the mortgagee must initiate foreclosure
or take one of the other actions specified in the rule (24 CFR 203.355
(a)) within six months from the date of default. This change shall apply
to all mortgages where the date of default is on or after February 1,
1998.

To meet the new procedural requirements of 203.355, mortgagees must now
become proactive earlier in the delinquency. The earlier that the
mortgagee begins loss mitigation, the more likely it is that the
delinquency can be cured and the mortgagor will

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be able to retain ownership of his or her home. Extensions of time
beyond the six-month time limit are provided for each of the
home-retention loss mitigation initiatives provided the initiative is
begun prior to the expiration of the initial time frame.

In addition, mortgagees may request an additional extension of time from
the local HUD Office having jurisdiction over the mortgaged property.
Each extension request must be submitted on Form HUD-50012 and must be
accompanied by a valid justification for the extension. Please indicate
both a contact person and a telephone number that HUD may use to contact
the individual requesting the extension of time directly.

\(A\) General Instructions - All Properties - This amendment reduces the
time frame within which foreclosure must be commenced (or take such
other action as provided in 203.355(a)) from nine months from the date
of default to six months from the date of default.

1.  The reduced time frame shall apply to all mortgages where the date
    of default is February 1, 1998, or later.

2.  The key to relating the effective date of this amendment to the
    claim, Form HUD-27011, is to ensure that foreclosure is initiated
    (or other such action as provided in 203.355(a)) within six months
    from the date of default for all cases where Block 8 (last complete
    paid installment) reflects December 1, 1997, or later.

\(B\) Vacant or abandoned property - The Loss Mitigation Final Rule did
not change any of the requirements for properties that have become
vacant or abandoned 203.355 (b).

1.  As a reminder, the reduced time frame for vacant or abandoned
    properties became effective for cases where the date of default was
    on or after December 1, 1992, (the date of the last paid installment
    was on or after October 1, 1992) and where the property became
    vacant or abandoned (or should have been discovered to be vacant or
    abandoned) on or after August 1, 1993.

If the mortgage is in default and the property has been determined to be
vacant or abandoned, foreclosure must be initiated by the earliest of:

\(a\) six months from the date of default; or,

\(b\) 120 days after the date the property become vacant, was discovered
vacant. or

should have been discovered vacant.

> 2\. There is no requirement to initiate foreclosure where the mortgage
> is current, regardless of how long the property has remained vacant.

These requirements deal strictly with monetary defaults.

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\(C\) Bankruptcies - The Loss Mitigation Procedures Final Rule made only
one minor change in reference to 203.355 (c).

1.  HUD\'s long-standing policy has been to consider the prohibition to
    foreclosure due to a bankruptcy stay to be the same as a prohibition
    to foreclosure due to state law. In both circumstances, the
    mortgagee has had 60 days following the release of the specific
    prohibition to institute foreclosure. HUD also provided an
    additional 30 day extension for situations following a bankruptcy
    release where a demand letter was required to be sent not less than
    30, but no more than 90 days prior to the publication of sale.

2.  For consistency, the rule now provides a 90-day time frame
    incorporating the 30 day allowance for issuance of a demand letter.
    Foreclosure must now be commenced (or re-commenced) within 90 days
    after the expiration of the time during which foreclosure was
    prohibited. An additional extension of 30 days to allow for the
    issuance of a demand letter will not be provided.

\(D\) Extensions of Time

1.  Changes to Existing Instructions The extension of time provided to
    mortgagees to commence or (re-commence) for situations where
    foreclosure is prohibited (in most cases by bankruptcy) is explained
    in paragraph (C) above. Similar changes (see 203.355 (g) and 203.355
    (h)) were also made in situations where the mortgagee was attempting
    to cure the default utilizing either a special forbearance (203.614)
    or a pre- foreclosure sale (203.370) from a 60-day to a 90-day
    extension of time.

2.  Extensions for New Loss Mitigation Initiatives For the following
    loss mitigation initiatives; (a) modification of the mortgage under
    203.616, (b), a refinance of the mortgage under 203.43(c), or (c),
    an assumption of the mortgage under 203.512, the mortgagee shall be
    provided an additional 90 days to complete the respective loss
    mitigation action, provided that the mortgagee established the
    borrower\'s eligibility within the initial time frame provided by
    203.355(a).

3.  Identifying Extensions on the Claim Form, HUD-27011

> Mortgagees shall continue to include all approved extensions of time
> to initiate foreclosure (including those extensions that are
> automatic) in item 19 of Form HUD-27011.

2\. 203.402(f) Items Included in Claim Payment

Previously, HUD would reimburse foreclosure and acquisition costs
actually borne by the mortgagee and approved by HUD in an amount not in
excess of two thirds of such costs or \$75.00, whichever was greater.
This policy will not change for all. mortgages insured prior to February
1, 1998.

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The final rule now provides that for mortgages insured on or after
February 1, 1998, the Secretary will reimburse a percentage of
foreclosure costs or costs of acquiring the property, which percentage
shall be determined in accordance with such conditions as the Secretary
shall prescribe.

This reimbursement percentage will be periodically revised based upon
HUD\'s review of lender performance. All revisions will be announced by
Mortgagee Letter in advance of the effective date of the change.

Mortgagees shall continue to identify their attorney fees in Item 306 of
Form HUD-27011 and foreclosure and acquisition costs in Item 307 of Form
HUD-27011. HUD will calculate the appropriate percentage that will be
reimbursed in accordance with the performance incentives.

3\. 203.412 Payment for Foreclosure Alternative Actions

Mortgagee Letter 96-61 , advised mortgagees that the administrative fee
that would be paid to mortgagees upon execution of a valid special
forbearance agreement would increase from \$100.00 to \$200.00 if the
mortgagee\'s loss mitigation score was among those in the highest
percentile ranking. This became effective for special forbearance
agreements executed on or after September 1, 1997.

If mortgagees are eligible for the full \$200.00 fee, they must ensure
that the full \$200.00 is identified on the original loss mitigation
claim submission. No supplemental claims will be honored. A second claim
requesting an additional \$100.00 will appear to be a duplicate and will
not be processed.

Sincerely yours,

![](media/image1.png){width="2.59375in" height="0.625in"}

Nicolas P. Retsinas

Assistant Secretary for Housing-

Federal Housing Commissioner