[Federal Register Volume 61, Number 129 (Wednesday, July 3, 1996)]
[Rules and Regulations]
[Pages 35014-35020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16869]



[[Page 35013]]


_______________________________________________________________________

Part IV





Department of Housing and Urban Development





_______________________________________________________________________



Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner; Single Family Mortgage Insurance; Loss Mitigation 
Procedures; Interim Rule



_______________________________________________________________________



24 CFR Parts 203 and 206

Federal Register / Vol. 61, No. 129 / Wednesday, July 3, 1996 / Rules 
and Regulations

[[Page 35014]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT


Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner; Single Family Mortgage Insurance--Loss Mitigation 
Procedures

24 CFR Parts 203 and 206

[Docket No. FR-4032-I-01]
RIN 2502-AG72
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Interim rule.

-----------------------------------------------------------------------

SUMMARY: This interim rule amends 24 CFR part 203 to eliminate the 
Mortgage Assignment Program and to provide that HUD may: recompense 
mortgagees for using mortgage foreclosure alternatives, such as special 
forbearance, loan modifications, and deeds in lieu of foreclosure; pay 
the mortgagee a partial claim which would be applied to the arrearage 
of a defaulted mortgage; and accept assignment of a mortgage which the 
mortgagee has modified to cure the default.

DATES: Effective Date: August 2, 1996. Comments due date: September 3, 
1996.

ADDRESSES: Interested persons are invited to submit comments regarding 
this interim rule to the Rules Docket Clerk, Office of General Counsel, 
Room 10278, Department of Housing and Urban Development, 451 Seventh 
Street, S.W., Washington, D.C. 20410. Communications should refer to 
the above docket number and title. A copy of each communication 
submitted will be available for public inspection and copying between 
7:30 a.m. and 5:30 p.m. weekdays at the above address. FAXED comments 
will not be accepted.

FOR FURTHER INFORMATION CONTACT: Joseph McCloskey, Director, Single 
Family Servicing Division, Room 9178, Department of Housing and Urban 
Development, 451 7th Street, SW., Washington, DC 20410, (202) 708-1672, 
or, TTY for hearing and speech impaired, (202) 708-4594. (These are not 
toll-free numbers.)

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act Statement

    The Department is seeking approval of the information collection 
requirements contained in Sec. 203.605 by the Office of Management and 
Budget in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3501-3520). The OMB control number will be published in the 
Federal Register upon approval. An agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless the collection displays a valid control number.

II. Background

Summary of Legislative Changes

    This interim rule implements section 407 of The Balanced Budget 
Downpayment Act, I (Pub. L. 104-99, approved January 26, 1996) 
(Downpayment Act), which amended sections 204 and 230 of the National 
Housing Act. The amendment of section 230 eliminated the current HUD 
programs for Temporary Mortgage Assistance Payments and Assignment of 
Mortgages at Secs. 203.640 - 203.660 of 24 CFR. This amendment did not 
become effective until the passage of The Omnibus Consolidated 
Rescissions and Appropriations Act of 1996 (Pub. L. 104-134, approved 
April 26, 1996). However, this Appropriations Act provided that 
mortgagors who had applied for relief under the Assignment Program 
before April 26, 1996 will be governed by the requirements of section 
230 before the amendments made by the Downpayment Act.
    To continue to provide foreclosure alternatives for mortgagors, the 
Downpayment Act amended sections 204 and 230 of the National Housing 
Act to promote foreclosure alternatives and loss mitigation tools to be 
used by mortgagees. Section 204 was amended to provide that the 
Secretary may recompense mortgagees for their actions to provide 
mortgage foreclosure alternatives, such as special forbearance, loan 
modifications, and deeds in lieu of foreclosure. Section 230 was 
amended to provide that the Secretary may pay the mortgagee a partial 
claim which would be applied to the arrearage of a defaulted mortgage. 
In addition, Section 230 was amended to provide that the Secretary may 
accept assignment of a mortgage which the mortgagee has modified to 
cure the default and where repooling of the loan is not possible. This 
procedure is to be distinguished from forbearance relief for defaulted 
loans, as well as from the former Mortgage Assignment Program. It 
should be noted that the Downpayment Act permitted, but did not 
require, the Secretary to establish these partial claim and assignment 
procedures. Further, the Downpayment Act provided that no decision by 
the Secretary to exercise or forego exercising his authority under 
section 230 and the new authority under section 204 shall be subject to 
judicial review.

Overview of HUD's Approach

    The techniques to be employed under HUD's new foreclosure 
alternatives/loss mitigation approach implemented by this rule will 
include special forbearance plans, loan modifications, partial claims, 
preforeclosure sales, deeds in lieu of foreclosure, and similar tools. 
These approaches generally fall into two broad categories--(a) those 
which (if utilized successfully) would result in curing the default and 
retaining homeownership, and (b) those which would result in the 
relinquishment of homeownership, by means of a sale to a third party or 
by a voluntary conveyance of the property by deed in lieu of 
foreclosure.
    The Department has decided to implement a comprehensive approach 
toward promoting alternatives to foreclosure, as well as loss 
mitigation, which enhances lender flexibility in dealing with the 
circumstances in which homeowners find themselves. This approach 
describes a series of servicing actions and strategies that may be used 
singly or in combination to meet those objectives; provides insurance 
benefits to lenders that evaluate mortgagors with delinquent and 
defaulted loans and choose appropriate steps which--when successful--
result in outcomes other than foreclosure of the mortgage; and 
establishes the groundwork for Departmental monitoring of lenders' 
efforts.

End of Assignment Program

    In October, 1995, the General Accounting Office (GAO) issued a 
report to Congress regarding HUD's Mortgage Assignment Program. After 
analyzing over 68,000 mortgages assigned to HUD since 1989, the GAO 
estimated that the loss to FHA per assigned mortgage would be $49,000, 
compared to the estimated $27,000 FHA would have lost had the loan not 
entered the Assignment Program. The GAO noted that to offset these 
losses, FHA was required to charge higher mortgage insurance premiums 
to new mortgagors. As a result of the GAO report, Congress, as 
discussed above, has amended section 230 of the National Housing Act to 
end the Mortgage Assignment Program with respect to the intake of new 
applicants into that program. Therefore, references to the Assignment 
Program are amended or removed accordingly in the following sections: 
203.350, 203.355, 203.402a, 203.438, 203.500, 203.604, 203.606, 
203.640-203.660, and 203.664-203.666.

[[Page 35015]]

Early Default Counseling

    The Department emphasizes that early intervention coupled with the 
use of default counseling are effective techniques for curing defaulted 
mortgages. A successful servicing strategy by a mortgagee takes into 
consideration each defaulted mortgage individually. Based on the 
circumstances involved, the mortgagee executes a plan which will 
eliminate the default and prevent a foreclosure. In an effort to 
clarify misunderstandings of various alternatives available to 
homeowners whose mortgages are in a defaulted status, and to reduce 
delays in obtaining assistance, HUD Handbook 4330.1 REV-5, 
Administration of Insured Home Mortgages, continues to require lenders 
to refer those homeowners to HUD-approved housing counseling agencies 
early in the default period.

Actions To Promote Foreclosure Alternatives/Loss Mitigation

    Section 407(a) of the Downpayment Act amended section 204(a) of the 
National Housing Act to provide that HUD may pay insurance benefits to 
the mortgagee to recompense the mortgagee for its actions to provide an 
alternative to the foreclosure of a mortgage that is in default. These 
actions may include special forbearance, loan modification, and/or 
deeds in lieu of foreclosure, all upon terms and conditions as the 
mortgagee shall determine in the mortgagee's sole discretion, within 
guidelines provided by HUD.
    The current regulations already provide for most of these 
foreclosure alternative or loss mitigation actions. Therefore, 
Sec. 203.501 of the regulations, governing loss mitigation, is amended 
to provide cross references to these various foreclosure alternative 
actions available to mortgagees. To clarify that the claim file 
requirements at Sec. 203.365(c) include claims involving these loss 
mitigation actions, a new Sec. 203.605 is added to specify that 
mortgagees must document that they have considered--beginning no later 
than when three full monthly installments due on the mortgage are 
unpaid, and continuing with monthly reevaluations while the loan 
remains in default--all loss mitigation options to determine which, if 
any, are appropriate before initiating foreclosure. In addition, a new 
Sec. 203.412 is added to the regulations to provide that the Secretary 
may pay insurance benefits to encourage mortgagees to pursue these loss 
mitigation techniques.
    Some of the provisions to promote loss mitigation are given a 
delayed implementation date in the text of this interim rule to enable 
the Department to consider any comments before making them effective in 
a final rule. Thus, the reduction from nine to six months for taking 
action upon default of a mortgage in Sec. 203.355, and the amendment to 
the provision in Sec. 203.402(f) for varying the percentage of 
foreclosure costs or the costs of acquiring a property that are 
reimbursed, are made to apply only after March 1, 1997. Each of these 
changes is discussed below in this preamble.
    In certain cases foreclosure may be avoided where the mortgagor's 
sale of the property is facilitated by the assumption of the mortgage 
by a credit-worthy, owner-occupant purchaser. Although not included in 
this interim rule, procedures to facilitate the use of assumptions as a 
type of ``preforeclosure sale'' are being considered by HUD for future 
implementation. Finally, this rule amends the regulations to provide 
for the increased flexibility in the use of these foreclosure 
alternative tools, as described below.

Reduction of Time for Taking Action

    Concerning the reduction of the foreclosure initiation time frame 
from nine months to six months, in 1991 the Department proposed to 
reduce the time frame for lenders to initiate foreclosure from twelve 
months to six months (56 Fed. Reg. 19212, April 25, 1991). Public 
comments received indicated that the six-month deadline could not 
reasonably be met due to several reasons including compliance with the 
HUD Assignment Program, administrative matters, State law requirements 
regarding notice, and the desire to encourage workout or forbearance 
agreements with mortgagors.
    The Department believes that the biggest obstacle to initiating 
foreclosure within six months was the requirement to process borrower 
applications for acceptance into the HUD Assignment Program. Since the 
Assignment Program is no longer an option for those mortgagors who did 
not apply for assignment relief on or before April 25, 1996, HUD now 
believes that a shortened time frame is workable. As evidenced by this 
rule, HUD also desires to encourage workout and forbearance agreements 
with mortgagors. However, HUD believes that early intervention is 
necessary for effective loss mitigation and that a workout must be 
established before six months of arrearage has accumulated, wherever 
possible.
    With regard to State legal notice requirements, there should not be 
a problem meeting the six month time frame, because under the new 
procedures, HUD will generally permit mortgagees to make timely 
preparations to initiate foreclosure, even while simultaneously 
considering the various loss mitigation tools. Also, under current 
regulations the foreclosure initiation time frame is stayed when the 
mortgagor has entered into a special forbearance agreement or has 
commenced participation in the pre-foreclosure sales procedure.
    The Department specifically requests public comments on this 
proposed time frame. The rule expressly provides for a delayed 
implementation of the six-month time limit to permit notice and comment 
on this change.

Varying the Percentage of Costs Reimbursed

    Section 203.402(f) currently provides for \2/3\ reimbursement of 
foreclosure and acquisition costs on mortgage insurance claims. This 
regulation would amend that section to allow HUD to vary the percentage 
of reimbursement by administrative issuance such as a Mortgagee Letter. 
The percentage may be based on individual mortgagee performance in 
mitigating loss. The Department specifically requests public comments 
on this proposed change in reimbursement for foreclosure costs. The 
rule has expressly provided for a delayed implementation of the 
amendment in order to provide for notice and comment on this change. 
The same change has also been incorporated into the Home Equity 
Conversion Mortgage (HECM) rule at Sec. 206.129(d)(2)(ii).
1. Special Forbearance
    Section 203.614 currently provides the conditions under which 
mortgagees may enter into special forbearance agreements with 
mortgagors. This interim rule amends Sec. 203.614 to provide lenders 
with more flexibility in administering special forbearance, with the 
exception that partial claims will not be permitted when forbearance is 
extended for more than 18 months. Rather than including requirements in 
the rule, HUD will provide special forbearance guidelines in Mortgagee 
Letters and handbooks. A statutory requirement remains, pursuant to 
section 204(a) of the National Housing Act, that a default must be due 
to circumstances beyond the mortgagor's control for additional note 
rate interest to be paid should a mortgage insurance claim be filed 
after an unsuccessful special forbearance agreement.
    In addition, Sec. 203.471, which provides for the conditions under 
which mortgagees may enter into special forbearance agreements in the 
case of 203(k) rehabilitation loans, is amended to be consistent with 
the amendment to

[[Page 35016]]

Sec. 203.614. Finally, as noted above, a new Sec. 203.412 is added to 
the regulations to provide, among other things, that HUD may pay the 
mortgagee for its actions in entering into special forbearance 
agreements under Sec. 203.614. At this time, HUD intends to issue a 
Mortgagee Letter specifying that this amount will be $100.
2. Partial Claims
    Section 407(b) of the Downpayment Act amended section 230(a) of the 
National Housing Act to provide that the Secretary may establish a 
program for payment of a partial claim to a mortgagee that agrees to 
apply the claim amount to payment of a defaulted single family 
mortgage. The amended section 230(a) provides that such payment shall 
be in an amount determined by the Secretary, and shall not exceed an 
amount equivalent to 12 monthly mortgage payments plus any costs 
related to the default that are approved by the Secretary. In addition, 
the amended section 230(a) provides that the mortgagor shall agree to 
repay this amount to the Secretary, and that the Secretary may pay the 
mortgagee in connection with any activities that the mortgagee is 
required to undertake concerning repayment by the mortgagor of the 
amount owed to the Secretary.
    New Secs. 203.371 and 203.414 are added to the regulations to 
provide that the mortgagee may apply for a partial claim after a period 
of forbearance. The partial claim will be in the amount of the 
arrearage accumulated during the forbearance period. The lender shall 
apply this amount to the mortgage to bring it current and the mortgagor 
shall be required to execute a subordinate mortgage in favor of the 
Secretary in the amount of the partial claim. The forbearance period 
may be extended until the arrearage equals the equivalent of 12 monthly 
mortgage payments. The equivalent of twelve monthly payments for 
mortgages with varying monthly payments, such as adjustable rate 
mortgages (ARMS), graduated payment mortgages (GPMS) and growing equity 
mortgages (GEMS), will be calculated by multiplying 12 times the 
monthly mortgage payment due on the date of default. The Department 
expects to issue guidelines to assure that such forbearances do not 
extend beyond 18 calendar months. Similarly, guidelines will provide 
that mortgagees may file a partial claim only after the borrower has 
been delinquent for at least 4 months. Mitigation of losses through 
forbearance with a subordinate mortgage would not be available to 
borrowers who had the financial capacity to modify the mortgage or 
obtain a new refinanced mortgage. Nor would this approach be available 
to a mortgagor who could not make at least a full monthly mortgage 
payment after the forbearance period.
    It is expected that repayment terms of the subordinate mortgage 
will vary depending on the income and debts of the mortgagor. The 
subordinate mortgage may call for repayment commencing at a future date 
before maturity of the insured mortgage, or may not require repayment 
until a transfer of ownership of the property or payoff of the insured 
mortgage. HUD guidelines will likely specify that subordinate mortgages 
must be interest free.
    Mortgagees can file for a partial claim under the new Sec. 203.414 
if the mortgagor is able to resume full monthly payments, but not pay 
off the arrearage. The claim amount will be the amount of the payments 
in arrears, including costs related to the default as established by 
HUD. The new regulation also permits the Secretary to require the 
mortgagee to be responsible for servicing the subordinate mortgage and 
provides that servicing mortgagees may be compensated for activities 
that they perform on behalf of the Secretary.
3. Modifications/Recastings
    Mortgagees currently have the authority under Sec. 203.616 of the 
regulations to modify defaulted mortgages, in certain cases, for the 
purpose of changing the amortization provisions by recasting the total 
unpaid amount due over the remaining term of the mortgage, or over a 
term extending not more than 10 years beyond the original maturity 
date. In most cases, mortgagees cannot utilize this authority because 
of secondary mortgage market restrictions. Approximately 95% of FHA-
insured mortgages are pooled in Government National Mortgage 
Association (Ginnie Mae) mortgage backed securities. The pool 
requirements prevent the mortgagee from keeping the mortgage in the 
pool if the terms of the mortgage are modified. Thus, to modify the 
terms of the mortgage, Ginnie Mae issuers must buy the mortgage out of 
the Ginnie Mae pool.
    Ginnie Mae requirements generally have prevented the repooling of a 
modified mortgage if more than 24 months have elapsed since the date of 
the first scheduled payment under the mortgage. To facilitate FHA's 
loss mitigation efforts, Ginnie Mae has agreed to permit the removal of 
mortgages that are 90 days or more past due from Ginnie Mae pools so 
that the mortgages can be modified and repooled using the date of 
modification of the mortgages as the origination date. Ginnie Mae will 
provide its issuers with specific instructions and requirements for 
this process. Therefore, HUD encourages mortgagees to make increased 
use of loan modifications or recastings to avoid foreclosure and will 
shortly provide detailed guidance in a Mortgagee Letter. A new 
Sec. 203.412 is added to the regulations to provide, among other 
things, that HUD may pay the mortgagee for its actions in modifying or 
recasting the mortgage and repooling it. The payment would include 
reimbursement for any necessary title examination and/or title 
insurance policy endorsement.
    In addition, Sec. 203.616 of the regulations is being amended to 
allow recasting of mortgages even where the mortgage is not in default, 
by agreement of the parties, although loss mitigation claims are 
permitted only with respect to mortgages in default. This amendment 
will allow willing mortgagees, especially state or local housing 
authorities or portfolio lenders, to recast a mortgage where there may 
be an imminent default if the mortgage is not recast, but where no 
default has yet occurred. This procedure, in turn, can prevent adverse 
impacts on mortgagors' credit ratings. A conforming amendment is made 
to Sec. 203.342. The authority to allow recasting of mortgages where 
the mortgage is not in default is based on the Secretary's inherent 
broad authority to operate the insurance programs, and is not based on 
the authority contained in sections 204 or 230 of the National Housing 
Act, as amended. Those two sections generally refer only to mortgages 
in default. It should be noted that, pursuant to the National Housing 
Act, if a mortgage insurance claim is eventually filed, the unpaid 
principal balance paid on the claim will be based on the modified 
amount only where there had been a default caused by circumstances 
beyond the mortgagor's control, as defined by the Secretary.
    In rare circumstances, the mortgagee may not be able to repool the 
modified or recast mortgage. In such situations, HUD will now be able 
to approve the assignment to HUD of a mortgage modified after default. 
Section 407(b) of the Downpayment Act amended section 230(b) of the 
National Housing Act to provide that HUD may accept assignment of a 
mortgage if the mortgage was in default and the mortgagee has modified 
the mortgage to cure the default and to provide for mortgage payments 
within the reasonable ability of the mortgagor to pay, at interest 
rates not exceeding current market interest rates. HUD is also required 
to arrange for servicing of the assigned mortgage by

[[Page 35017]]

a mortgagee, which may include the assigning mortgagee.
    Section 203.350 of the regulations is amended to provide for 
assignment of mortgages under the requirements just noted, and 
Sec. 203.404 of the regulations is amended to provide for the amounts 
the mortgagee will be reimbursed on such an assignment claim.
4. Pre-foreclosure Sales
    Section 203.370 of the regulations, which provides for pre-
foreclosure sales, is amended to remove the reference to the now 
obsolete Assignment Program. Section 203.402 of the regulations 
currently provides in paragraphs (l) and (s) that HUD will reimburse 
the mortgagee for the costs of an appraisal and a title search. Section 
203.402(t) provides HUD will pay the mortgagee an administrative fee, 
as authorized by the Secretary, for the mortgagee's role in 
facilitating a successful pre-foreclosure sale. Presently, HUD is 
reimbursing mortgagees for reasonable and customary costs of the 
appraisal and title search, and $1,000 as the administrative fee for 
each successful pre-foreclosure sale. The selling mortgagor is also 
paid a consideration from gross sales proceeds of up to $1,000, 
depending on the length of time it takes to close the sale. HUD intends 
to continue these reimbursement amounts for the present, although they 
are subject to change in the future.
5. Deeds in Lieu of Foreclosure
    Section 203.402(p) of the regulations currently provides that in a 
conveyance claim the Secretary will reimburse the mortgagee an amount 
approved by the Secretary that was paid to the mortgagor as 
consideration for the execution of a deed in lieu of foreclosure. This 
amount is currently a maximum of $500. This interim rule amends 
Sec. 203.402(p) to provide that the Secretary may also pay the 
mortgagee an administrative fee for its role in facilitating a 
successful deed in lieu of foreclosure. HUD intends to issue a 
Mortgagee Letter specifying that this amount shall not exceed $250. 
Also, this rule amends Sec. 203.402(s) to clarify that, as part of a 
conveyance claim, HUD will reimburse the mortgagee for the cost of a 
title search involved in determining whether it is feasible to accept a 
deed in lieu of foreclosure. HUD intends to issue a Mortgagee Letter 
specifying that this amount shall not exceed $250. This rule also 
amends the Home Equity Conversion Mortgage (HECM) rule at 
Sec. 206.129(d)(2)(i) to conform to the revised language of 
Sec. 203.402(s).

III. Other Matters

Regulatory Planning and Review

    This interim rule has been reviewed in accordance with Executive 
Order 12866, issued by the President on September 30, 1993 (58 FR 
51735, October 4, 1993). Any changes to the rule resulting from this 
review are available for public inspection between 7:30 a.m. and 5:30 
p.m. weekdays in the Office of the Rules Docket Clerk.

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations at 24 CFR part 50, 
which implement section 102(2)(C) of the National Environmental Policy 
Act of 1969. The Finding of No Significant Impact is available for 
public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the 
Office of the Rules Docket Clerk.

Regulatory Flexibility Act

    The Secretary, in accordance with provisions of the Regulatory 
Flexibility Act (5 U.S.C. 605(b)), has reviewed this interim rule 
before publication and by approving it certifies that it will not have 
a significant economic impact on a substantial number of small 
entities. Most of the economic impact of the interim rule will affect 
the Department, which stands to benefit from the successful 
implementation of the loss mitigation techniques addressed by the 
interim rule.

Executive Order 12612, Federalism

    HUD has determined, in accordance with Executive Order 12612, 
Federalism, that this interim rule will not have a substantial, direct 
effect on the States or on the relationship between the Federal 
government and the States, or on the distribution of power or 
responsibilities among the various levels of government, since the 
interim rule involves primarily relationships between the Department 
and private entities.

Executive Order 12606, The Family

    HUD has determined that this interim rule would have only an 
indirect impact on family formation, maintenance, and general well-
being within the meaning of Executive Order 12606, The Family, because 
it would assist mortgagors in maintaining ownership of their 
properties. To the extent such mortgagors consist of families, the 
impact would be beneficial. As such, no further review is necessary.

Justification for Interim Rulemaking

    The Omnibus Consolidated Rescissions and Appropriations Act of 1996 
(the Act) directs the Department to issue interim regulations to 
implement section 407 of the Downpayment Act within 30 days of the date 
of enactment of the Act.

List of Subjects

24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy.

24 CFR Part 206

    Aged, Condominiums, Loan programs--housing and community 
development, Mortgage insurance, Reporting and recordkeeping 
requirements.

    Accordingly, parts 203 and 206 of title 24 of the Code of Federal 
Regulations are amended as follows:

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

    1. The authority citation for part 203 is revised to read as 
follows:

    Authority: 12 U.S.C. 1709, 1710, 1715b, and 1715u; 42 U.S.C. 
3535(d).

    2. Section 203.342 is revised to read as follows:


Sec. 203.342  Recasting of mortgage.

    If a mortgage is recast pursuant to Sec. 203.616 subsequent to a 
finding by the mortgagee that the default was due to circumstances 
beyond the mortgagor's control, as defined by HUD, the principal amount 
of the mortgage, as modified, shall be considered to be the ``original 
principal balance of the mortgage'' as that term is used in 
Sec. 203.401.


Sec. 203.350  [Removed]

    3. In Sec. 203.350, the following are removed:
    a. The ``Effective Date Note (1);
    b. The ``Effective Date Note (2)'';
    c. The second undesignated center heading ``ASSIGNMENT OF 
MORTGAGE'';
    d. The ``Effective Date Note (3);
    e. All text of the second version of Sec. 203.350, which includes 
paragraphs (a) through (d) and the information collection 
parenthetical; and
    f. The FR source ``[52 FR 6914, Mar. 5, 1987].
    3a. In the remaining Sec. 203.350, the section heading and 
paragraph (a) are revised, to read as follows:

[[Page 35018]]

Sec. 203.350  Assignment of mortgage.

    (a) Assignment of modified mortgages pursuant to section 230, 
National Housing Act. HUD may accept an assignment of any mortgage 
covering a one-to-four family residence if the following requirements 
are met:
    (1) The mortgage was in default;
    (2) The mortgagee has modified the mortgage under Sec. 203.616 to 
cure the default and to provide for mortgage payments within the 
reasonable ability of the mortgagor to pay, at an interest rate not 
exceeding current market interest rates; and
    (3) Such other conditions that HUD may prescribe, which may include 
the requirement that the mortgagee continue to be responsible for 
servicing the mortgage.
* * * * *
    4. In Sec. 203.355:
    a. The introductory text of paragraph (a) and paragraph (a)(2) are 
revised;
    b. Paragraphs (a)(3) through (a)(6) are added; and
    c. Paragraphs (b), the introductory text of paragraph (c) and the 
introductory text of paragraph (g) are revised; and
    d. Paragraph (h) is added, to read as follows:


Sec. 203.355  Acquisition of property.

    (a) In general. Upon default of a mortgage, except as provided in 
paragraphs (b) through (h) of this section, the mortgagee shall take 
one of the following actions within nine months from the date of 
default, or within any additional time approved by the Secretary or 
authorized by Secs. 203.345 or 203.346. For mortgages where the date of 
default is on or after March 1, 1997, the mortgagee shall take one of 
the following actions within six months of the date of default or 
within such additional time approved by HUD or authorized by 
Secs. 203.345 or 203.346:
* * * * *
    (2) Enter into a special forbearance agreement under Sec. 203.614;
    (3) Complete a refinance of the mortgage under Sec. 203.43(c);
    (4) Complete a modification of the mortgage under Sec. 203.616;
    (5) Complete an assumption under Sec. 203.512; or
    (6) Commence foreclosure.
    (b) Vacant or abandoned property. With respect to defaulted 
mortgages on vacant or abandoned property, if the mortgagee discovers, 
or should have discovered, that the property is vacant or abandoned, 
the mortgagee must commence foreclosure within the later of 120 days 
after the date the property became vacant, or 60 days after the date 
the property is discovered, or should have been discovered, to be 
vacant or abandoned; but no later than the number of months from the 
date of default as provided in paragraph (a) of this section. The 
mortgagee must not delay foreclosure on vacant or abandoned property 
because of the requirements of Sec. 203.606.
    (c) Prohibition of foreclosure within time limits. If the laws of 
the State in which the mortgaged property is located, or Federal 
bankruptcy law:
* * * * *
    (g) Pre-foreclosure sale procedure. Within 60 days of the end of a 
mortgagor's participation in the pre-foreclosure sale procedure, or 
within the time limit described in paragraph (a) of this section, 
whichever is later, if no closing of an approved pre-foreclosure sale 
has occurred, the mortgagee must obtain a deed in lieu of foreclosure, 
with title being taken in the name of the mortgagee or the Secretary, 
or commence foreclosure. The end-of-participation date is defined as:
* * * * *
    (h) Special forbearance. If the mortgagor fails to meet the 
requirements of a special forbearance under Sec. 203.614 and the 
failure continues for 60 days, the mortgagee must commence foreclosure 
within the time limit described in paragraph (a) of this section or 90 
days after the mortgagor's failure to meet the special forbearance 
requirements.


Sec. 203.370  [Amended]

    5. In Sec. 203.370, paragraph (c)(3) is removed, and paragraphs 
(c)(4) and (c)(5) are redesignated as paragraphs (c)(3) and (c)(4).
    6. A new Sec. 203.371 is added before the undesignated center 
heading ``CONDITION OF PROPERTY'', to read as follows:


Sec. 203.371  Partial claim.

    (a) General. Notwithstanding the conveyance, sale or assignment 
requirements for payment of a claim elsewhere in this part, HUD will 
pay partial FHA insurance benefits to mortgagees after a period of 
forbearance, the maximum length of which HUD will prescribe, and in 
accordance with this section.
    (b) Requirements. The following conditions must be met for payment 
of a partial claim:
    (1) The mortgage has been delinquent for at least 4 months or such 
other time prescribed by HUD;
    (2) The amount of the arrearage has not exceeded the equivalent of 
12 monthly mortgage payments;
    (3) The mortgagor is able to resume making full monthly mortgage 
payments;
    (4) The mortgagor is not financially able to make sufficient 
additional payments to repay the arrearage within a time specified by 
HUD; and
    (5) The mortgagor is not financially able to support monthly 
mortgage payments on a modified mortgage or on a refinanced mortgage in 
which the total arrearage is included.
    (c) Repayment of the subordinate lien. The mortgagor must execute a 
mortgage in favor of HUD with terms and conditions acceptable to HUD 
for the amount of the partial claim under Sec. 203.414(a). HUD may 
require the mortgagee to be responsible for servicing the subordinate 
mortgage on behalf of HUD.
    (d) Application for insurance benefits. Along with the prescribed 
application for partial claim insurance benefits, the mortgagee shall 
forward to HUD the original credit and security instruments required by 
paragraph (c) of this section.
    7. In Sec. 203.402, paragraphs (f), (p) and (s) are revised to read 
as follows:


Sec. 203.402  Items included in payment--conveyed and non-conveyed 
properties.

* * * * *
    (f) Foreclosure costs or costs of acquiring the property otherwise 
(including costs of acquiring the property by the mortgagee and of 
conveying and evidencing title to the property to HUD, but not 
including any costs borne by the mortgagee to correct title defects) 
actually paid by the mortgagee and approved by HUD, in an amount not in 
excess of two-thirds of such costs or $75, whichever is the greater. 
For mortgages insured on or after March 1, 1997, 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. Where the foreclosure 
involves a mortgage sold by the Secretary on or after August 1, 1969, 
or a mortgage executed in connection with the sale of property by the 
Secretary on or after such date, the mortgagee shall be reimbursed (in 
addition to the amount determined under the foregoing) for any extra 
costs incurred in the foreclosure as a result of a defect in the 
mortgage instrument, or a defect in the mortgage transaction or a 
defect in title which existed at or prior to the time the mortgage (or 
its assignment by the Secretary) was filed for record, if the mortgagee 
establishes to the satisfaction of the Commissioner

[[Page 35019]]

that such extra costs are over and above those customarily incurred in 
the area.
* * * * *
    (p) An amount approved by HUD and paid to the mortgagor as 
consideration for the execution of a deed in lieu of foreclosure and, 
if authorized by HUD, an administrative fee approved by HUD paid to the 
mortgagee for its role in facilitating a successful deed in lieu of 
foreclosure, not to be subject to the payment of debenture interest 
thereon.
* * * * *
    (s) Reasonable costs of the title search ordered by the mortgagee, 
in accordance with procedures prescribed by HUD, to determine the 
status of a mortgagor meeting all other criteria for approval to 
participate in the pre-foreclosure sale procedure, or to determine if a 
mortgagor meets the criteria for approval of the mortgagee's acceptance 
of a deed in lieu of foreclosure.
* * * * *


Sec. 203.402a  [Amended]

    8. In Sec. 203.402a, paragraph (b)(1) is removed and paragraphs 
(b)(2) and (b)(3) are redesignated as paragraphs (b)(1) and (b)(2).
    9. In Sec. 203.404, paragraph (a)(3) is revised, and new paragraphs 
(a)(5) and (a)(6) are added, to read as follows:


Sec. 203.404  Amount of payment--assigned mortgages.

* * * * *
    (a) * * *
    (3) Reimbursement for such costs and attorney's fees as HUD finds 
were properly incurred in connection with the defaulted mortgage and 
its modification and assignment to HUD.
* * * * *
    (5) An administrative fee to the mortgagee for modifying the 
mortgage.
    (6) A fee for servicing the mortgage assigned to HUD, if HUD 
requires such servicing.
* * * * *
    10-11. New Secs. 203.412 and 203.414 are added before the 
undesignated center heading ``CERTIFICATE OF CLAIM'', and Sec. 203.413 
is reserved, to read as follows:


Sec. 203.412  Payment for foreclosure alternative actions.

    Notwithstanding the conveyance, sale, or assignment requirements 
for payment of a claim elsewhere in this part, HUD may pay the 
mortgagee, in accordance with procedures prescribed by HUD, for the 
following foreclosure alternative actions, in such amounts as HUD 
determines:
    (a) Assumptions under Sec. 203.512;
    (b) Special forbearance under Secs. 203.471 and 203.614;
    (c) Recasting or modification of defaulted mortgages under 
Sec. 203.616, where the mortgagee is not reimbursed under 
Sec. 203.405(a);
    (d) Refinancing under Sec. 203.43(c).


Sec. 203.413  [Reserved]


Sec. 203.414  Amount of payment--partial claims.

    (a) Claim amount. Where a claim for partial insurance benefits is 
filed in accordance with Sec. 203.371, the amount of the insurance 
benefits shall consist of the arrearage accumulated during the 
forbearance period, not to exceed an amount equivalent to 12 monthly 
mortgage payments, and any costs prescribed by HUD related to the 
default.
    (b) Servicing fee. The claim may also include a payment for 
activities, such as servicing the subordinate mortgage, which HUD may 
require.
    12. In Sec. 203.438, paragraph (c) is revised to read as follows:


Sec. 203.438  Mortgages on Indian land insured pursuant to section 248 
of the National Housing Act.

* * * * *
    (c) Foreclosure by HUD. HUD may initiate foreclosure proceedings 
with respect to any mortgage acquired under this section in a tribal 
court, a court of competent jurisdiction or Federal district court. If 
the mortgagor remains on the property following foreclosure, HUD may 
seek an eviction order from the court hearing the foreclosure action.
    13. Section 203.471 is revised to read as follows:


Sec. 203.471  Special forbearance.

    If the mortgagee finds that a default is due to circumstances 
beyond the mortgagor's control, as defined by the Secretary, the 
mortgagee may grant special forbearance relief to the mortgagor in 
accordance with the conditions prescribed by the Secretary.
    14. In Sec. 203.473 paragraph (a) is revised to read as follows:


Sec. 203.473  Claim procedure.

    (a) A claim for insurance benefits on a loan secured by a first 
mortgage shall be made, and insurance benefits shall be paid, as 
provided in Secs. 203.350 through 203.414.
* * * * *
    15. Section 203.500 is revised to read as follows:


Sec. 203.500  Mortgage servicing generally.

    This subpart identifies servicing practices of lending institutions 
that HUD considers acceptable for mortgages insured by HUD. Failure to 
comply with this subpart shall not be a basis for denial of insurance 
benefits, but a pattern of refusal or failure to comply will be cause 
for withdrawal of HUD's approval of a mortgagee. It is the intent of 
the Department that no mortgagee commence foreclosure or acquisition of 
a property until the requirements of this subpart have been followed.
    16. Section 203.501 is amended by adding at the end of the section 
the following two sentences:


Sec. 203.501  Loss mitigation.

    * * * Such actions include, but are not limited to, deeds in lieu 
of foreclosure under Sec. 203.357, pre-foreclosure sales under 
Sec. 203.370, partial claims under Sec. 203.414, assumptions under 
Sec. 203.512, special forbearance under Secs. 203.471 and 203.614, and 
recasting of mortgages under Sec. 203.616. HUD may prescribe conditions 
and requirements for the appropriate use of these loss mitigation 
actions, concerning such matters as owner-occupancy, extent of previous 
defaults, prior use of loss mitigation, and evaluation of the 
mortgagor's income, credit and property.
    17. In Sec. 203.552, paragraph (a) introductory text is revised to 
read as follows:


Sec. 203.552  Fees and charges after endorsement.

    (a) The mortgagee may collect reasonable and customary fees and 
charges from the mortgagor after insurance endorsement only as provided 
in this paragraph (a). The mortgagee may not collect these fees or 
charges from the mortgagor if the mortgagee has been or will be 
reimbursed by the Secretary for the services for which the fees or 
charges are assessed.
* * * * *


Sec. 203.604  [Amended]

    18. In Sec. 203.604, paragraphs (e)(2) (iii) and (iv) are removed, 
and paragraph (e)(2)(v) is redesignated as paragraph (e)(2)(iii).
    19. A new Sec. 203.605 is added to read as follows:


Sec. 203.605  Loss mitigation evaluation.

    No later than when three full monthly installments due on the 
mortgage are unpaid, the mortgagee shall evaluate all of the loss 
mitigation techniques provided at Sec. 203.501 to determine which, if 
any, are appropriate, and shall reevaluate monthly thereafter. The 
mortgagee shall maintain documentation of such evaluations. Should a 
claim for mortgage insurance benefits later be filed, the mortgagee 
shall maintain this documentation in

[[Page 35020]]

the claim file under the requirements of Sec. 203.365(c).
    20. In Sec. 203.606, paragraph (a) is amended by adding at the end 
the following sentence, and the introductory text of paragraph (b) is 
revised, to read as follows:


Sec. 203.606  Pre-foreclosure review.

    (a) * * * In addition, prior to initiating any action required by 
law to foreclose the mortgage, the mortgagee shall notify the mortgagor 
in a format prescribed by the Secretary that the mortgagor is in 
default and the mortgagee intends to foreclose unless the mortgagor 
cures the default.
    (b) If the mortgagee determines that any of the following 
conditions has been met, the mortgagee may initiate foreclosure without 
the delay in foreclosure required by paragraph (a) of this section:
* * * * *
    21. Section 203.614 is revised to read as follows:


Sec. 203.614  Special forbearance.

    If the mortgagee finds that a default is due to circumstances 
beyond the mortgagor's control, as defined by HUD, the mortgagee may 
grant special forbearance relief to the mortgagor in accordance with 
the conditions prescribed by HUD.
    22. Section 203.616 is revised to read as follows:


Sec. 203.616  Recasting of mortgage.

    The mortgagee may modify a mortgage for the purpose of changing the 
amortization provisions by recasting the total unpaid amount due over 
the remaining term of the mortgage or a term not exceeding 360 months. 
The mortgagee must notify HUD of such modification in a format 
prescribed by HUD within 30 days of the execution of the modification 
agreement.


Secs. 203.640 through 203.660  [Removed]

    23. All versions of Secs. 203.640 through 203.660 are removed.
    24. Section 203.664 is revised to read as follows:


Sec. 203.664  Processing defaulted mortgages on property located on 
Indian land.

    Before a mortgagee requests that the Secretary accept assignment 
under Sec. 203.350(b) of a mortgage insured pursuant to section 248 of 
the National Housing Act (Sec. 203.43h), the mortgagee must submit 
documents showing that the requirements of Sec. 203.604 have been met.
    25. Section 203.665 is revised to read as follows:


Sec. 203.665  Processing defaulted mortgages on property located on 
Hawaiian home lands.

    Before a mortgagee requests the Secretary to accept assignment 
under Sec. 203.350(c) of a mortgage insured pursuant to section 247 of 
the National Housing Act (Sec. 203.43i), the mortgagee must submit 
documents showing that the requirements of Sec. 203.604 have been met.
    26. In Sec. 203.666 paragraph (b) is revised, and paragraphs (c) 
and (d) are removed, to read as follows:


Sec. 203.666  Processing defaulted mortgages on property in Allegany 
Reservation of Seneca Nation of Indians.

* * * * *
    (b) Claims through assignment. Before a mortgagee requests the 
Secretary to accept assignment under Sec. 203.350(d) the mortgagee must 
submit documents showing that the requirements of Sec. 203.604 have 
been met.

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

    27. The authority citation for part 206 continues to read as 
follows:

    Authority: 12 U.S. C. 1715b, 1715z-1720; 42 U.S.C. 3535(d).

    28. In Sec. 206.129, paragraphs (d)(2)(i) and (d)(2)(ii) are 
revised to read as follows:


Sec. 206.129  Payment of claim.

* * * * *
    (d) * * *
    (2)(i) Items listed in Sec. 203.402 (a), (b), (c), (d), (e), (g), 
(j), and (s), and Sec. 204.322(l) of this chapter.
    (ii) Foreclosure costs or costs of acquiring the property actually 
paid by the mortgagee and approved by HUD, in an amount not in excess 
of two-thirds of such costs or $75, whichever is the greater. For 
mortgages insured after March 1, 1997, HUD may reimburse a percentage 
of foreclosure costs or costs of acquiring the property, which 
percentage shall be determined in accordance with such conditions as 
HUD shall prescribe.
* * * * *
    Dated: June 5, 1996.
Nicolas P. Retsinas,
Assistant Secretary for Housing-Federal Housing Commissioner.
[FR Doc. 96-16869 Filed 7-2-96; 8:45 am]
BILLING CODE 4210-27-P