35014 Federal Register / Vol. 61, No. 129 / Wednesday, July 3, 1996 / Rules and Regulations

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 § 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 §§ 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.
Federal Register / Vol. 61, No. 129 / Wednesday, July 3, 1996 / Rules and Regulations 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, § 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 § 203.365(c) include

claims involving these loss mitigation

actions, a new § 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 § 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 § 203.355, and the amendment to the

provision in § 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 creditworthy, 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 preforeclosure sales procedure.

The Department specifically requests

public comments on this proposed time

frame. The rule expressly provides for a

delayed implementation of the sixmonth 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

§ 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 § 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, § 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
35016 Federal Register / Vol. 61, No. 129 / Wednesday, July 3, 1996 / Rules and Regulations

§ 203.614. Finally, as noted above, a

new § 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 § 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 §§ 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 § 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 § 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 § 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, § 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 § 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
Federal Register / Vol. 61, No. 129 / Wednesday, July 3, 1996 / Rules and Regulations 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 § 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 § 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 § 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 § 206.129(d)(2)(i) to

conform to the revised language of

§ 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:

§ 203.342 Recasting of mortgage.

If a mortgage is recast pursuant to

§ 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

§ 203.401.

§ 203.350 [Removed]

3. In § 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

§ 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 § 203.350, the

section heading and paragraph (a) are

revised, to read as follows:
35018 Federal Register / Vol. 61, No. 129 / Wednesday, July 3, 1996 / Rules and Regulations

§ 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 § 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 § 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:

§ 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

§§ 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 §§ 203.345 or 203.346:

* * * * *

(2) Enter into a special forbearance

agreement under § 203.614;

(3) Complete a refinance of the

mortgage under § 203.43(c);

(4) Complete a modification of the

mortgage under § 203.616;

(5) Complete an assumption under

§ 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 § 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 preforeclosure 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-ofparticipation date is defined as:

* * * * *

(h) Special forbearance. If the

mortgagor fails to meet the requirements

of a special forbearance under § 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.

§ 203.370 [Amended]

5. In § 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 § 203.371 is added before

the undesignated center heading

‘‘CONDITION OF PROPERTY’’, to read

as follows:

§ 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

§ 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 § 203.402, paragraphs (f), (p) and

(s) are revised to read as follows:

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

* * * * *

§ 203.402a [Amended]

8. In § 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 § 203.404, paragraph (a)(3) is

revised, and new paragraphs (a)(5) and

(a)(6) are added, to read as follows:

§ 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 §§ 203.412 and 203.414

are added before the undesignated

center heading ‘‘CERTIFICATE OF

CLAIM’’, and § 203.413 is reserved, to

read as follows:

§ 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 § 203.512;

(b) Special forbearance under

§§ 203.471 and 203.614;

(c) Recasting or modification of

defaulted mortgages under § 203.616,

where the mortgagee is not reimbursed

under § 203.405(a);

(d) Refinancing under § 203.43(c).

§ 203.413 [Reserved]

§ 203.414 Amount of payment—partial

claims.

(a) Claim amount. Where a claim for

partial insurance benefits is filed in

accordance with § 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 § 203.438, paragraph (c) is

revised to read as follows:

§ 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:

§ 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 § 203.473 paragraph (a) is

revised to read as follows:

§ 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 §§ 203.350 through

203.414.

* * * * *

15. Section 203.500 is revised to read

as follows:

§ 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:

§ 203.501 Loss mitigation.

* * * Such actions include, but are

not limited to, deeds in lieu of

foreclosure under § 203.357, preforeclosure sales under § 203.370,

partial claims under § 203.414,

assumptions under § 203.512, special

forbearance under §§ 203.471 and

203.614, and recasting of mortgages

under § 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 § 203.552, paragraph (a)

introductory text is revised to read as

follows:

§ 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.

* * * * *

§ 203.604 [Amended]

18. In § 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 § 203.605 is added to read

as follows:

§ 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 § 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
35020 Federal Register / Vol. 61, No. 129 / Wednesday, July 3, 1996 / Rules and Regulations

the claim file under the requirements of

§ 203.365(c).

20. In § 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:

§ 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:

§ 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:

§ 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.

§§ 203.640 through 203.660 [Removed]

23. All versions of §§ 203.640 through

203.660 are removed.

24. Section 203.664 is revised to read

as follows:

§ 203.664 Processing defaulted mortgages

on property located on Indian land.

Before a mortgagee requests that the

Secretary accept assignment under

§ 203.350(b) of a mortgage insured

pursuant to section 248 of the National

Housing Act (§ 203.43h), the mortgagee

must submit documents showing that

the requirements of § 203.604 have been

met.

25. Section 203.665 is revised to read

as follows:

§ 203.665 Processing defaulted mortgages

on property located on Hawaiian home

lands.

Before a mortgagee requests the

Secretary to accept assignment under

§ 203.350(c) of a mortgage insured

pursuant to section 247 of the National

Housing Act (§ 203.43i), the mortgagee

must submit documents showing that

the requirements of § 203.604 have been

met.

26. In § 203.666 paragraph (b) is

revised, and paragraphs (c) and (d) are

removed, to read as follows:

§ 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 § 203.350(d)

the mortgagee must submit documents

showing that the requirements of

§ 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 § 206.129, paragraphs (d)(2)(i)

and (d)(2)(ii) are revised to read as

follows:

§ 206.129 Payment of claim.

* * * * *

(d) * * *

(2)(i) Items listed in § 203.402 (a), (b),

(c), (d), (e), (g), (j), and (s), and

§ 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