The Federal Housing Administration (FHA) has issued guidance to its approved servicers on how to assist borrowers facing ‘imminent default.’ Previously, these homeowners were ineligible for such assistance until after they had missed payments.
The Helping Families Save Their Home Act of 2009, signed into law last May, expanded the FHA's authority to use its loss mitigation tools to assist FHA borrowers avoid foreclosure to include those facing imminent default.
‘Loss mitigation assistance is beneficial to both borrowers and FHA because it helps borrowers retain their homes while protecting the FHA insurance fund from unnecessary losses,’ says FHA Commissioner David Stevens. ‘FHA has always required lenders to establish early contact with delinquent borrowers to discuss the reason for missing a payment and to evaluate reinstatement options. Now, servicers will have additional options for those borrowers who seek help before they go delinquent, which increases the likelihood that the borrower will be able to retain their home.’
Effective immediately, the loss mitigation options of forbearance and FHA's Home Affordable Modification Program (FHA-HAMP) may be used to assist borrowers facing imminent default.
The FHA defines an ‘FHA borrower facing imminent default’ to be an FHA borrower who is current or less than 30 days past due on the mortgage obligation and is experiencing a significant reduction in income or some other hardship that will prevent him or her from making the next required payment on the mortgage during the month that it is due.
A forbearance agreement is an agreement by the servicer to postpone, reduce or suspend payments due on a loan for a limited and specific time period. FHA-HAMP allows qualified FHA-insured borrowers to reduce their monthly mortgage payment to an affordable level by permanently reducing the payment through the use of a partial claim combined with a loan modification.
The partial claim defers the repayment of a portion of the mortgage principal through an interest-free subordinate mortgage that is not due until the first mortgage is paid off. The remaining balance is then modified through re-amortization and in some cases, an interest-rate reduction.
Borrowers must be able to document the cause of the imminent default, which may include, but is not limited to, one or more of the following types of hardship:
- a reduction in or loss of income that was supporting the mortgage loan (e.g., unemployment, reduced job hours, reduced pay or a decline in self-employed business earnings; a scheduled temporary shutdown of the employer, such as for a scheduled vacation, would not in and by itself be adequate to support an imminent default);
- a change in household financial circumstances (e.g., death in family, serious or chronic illness, permanent or short-term disability);
Loan servicers must document the basis for their determination that a payment default is imminent and retain all documentation used to reach their conclusion. The servicer's documentation must also include information on the borrower's financial condition.