A mortgage servicer can initiate a foreclosure when a loan is in default as defined by the deed of trust that is signed by the borrower. Common reasons for default include loss of employment, a death in the family or unexpected financial obligations.
But what happens if financial hardships are brought about as the result of a natural disaster, such as an earthquake, flood or hurricane?
Homeowners who are victims of disasters are often faced with the tasks of repairing the damage to their homes and finding alternate living accommodations while their primary residence is being rebuilt or repaired. Unemployment is another burden that homeowners must deal with if their workplace is damaged by the disaster.
Extraordinary expenses associated with rebuilding and the sudden loss of income can lead to the inability to make monthly mortgage payments. Investors and insurers, however, specifically address this issue in their servicing guidelines.
Fannie Mae requests that the mortgage servicer evaluate each delinquent mortgage on a case-by-case basis. These mortgages must be delinquent as a result of the extraordinary damages or expenses related to the natural disaster.
When a natural disaster significantly damages a property and the borrower's employment or income (including rental income from an investment property) is seriously affected as a result of the disaster, the status of the mortgage should determine the course of action.
If the mortgage was current or fewer than 90 days delinquent before the disaster occurred, the servicer generally should not begin or continue any foreclosure action during the next 90 days. Instead, the company should work with the borrower to develop a formal relief provision that will cure the delinquency as soon as possible without imposing undue hardship on the borrower.
The mortgage servicer should also grant relief to a borrower who is unable to continue scheduled payments under an existing bankruptcy payment plan. If a repayment plan cannot be worked out, loss mitigation options such as deed in lieu of foreclosure or pre-foreclosure sale should be considered.
If the mortgage was seriously delinquent (90 or more days delinquent) when the disaster occurred and was not under some form of repayment plan, it is likely that the borrower's chances of curing the default were not greatly affected by the disaster. In this type of situation, the mortgage servicer may begin or continue foreclosure proceedings if it believes the foreclosure is warranted.
However, it is important to remember that the course of action taken should not jeopardize Fannie Mae's ability to recover damages under the hazard insurance policy.
With Freddie Mac, the mortgage servicer may suspend foreclosure, collections and eviction proceedings based on the merits of each individual case for up to 90 days from the date the disaster strikes.
Here, the mortgage servicer has discretion, but there are some relevant factors to consider: the degree to which the disaster has reduced the borrower's income, increased the borrower's living expenses, damaged the mortgaged property or limited the availability of alternative housing.
At the end of the 90-day period, the servicer must reassess the borrower's circumstances based on updated property inspections and the borrower's financial information to determine if a repayment plan can be worked out or whether the foreclosure proceedings should be initiated or resumed.
As with Fannie Mae, any action taken by the mortgage servicer should not jeopardize Freddie Mac's ability to recover damages under the hazard insurance policy.
Regarding U.S. Department of Housing & Urban Development (HUD) loans, there is a 90-day moratorium on foreclosures on properties directly affected by a disaster. The 90-day period begins from the date the president declares a disaster to have occurred, and this moratorium applies to the initiation of new foreclosures and foreclosures already in process.
In addition to the moratorium, HUD also recommends loss mitigation options for homeowners whose properties were directly affected by the disaster. These options include special forbearance plans, loan modifications, refinancings, waivers of late charges, partial claims, pre-foreclosure sales and deeds in lieu of foreclosure.
With U.S. Department of Veterans Affairs (VA) mortgages, it is the responsibility of the mortgage servicer to inspect damages to the properties, counsel borrowers concerning assistance and provide the VA with a report outlining the findings and actions for each of the damaged properties.
The VA requests that mortgage servicers establish a 90-day moratorium, from the date of the disaster, on initiating new foreclosures in areas affected by a disaster. However, there are two exceptions to this moratorium:
- When a default is clearly insoluble, there is no likelihood of reinstatement and the loan holder requests and receives prior approval from the VA, the mortgage servicer or mortgagee can initiate foreclosure.
- When the default occurred prior to the disaster and there was already a foreclosure sale scheduled, the loan holder can proceed with the sale. The sale should only be delayed to the extent necessary to determine whether or not the appraisal is still accurate, to allow time for the mortgage servicer to obtain an acceptable hazard insurance loss settlement or if there are issues with court delays.
Terry Ross is director of regulatory compliance with Barrett Daffin Frappier Turner & Engel LLP. He can be reached at (972) 341-0504.