FHA HAMP is a new and important part of the FHA’s overall loss mitigation waterfall. Complying with all the requirements of the FHA loss mitigation waterfall is critical to be able to collect a claim in the event of a foreclosure and subsequent REO sale. Servicers cannot initiate foreclosure until all loss mitigation options have been considered.
As a result, servicers should ensure that each step of the waterfall is effectively executed, documented and is in full compliance with FHA policy and procedures.
General Requirements:
FHA requires servicers to be very aggressive in resolving loans early in the delinquency process. No later than when 3 full monthly installments are due and unpaid, lenders must evaluate each defaulted loan and consider all loss mitigation techniques to determine which, if any, are appropriate. In order to comply with this 90-day evaluation requirement, lenders must already have contacted the borrower and gathered sufficient information about the borrower’s circumstances, intentions and financial condition in order to determine their eligibility for loss mitigation alternatives. Between 31 and 180 days, FHA expects the servicer to either resolve the loan or initiate foreclosure.
In the event that the specified loss mitigation approaches do not resolve the loan, FHA expects the servicer to move immediately to foreclosure. In any event, servicers must initiate foreclosure within six months of the loan entering default, subject to a 90-day extension if the servicer has begun but not completed a loss mitigation solution.
The FHA requires action prior to the Loss Mitigation waterfall in the form of (a) informal forbearance plans (less than 3 months in duration) and (b) delinquent refinance where the borrowers equity can be used to pay off arrearages. If neither of these is workable based on capacity information gathered, then the servicer moves to Loss Mitigation Waterfall.
Servicers are also encouraged to offer counseling to delinquent borrowers. At minimum, they must provide HUD publication PA-426H by the 60th day.
Program Incentives:
The incentives for each of the Loss Mitigation and Disposition waterfall options is as follows:
Reinstatement Options
Special Forbearance $ 100 ($200 for lenders with performance scores in the top 25%)
Loan Modification $ 500
Partial Claim $ 250
FHA HAMP $ 1,250
Disposition Options
Pre-Foreclosure Sale $ 1,000
Deed-In-Lieu of Foreclosure $ 250
The incentive for FHA HAMP is $1,250. It comprises $500 for the Partial Claim and $750 for the modification. The servicer must report the insurance partial claim (30% balloon) within 60 days of the initiation of the trial period. At that point, they receive $500. After the trial period, when the modification becomes permanent, the servicer receives an additional $750. Also, $250 is available for title and recording expenses. The servicer has discretion to decide to record but it must deliver marketable title.
Loss Mitigation Waterfall For Loans That Can Be Cured:
1) Special forbearance
a) 4 months or longer
b) Not more than 12 months of PITI
2) Loan modification
a) Permanent change to rate and term to bring loan to performing status
b) Must result in a fixed rate loan
c) Can offer performing loan modifications but no incentive payment
d) Can also offer modification for unemployed borrowers (this is a recent development)
e) No LTV restriction
f) May capitalize arrearages but not late fees, foreclosure costs or administrative costs
3) Partial Claim
a) Used to forgive arrearages
b) Cannot be combined with Loan Modification
c) Borrower must have sufficient capacity to continue monthly mortgage payments
4) FHA HAMP
a) 30% balloon calculated as principal net of arrearages and costs
b) Capped at 31% front end with 55% back end requirement
c) No NPV requirement but is last on the waterfall so de facto NPV
d) Not generally an option for unemployed because of the 55% back end ratio limit
Please note that modifications cannot be combined with partial claims. In modifications, the arrearages would be capitalized so there is no need for a partial claim.
Calculation of Maximum Partial Claim Amount under FHA HAMP:
The maximum partial claim amount under FHA HAMP consists of the sum of (i) arrearages, (ii) legal fees and foreclosure costs related to a canceled foreclosure action and (iii) the principal reduction / deferment.
· Arrearages included in the partial claim cannot exceed 12 months of PITI
· The maximum partial claim amount is 30 percent of the outstanding principal balance as of the date of default
· The principal deferment on the modified mortgage is calculated by multiplying the outstanding principal balance by 30 percent and then reducing that amount by arrearages advanced to cure the default for up to 12 months PITI, and any foreclosure costs incurred to that point
· The principal deferment amount is limited to the amount that will bring the borrower(s) total monthly mortgage payment to 31 percent of gross monthly income
Example From HUD / FHA:
Borrower had a reduction of income and is delinquent 3 full mortgage payments. The unpaid principal balance on the mortgage on the date of default is $150,000 and the monthly payment is $1,220 (consisting of P&I of $920 and escrows, including MIP, of $300). The financial analysis reveals that the borrower’s gross monthly income is $3,500 and the total monthly other recurring debt payments are $800.
In order to fulfill the 31% front-end ratio requirement, the borrower(s) total monthly mortgage payment would have to be reduced to $1,085 ($3,500 x 31%). Therefore, P&I would have to be reduced to $785 ($1,085 total monthly mortgage payment less $300 escrow and MIP). Assuming that the loan modification will have an interest rate of 6% and a P&I of $785, the new mortgage amount would have to be $130,931, resulting in a principal reduction of $19,069 ($150,000 unpaid principal balance less $130,931). In this example, the borrower’s back end ratio is 53.9% ($1,885/$3,500), which satisfies the 55% back end ratio limitation.
In this example, the maximum principal deferment is $41,340 (30% of $150,000, less the $3,660 delinquency, or $45,000 - $3,660). However, based on their gross income, borrower is eligible only for a principal deferment of $19,069 plus $3,660 arrearages (which would include any foreclosure costs incurred to that point) for the total partial claim of $22,729.
Waterfall For Loans That Cannot Be Cured:
- Pre-foreclosure sale
- Deed in Lieu
- Foreclosure
The servicer cannot pursue a foreclosure action until all loss mitigation options have been exhausted. It is therefore critical that the servicer pursue all loss mitigation options, including FHA HAMP, to be eligible to collect on a claim under a foreclosure action and subsequent REO sale.
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