FHA Loss Mitigation Feedback
Fremont Street
Strategic Business Development and Marketing for the Mortgage Services Industry
In response to the call to action by David Lykken, I will be taking the torch, and soliciting as much industry feedback as I can, and will submit to FHA in response to the Loss Mitt Calculator FHA draft updates.
As noted on the Lykken on Lending podcast, timing is everything, and the industry needs time to properly implement wholesale changes. Beyond that, I have highlighted some of the proposed changes, and please tag anyone who could provide valuable feedback. All FHA servicers can submit feedback on their own, or can provide feedback to me directly that I will submit. Submit your response in the comments and we will add it to the spreadsheet to send to FHA.
Below is the first section for review on Fremont Street Intelligence, regarding the new Outside of the Waterfall Loan Modification
vii. Outside of the Waterfall Loan Modification
6 (A) Definition
7 An Outside of the Waterfall Loan Modification (OWL) is a permanent change in one
8 or more terms of a Borrower’s Mortgage that achieves a minimum reduction to the
9 Borrower’s monthly Principal & Interest (P&I) payment where the Borrower has
10 been unresponsive.
11 (B) Eligibility
12 The Mortgagee must ensure that:
13 • the Borrower has been unresponsive to outreach by the Mortgagee during the
14 Default episode to initiate or complete a Loss Mitigation Option;
15 • final documents to complete a Loss Mitigation Option have not been sent to
16 the Borrower during the Default episode;
17 • the OWL at the Market Rate will achieve a reduction equal to or greater than
18 $20 and 5 percent of the P&I portion of the Borrower’s monthly Mortgage
19 Payment as of the date the OWL begins; and
20 • the Borrower receives at least one offer for an OWL per Default episode.
21 Non-Borrowers Who Acquired Title through an Exempted Transfer are not eligible
22 for the OWL and must be evaluated for the other Permanent Home Retention
23 Options.
24 (1) Mortgage Status
25 The Mortgagee must ensure that:
26 • the Mortgage is 120 or more Days Delinquent;
27 • at least six months have elapsed since the date of the first payment on the
28 original Mortgage, as evidenced on HUD’s Neighborhood Watch system,
29 and a minimum of four Mortgage Payments have been paid by the
30 Borrower on the current Mortgage, except for Disaster Home Retention
31 Options;
32 • the first legal action to initiate foreclosure has not been completed; and
33 • the Arrearages do not exceed the equivalent of 12 months PITI.
34 (2) Property Condition
35 The Mortgagee must conduct any review it deems necessary, including a property
36 inspection, when:
1 • the Mortgagee receives notice from the Borrower, local government, or
2 other third parties regarding adverse property condition; or
3 • the Property may be affected by a disaster event.
4 If the Mortgagee determines the property condition will adversely impact the
5 long-term use of the Property or ability to support the debt, the Mortgagee is not
6 required to review the Borrower for the OWL.
7 (C) Standard
8 The Mortgagee must review Borrowers who are 120 or more Days Delinquent and
9 have not responded to outreach by the Mortgagee during the current Default episode
10 to initiate an OWL.
11 The Mortgagee must first review the Borrower for a 30-year Standalone Loan
12 Modification at the Market Rate. If the minimum payment reduction is not met, the
13 Mortgagee must review the Borrower for a 40-year Standalone Loan Modification at
14 the Market Rate.
15 If the Borrower is eligible, the Mortgagee must:
16 • prepare and send out the Loan Modification documents to the Borrower; and
17 • provide a cover letter that includes:
18 an explanation of terms including the modified Mortgage Payment
19 amount;
20 the date the next payment is due;
21 a statement that no lump sum payment is required;
22 a statement that the Borrower is encouraged to contact the Mortgagee to
23 discuss other Loss Mitigation Options that may provide further payment
24 reduction and to reinstate their Mortgage;
25 a statement that the OWL is contingent on the Mortgagee’s review of title
26 to ensure the FHA-insured Mortgage remains in first lien position;
27 information for the Borrower to contact the Mortgagee; and
28 a statement that the Borrower must sign and return the Loan Modification
29 documents within 30 Days of receipt of the documents.
30 The Mortgagee does not have to contact the Borrower prior to reviewing the
31 Borrower for the OWL or sending out the modification documents.
32 (D) Terms
33 The Mortgagee must ensure that:
34 • the OWL at the Market Rate will achieve a reduction equal to or greater than
35 $20 and 5 percent of the P&I portion of the Borrower’s monthly Mortgage
36 Payment as of the date the OWL begins;
37 • the modified Mortgage is a fixed rate Mortgage;
38 • the OWL fully reinstates the Mortgage; and
1 • the OWL only capitalizes Arrearages, as calculated in Appendix 4.0, Part A:
2 Arrearages.
3 Mortgagees may include an additional month in the total outstanding debt to be
4 resolved to allow time for the Borrower to return the executed Loan Modification
5 documents before the modified Mortgage Payment begins.
6 HUD does not provide a model document for the OWL. The Mortgagee must ensure
7 the FHA-insured Mortgage remains in first lien position and is legally enforceable.
8 (E) Required Documentation
9 For those Borrowers that were sent an offer for an OWL, a copy of the cover letter
10 and Loan Modification documents must be retained in the Servicing File.
11 Mortgagees are required to note in each individual Borrower’s file if the Borrower
12 does not qualify for the OWL.
13 viii. Permanent Home Retention Option Failure Is New Default
14 If the Borrower is in Default following the use of a Permanent Home Retention Option,
15 the Mortgagee must treat this as a new Default episode.
16 j. Home Disposition Options
17 i. Standard
18 The Mortgagee must review Borrowers for Home Disposition Options who are unable to
19 sustain the Mortgage with the assistance of a Loss Mitigation Home Retention Option.
20 The Home Disposition Options include:
21 • Equity Saver Sale (ESS);
22 • Pre-Foreclosure Sale (PFS); and
23 • Deed-in-Lieu (DIL).
24 The Mortgagee must notify the Borrower that they may be able to avoid foreclosure by
25 selling their home with an ESS or PFS Option and must provide the Borrower the
26 following information:
27 • a cover letter that explains the ESS and PFS Options that must include, at
28 minimum:
29 the ESS Option allows the Borrower to retain the net equity proceeds from the
30 sale of the Property if the current market value of the Property is greater than
31 the total outstanding amount owed on the Property;
32 the PFS Option will allow the Borrower to sell the home for less than the
33 amount owed if the current market value of the Property is less than the total
34 outstanding amount owed on the Property;
1 the Borrower is not prohibited from attempting to sell their home on their own
2 (with or without the use of a licensed real estate professional), but it does not
3 stop the initiation of Foreclosure unless they participate in the ESS or PFS
4 Option; and
5 the Borrower may be responsible for the cost of an appraisal and title search;
6 • form HUD-90035, Information Sheet: Pre-foreclosure Sale Procedure;
7 • the total accumulated Mortgage Arrearages must not exceed the equivalent of six
8 months PITI at the time of approval for the ESS or PFS Option; and
9 • the Borrower must retain a licensed real estate broker/agent and provide an
10 executed Property listing agreement to the Mortgagee within seven Days of the
11 date of approval to participate in the ESS or PFS Option.
12 The terms of the Property listing agreement must state that the Property will
13 be listed on the Multiple Listing Service (MLS).
14 Where the Borrower has confirmed they are willing to attempt to sell the Property prior
15 to the initiation of foreclosure, the Mortgagee must review the Borrower for an ESS and
16 PFS, as appropriate.
17 If the Borrower advises that their financial situation has improved during the ESS, PFS,
18 or DIL process and wants to retain the Property, the Mortgagee must review the
19 Borrower for one additional Loss Mitigation Home Retention Option.
20 ii. Equity Saver Sale
21 (A) Definition
22 An Equity Saver Sale (ESS) refers to the sale of a Property with a Mortgage in
23 Default where the current market value of the Property is greater than the total
24 amount owed on the Mortgage, and any subordinate liens, and provides the Borrower
25 with a marketing period to complete the sale and retain their equity.
26 (B) Standard
27 The Mortgagee must advise Borrowers who are unable to sustain the Mortgage with
28 the assistance of a Loss Mitigation Home Retention Option of the availability of the
29 ESS and the requirements for an ESS marketing period.
30 If the Borrower listed the Property for sale prior to the initiation of the first legal
31 action to foreclose, the Borrower may elect to participate in the ESS to allow for
32 additional time to market and sell the Property with a licensed real estate professional.
33 (C) Eligibility
34 The Mortgagee must ensure that:
35 • the total accumulated Mortgage Arrearages must not exceed the equivalent of
36 six months PITI at the time of approval;
37 • first legal action to initiate foreclosure has not been completed; and
1 • the Borrower agrees to:
2 reimburse the Mortgagee for costs incurred for an Automated Valuation
3 Model (AVM)/ Broker’s Price Opinion (BPO) and title search if a contract
4 of sale for the transaction closes. The cost may be added to the payoff
5 statement of the Mortgage;
6 provide the Mortgagee with a listing agreement executed by the Borrower
7 and a licensed real estate agent/broker within seven Days of the date of the
8 Mortgagee’s approval of the ESS marketing period;
9 include terms in the listing agreement that states that the Property will be
10 listed on the MLS;
11 perform routine Property maintenance (e.g., interior cleaning, lawn
12 maintenance, etc.);
13 make the Property available to show during the ESS marketing period; and
14 if the Property is vacant or becomes vacant, notify the Mortgagee and
15 secure the Property.
16 (D) Equity Saver Sale Marketing Period
17 The Mortgagee must provide eligible Borrowers a 120 Day ESS marketing period to
18 market the Property for sale.
19 If, following the initiation of foreclosure, the Mortgagee has received an acceptable
20 contract of sale that meets the ESS requirements, the ESS marketing period must only
21 be issued for the time needed to close based on the close of escrow date on the
22 contract of sale.
23 If the Borrower provides the Mortgagee with a signed contract of sale but settlement
24 has not occurred by the end of the 120 Day marketing period, HUD provides an
25 automatic two-month extension to the marketing period to complete the sales
26 transaction.
27 (E) ESS Agreement
28 The Mortgagee must provide the ESS Agreement using methods providing
29 confirmation or a timestamp of delivery to the Borrower, which must include:
30 • the marketing period start and end dates;
31 • the date by which the Borrower’s sales contract must be executed and that the
32 Mortgagee must receive the executed ESS from the Borrower within seven
33 Days of the date of delivery of the ESS Agreement;
34 • acknowledgement that the ESS marketing period may be terminated after the
35 Mortgagee’s review of the list price and Property title;
36 • that if sufficient equity does not exist, the Mortgagee will contact the
37 Borrower to discuss additional options including selling under the PFS
38 Option; and
39 • agreement that the Borrower must:
40 retain a licensed real estate broker/agent;
1 provide an executed Property listing agreement to the Mortgagee within
2 seven Days of the date of approval to participate in the ESS or PFS
3 Option. The terms of the Property listing agreement must state that the
4 Property will be listed on the MLS;
5 reimburse the Mortgagee for the costs incurred for an AVM/BPO and title
6 search if a contract of sale transaction closes; and
7 maintain and make the Property available to show during the ESS
8 marketing period.
9 (F) Mortgagee Review and Monitoring of ESS
10 After the ESS Agreement is signed, the Mortgagee must review the title and the list
11 price of the Property to determine if sufficient equity exists. If equity is insufficient or
12 title issues exist, the Mortgagee must contact the Borrower to discuss additional
13 options including selling under the PFS Option.
14 The Mortgagee must contact the Borrower or their agent monthly during the ESS
15 marketing period to verify the status of the Property listing.
16 (G)Required Documentation
17 The Mortgagee must retain a copy of the ESS Agreement and the executed listing
18 agreement in the Servicing File and Claim File, if applicable.
19 The Mortgagee must include monthly notations in the servicing record, documenting
20 the Mortgagee’s monitoring of the ESS with the Borrower during the ESS marketing
21 period.