Navigating the COVID-19 Loss Mitigation Options

QUESTION

We originate and service a lot of FHA loans, both refinance and purchase money. Recently, FHA put out a Mortgagee Letter that involves loss mitigation options during the COVID-19 pandemic.

Our compliance department is just two people, and we are getting bombarded with loss mitigation issues on our FHA loans. The Mortgagee Letter is so filled with legalese that we can’t make sense of some of the requirements.

Hopefully, you can enlighten us without the legalistic mumbo-jumbo.

So, in normal lingo, what are some of the main features of these COVID-19 loss mitigation requirements?

ANSWER

I know how you feel. Some issuances from federal agencies are so overly-lawyered that only the lawyers seem to be able to interpret them. Maybe it's their way of keeping job security!

But, to keep it real, the financial services industry is highly litigious, which is a reflection of its many accrued regulations as well as the mandates to implement federal and state banking laws. It is often not that we have too many rules and laws. Most existing laws simply need to be enforced. Lack of enforcement is a much bigger problem than too many laws. So, sometimes we just need to be patient with the legalese. After all, a day may come when you need a good lawyer to defend actions you have taken in good faith. And I am more than happy to provide the straight-out plain talk, and hopefully, a better understanding to be able to subdue some of your bewilderment.

The HUD issuance you are referring to is Mortgagee Letter 2020-22, which is dated July 8, 2020. It pivots from the previous Mortgagee Letter 2020-06 of April 1, 2020. The earlier ML was issued as a response to the Coronavirus Aid, Relief, and Economic Stimulus (CARES) Act, which was signed into law on March 27, 2020. ML 2020-06 provided guidance in establishing (1) the Forbearance for Borrowers Affected by the COVID-19 National Emergency (COVID-19 Forbearance), (2) the COVID-19 National Emergency Standalone Partial Claim (COVID-19 Standalone Partial Claim), and (3) the extension period for Home Equity Conversion Mortgages (HECM) affected by COVID-19.

We discuss these guidelines to some extent in our free Checklist and Workbook on the Business Continuity plan and Pandemic Response (which, by the way, will soon be published in Update # 8.) Download it HERE.

ML 2020-22 deals with additional Loss Mitigation Home Retention Options due to the COVID-19 National Emergency. The ML pertains to forward mortgages. Note the word “options.” The options are available to borrowers affected by the COVID-19 national emergency who were current or less than 30 days past due as of March 1, 2020. With respect to mortgage servicing, the servicers must offer eligible borrowers the COVID-19 Loss Mitigation Options no later than 90 days from the date of the ML (viz., July 8^th), but servicers may begin offering the new options immediately.

So, the ML 2020-22 updates the guidance in ML 2020-06, and the requirements are going to be incorporated into HUD Handbook 4000.1. ML  2020-06 dealt with the COVID-19 forbearance based on the CARES Act and the COVID-19 Standalone Partial Claim. Now, HUD is issuing the ML 2020-22 to fortify on such measures by establishing the following six COVID-19 Home Retention and Disposition Options:

1. COVID-19 Owner-Occupant Loan Modification
2. COVID-19 Combination Partial Claim and Loan Modification
3. COVID-19 FHA-Home Affordable Mortgage Program (FHA-HAMP) Combination Loan Modification and Partial Claim with Reduced Documentation (which may include principal deferment and requires income documentation)
4. COVID-19 Non-Occupant Loan Modification
5. COVID-19 Pre-Foreclosure Sale (PFS)
6. COVID-19 Deed-in-Lieu (DIL) of Foreclosure

I’m going to explain these options in cursory detail. The options require systemic implementation. Make sure you discuss these options with a compliance professional. If you need assistance, we’re here to help. Let me know. Click HERE.

The options are meant to provide methods to reinstate a mortgage after the expiration of the COVID-19 forbearance period. The COVID-19 Standalone Partial Claim – indeed, the first three options listed above – are available for eligible owner-occupant borrowers who are able to resume their monthly mortgage payment (or, if applicable, a modified payment).

The COVID-19 Non-Occupant Loan Modification is available for eligible non-occupant borrowers who are able to resume the monthly mortgage payment (or, if applicable, a modified payment).

The use of a COVID-19 Home Retention Option does not count against a borrower’s limit of one FHA-HAMP agreement within 24 months. The last two options – specifically, the Home Disposition Options – are available for eligible owner-occupant and non-occupant borrowers who are unable to reinstate the mortgage.

For eligible borrowers, servicers must complete a Loss Mitigation Option no later than 90 days from the earlier of the completion or expiration of the COVID-19 forbearance. For the Home Disposition Options, a signed Agreement to Participate (ATP) Agreement or signed DIL Agreement will meet this requirement.

For borrowers who are participating in a COVID-19 forbearance, servicers are granted an automatic 90-day extension of the first legal deadline date, from the earlier of the completion or expiration of the COVID-19 forbearance, to complete a Loss Mitigation Option or to commence or re-commence foreclosure.

By the way, a trial payment plan is not required for a borrower to be eligible for a COVID-19 Loss Mitigation Option.

Now I am going to get into some detail, but I hope to keep it measured, succinct, and brief. Where possible, I will provide a bulleted outline. I will discuss the -

• COVID-19 Standalone Partial Claim,
• COVID-19 Owner-Occupant Loan Modification,
• COVID-19 Combination Partial Claim and Loan Modification,
• COVID-19 FHA-HAMP Combination Loan Modification and Partial Claim with Reduced Documentation, and 
• COVID-19 Non-Occupant Loan Modification.

COVID-19 Standalone Partial Claim

The borrowers who receive a COVID-19 forbearance must be evaluated for the COVID-19 Standalone Partial Claim no later than the end of the forbearance period.

There are three criteria that the servicer must confirm, to wit, that -

(1) the borrower was current or less than 30 days past due as of March 1, 2020,
(2) the borrower indicates an ability to resume making on-time mortgage payments, and
(3) the property is owner-occupied.

The terms of the COVID-19 Standalone Partial Claim are the following: 

• The borrower’s accumulated late charges, fees and penalties are waived;
• The COVID-19 Standalone Partial Claim amount includes only arrearages that consist of principal, interest, taxes and insurance;
• The COVID-19 Standalone Partial Claim does not exceed the 30% maximum statutory value of all partial claims for an FHA insured mortgage; and
• The borrower may receive only one permanent COVID-19 Home Retention Option.

COVID-19 Owner-Occupant Loan Modification

For borrowers who do not qualify for a COVID-19 Standalone Partial Claim, the servicer must review the borrower for a COVID-19 Owner-Occupant Loan Modification, which modifies the rate and term of the mortgage at the end of a COVID-19 forbearance period.

The servicer must confirm three criteria, to wit, that -

(1) the borrower was current or less than 30 days past due as of March 1, 2020,
(2) the borrower indicates an ability to make the modified mortgage payment, and
(3) the property is owner-occupied.

The terms of the COVID-19 Owner-Occupant Loan Modification are the following: 

• All accumulated late charges, fees and penalties must be waived;
• Only arrearages for unpaid accrued interest and servicer advances for escrowed items may be capitalized;
• The COVID-19 Owner-Occupant Loan Modification must fully reinstate the mortgage;
• The modified mortgage, including adjustable rate mortgage loans, graduated payment mortgage loans, and growing equity mortgage loans, must be a fixed rate mortgage;
• The interest rate must be no more than the market rate, as defined by HUD;
• The term for the modified mortgage is 360 months, or less if requested by the borrower;
• The principal and interest payment may not increase, unless the borrower has exhausted the 30% maximum statutory value of all partial claims for an FHA insured mortgage;
• The FHA insured mortgage must remain in a first lien position and be legally enforceable (HUD does not provide model documents for a COVID-19 Loan Modification); and
• The borrower may receive only one permanent COVID-19 Home Retention Option.

Note, HUD defines the “market rate” as a rate that is no more than 25 basis points greater than the most recent Freddie Mac Weekly Primary Mortgage Market Survey (PMMS) Rate for 30-year fixed-rate conforming mortgages (U.S. average), rounded to the nearest one-eighth of 1 percent (0.125 percent), as of the date the loan modification is approved.

COVID-19 Combination Partial Claim and Loan Modification

The servicer must review an owner-occupant borrower for a COVID-19 Combination Partial Claim and Loan Modification if

(1) the modified monthly mortgage payment will increase utilizing the COVID-19 Owner-Occupant Loan Modification, and
(2) the borrower is unable to bring the mortgage current through the COVID-19 Standalone Partial Claim because

   (a) the total arrearage exceeds the available portion of the statutory maximum for partial claims, and the available portion of the statutory maximum for the mortgage has not been fully exhausted, or

   (b) the borrower cannot resume their existing monthly mortgage payments with a COVID-19 Standalone Partial Claim.

The servicer must confirm four criteria, to wit, that -

(1) the borrower was current or less than 30 days past due as of March 1, 2020,
(2) the borrower has not exceeded the 30% statutory maximum value of all partial claims for an FHA insured mortgage,
(3) the borrower indicates an ability to make the modified mortgage payment, and
(4) the property is owner-occupied.

The terms of the COVID-19 Combination Partial Claim and Loan Modification are the following: 

• All accumulated late charges, fees and penalties must be waived;
• Only arrearages for unpaid accrued interest and servicer advances for escrowed items may be capitalized;
• The servicer must determine the maximum partial claim amount available that does not exceed the 30% maximum statutory value of all partial claims for an FHA insured mortgage, and must apply any remaining available partial claim amount toward the arrearage first, and then capitalize the remaining arrearage into the modified mortgage;
• The COVID-19 Combination Partial Claim and Loan Modification must fully reinstate the mortgage;
• The modified mortgage, including adjustable rate mortgage loans, graduated payment mortgage loans, and growing equity mortgage loans, must be a fixed rate mortgage;
• The interest rate must be no more than the market rate, as defined by HUD;
• The term for the modified mortgage is 360 months, or less if requested by the borrower;
• The total monthly mortgage payment may increase;
• The FHA insured mortgage must remain in a first lien position and be legally enforceable (HUD does not provide model documents for a COVID-19 Loan Modification); and
• The borrower may receive only one permanent COVID-19 Home Retention Option.

COVID-19 FHA-HAMP Combination Loan Modification and Partial Claim with Reduced Documentation

A borrower may provide income documentation to a servicer to be reviewed for an affordable monthly payment under a COVID-19 FHA-HAMP Combination Loan Modification and Partial Claim with Reduced Documentation, which may include a principal deferment.

The servicer must confirm four criteria, to wit, that -

(1) the borrower was current or less than 30 days past due as of March 1, 2020,
(2) the borrower has not exhausted the 30% statutory maximum value of all partial claims for an FHA insured mortgage,
(3) the borrower is not eligible for the COVID-19 Home Retention Options due to the following

   (a) the borrower is not eligible for the COVID-19 Standalone Partial Claim because the borrower indicates they are unable to resume the existing monthly mortgage payments after the COVID-19 forbearance or

   (b) the borrower is not eligible for the COVID-19 Combination Partial Claim and Loan Modification because the borrower indicates they are unable to make the modified monthly mortgage payment under the COVID-19 Combination Partial Claim and Loan Modification, and
(4) the property is owner-occupied.

The servicer must review the borrower for an affordable monthly payment using the FHA-HAMP calculations in Step 5 of the Loss Mitigation Home Retention Waterfall Options. Caution: please be sure you are familiar with these Waterfall Options and already have them ratified, monitored, and tested.

If required, a principal deferment may be utilized. But no portion of the partial claim may be used to bring the modified total monthly mortgage payment below the targeted payment.

The following reduced income documentation requirements are acceptable for the review of the borrower:

• The borrower’s most recent pay stub for wage income reflecting year-to-date earnings; or
• The borrower’s most recent bank statement reflecting deposits of income amounts from applicable sources; or
• Other documentation (i.e., monthly statement of Social Security benefits, monthly pension statement) reflecting the amount of income.

COVID-19 Non-Occupant Loan Modification

At the expiration of a COVID-19 forbearance period, the servicer must review non-occupant borrowers for a COVID-19 Non-Occupant Loan Modification, which modifies the rate and term of the mortgage.

There are three criteria that servicer must confirm, to wit, that –

(1) the borrower was current or less than 30 days past due as of March 1, 2020,
(2) the borrower indicates an ability to make the modified mortgage payment, and
(3) the property is not owner-occupied (viz., the property can be used as rental property, a second home, or a vacation home).

The terms of the Non-Occupant Loan Modification are the following: 

• All accumulated late charges, fees and penalties must be waived;
• Only arrearages for unpaid accrued interest and servicer advances for escrowed items may be capitalized;
• The COVID-19 Non-Occupant Loan Modification must fully reinstate the mortgage;
• The modified mortgage, including adjustable rate mortgage loans, graduated payment mortgage loans, and growing equity mortgage loans, must be a fixed rate mortgage;
• The interest rate must be no more than the market rate, as defined by HUD;
• The term for the modified mortgage is 360 months, or less if requested by the borrower;
• The total monthly mortgage payment may increase;
• The FHA insured mortgage must remain in a first lien position and be legally enforceable (HUD does not provide model documents for a COVID-19 Loan Modification); and
• The borrower may receive only one permanent COVID-19 Home Retention Option.

Please note that ML 2020-22 also addresses the evaluation of borrowers for a COVID-19 Pre-Foreclosure Sale and COVID-19 Deed-in-Lieu of Foreclosure, and for standard Loss Mitigation Home Retention Options if the borrower does not qualify for the COVID-19 Home Retention or Home Deposition Options.

Also, the ML 2020-22 addresses documentation requirements for the Loss Mitigation Options, and reporting requirements for borrowers affected by the COVID-19 national emergency.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group