The U.S. Department of Housing and Urban Development (HUD)
has come up with both a carrot and a stick to reduce losses arising from FHA
insured loans gone bad.
On April 26 HUD released information on a punitive approach to lenders that
issue FHA loans and then fail to engage in loss mitigation efforts when those
loans default. Then HUD announced a program to reward lenders who do utilize
what HUD considers to be its most effective options for dealing with distressed
loans.
On the stick side, HUD published a final rule that dramatically increased the
financial damages that HUD can seek against lenders that fail to utilize its
mitigation programs. Prior to the release of these rules, HUD could assess fines
of $6,500 per occurrence up to a maximum of $1.25 million per year against lenders.
The new rules provide for additional damages of triple the amount of any FHA
mortgage insurance benefit claimed by a lender.
Then, three days later, came the carrot in the form of a financial incentive
offered to FHA lenders to encourage use of these loss mitigation tools. The
new rules will allow lenders to claim up to $750 for completing mortgage modifications
and $500 for partial claims. This is an increase of $250 in each case.
Both the positive and the negative reinforcement techniques are meant
to prevent foreclosures or minimize their impact on the FHA
insurance funds and homeowners themselves. HUD claims that its loss
mitigation techniques helped more than 78,000 homeowners keep their residences
in 2004, a larger number than the sum of claims paid by FHA to lenders for completed
foreclosures.
The FHA Loss Mitigation Program gives lenders the authority and responsibility
to assist homeowners who have fallen into financial difficulties with their
home mortgages. Lenders have the option of offering borrowers a number of HUD/FHA
approved options for avoiding foreclosure:
- Special Forbearance: This can include a temporary reduction or suspension
of mortgage payments until the borrower can re-establish financial stability
or a permanent revision in the payment amount to reflect a borrower's
new and reduced financial status.
- Modifications: The lender can rewrite the mortgage note in order to
roll delinquent amounts into the principal or extend the term of the loan to
reduce monthly payments.
- Partial Claim: Under this program FHA's insurance fund makes a
one-time payment to bring the mortgage current.
- Pre-Foreclosure Sale: The borrower avoids foreclosure by selling the
property for its appraised value even if this results in a "short sale,"
i.e., the proceeds are not enough to pay off the mortgage.
- Deed-in-Lieu of Foreclosure: This is a negotiated settlement wherein
the borrower deeds the house back to the lender, saving the FHA insurance fund
some legal costs and the borrower all of the credit ramifications of a foreclosure.
HUD's press release states that the incentives, effective June
1, are offered to lenders to reflect the increased costs lenders incur
when working out solutions to homeowners financial difficulties.