HUD boosts fines for failure to help troubled borrowers

The U.S. Department of Housing and Urban Development published a final rule April 26 that dramatically increases the amount of damages HUD can seek against FHA lenders that fail to engage in loss mitigation techniques. Loss mitigation options enable many homeowners who are in default on their FHA mortgages to avoid foreclosure and remain in their homes.

“We are working to ensure that every FHA borrower is afforded the opportunity to explore all options to keep their homes,” said HUD Secretary Alphonso Jackson in a news release. “Our lenders must make every effort to help people stay in their homes, help to stabilize neighborhoods and prevent losses to FHA’s insurance fund.”

The maximum penalty that can be imposed on lenders is $6,500 for each violation, up to a limit of $1.25 million for all violations committed during any one-year period. But the new penalty provides for additional damages of three times the amount of any FHA mortgage insurance benefit claimed by a lender and is not subject to the current limitations.

In recent years, HUD has worked to ensure that lenders work with FHA-insured homeowners in default to see how they may qualify for one of HUD’s loss mitigation options.

Those options include:

• Special forbearance. The lender arranges a repayment plan based on the borrower’s financial situation, and possibly provides for a temporary reduction or suspension of payments.

• Mortgage modification. The lender capitalizes the mortgage delinquency, usually reducing the monthly payment and/or extending the term of the mortgage.

• Partial claim. The lender obtains a one-time payment from the FHA insurance fund to bring the mortgage current.

• Pre-foreclosure sale. The borrower avoids foreclosure by selling the property for its appraised value, and these proceeds are less than the amount necessary to pay off the mortgage.

• Deed-in-lieu of foreclosure. The borrower gives back the property to the lender. The borrowers lose their house, but do not damage their credit rating as much as a foreclosure would.

For each of these options, the borrower must meet certain qualifications, based on their circumstances.

Preserving homeownership

In the past three fiscal years, almost 230,000 defaulted FHA borrowers benefited from loss mitigation, more than lost their homes through foreclosure. The new rule specifically addresses how HUD will be empowered to penalize lenders who fail to successfully engage in loss mitigation techniques and by specifically defines the criteria used evaluate a lender’s performance.

Failure to engage in loss mitigation is defined as a servicing lender’s failure to: evaluate a loan for loss mitigation before four full monthly mortgage installments are due and unpaid; determine which, if any, loss mitigation techniques are appropriate; and take appropriate loss mitigation actions. HUD will use its Tier Ranking System to measure a lender’s loss mitigation efforts on a portfolio-wide basis, and rank the lender based on the ratio of loss mitigation actions to foreclosure actions. HUD intends to focus its efforts on lenders ranked in the lowest tier.

Added incentive

In a separate news release, HUD announced that effective June 1, it will increase the incentive payments available to lenders who use HUD’s loss mitigation options to help borrowers avoid default.

With the increases, HUD lenders that use the mortgage modification and partial claim tools will be able to claim an additional financial incentive of $250 per loan. The total incentive for mortgage modifications will be $750 and for partial claims, it will be $500.

HUD is committed to increasing homeownership, particularly among minorities; creating affordable housing opportunities for low-income Americans; and supporting the homeless, elderly, people with disabilities and people living with AIDS.

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