Servicers of loans insured by the Federal Housing Administration can now implement loss-mitigation options before the borrower defaults.
Imminent default has been defined as an FHA borrower who is current or less than 30 days past due but experiencing a significant reduction in income or facing some hardship that will prevent the next payment from being made, according to Mortgagee Letter 2010-04 issued Friday by the U.S. Department of Housing and Urban Development.
By establishing that borrowers are facing imminent default, FHA servicers can utilize loss-mitigation options before the borrower goes into default. Loss-mitigation options include formal forbearance agreements (more than three months), informal forbearance agreements (three months or less) and FHA’s Home Affordable Modification Program.
The borrower must document the circumstances that will cause the default.
Reduced employee compensation, the loss of one spouse’s ability to earn income or declining self-employment income are all acceptable causes — as long as the income was originally used to qualify the borrower. But the temporary shut down by an employer would be inadequate to support an imminent default.
HUD said its authority to use such programs for FHA borrowers facing imminent default was established by the Helping Families Save Their Home Act of 2009.
The change is effective immediately.
