Advice for Dealing with Disaster Related Defaults
By Donna Schmidt, Managing Director – DLS Servicing Consultants, LLC
With Hurricane Harvey, wildfires in Montana, flooding in West Virginia, and severe weather in other parts of the country, it is essential that Mortgage Servicers are prepared and poised to assist your neighbors/mortgagors through the crises.
The rules vary based on the Investor/Holder of the loan or the insurer/guarantor. Below is a brief summary of what you can and cannot do.
In general, the best practice is:
Validate that the disaster either damaged the property or impaired the mortgagor’s income potential.
Only those mortgagors who have submitted a loss mitigation application (borrower response package) should be considered for a special disaster forbearance plan, if the loan is current. A small percentage of mortgagors will not be able to qualify for a permanent home retention option at the end of a forbearance plan. If the mortgagor can maintain the monthly payments, they should be encouraged to do so.
Once a loan does become delinquent and the delinquency is in direct result of the disaster, most insurers/guarantors will offer a 90 day special forbearance to give the mortgagor time to recover, file insurance claims or FEMA applications or find new employment. For some mortgagors they have lost everything and they need time to reconstruct essential documentation to apply for assistance.
In addition, most entities will also afford a 90 day moratorium on initiating foreclosures, foreclosure sales and evictions.
We are recommending the following:
When a mortgagor calls to report their property is damaged or that they are now temporarily unemployed due to a disaster – issue a loss mitigation application package and encourage them to submit as much documentation as they can pull together. The most essential items are evidence such as an insurance claim or letter from employer, etc. The loss mitigation application will be processed in accordance with the insurer/guarantor or investor’s guidelines.
If there is no contact with the mortgagor, the property falls within the FEMA map of individual assistance areas (or HUD’s affected county list) and the loan is 30+ days delinquent one month after the disaster, issue a special forbearance plan that provides for a monthly payment of $10 per month for three months (when not restricted by the insurer/guarantor or investor). This will encourage the borrower to make contact, and remain in contact, during the 90 day moratorium period.
For properties that are located in the FEMA individual assistance counties or the counties identified by HUD, the servicer should refrain from reporting a delinquent loan to the credit repositories for the 90 day moratorium period.
Please remember that, as the servicer, you still have an obligation to have abandoned properties secured. It is critical to attempt contact with the mortgagor and to schedule inspections as soon as possible for any property that falls within the disaster mapping areas. This inspection will also determine if the property was indeed damaged by the disaster and help the servicer understand if additional relief options are necessary.
Below is a brief summary of the various guidelines – please see the individual entity announcements, handbooks, circulars and guides for more detailed guidance.
GSE Loans (Fannie Mae or Freddie Mac)
Both GSE’s offer a moratorium for 90days for the initiation of new foreclosure and the continuance of any existing foreclosure, until it can be determine whether the property was affected by the disaster. Under no circumstances should a foreclosure be allowed to consummate until It is determined that a foreclosure is feasible.
The GSE’s allow for a 3 month forbearance, and up to a 6 month plan if there is contact with the mortgagor.
FHA has issued a 90 day moratorium on foreclosures and forbearance on payments. This became effective 8/28/2017, and will expire on 11/26/2017.
VA has issued a circular dated 8/29/2017 that states that they encourage a 90 day moratorium on the referral to foreclosure and foreclosure sales. They also encourage forbearance for those mortgagors directly affected by the disaster, but servicers should use sound judgement to determine if the default may have been caused by another reason.
VA further allows the servicer to reverse previous prepayment (principal curtailments) and reapply as contractual payments, as an effort to keep the loan current.
VA further reminds servicers that the National Guard has been called to assist in numerous instances and the Soldiers and Sailors Relief Act protections would apply to those mortgagors asked to assist.
Section 4 of the Rural Housing Guide provides detailed instructions on how to handle a disaster. RHS authorizes a 90 day moratorium for new foreclosure referrals and foreclosure sales – however, they clearly state that there must be evidence that the property or the mortgagor’s employer was directly affected by the disaster.
Rural Housing allows for a forbearance period, but does not specify the parameters, and therefore should be evaluated on a case by case basis – making it necessary for the borrower to submit a loss mitigation package. At no time can the loan be more than 12 months delinquent during the forbearance period.
Privately Held Loans
We strongly recommend that all foreclosures be placed on a 90 day moratorium, until the property condition can be evaluated, as well as the occupancy status of the property. Sound judgement should be used in determining whether the foreclosure can be commenced.
An automatic 3 month forbearance of $10 per month can be issued to all properties located in the disaster zone for all loans that are 30+ days delinquent. This should only be granted if the servicer has determined that prior to the disaster the property had not been abandoned.
DLS Servicing Consultants, LLC is a loss mitigation outsourcing consulting firm. Our experienced staff stands ready to assist and ensure that the mortgage servicer meets the needs of their portfolio and community. Please visit our website at www.dls-servicing.com for more information.