In an announcement Friday, HUD said homeowners with mortgages insured by the Federal Housing Administration (FHA) who are experiencing financial hardship are now eligible for loss mitigation assistance before they fall behind on their mortgage payments.

Previously, these homeowners were not eligible for such assistance until after they had missed payments. But the Helping Families Save Their Home Act of 2009 signed into law by President Obama expanded FHA’s authority to use its loss mitigation tools for borrowers facing “imminent default.” FHA issued guidance Friday to its loan servicers on how to assist these homeowners before they default.

According to FHA Commissioner David Stevens, FHA has always required lenders to establish early contact with delinquent borrowers to discuss the reason for missing a payment and to evaluate reinstatement options. But now, he says, servicers will have additional options for those homeowners who seek help before they go delinquent, increasing the likelihood that the borrower will be able to retain their home.

Effective immediately, the loss mitigation options of forbearance and FHA’s Home Affordable Modification Program may be used to assist borrowers facing imminent default.  FHA defines a “borrower facing imminent default” to be one who is current or less than 30 days past due on their mortgage obligation, and who is experiencing a significant reduction in income or some other hardship that will prevent them from making the next required payment.

Under the agency’s forbearance program, the loan servicer can agree to postpone, reduce, or suspend payments due on a loan for a limited and specific time period.  FHA-HAMP allows qualified FHA-insured borrowers to reduce their monthly mortgage payment to an affordable level by permanently reducing the payment through the use of a partial claim combined with a loan modification. The partial claim defers the repayment of a portion of the mortgage principal through an interest-free subordinate mortgage that is not due until the first mortgage is paid off. The remaining balance is then modified through re-amortization and in some cases, an interest rate reduction.

The borrower must be able to document the cause of the imminent default, such as unemployment or reduced pay, or a change in household financial circumstances such as a death in the family or serious illness.  FHA said loan servicers are required to document the basis for their determination that a payment default is imminent and retain all documentation used to reach that conclusion. The servicer’s documentation must also include information on the borrower’s financial condition.

Source: Carrie Bay, DSNews.com