Thoughts and Insight Regarding FHA Mortgagee Letter 2015-07 3/26/2015
After reviewing Mortgagee Letter 2015-07 released on 3/18/2015, DLS Servicing Consultants, LLC has reviewed and is offering the following insight and practical advice regarding some key sections:
Trial Payment Plan Agreement and Required Signatures
“The Trial Payment Plan Agreement is a written agreement to be executed by all parties on the original note, all parties on the FHA-insured mortgage, and all parties that will be subject to the modified mortgage and/or partial claim, except where:
a borrower or co-borrower is deceased;
a borrower and a co-borrower are divorced or legally separated; or
a borrower or co-borrower on the original note and mortgage has been released from liability in connection with an assumption performed in accordance with HUD’s requirement.
When a borrower uses a non-borrower household member’s income in qualifying for a loss mitigation home retention option and that non-borrower household member will also be included on the modified note, FHA-insured mortgage and/or partial claim, the non-borrower household member must sign the TPP Agreement.”
The key words here are “and that non-borrower household member will also be included on the modified note”. There is no requirement that a non-borrower household member be included on the modified Note. This section is ONLY talking about the required signatures of the Trial Payment Agreement document. It’s important that servicers understand this.
While the mortgagee letter does not require specific signature on the loan modification documents, the letter does raise another question about who must sign the loan mod docs in the events such as divorce or legal separation. Good judgment and care should be used before making the decision to include anyone other than the original borrowers on modified loan documents and we suggest that you seek legal counsel before doing so. Issues and concerns that COULD arise as a result of this practice:
TILA-RESPA Integrated Disclosure Rule – Having a non-original/non- borrower household member execute modified loan documents may be construed as an extension of credit and may trigger the need for disclosure documents to be sent per the CFPB’s TILA-RESPA Integrated Disclosure rule.
Future Foreclosure Actions – What are the ensuing requirements should the loan reenter default and go through foreclosure; what obligations are there to include the newly added non-borrower household member?
Many nuances must be considered when analyzing non-borrower income. Utilizing a nonborrower spouse is reasonable and a simple approach, but outside of that scenario things get more complicated. When should you treat this additional household income as purely rental income (a flat regular contribution each month) that must be documented, or alternatively include all of the non-borrower’s expenses and income into the total household budget? Consider the length of time the non-borrower has contributed to the household and what the likelihood of it continuing.
The goal is certainly to keep the borrower in the home, but there must be a reasonable expectation that the payments will be made based on the information provided.
Start of Trial Payments for Imminent Default Risk Loans
“The mortgagee must send the proposed TPP Agreement to the borrower at least 30 calendar days before the first trial payment is due.”
Imminent Default is essentially defined as a loan that is current, but the borrower has expressed that they are having financial difficulties that likely will cause them to not be able to make future mortgage payments at the current rate.
Requiring a minimum of 30 calendar days for these types of situations can in some instances simply not make sense, and in others complicate the entire process.
In many cases, borrowers in imminent default have worked very hard to successfully make their monthly mortgage payment and keep their loan current. This 30 calendar day requirement will most likely result in the servicer asking the borrower to skip an entire monthly payment in order to have the Trial Payment Plan calculations correct.
Further, any miscommunication or gap in communication between the servicer and the borrower regarding payments during this 30 day period could result in an additional 30 day delay.
Servicers should understand this and ensure proper procedures are in place to minimize the problems that could arise from this new requirement.
DLS Servicing Consultants, LLC is a mortgage default consulting firm and provider of outsource servicing functions. DLS specializes in sub-prime, high touch, FHA and Housing Finance Agency Loan Servicing. DLS is also the creator and owner of WaterfallCalc.com, the industry’s premiere FHA Loss Mitigation Calculation Software.
For more information, please contact:
Michael Meroney Director of Business Development and Consulting