Notice of FHA Accelerated Claim Disposition Demonstration
[Federal Register: October 29, 2002 (Volume 67, Number 209)]
[Notices]
[Page 66037-66042]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29oc02-113]
-----------------------------------------------------------------------
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
[Docket No. FR-4691-N-02]
Notice of FHA Accelerated Claim Disposition Demonstration
AGENCY: Office of the Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Notice.
-----------------------------------------------------------------------
SUMMARY: This notice announces HUD's establishment of the Accelerated
Claim Disposition (ACD) Demonstration. Under the ACD Demonstration, HUD
will pay accelerated claims on certain defaulted FHA-insured mortgages.
HUD intends to select up to nine mortgagees to participate in the ACD
Demonstration. The demonstration will have a limited initial duration
and will include mortgage loans secured by properties located within
the jurisdiction of HUD's Philadelphia, Pennsylvania and Atlanta,
Georgia Homeownership Centers (HOCs). At the conclusion of the
demonstration, HUD will assess its success and determine whether to
implement the ACD process, on a permanent basis, throughout the
country. This notice follows publication of a February 5, 2002 Federal
Register notice proposing the establishment of the ACD Demonstration,
and takes into consideration the public comments received on the
earlier notice.
FOR FURTHER INFORMATION CONTACT: Kathleen S. Malone, Director, Office
of Asset Sales, Room 6266, U.S. Department of Housing and Urban
Development, 451 Seventh Street, SW, Washington, DC 20410; telephone:
(202) 708-2625 (this is not a toll-free telephone number). Hearing- and
speech-impaired persons may access this telephone number via TTY by
calling the toll-free Federal Information Relay Service at 1-800-877-
8339.
SUPPLEMENTARY INFORMATION:
I. Background--HUD's February 5, 2002 Federal Register Notice
On February 5, 2002 (67 FR 5418), HUD published a notice in the
Federal Register announcing its intent to establish the Accelerated
Claim Disposition (ACD) Demonstration, and soliciting public comments
on the proposal. The ACD Demonstration is authorized under section 204
of the National Housing Act (12 U.S.C. 1710), as amended by section 601
of the Fiscal Year 1999 Departments of Veterans Affairs and Housing and
Urban Development and Independent Agencies Appropriations Act (Pub. L.
105-276, approved October 21, 1998) (the FY 1999 HUD Appropriations
Act). Section 601 of the FY 1999 HUD Appropriations Act amended section
204 to make more effective the methods for paying insurance claims and
disposing of HUD-acquired single family mortgages and properties.
Under amended section 204(a)(1)(A) of the National Housing Act, the
Secretary of HUD is authorized to pay accelerated claims upon
assignment of certain defaulted FHA-insured mortgage loans. Before
implementing the new accelerated claim payment process authorized by
amended section 204 on a nationwide basis, HUD has decided to conduct a
demonstration involving a group of defaulted mortgages. The ACD
Demonstration will allow HUD to assess the success of the new
accelerated claim payment process and to address any programmatic
concerns before authorizing its use throughout the country. Publication
of the February 5, 2002 notice allowed HUD to solicit input on how the
ACD Demonstration should be structured and its success evaluated.
II. Significant Changes to Proposed ACD Demonstration
This notice announces HUD's establishment of the ACD Demonstration.
The notice follows publication of the February 5, 2002 notice, and
takes into consideration the public comments received on the earlier
notice. The most significant changes that have been made to the ACD
Demonstration since publication of the February 5, 2002 notice are as
follows:
A. Changes Regarding FHA Insurance Requirements
1. Eligibility of FHA-insured mortgages on two to four-unit homes.
HUD has expanded eligibility for the ACD Demonstration to include FHA
single family mortgages on one to four-unit homes. The February 5, 2002
notice limited eligibility to FHA mortgages on one-unit homes.
Mortgages on two to four-unit homes have a higher risk of foreclosure,
all other factors being equal. Inclusion of these mortgages in the ACD
Demonstration will therefore increase the number of defaulted loans
available for submission of an accelerated claim and enhance the
usefulness of the ACD process for participating mortgagees.
Accordingly, HUD has determined that inclusion of these mortgages in
the ACD Demonstration is appropriate.
2. FHA endorsement date. The notice specifies that the FHA
endorsement date of the mortgage loan must be prior to February 5,
2002.
3. No pending or paid partial FHA insurance claim. The notice
provides that there must be no pending or paid partial FHA mortgage
insurance claim in connection with the defaulted mortgage.
B. Changes Regarding Loan Status
1. Minimum unpaid principal balance. The notice provides that the
mortgage must have an unpaid principal balance of no less than $20,000.
2. Minimum length of default prior to payment of accelerated claim.
This notice clarifies that to be eligible for an accelerated claim, a
mortgage must be in default for at least four full monthly installments
(i.e., four full mortgage payments are due and unpaid).
3. Maximum length of default prior to payment of accelerated claim.
Related to the preceding clarification, HUD will also establish a
maximum number of missed payments beyond which it will not pay an
accelerated claim on a defaulted mortgage. This maximum number of
missed payments will vary depending on the location of the underlying
property, and will be based on the foreclosure timelines for the
various jurisdictions in the Atlanta and Philadelphia Homeownership
Centers (HOCs). The schedule of maximum missed mortgage payments will
be provided to mortgagees prior to their agreement to participate in
the ACD Demonstration.
4. Revised loan to value requirements. This notice provides that,
to be eligible under the ACD Demonstration, a mortgage must have a loan
to value ratio of 85 percent or greater, rather than the 90 percent
specified in the February 5, 2002 notice. HUD has determined that a
high percentage of claims meeting the lower loan to value ratio satisfy
the other eligibility criteria for an accelerated claim. Revising the
loan to value ratio will make more loans eligible for the ACD process,
thereby increasing its usefulness for participating mortgagees and
better enabling HUD to evaluate the success of the ACD Demonstration.
Accordingly, HUD believes that inclusion of these mortgages in the ACD
Demonstration is appropriate.
5. Need for Broker's Price Opinion (BPO). This notice clarifies
that BPOs are not used to calculate loan eligibility for the ACD
Demonstration. However, BPOs will be required for all loans for which a
claim is submitted. The BPO will be made available to private sector
firms who qualify to participate in a competitive bidding process to
select a participant in the joint venture formed for disposition of the
mortgage loans. Participating mortgagees will be reimbursed for BPOs on
all loans for which a claim is submitted and paid.
[[Page 66039]]
6. FICO score no longer an eligibility criterion. This notice
provides that a mortgagor's FICO score will no longer be used as an
eligibility criterion under the ACD Demonstration. (FICO stands for
Fair, Issac and Company--the company that has developed the
mathematical formulas used to derive FICO scores.)
7. Indemnification Agreement. The notice provides that the mortgage
loan must not be, to the knowledge of the participating mortgagee,
subject to an Indemnification Agreement as of the provisional claim
approval date.
C. Changes Regarding Loss Mitigation
1. Loss mitigation evaluation. The notice provides that, for each
defaulted mortgage, the participating mortgagee (or the prior servicer
of the defaulted mortgage) has evaluated all of the loss mitigation
actions provided in 24 CFR 203.605 and determined that no such action
is appropriate or, if appropriate, that such action has been tried and
has failed.
2. Special forbearance relief. To be eligible under the ACD
Demonstration, the mortgage loan must not be subject to special
forbearance relief under 24 CFR 203.614.
D. Changes Regarding Property Securing Mortgage
1. Exclusion of properties located in asset control areas. This
notice provides that the ACD Demonstration will exclude loans secured
by properties located in asset control areas designated under section
204(h) of the National Housing Act, as added by section 602 of the FY
1999 HUD Appropriations Act.
2. Properties seized by the United States. The mortgage must not be
secured by a property that has been seized by the U.S. Department of
Justice or subject to a seizure order in connection with a drug-related
case.
3. Limit on cost of repairs. As of the provisional claim approval
date, the cost of any required repairs to the property must be less
than 10% of the property's value.
E. Changes Regarding Foreclosure
1. Foreclosure sales and deeds-in-lieu of foreclosure. For a
mortgage to be eligible for an accelerated claim, there must not have
been a foreclosure sale or pre-foreclosure sale of the property, no
deed-in-lieu of foreclosure has been accepted, and no foreclosure sale
has been scheduled within sixty days following the claim date.
2. Commencement of foreclosure proceedings. If foreclosure of the
property has been initiated, the foreclosure action may not have been
contested in order for the defaulted mortgage to be eligible under the
ACD Demonstration.
III. Discussion of the Public Comments Received on the February 5, 2002
Notice
The public comment period on the February 5, 2002 notice closed on
April 8, 2002. HUD received 21 comments on the notice. Mortgage
companies, legal aid providers, nonprofit housing and community
development organizations, and national organizations representing
mortgage bankers and realtors submitted comments. This section of the
preamble presents a discussion of the most significant issues raised by
the public commenters on the February 5, 2002 notice, and HUD's
responses to these comments.
Comment: Participation in the ACD Process should be voluntary.
Several of the commenters made this suggestion.
HUD Response: Participation in the ACD Demonstration is voluntary.
Comment: Participating mortgagees should be required to fully
comply with loss mitigation processes. Some commenters expressed
concern that the ACD Demonstration could result in families losing
their homes if participating mortgagees do not fully utilize the
existing HUD loss mitigation process.
HUD Response: The ACD Demonstration will not compromise existing
loss mitigation standards and requirements. Only those mortgagees
qualified in the top tier of the FHA Tiering System (which ranks
mortgagees in loss mitigation use) are eligible to participate in the
ACD Demonstration. Participating mortgagees must exhaust all loss
mitigation options prior to submitting a claim under the ACD
Demonstration. Further, HUD expects that the joint venture Manager will
be motivated to avoid foreclosure and seek to restructure loans in
accordance with market value and owner income.
Comment: HUD should permit use of additional risk scoring models.
Several commenters suggested that participating mortgagees be allowed
to use risk scoring models, other than the Freddie Mac Early Indicator
Risk Scoring System, to determine the eligibility of a mortgage for an
accelerated claim.
HUD Response: HUD has not adopted the change suggested by the
commenters. Mortgagees participating in the ACD Demonstration are
required to use the Freddie Mac Early Indicator Risk Scoring System.
However, HUD will explore the use of other risk scoring models for use
in the permanent ACD program.
Comment: HUD should conduct an audit before terminating FHA
mortgage insurance. One commenter suggested that HUD conduct pre-claim
audits to ensure the eligibility of a loan for an accelerated claim
prior to termination of FHA insurance. Alternatively, the commenter
suggested that HUD conduct a post-claim audit but not terminate FHA
insurance until the audit is complete.
HUD Response. HUD has not adopted the change requested by the
commenter. The ACD Demonstration will contain several safeguards to
ensure that a defaulted loan qualifies for payment of an accelerated
claim. Participating mortgagees are required to assure that loans meet
the eligibility criteria for an accelerated claim. HUD will also review
the eligibility of defaulted loans during the pre-claim process and
notify the participating mortgagees of provisional approval or
disapproval of the submitted loans. FHA mortgage insurance will be
terminated upon payment of the claim.
Comment: Will FHA insurance be restored for a mortgage loan
reassigned to the participating mortgagee? One commenter asked this
question.
HUD Response. If the FHA insurance was valid prior to submittal of
the accelerated claim, HUD will reinstate the mortgage insurance after
reassignment of the loan to the participating mortgagee.
Comment: ACD Demonstration should take into consideration other
community revitalization and affordable housing programs and
initiatives. One commenter made this suggestion. The commenter was
particularly concerned about the potential impacts of the ACD
Demonstration on the program for the disposition of HUD-owned single
family assets in asset control areas authorized by section 602 of the
FY 1999 HUD Appropriations Act.
HUD Response. HUD agrees and has revised the ACD Demonstration in
response to the concerns expressed by the commenter. Specifically, the
ACD Demonstration will not include any mortgages secured by a property
located within an asset control area.
Comment: Objection to use of BPO in calculating loan to value
ratio. Several commenters objected to the use of a BPO in calculating
the loan to value ratio of the defaulted mortgage. The commenters
suggested that HUD reimburse mortgagees for the cost of the BPO, or
permit the use of an Automated Valuation Model (AVM) analysis to
determine the value of the property.
HUD Response. BPOs are not used to calculate the loan to value
ratios to determine eligibility for the ACD
[[Page 66040]]
Demonstration. Loan to value ratios will be determined using the
original appraisal or, if none is available, the original principal
balance of the mortgage. However, BPOs will be required for all loans
for which a claim is submitted, and made available to bidders
qualifying for participation in the joint venture. Participating
mortgagees will be reimbursed for BPOs on all loans for which a claim
is submitted and paid.
Comment: FICO score should not be used in determining loan
eligibility. One commenter suggested that HUD eliminate some of the
specific loan eligibility criteria during the demonstration period, and
specifically suggested the removal of the FICO score requirement.
HUD Response. HUD will not use the FICO score eligibility criterion
during this demonstration period. The FICO score requirement is being
removed both in response to the public comments and because the
requirement overlapped with other eligibility criteria.
Comment: Loans should be in default for longer than three months to
qualify for the ACD process. Several commenters suggested that HUD
extend the three-month period that a loan must be default to qualify
for payment of an accelerated claim.
HUD Response. In response to these comments, this notice clarifies
that HUD will not pay an accelerated claim until an eligible mortgage
is in default for at least four full monthly installments (i.e., four
full mortgage payments are due and unpaid). Further, HUD will also
establish a maximum number of missed payments beyond which it will not
pay an accelerated claim on a defaulted mortgage. This maximum number
of missed payments will vary depending on the location of the
underlying property, and will be based on the foreclosure timelines for
the various states located within the jurisdictions of the Atlanta and
Philadelphia HOCs. The schedule of maximum missed mortgage payments
will be provided to mortgagees prior to their agreement to participate
in the ACD Demonstration.
Comment: Accelerated claim amount should be based on the mortgage
note interest rate. Several commenters wrote that HUD should base the
amount of the accelerated claim on the mortgage note rate of interest
(rather than on the debenture rate). The commenters also suggested that
the amount of the claim be calculated from the date of the last paid
installment rather than from the date of default.
HUD Response. HUD is statutorily required to pay insurance claims
based on the debenture rate from the date of default.
Comment: Submission of a Mortgage Insurance Certificate (MIC)
should not be required for payment of an accelerated claim. A few
commenters opposed requiring the submission of a paper MIC as part of
the claim submission process.
HUD Response. HUD has eliminated the submission of an MIC as a
prerequisite for the payment of an accelerated claim. For claim payment
under the ACD Demonstration, HUD will rely on representations and
information provided by participating mortgagees (including a screen
print-out from the FHA Connection portfolio screen verifying mortgagee
identification number, property address and current holder) as well as
internal information to determine insurance status. Participating
mortgagees will, however, be required to submit the MIC with the
collateral files (and obtain a duplicate original MIC if the original
MIC is missing) following claim submission. Mortgagees will continue to
be required to submit the original or a duplicate MIC as a prerequisite
to submitting a conveyance or other disposition claim for FHA single
family mortgage insurance benefits.
Comment: Factors for consideration in evaluating the success of the
ACD Demonstration. Several commenters submitted helpful recommendations
regarding the factors HUD should consider in evaluating the success of
the ACD Demonstration.
HUD Response. HUD appreciates all of the suggestions made by these
commenters. HUD will consider all of these comments in determining the
criteria for evaluating the ACD Demonstration. A summary of the results
of the evaluation will be published in the Federal Register.
IV. Overview of the ACD Demonstration
A. Duration
The ACD Demonstration will have a limited duration. HUD may extend
the duration of the demonstration in order to accurately assess its
effectiveness.
B. Geographic Scope
The demonstration will initially include mortgages secured by
properties located within the jurisdiction of HUD's Philadelphia,
Pennsylvania and Atlanta, Georgia HOCs. HUD may decide at a future date
to expand the scope of the ACD Demonstration to include one or more
additional HOCs.
The Philadelphia HOC serves Connecticut, Delaware, the District of
Columbia, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New
Jersey, New York, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia,
and West Virginia.
The Atlanta HOC serves Alabama, Florida, Georgia, Kentucky,
Illinois, Indiana, Mississippi, North Carolina, South Carolina, and
Tennessee, as well as the Caribbean.
C. Participating Mortgagees
Mortgagee participation in the ACD Demonstration is voluntary. HUD
will select up to 9 eligible mortgagees to participate in the ACD
Demonstration. In order to be selected for participation in the ACD
Demonstration, a mortgagee must satisfy all of the following criteria:
1. Number of serviced loans. The mortgagee must currently service
in excess of 20,000 mortgage loans secured by properties that are
located within the jurisdiction of the Philadelphia or Atlanta HOCs.
2. Loss mitigation performance. The mortgagee must be qualified in
the top tier of the FHA Tiering System, which ranks mortgagees in loss
mitigation use. The FHA Tiering System was developed by HUD's National
Servicing and Loss Mitigation Center and is subject to future
refinement.
3. Computer system capabilities. The mortgagee must have the
technical capability to interface with the FHA Single Family Claims
system, through the internet (using the FHA Connection System) and
using Electronic Data Interchange (EDI) technology. In addition, the
mortgagee must have the technical capability to interface with any
other computer systems utilized by FHA or its contractors pertaining to
the ACD Demonstration.
4. Use of the Freddie Mac Early Indicator Risk Scoring System. The
mortgagee must have the ability to run risk scoring models using the
Freddie Mac Early Indicator Risk Scoring software program.
5. Other criteria. The mortgagee will be required to meet any
additional criteria that HUD may establish regarding the eligibility of
mortgagees for participation in the ACD Demonstration.
D. Eligible Loans
Only certain defaulted FHA-insured loans are eligible for the
accelerated claim payment process. To be eligible for payment of an
accelerated claim, the defaulted mortgage must meet the following
criteria:
1. FHA Insurance
(a) The mortgage is an FHA-insured single family mortgage loan on a
one-to four-unit home.
[[Page 66041]]
(b) The mortgage loan is an actively insured by FHA under either
section 203(b) or 234 of the National Housing Act (12 U.S.C. 1709(b)
and 1715y).
(c) The FHA endorsement date of the mortgage is prior to February
5, 2002.
(d) There is no pending or paid partial FHA mortgage insurance
claim in connection with the mortgage.
2. Loan Status
(a) The mortgage loan has an unpaid principal balance of no less
than $20,000.
(b) The mortgage must be in default for at least four full monthly
installments (i.e., four full mortgage payments are due and unpaid).
However, the number of missed monthly installments on the mortgage as
of the provisional approval date may not exceed the maximum number
allowed by HUD for the jurisdiction in which the property securing the
mortgage is located.
(c) The mortgage has a loan to value ratio of 85 percent or
greater. The loan to value ratio represents the relationship between
the amount of the mortgage loan and the value of the real estate. The
loan to value ratio is to be determined using the original appraisal
or, if none is available, the original principal balance of the
mortgage loan.
(d) The mortgage must have received a score of D, E, or F on the
Freddie Mac Early Indicator Risk Scoring software system.
(e) To the knowledge of the participating mortgagee, the mortgage
loan is not subject to an Indemnification Agreement as of the
provisional claim approval date.
4. Property Securing Mortgage
(a) The mortgage must be secured by a property located within the
jurisdiction of HUD's Philadelphia, Pennsylvania or Atlanta, Georgia
HOCs. However, the property must not be located in an asset control
area designated under section 204(h) of the National Housing Act as
added by section 602 of the FY 1999 HUD Appropriations Act.
(b) The mortgage must not be secured by a property that has been
seized by the U.S. Department of Justice or otherwise subject to a
seizure order in connection with a drug-related case.
(c) As of the provisional claim approval date, the cost of any
required repairs to the property must be less than 10% of the
property's value.
5. Foreclosure
(a) No foreclosure sale of the property has been scheduled within
the sixty (60) day period after the claim date, there has been no
foreclosure sale or pre-foreclosure sale, and no deed-in-lieu of
foreclosure has been accepted.
(b) If the first step required under applicable law to initiate a
foreclosure of the property has been taken, the foreclosure action has
not been contested.
6. Other Eligibility Requirements
The mortgage must meet any additional criteria that HUD may
establish regarding the eligibility of defaulted mortgage loans for an
accelerated claim under the ACD Demonstration.
E. Risk Scoring
At the 90th day of delinquency, mortgagees participating in the ACD
Demonstration will be required to begin running scoring models using
the Freddie Mac Early Indicator Risk Scoring System to confirm the
eligibility of the mortgage for payment of an accelerated claim.
Provided that the mortgage meets the eligibility criteria described in
paragraph. IV.D. of this notice, participating mortgagees will have the
option to submit an accelerated claim.
F. Disposition Methods
HUD will use one or both of the following disposition methods under
the ACD Demonstration. HUD, in its sole discretion, will determine
which of the two disposition methods to use for particular mortgages
under the demonstration.
1. Joint Venture. The joint venture method will be the primary
disposition method used under the ACD Demonstration. Under this
disposition method, HUD will sell a majority interest in a public/
private joint venture formed to acquire, service and dispose of the
mortgage loans submitted under the ACD Demonstration. The private
sector entity will be selected through a competitive bid process and
will serve as the Manager of the joint venture. The joint venture
Manager will receive a percentage of the net cashflow from the joint
venture derived from the eligible mortgages submitted by mortgagees
participating in the ACD Demonstration. The private sector joint
venture Manager will be responsible for maximizing the value of each
mortgage loan asset through re-performance, refinancing, workout,
foreclosure and/or disposition. HUD expects the joint venture Manager
to conduct its operations in a manner consistent with applicable FHA
and industry standards for integrity and avoidance of predatory lending
practices.
Private sector firms that pre-qualify will be given the opportunity
to bid at a competitive auction to be the joint venture Manager. To
qualify, bidders must be adequately capitalized and must meet other FHA
standards for loan servicing, experience and integrity. Before bidding,
investors will be required to make a security deposit with HUD.
2. Other disposition methods may be used. HUD may also consider
using the special servicing disposition method or other disposition
methods under later subsequent demonstrations. The ACD Demonstration
will not initially use this method, and HUD may decide not to use this
disposition method at all during the course of the demonstration. Under
this disposition method, servicing of the mortgage may be transferred
to a special servicer. The special servicer may provide assistance to
HUD in undertaking one or more of the following actions: (a)
Foreclosing and selling the properties; (b) accumulating mortgages for
a whole loan sale; and/or (c) accumulating mortgages for disposition in
a securitization.
V. Evaluating the Success of the ACD Demonstration
At the conclusion of the ACD Demonstration, HUD will assess its
success and determine whether to implement the ACD process on a
permanent basis throughout the country. In conducting this evaluation,
HUD will assess such factors as whether the use of the ACD process
will: (1) reduce loss rates; (2) reduce the cost and time associated
with claim dispositions; and (3) enhance the ability of HUD to assess
risk and manage the FHA mortgage insurance fund.
VI. Findings and Certifications
Environmental Impact
A Finding of No Significant Impact with respect to the environment
was prepared for the February 5, 2002 notice in accordance with HUD
regulations at 24 CFR part 50, which implement section 102(2)(c) of the
National Environmental Policy Act of 1969 (42 U.S.C. 4332). That
Finding of No Significant Impact remains applicable to this notice and
is available for public inspection between the hours of 7:30 a.m. and
5:30 p.m. weekdays in the Office of the Rules Docket Clerk, Office of
General Counsel, Room 10276, Department of Housing and Urban
Development, 451 Seventh Street, SW., Washington, DC.
[[Page 66042]]
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits, to the
extent practicable and permitted by law, an agency from promulgating
policies that have federalism implications and either impose
substantial direct compliance costs on State and local governments and
are not required by statute, or preempt State law, unless the relevant
requirements of section 6 of the Executive Order are met. This notice
does not have federalism implications and does not impose substantial
direct compliance costs on State and local governments or preempt State
law within the meaning of the Executive Order.
Dated: October 23, 2002.
Sean Cassidy,
General Deputy Assistant Secretary for Housing-Federal Housing
Commissioner.
[FR Doc. 02-27559 Filed 10-28-02; 8:45 am]
BILLING CODE 4120-27-P
![[logo] US EPA](http://www.epa.gov/epafiles/images/logo_epaseal.gif){kind=logo}