It has been VA’s longstanding policy to encourage mortgage holders to extend forbearance to veteran-borrowers who find themselves in temporary financial difficulties through no fault of their own. In loan default cases, the mortgage holder is responsible for contacting the borrower, determining the reason for the default, and making arrangements for repayment of the delinquency. If this cannot be accomplished by the time that three or four installments are due and payable, the default must be reported to VA, together with the holder’s
explanation of the reason for the default and a summary of its servicing efforts.1 Upon receipt of such notice, VA takes an active role in working to protect the interests of the veteran-borrower and the Government by initiating an outreach effort to personally contact the borrower and perform supplemental servicing.
VA closely reviews the holder’s servicing of the account and follows up by attempting to contact the borrower by letter or telephone. Once contact has been established and on the basis of facts in the case, VA personnel may offer financial or other counseling to the veteran and/or may intercede with the holder on behalf of the veteran to obtain forbearance or arrange a reasonable repayment schedule in appropriate cases.
When VA efforts to secure additional forbearance are unsuccessful, VA has discretionary authority to “refund” (i.e., to purchase a loan from the mortgage holder). The law providing this authority to VA does not vest borrowers with any right to have their loans refunded or to apply for refunding. Nevertheless, VA considers whether refunding is in the best interests of the veteran and the Government in every case before foreclosure. When VA refunds a loan, it may be reamortized to eliminate a delinquency, and the interest rate may be reduced up to 3 percent below the maximum rate for new GI loans in order to lower the monthly installment payments.
VA regulation 38 C.F.R. 36.4315 requires that a default be reported no later than 45 days after nonpayment on any installment has continued for 60 days. This effectively means that a default must be reported no later than 15 days after the fourth payment is missed.
VA intervention through refunding is exercised in situations where the borrower has the ability to maintain the mortgage obligation or clearly will have that ability in the near future, but the holder has determined it would not be in its best interest to continue to extend forbearance.
When a borrower has no realistic prospects for maintaining even reduced mortgage payments, VA will encourage a private sale of the home to avoid foreclosure. Such a sale can be difficult to arrange if the property is worth less than the total amount owed on the loan, as is sometimes the case in areas that have depressed housing markets. In such a situation, VA may be able to offer assistance by using a procedure that involves a
compromise loan guaranty claim. This procedure can be considered if the difference between the loan indebtedness and the purchase price is less than the amount of VA’s maximum guaranty. If a veteran finds a buyer who will purchase the property for its fair market value and the proceeds of the sale are applied to the existing indebtedness, a compromise would enable VA to pay a claim for the difference between the sale price and the loan indebtedness.
When a borrower is unable to reinstate the loan (i.e., pay all amounts in default), refunding is not appropriate, and a private sale cannot be arranged, VA considers approving the
acceptance of a deed in lieu of foreclosure. If acceptance of the deed will be in the best interests of both the borrower and VA, then VA will approve it. If a deed in lieu of foreclosure is not feasible, the holder will generally proceed with foreclosure.
VA has established the Servicer Loss Mitigation program (SLMP), which authorizes loan holders or their servicing agents (servicers) to perform most of the analyses involved in approving compromise agreements or deeds in lieu of foreclosure. Borrowers may contact the loss mitigation department of their servicer to determine whether the company is
authorized to process a compromise or deed; if not, the borrower should contact VA directly. Termination of the loan is the sole responsibility of the mortgage holder, and it must be accomplished in accordance with State law applicable to all mortgage loans. Prior to the termination, the mortgage holder must notify VA of its intention to foreclose and wait 30 days after VA receives the notice before initiating termination. The holder must then notify VA of the proposed action (e.g., foreclosure sale or a voluntary deed to the holder in lieu of foreclosure), so that VA can take certain actions designed to protect the interests of the veteran-borrower and the Government. An appraisal of the property is obtained, and VA then determines the net value of the property by reducing the appraised value by the estimated costs to VA of acquiring, managing, and reselling the property, including losses sustained on the resale of the property. VA then decides whether or not to specify an amount.
If the sum of the net value of the property plus the maximum amount of claim payable on the loan guaranty amounts to more than the total owed on the loan (unpaid principal, accrued interest, advances for taxes and insurance, liquidation expenses), then VA can reduce the amount of guaranty claim payable by specifying an amount (the net value) for credit to the loan amount. VA only pays a claim for any unpaid balance on the loan account after this
credit, and if the mortgage holder acquires the property during the termination process, the holder may transfer the property to VA for the specified amount or net value of the property. When the sum of the net value plus the maximum amount of claim payable on the loan guaranty amounts to less than the total owed on the loan, VA will not specify an amount. This is called a no-bid. In such a case, even if the loan account were credited with the net value, VA would still have to pay the maximum claim, so there is no advantage to VA in specifying an amount for credit to the loan account. However, this also means that the mortgage holder does not have the option of transferring the property to VA, and the mortgage holder will have to otherwise dispose of the property if it is acquired during the loan termination.
Performance Measure for Loss Mitigation
Veterans Benefits Administration’s (VBA’s) index of Foreclosure Avoidance Through Servicing (FATS) measures the success of regional offices in arranging alternatives to foreclosure. The index measures the percentage of foreclosures avoided because of
successful VA interventions, refunding, compromise claims, and deeds in lieu of foreclosure. To encourage field stations to improve their supplemental servicing, VBA established goals to improve performance measured by the index. The FATS ratio is now a part of VBA’s Balanced Scorecard, which contains both strategic objectives and fiscal year targets for the ratio.