In the wake of Hurricane Sandy, both the U.S. Department of Housing and Urban Development (“HUD”) and the Rural Housing Service (“RHS”) have issued guidance intended to help homeowners with government insured or guaranteed loans who were affected by the storm. With regard to loans insured by the Federal Housing Administration (“FHA”), the guidance is a combination of reminders about existing relief or insurance programs available to assist disaster victims and new policies designed to aid borrowers in the process of obtaining FHA financing for properties impacted by natural disasters. With regard to RHS-guaranteed loans, the guidance focuses on foreclosure and loss mitigation relief available to borrowers impacted by Hurricane Sandy.
In a series of press releases issued between October 30, 2012 and November 26, 2012, HUD made announcements regarding a foreclosure moratorium and other benefits available to FHA borrower victims of Hurricane Sandy in presidentially declared major disaster areas (“Disaster Areas”) in New Jersey, New York, Connecticut, Delaware, Maryland, and Rhode Island. Specifically:
• HUD reminded mortgagees about the 90-day moratorium on foreclosures of home mortgages insured by FHA in Disaster Areas.
• HUD highlighted the availability of its Section 203(h) loan program, which provides FHA-insured loans to disaster victims who have lost their homes, with up to 100 percent financing permitted.
• HUD also highlighted its separate Section 203(k) loan program, which allows people who have lost their homes to finance the purchase and repair of a new home with a single mortgage, and also allows homeowners with damaged homes to finance the rehabilitation of their existing home.
• HUD announced that New Jersey, New York, Connecticut, Delaware, Maryland, and Rhode Island may reallocate HUD’s Community Development Block Grants and HOME program funds to address disaster relief.
• HUD will offer Section 108 loan guarantee assistance to state and local governments for housing rehabilitation, economic development, and the repair of public infrastructure.
On November 16, 2012, HUD issued Mortgagee Letter 2012-23, “Guidance for FHA-Approved Mortgagees Originating and Servicing Mortgages in Presidentially-Declared Major Disaster Areas,” to elaborate on existing policies and programs related to loans secured by properties in Disaster Areas and to introduce new policies applicable to pending loans when disasters occur. For example:
• The moratorium on foreclosures applicable in Disaster Areas is in effect for 90 days from the date of the Disaster Area declaration and applies to both the initiation of new foreclosures and foreclosures already in process.
• HUD encourages servicers to consider affected homeowners for loss mitigation options and the waiver of late charges.
• Servicers are reminded to release a borrower’s hazard insurance proceeds to the borrower and refrain from retaining the proceeds to make up an arrearage without the borrower’s written consent.
• The Mortgagee Letter identifies inspection and repair requirements that apply to pending loans that have not yet closed and loans that have closed but have not yet been endorsed for FHA insurance. The appropriate course of action depends on whether the dwelling is habitable and whether the damage is greater than $5000. A damage inspection report is required, and the damage inspection must be performed by the original appraiser unless the original appraiser is unavailable. A post-repair inspection is also required.
• For loans that did not close prior to the disaster where the damage inspection report indicates property damage, the appraisal validity period is extended from 120 days to a maximum of one year from the effective date of the original appraisal. When insuring the loan in FHA Connection, the lender must indicate that the property is located in a Disaster Area and that the property sustained damage.
For additional details on the inspection criteria, damage thresholds, and repair requirements applicable to pending loans and closed loans yet to be endorsed, please refer to the Mortgagee Letter. Please note that the guidance in Mortgagee Letter 2012-23 applies to loans in all Disaster Areas; it is not unique to Hurricane Sandy.
Finally, on November 19, 2012, HUD announced that it will allow additional closing time for properties located in Disaster Areas affected by Hurricane Sandy. Normally, per FHA guidelines, all documents in a mortgage loan application must be no more than 120 days old at loan closing (180 days old for new construction). According to HUD’s announcement, lenders closing on loans for properties located in Disaster Areas affected by Hurricane Sandy will be allowed an additional 60 days for all documents in the mortgage loan application at closing beyond the 120- or 180-day window noted above, as long as the lender does not expect a material change in the loan application documentation. This extension applies to all case numbers assigned on or before October 29, 2012 with a settlement date on or after October 29, 2012.
RHS has issued similar but more limited guidance. In a Servicing Update dated November 8, 2012, RHS requested that servicers establish a 90-day moratorium on foreclosure actions involving properties in Disaster Areas that were affected by Hurricane Sandy. The moratorium should cover the initiation of new foreclosures, as well as foreclosures that are already in process, and the 90-day period should run from the Disaster Area declaration date.
RHS also directs servicers to review all scheduled foreclosures in the affected areas to determine whether the borrowers have been affected significantly enough by Hurricane Sandy to justify postponing the sale. Servicers should inspect properties in the affected areas to determine occupancy status and the extent of the damage. RHS cautions servicers to ensure that a property is not vacant or abandoned before delaying foreclosure pursuant to the moratorium. The servicer is ultimately responsible for determining when to initiate and whether to postpone a foreclosure, and the servicer should exercise good judgment in making these decisions.
The Servicing Update also encourages servicers to offer forbearance to borrowers who are having difficulty making their payments as a result of Hurricane Sandy. However, RHS cautions that servicers should determine whether the borrower’s trouble is actually related to Hurricane Sandy or whether there is another underlying problem that needs to be addressed. RHS also encourages servicers to waive late charges on loans secured by properties located in the Disaster Areas.
Finally, the Servicing Update reminds servicers to fully document their decisions with respect to loss mitigation.
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As many servicers continue to implement new servicing standards and others prepare for new servicing regulations proposed by federal regulators, FHA and RHS servicers should be sensitive to the additional relief available to their borrowers impacted by Hurricane Sandy. At the same time, FHA is sensitive to the negative impact on its insurance fund if pending loans are closed and endorsed on damaged properties. FHA lenders also should be careful to comply with the inspection and repair requirements applicable to damaged properties in Disaster Areas. If a lender does not follow these requirements, it risks originating a loan that cannot be insured by FHA.