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Compliance Update - June 2016

With the recent issue of Mortgagee Letter 2016-07, regulatory changes surrounding tax and insurance defaults have continued to be very active in the first half of 2016.

As you may recall, HUD issued ML 2015-11 last year that required a loan be presented to HUD and called due and payable within 30 days of the default. This ML also provided for a five-year repayment plan option, provided the borrower met the income/expense analysis requirements detailed in the ML.

The industry provided significant feedback to HUD on ML 2015-11 that resulted in some changes captured in the most recent Mortgagee Letter (ML 2016-07).  

This recent guidance from HUD contains three key features:

  1. Removal of the mandatory requirement whereby a repayment plan had to be limited to the estimated date that the loan would reach 98% of the maximum claim amount.  
  2. Creation of an optional delay to call the loan due and payable if the default balance was less than $2,000 and the borrower met certain other criteria.  
    1. If the borrower’s default balance later exceeded the $2K threshold or they failed to meet any of the other eligibility criteria detailed in the ML (such as failing to return their annual occupancy certificate), then the optional delay would cease and the loan would be required to be called due and payable.
  3. Creation of a “Mortgagee Funded Cure” option whereby the servicer/investor could use funds to perform a one-time cure of the borrower’s T&I Default.  
    1. If this option was selected, then the servicer could not seek assignment of the loan to HUD for three years.  The three year clock would run from the later of the date of the Mortgagee Funded Cure or once three consecutive years had passed where the borrower paid all of their taxes and insurance on time (and the servicer did not have to advance any funds on their behalf for T&I).

While these changes are helpful, and do provide relief for some borrowers, this likely is not the end of the regulatory cycle on this highly sensitive issue!