September 9, 2013
by Terry Ross, Director, Regulatory Compliance
Barrett Daffin Frappier Turner & Engel, LLP – USFN Member (Texas)
The author thanks Cheryl Amitay, Rhonda Armitage, Terry Cere, Theresa Gonzalez, and Mary Ann Mills of the VA Central Office Loan Management staff for their valuable contributions to this article.
Once upon a time, servicing U.S. Department of Veterans Affairs (VA) loans going to foreclosure sale required the servicer to consider buying down the debt so that VA could issue a specified bid, which allowed the servicer the option to convey the property to VA after the foreclosure sale. With the introduction of VALERI (VA Loan Electronic Reporting Interface), VA made major changes in servicing these loans. One of the biggest changes was to eliminate the buy-down program and introduce the write-off.
The VA Servicer Guide explains in detail the necessary steps in the foreclosure process. The guide contains all of the information a servicer needs to service VA loans and is available at:
When a delinquent loan cannot be cured through a loss mitigation option, prompt termination of the loan is in the best interest of all parties. VA has delegated the foreclosure sale process to the servicer. The foreclosure sale process includes the scheduling, postponing, canceling, or completion of the sale, as well as the determination of the bid type and bid amount.
The necessary steps to determine the termination bid amount are: (1) Obtain a liquidation appraisal; (2) Determine net value; (3) Calculate total eligible indebtedness; and (4) Determine final bid amount.
Step 1: Obtain a Liquidation Appraisal — The servicer is required to order a VA appraisal of the property at least 30 days prior to completing a foreclosure sale. VA appraisals are ordered by accessing the Veterans Information Portal. A VA-approved appraiser then appraises the property. If a servicer participates in the Servicer Appraisal Process Program (SAPP), its designated SAPP Staff Appraisal Reviewer (SAR) reviews the appraisal and determines the reasonable value of the property. Next, the SAPP SAR issues a notice of value (NOV). If a servicer does not participate in SAPP, VA Construction and Valuation (C&V) issues the NOV. Any appraisal value can be viewed once the NOV is issued in WebLGY. VA will reimburse the servicer for an appraisal cost when the claim is filed, and the appraisal cost may be paid over and above the maximum guaranty amount. An appraisal should be ordered early in the process to avoid delays that may jeopardize the sale. An appraisal is valid for 180 days unless VA determines that rapidly changing market conditions warrant a shorter validity period. If property damage is learned of after obtaining the appraisal, but prior to the completion of the foreclosure sale, the appraiser must be contacted to obtain an updated appraisal report. If an updated appraisal report cannot be completed, a new appraisal may be required. Use the updated NOV and adjust the net value if necessary.
Step 2: Determine Net Value — Determine net value using the VA formula. The fair market value is received through the SAPP program or from VA. Net value is the fair market value minus the cost factor. The cost factor is a percentage of fair market value and represents the cost to VA for acquiring and disposing of properties. VA publishes the cost factor as necessary in the Federal Register, and it is available on the VA Loan Guaranty website at http://www.homeloans.va.gov. For convenient reference, Circular 26-13-15 (dated September 3, 2013), announcing the "New Percentage to Determine Net Value" and stating the percentage is increased from 11.87 percent to 14.95 percent effective October 8, 2013, is accessible here.
Pre-October 8, 2013 — Illustration of determining net value: If a property has a fair market value of $100,000 and the VA cost factor is 11.87%, the net value would be calculated as follows:
- Fair Market Value $100,000
- VA Cost Factor (11.87% of $100,000 = $11,870)
- Net Value ($100,000 - $11,870 = $88,130)
Effective October 8, 2013 — Illustration of determining net value: If a property has a fair market value of $100,000 and the VA cost factor is 14.95%, the net value would be calculated as follows:
- Fair Market Value $100,000
- VA Cost Factor (14.95% of $100,000 = $14,950)
- Net Value ($100,000 - $14,950 = $85,050)
Step 3: Calculate Total Eligible Indebtedness — Total eligible indebtedness is the amount of the borrower’s indebtedness that VA allows on a claim. The following calculations should be used when determining total eligible indebtedness:
- Unpaid principal balance (UPB): The UPB as of the last payment date on the loan.
- Interest: Accrued unpaid interest up to the termination date or the maximum allowable interest date, whichever is sooner. (To include 30 days prior to the payment due date of the loan.)
- Liquidation expenses: All liquidation costs incurred up to the current date.
- Advances: Taxes, insurance, and preservation costs advanced on the loan up to the current date.
- Credits: Any credits on the borrower’s account that reduce the borrower’s total eligible indebtedness.
Step 4: Determine Bid Amount — To determine whether to bid total debt or net value, compare total eligible indebtedness to the net value. If net value of the property exceeds the total eligible indebtedness, bid total indebtedness (total debt bid). When the net value of the property is less than total eligible indebtedness, bid the net value of the property (net value bid). If the sale takes place in a state with statutory bid requirements, bid what is required by the state. VALERI will adjust the credit to indebtedness based on whether the property is conveyed, retained by the holder, or sold to a third party.
Eligibility to Transfer Custody and Title
Prior to initiating a transfer of custody, eligibility to transfer custody and title must be determined. A transfer of custody may be initiated if all of the following conditions are met:
The loan was terminated through a foreclosure or deed-in-lieu, the servicer writes off all indebtedness that will not be covered by the maximum claim payable and the acquisition payment, and sends a deficiency waiver notice to the borrower once the claim is paid if the net value of the property is less than the unguaranteed portion of the indebtedness (the total eligible indebtedness minus VA’s maximum claim payable under the guaranty). The deficiency waiver notice (letter) is only necessary in maximum guaranty cases.
The deficiency waiver notice must be sent to the debtor at his/her last-known address. In most cases, the last-known address will be the property address. If the debtor has given the U.S. Post Office a forwarding address, the letter will be sent to that address. A copy of the deficiency letter must be retained in the claims file for possible post-audit review. Further, if the deficiency waiver notice is returned by the post office, the envelope should be retained in the file.
For convenient reference, a sample deficiency waiver notice can be found here.
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