The Department of Veterans Affairs (VA) made significant changes to its loss mitigation program this month, launching its awaited Veterans Affairs Servicing Purchase Program, and implementing a 40-year loan modification term. Details of those developments are provided below.

                Extension to 40-Year Loan Modification Term

On April 17, 2024, the VA issued Circular 26-24-8, which extends the available term of its loan modification option. Effective immediately, VA servicers can modify loans to a repayment term of up to 480 months from the due date of the first payment required under the modification (provided the other criteria for reaching an affordable payment are met, pursuant to 38 C.F.R. § 36.4315(a)(1) through (a)(8) and (a)(10) through (a)(14)).

Notably, the Circular itself is characterized as constituting advanced consent from the VA. Servicers therefore do not need to submit a proposed modification to VA for prior approval, if the conditions in the Circular are met. We also note that this extended term aligns the VA with the 40-year modification term permitted by FHA.

    Launch of Veteran Affairs Servicing Purchase (VASP) Program

On April 10, 2024, VA announced the launch of its Veterans Affairs Servicing Purchase (VASP) program, which is slated to commence on May 31, 2024. Characterized as a “last-resort tool” for severe financial hardships, VA will use VASP to purchase defaulted VA loans, modify the loans, and then place them in the VA-owned portfolio as direct loans. As we previously reported, in conjunction with VA’s “strongly encouraged” foreclosure moratorium through May 31, 2024, it promised the upcoming launch of the VASP program.

Through VASP, borrowers will have a fixed 2.5% interest rate, and will not be required to directly apply for the program. Instead, servicers will identify eligible borrowers for VASP and submit requests on behalf of borrower, as a component of the VA loss mitigation waterfall.

The program is added as Chapter 9 of the VA Servicer Handbook and describes two types of purchases: Traditional VA Purchase (tVAP) and VA Servicing Purchase (VASP). According to the handbook, a borrower cannot elect to use either tVAP or VASP, and the options are offered to a borrower based on a review of all home retention options available.

tVAP

Under tVAP, the loan is evaluated by VA (and not the servicer) on a case-by-case basis, and exercised when VA determines the option is in the best interest of both the Veteran and VA. Either the servicer or the VA-assigned technician can initiate a request for tVAP evaluation. When tVAP is initiated by the servicer, the servicer does not review any qualifying loan criteria, and instead, simply refers the loan to VA for review. According to the handbook, VA may consider tVAP after an assumption, in rare cases, if the loan meets the general criteria and the technician determines tVAP is in the VA’s best interest.

According to the handbook, tVAP is considered on a case-by-case basis, however, a loan is not eligible unless the following general requirements are met:

1. The servicer has made the final decision to foreclose.
2. If tVAP is completed, the borrower certifies the intent to retain the home and occupy it as their residence.
3. The borrower overcame the reasons for default and regained the ability to resume monthly payments or will have that ability in the reasonably foreseeable future.
4. The VA technician determines the borrower and all other obligors on the loan had an acceptable credit history prior to default, and can verify current or future income that is stable and reliable.
5. The borrower is the current legal owner of record of the property.
6. The borrower and all other obligors on the loan agree to the modification offered by VA. The modification will include a provision calling the loan due on the sale of the property.
7. All other lienholders will subordinate their liens.

The Handbook also describes a preliminary review process, a final review and determination process by the VA-assigned technician, and a series of steps for processing and implementing the tVAP option, including the necessary loan modification. We note that the handbook does not elaborate on the terms of the associated loan modification specific to tVAP, and how a determination of ability to make the modified payments is made. In addition, it appears that certain of the criteria for this option are inconsistent, such as the requirements that the servicer has made the final decision to foreclose, and that the borrower overcame the reasons for default and can resume monthly payments.

VASP

According to the handbook, VASP is an expedited process through which VA elects to purchase the loan, in conjunction with a loan modification completed by the servicer. Under VASP, the servicer evaluates the loan for eligibility, and if the criteria are met, the servicer completes a series of steps resulting in purchase by VA and modification of the loan.

The eligibility criteria are as follows:

1. The loan is between 3 and 60 months delinquent on the date submitted to VA. The loan is submitted with either a trial payment plan (“VASP TPP event”), or no trial payment plan (“VASP with No TPP event”).
2. The property is owner-occupied. We note the handbook provides detail on this requirement for certain situations, such as divorce and active military service.
3. Neither the borrower nor any other obligor are in active bankruptcy when the loan is submitted. Dismissed or discharged bankruptcies do not preclude VASP review.
4. The reason for default has been resolved and the borrower has indicated they can resume making scheduled payments.
5. The borrower and all other obligors have a stable and reliable source of income.
6. The VA loan is in first lien position, and the property is not encumbered by any liens or judgments that would jeopardize that lien position. In addition, servicers must confirm that HOA charges are current, and if not, include any outstanding charges or assessments in the VASP payoff amount.
7. The borrower has made at least 6 monthly payments on the loan since origination. If the loan has been modified, the borrower has made at least 6 monthly payments since the most recent modification.
8. The borrower is the current legal owner of record on the property. Additional detail is provided regarding required signatories on the modification documents, scenarios of divorce, necessary assumptions, and occupancy requirements, related to ownership of the property.
9. The borrower and all other obligors agree to the terms of the VASP modification.

Servicers are required to evaluate borrowers for these criteria, as part of the overall loss mitigation evaluation under the existing VA Home Retention Waterfall. VASP is the final home retention option in that loss mitigation waterfall.

The handbook further states that VA will conduct an automated, preliminary review of the qualifying loan criteria through VALERI, and that oversight will be conducted through a Post Audit process after the VASP payment to the servicer by VA is made and certified.

If the loan qualifies for VASP, modified terms can be offered to the borrower consisting of the following:

• Loans are modified to a fixed rate of 2.5%, with either a 360 or 480 month term.
• The modification is first calculated for a new payment over 360 months. If that does not result in a 20% reduction in the principal and interest portion of the monthly payment, then the term can be extended to 480 months. If the borrower cannot afford the payment calculated for the 480 month term, the servicer can proceed to liquidation options.
• A Trial Payment Plan (TPP) is required under either of the following circumstances: (1) the loan is 24 months or more delinquent; or (2) the principal and interest portion of the monthly payment is not reduced by at least 20%.
• If the borrower fails a TPP, the loan may be evaluated for VASP again in the future. If the borrower fails 3 TPPs during a single default episode, the loan no longer qualifies for VASP.

If a TPP is appropriate, the terms must be offered to the borrower within 15 days of the waterfall evaluation. TPPs must meet the following criteria:

1. TPPs cover 3 payments.
2. Servicers must complete an escrow analysis prior to establishing the TPP.
3. TPP payments are equal to the anticipated monthly payment required after the VASP modification is complete.
4. If the TPP is offered on or before the 15^th day of the month, the first TPP payment will be due on day 1 of the next calendar month. If the TPP is offered after the 15^th day of the month, the first TPP payment is due on day 1 of the month after the next calendar month. The remaining 2 payments are due on the same day for the next two consecutive months.
5. The borrower must make each of the 3 payments on or before the last day of the month in which the payment is due.

Once the TPP is complete, the servicer can submit a request to VA for VASP payment. If the TPP is failed, the servicer can proceed with delinquent loan servicing.

The handbook provides additional detail regarding the process for submitting the VASP options to VA for processing, reporting to VA, and the initiation and completion of the VASP payment process through VA. After the VASP payment from VA has been completed and certified, the servicer can prepare the appropriate loan modification documents, and send them to the necessary parties for execution.

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