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VA Circular 26-15-16 Auction Service for the Termination of VA Loans

On July 1, the U.S. Department of Veterans Affairs (VA) released Circular 26-15-16, subtitled Auction Service for the Termination of VA Loans.

Auction Service for the Termination of VA Loans

1. Purpose. This Circular provides guidance to mortgage servicers of Department of VeteransAffairs (VA) guaranteed loans electing to use an auction service as a means to terminate a loan. VA authorizes mortgage servicers and holders to employ an auction service in lieu of completing a traditional foreclosure sale, where feasible. The process must comply with VA requirements, federal, state, county, and local foreclosure laws.

2. Background. Per Title 38, Code of Federal Regulations (CFR), section 36.4322, VA has delegated the loan termination process to mortgage servicers. When a delinquency cannot be resolved and the loan has been deemed insoluble, the servicer refers the loan to foreclosure. The servicer is required to complete a valid foreclosure sale following VA requirements and complying with all federal, state, county, and local foreclosure laws. VA requires the servicer to obtain a VA liquidation appraisal to establish the fair market value of a property and calculate the Net Value. VA’s Net Value is the fair market value of real property, minus the calculated amount representing the costs VA will incur in acquiring and disposing of the property. The resulting “Net Value Bid” is the minimum credit to the indebtedness applied for claim computation under 38 CFR 36.4324. If the sale proceeds are greater than the Net Value, the actual proceeds of the sale will be credited to the indebtedness. The cost factor used will be the most recent percentage of the fair market value that VA calculated and published in the Notices section of the Federal Register.

3. Issue. Traditional foreclosure methods hinder the opportunity for servicers to obtain greaterproceeds at sale, which are applied to reduce the Veteran’s debt. This may result in VA paying a higher guaranty claim payment and VA to assume the liability of managing and marketing a conveyed property in Real Estate Owned (REO) inventory. The state and county foreclosure process limits the number of potential third-party bidders, and additional costs are incurred by VA as a result of properties conveyed to VA after the completion of a traditional foreclosure sale. The overwhelming majority of winning bidders of foreclosure sales are the mortgage holders, who routinely elect to convey properties to VA instead of incurring the costs of managing and marketing the properties in their own REO portfolios. Upon accepting conveyance, VA pays an up-front property preservation and management fee, plus additional costs associated with maintaining, preserving, and marketing the property.

4. Auction sales may improve awareness among potential bidders and increases marketability,competition, and sale proceeds, when a mortgage servicer terminates a loan through an auction service. Increase to sale proceeds benefit the Veteran by potentially reducing the Veteran’s debt. Auctions generally shorten the amount of time the property remains on the market, thereby decreasing the risk of damage or vandalism. Such third-party sales at auction would save VA the costs of managing and marketing a property. Potential increases in sale proceeds are especially advantageous to servicers in situations where the total loan indebtedness exceeds the Net Value and VA pays the maximum guaranty. Holders may find it advantageous to pursue termination through an auction service, rather than having to waive a greater amount at foreclosure.

5. New. VA authorizes servicers to use an auction service in localities where available to complete the termination of a VA-guaranteed loan as opposed to a traditional foreclosure sale. The servicer must comply with VA regulations and determine the likelihood of increased sale proceeds. VA cannot recommend or advise which auction service to use. However, mortgage holders are accountable for the “selected auction service’s” failures to follow all federal, state, and local laws in addition to errors invalidating an auction sale.

6. As always, VA encourages servicers of VA-guaranteed home loans to explore all reasonable options to help Veterans retain their homes or avoid foreclosure. Once the mortgage servicer has exhausted all home retention and alternative to foreclosure options and determined foreclosure is unavoidable, the servicer may use an auction service to terminate the loan. The results of the auction must be equal to or higher than Net Value, as VA will only apply proceeds of sale equal to or greater than Net Value to the guaranty claim. All properties will be sold “AS IS” in accordance with financial matters pursuant to the terms set forth by the auction service to all bidders. VA does not provide financing for properties sold by foreclosure sale or auction.

7. Guidance to Servicers.

a. Priority of Review. VA expects servicers to exert all reasonable efforts to assist Veteran borrowers in retaining ownership of their homes or mitigating losses when retention is not possible. If the servicer has exhausted all loss mitigation efforts and determines the loan insoluble, they may use the traditional method of foreclosure or an auction service to terminate the loan.

b. Appraisal. Mortgage servicers must obtain a VA appraisal to determine the “Net Value.” At least 30 days prior to an auction sale, the holder must request that VA assign an appraiser to conduct a liquidation appraisal to establish fair market value. The “Net Value Factor” is applied to the fair market value to determine a Net Value bid.

c. Marketing. In order for auction expenses to be eligible for reimbursement on a VA claim, properties selected for an auction sale will be marketed for a minimum of 15 days prior to the scheduled sale and sold for an amount equal to, or greater than, the “Net Value Bid.” Mortgage servicers must ensure they employ a non-affiliated auction service to market properties to the greatest number of potential bidders possible. Auction services may use all marketing tools available including advertisement through television, radio, newspaper, and the internet to expose properties to potential buyers in multiple geographic regions. Marketing of the property should be designed to alert the largest number of potential buyers and provide those potential buyers a means to participate in the auction process. A mortgage servicer that employs an auction service meeting all VA auction marketing requirements will be eligible for reimbursement of auction fees on a successful sale without the actual calling or crying the sale.

d. Servicer Reporting Sale Results to VA. Servicers will continue to report bid results to VA through the VA Loan Electronic Report Interface (VALERI). Servicers will report the amount of the highest bidder to VA on the “Results of Sale” event in the VALERI application. The credit to indebtedness must equal or exceed the Net Value of the property securing the loan.

e. Servicer Claiming Fees Related to Termination Through an Auction Service. When a property is successfully sold at auction, VA will reimburse an “auction fee” up to 5 percent of the sales price at the time of claim submission. The “auction fee” will be reviewed by VA and considered payable up to the maximum guaranty amount of the loan. When submitting the claim under guaranty, the fee incurred must be included as a line item expense. VA will not pay an “auction fee” for homes offered at an auction sale, but not actually sold to a third party. If a property is conveyed to VA in error after a completed auction sale, the property will be reconveyed to the mortgage servicer and any acquisition paid, plus the costs associated with accepting and maintaining property in the VA REO portfolio, will be collected from the mortgage servicer.

f. VA foreclosure timeframes will not be extended to accommodate an auction sale. Mortgage servicers are expected to terminate insoluble loans in accordance with the “State Foreclosure Process and Statutory Bid Information” listed at http://www.benefits.va.gov/homeloans/servicers_valeri.asp and not increase the liability of the Secretary when liquidation is the most prudent course of action. The decision whether to pursue a second auction sale or to proceed with a traditional foreclosure to terminate a loan is not mandated by VA.

8. Guidance to VA Staff.

a. VA Claim Review. VA will review the auction fee as a line item at the time of guaranty claim submission to ensure the fee does not exceed 5 percent of the auction sale price.

b. Special Considerations. Regional Loan Center (RLC) management may contact VA Central Office (VACO) for guidance in unusual situations.

8. Rescission: This Circular is rescinded July 1, 2016.

By Direction of the Under Secretary for Benefits
Michael J. Frueh
Director, Loan Guaranty Service

Please click here to view the online Circular.

About Safeguard 
Safeguard Properties is the mortgage field services industry leader, preserving vacant and foreclosed properties across the U.S., Puerto Rico, Virgin Islands and Guam. Founded in 1990 by Robert Klein and headquartered in Cleveland, Ohio, Safeguard provides the highest quality service to our clients by leveraging innovative technologies and proactively developing industry best practices and quality control procedures. Consistent with Safeguard’s values and mission, we are an active supporter of hundreds of charitable efforts across the country. Annually, Safeguard gives back to communities in partnership with our employees, vendors and clients. We also are dedicated to working with community leaders and officials to eliminate blight and stabilize neighborhoods. Safeguard is dedicated to preserving today and protecting tomorrow.  Website: www.safeguardproperties.com.

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CEO

Alan Jaffa

Alan Jaffa is the Chief Executive Officer for Safeguard Properties, steering the company as the mortgage field services industry leader. He also serves on the board of advisors for SCG Partners, a middle-market private equity fund focused on diversifying and expanding Safeguard Properties’ business model into complimentary markets.

Alan joined Safeguard in 1995, learning the business from the ground up. He was promoted to Chief Operating Officer in 2002, and was named CEO in May 2010. His hands-on experience has given him unique insights as a leader to innovate, improve and strengthen Safeguard’s processes to assure that the company adheres to the highest standards of quality and customer service.

Under Alan’s leadership, Safeguard has grown significantly with strategies that have included new and expanded services, technology investments that deliver higher quality and greater efficiency to clients, and strategic acquisitions. He takes a team approach to process improvement, involving staff at all levels of the organization to address issues, brainstorm solutions, and identify new and better ways to serve clients.

In 2008, Alan was recognized by Crain’s Cleveland Business in its annual “40-Under-40” profile of young leaders. He also was named a NEO Ernst & Young Entrepreneur Of The Year® Award finalist in 2013.

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Esq., General Counsel and EVP

Linda Erkkila

Linda Erkkila is the General Counsel and Executive Vice President for Safeguard Properties, with oversight of legal, human resources, training, and compliance. Linda’s broad scope of oversight covers regulatory issues that impact Safeguard’s operations, risk mitigation, strategic planning, human resources and training initiatives, compliance, insurance, litigation and claims management, and counsel related to mergers, acquisition and joint ventures.

Linda assures that Safeguard’s strategic initiatives align with its resources, leverage opportunities across the company, and contemplate compliance mandates. She has practiced law for 25 years and her experience, both as outside and in-house counsel, covers a wide range of corporate matters, including regulatory disclosure, corporate governance compliance, risk assessment, compensation and benefits, litigation management, and mergers and acquisitions.

Linda earned her JD at Cleveland-Marshall College of Law. She holds a degree in economics from Miami University and an MBA. Linda was previously named as both a “Woman of Influence” by HousingWire and as a “Leading Lady” by MReport.

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COO

Michael Greenbaum

Michael Greenbaum is the Chief Operating Officer of Safeguard Properties, where he has played a pivotal role since joining the company in July 2010. Initially brought on as Vice President of REO, Mike’s exceptional leadership and strategic vision quickly propelled him to Vice President of Operations in 2013, and ultimately to COO in 2015. Over his 14-year tenure at Safeguard, Mike has been instrumental in driving change and fostering innovation within the Property Preservation sector, consistently delivering excellence and becoming a trusted partner to clients and investors.

A distinguished graduate of the United States Military Academy at West Point, Mike earned a degree in Quantitative Economics. Following his graduation, he served in the U.S. Army’s Ordnance Branch, where he specialized in supply chain management. Before his tenure at Safeguard, Mike honed his expertise by managing global supply chains for 13 years, leveraging his military and civilian experience to lead with precision and efficacy.

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CFO

Joe Iafigliola

Joe Iafigliola is the Chief Financial Officer for Safeguard Properties. Joe is responsible for the Control, Quality Assurance, Business Development, Marketing, Accounting, and Information Security departments. At the core of his responsibilities is the drive to ensure that Safeguard’s focus remains rooted in Customer Service = Resolution. Through his executive leadership role, he actively supports SGPNOW.com, an on-demand service geared towards real estate and property management professionals as well as individual home owners in need of inspection and property preservation services. Joe is also an integral force behind Compliance Connections, a branch of Safeguard Properties that allows code enforcement professionals to report violations at properties that can then be addressed by the Safeguard vendor network. Compliance Connections also researches and shares vacant property ordinance information with Safeguard clients.

Joe has an MBA from The Weatherhead School of Management at Case Western Reserve University, is a Certified Management Accountant (CMA), and holds a bachelor’s degree from The Ohio State University’s Honors Accounting program.

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Business Development

Carrie Tackett

Business Development Safeguard Properties