1001 Overview

This chapter establishes the Department of Veterans Affairs’ (VA) financial policies for foreclosed property acquired under the various VA home loan programs (e.g., the VA-guaranteed loan and the Native American Direct Loan (NADL) programs). 

Key points covered in this chapter:

• VA will work with borrowers and servicers, as applicable, to prevent foreclosure;
• Veterans Benefits Administration (VBA) will manage the acquired properties in accordance with VA-specific statutes, regulations, and administrative requirements; and
• VA will value, record, report, and disclose such properties in accordance with the Federal Credit Reform Act (FCRA) of 1990, the Office of Management and Budget (OMB) Circular A-136, and related Statement of Federal Financial Accounting Standards (SFFAS) issued by the Federal Accounting Standards Advisory Board (FASAB).

1002 Revisions

See changelog.

1003 Definitions

Credit Reform Accounting – An accounting concept and methodology established by FCRA that measures more accurately the cost of federal credit programs. Its objective is to recognize the costs of providing credit at the time the costs are incurred by requiring that direct loans obligated and loan guarantees committed be accounted for on a present value basis.

Deed In Lieu of Foreclosure – A loss mitigation option in which the borrower voluntarily offers the deed to the servicer or VA, as applicable, in exchange for a release from all obligations under the mortgage.

Default – The borrower fails to make a mortgage payment or comply with the terms of the original loan documents signed at closing. It is often used to refer to loans that have been delinquent for at least 61 days.

Discount Rate – An interest rate that is applied in present value calculations to estimate the value of future payments.

Foreclosure – A legal proceeding to terminate a mortgagor’s interest in property, either to gain title or to force a sale in order to satisfy an unpaid debt secured by the property.

Loss Mitigation – An option available to help borrowers avoid foreclosure on delinquent loans and reduce possible loss to the government.

Present Value – The current value of future cash flows.

Subsidy Cost – The cost that represents a loan’s true cost under FCRA, which is the net present value of a loan’s expected cash inflows and outflows over the life of the loan.

Servicer – A company which performs services in connection with mortgages and mortgage-backed securities. The servicer is typically the entity reporting all loan activity to VA and filing claims under the guaranty on behalf of the holder (although the holder can service its own loans).

VA Loan Electronic Reporting Interface (VALERI) – The web-based system that supports VA employees and servicers in the oversight and servicing of guaranteed loans.

Web Enabled Loan Guaranty System (WebLGY) – VA’s system utilized by Loan Guaranty Service to manage loan origination and liquidation data and property information.

1004 Roles and Responsibilities

Under Secretaries, Assistant Secretaries, Other Key Officials, Administration and Staff Office CFOs are responsible for ensuring compliance with the policies outlined in this chapter.

Loan Guaranty Service (LGY), VBA is responsible for ensuring servicers’ compliance with laws, regulations, and VA’s requirements.  LGY is also responsible for the preservation, marketing, and sale of acquired property; as well as, overseeing the day-to-day financial operations associated with the two-way interface between VA’s accounting system, VALERI, and WebLGY.

Accounting Policy and Reporting Division (APRD), VBA is responsible for providing guidance on the accounting methods used to value, record, and post foreclosed property acquired in accordance with authoritative guidance.  APRD also assists the Office of Financial Reporting (OFR) in the reporting and disclosure of foreclosed property.

Administrative and Loan Accounting Center (ALAC), VBA is responsible for a full range of accounting services in support of the VA loan guaranty program and providing administrative accounting services for certain VA regional offices and other VBA facilities.  ALAC manages daily accounting operations for foreclosed property via VA’s accounting system and performs reconciliations to ensure the accuracy of accounting records.

1005 Policies

100501 General Policies

1. Generally, home loans become delinquent when a borrower misses one or more mortgage payments. In the guaranteed loan program, which is VA’s largest home loan program, loans are considered in default if payments are delinquent for at least 61 days.
2. Loan servicers may foreclose guaranteed loans if, despite loss mitigation attempts, delinquencies remain unresolved. When guaranteed loan servicers exercise their statutory option to convey, post-foreclosure, VA will acquire the properties that secured the loans.
3. VA will issue guaranty claims and other payments to the servicer, who will be responsible for forwarding funds to the holder, where applicable, in accordance with its servicing agreement. Incentives will generally be paid directly to the servicer based on its performance and in accordance with its tier ranking.
4. Also, VA typically acquires properties, post-foreclosure, when VA is the loan holder, rather than guarantor.
5. VA’s home loan programs will use foreclosure only as a last resort. To prevent foreclosure, VA will pursue loss mitigation activities to maintain the borrower’s homeownership such as, providing incentive payments to servicers, purchasing loans from the mortgage holder for certain borrowers, and conducting a thorough pre-foreclosure review.
6. When a delinquency cannot be resolved or the property has been abandoned, guaranteed loan servicers should proceed with foreclosure action.
7. When foreclosure of a guaranteed loan is unavoidable, VA will monitor and oversee the servicer’s foreclosure activities. These activities include but are not limited to:
   • Requiring the servicer to comply with all federal, state, county, and local foreclosure laws and follow VA’s requirements;
   • Reviewing required foreclosure related information submitted by the servicer in VA’s Loan Electronic Reporting Interface (VALERI);
   • Ensuring an accurate liquidation appraisal gauges the property value for the purpose of foreclosure;
   • Requiring the servicer to schedule and carry out foreclosure sales where home retention and foreclosure alternatives are not feasible; and
   • Authorizing the servicer to use an auction service when it is legal to terminate a guaranteed loan through an auction sale versus a foreclosure sale.
8. When a foreclosure occurs or a mortgagor executes a deed-in-lieu of foreclosure, VA will ensure the servicer’s conveyance of the property meets applicable requirements. When acquiring property under the program, VA will comply with:
   • Federal Credit Reform Act (FCRA) of 1990;
   • Title 38, U.S.C., chapter 37.
   • Title 38, C.F.R. Part 36, Loan Guaranty;
   • Related SFFAS issued by FASAB;
   • OMB Circular A-136, Financial Reporting Requirements – Revised;
   • Treasury Financial Manual (TFM) and credit reform case studies; and
   • VBA home loan circulars, manuals, and other materials.

100502 Management and Accounting of Foreclosed Property Acquired

1. LGY will manage acquired properties in accordance with Title 38, C.F.R. Part 36, related SFFAS, and VBA related Home Loan Circulars and Materials.
2. FCRA, with associated credit reform accounting methodology, divides direct loans obligated and loan guarantees committed into two categories: post-1991 and pre-1992.
   1. Foreclosure of post-1991 direct loans and guaranteed loans – VA will apply the present value accounting method to foreclosed properties as required.
   2. Foreclosure of pre-1992 direct loans and guaranteed loans – the present value method is permitted, but not required. VA will apply the present value method to foreclosed properties, with the exception of using the allowance-for-loss method for bad debt.
3. When the property is transferred to VA through foreclosure or deed in lieu of foreclosure, ALAC will record the foreclosed property as an asset at the present value of its estimated future net cash inflows discounted at the original discount rate.
4. VA will maintain control of documentation prescribed by 38 C.F.R. § 36.4323, data, and information relating to all foreclosed property acquired, or in the process of acquisition, under VA’s loan programs.
5. VA may use a contractor (currently Vendor Resource Management Services) to electronically process and store data associated with foreclosed properties, including sales documents such as – sales contracts, deeds, settlement statements, etc.
6. Foreclosed property data will be electronically transferred between VA’s contractor and VA’s VALERI and WebLGY systems which in turn will interface data with VA’s accounting system.
7. LGY will monitor the transfer of information between VA’s accounting system, VALERI, and WebLGY.  ALAC will perform reconciliations to ensure data and information accuracy, as needed.
8. LGY will, on a daily basis, verify invoicing and other supporting documentation in VRMS related to foreclosed property activity (such as, before and after photos of work, canceled checks to vendors, bids, etc.).
9. After the acquisition and prior to the disposition of the property, ALAC will record the following items on the foreclosed property account to reflect adjustments or changes to the property value with the passage of time.
   1. The present value calculated via original discount rate will be adjusted for the interest rate re-estimate.
   2. Changes in the estimated future cash flows and any accrual of interest due to the passage of time will be calculated at net present value.
   3. All other expenses and revenues associated with the property will be calculated at the net present value.
10. Where VA is the loan holder for loans other than Native American Direct Loans (NADL) and there is a foreclosure sale or other liquidation, VA will, in accordance with 38 C.F.R. § 36.4513, reduce the debt owed by the greater of:
    • The net proceeds of the sale; or
    • The current market value of the property as determined by VA, less the costs and expenses of liquidation, which will not exceed the amount of the gross indebtedness, nor shall such credit be less than the amount legally required to be credited to the indebtedness under local law.
11. In accordance with 38 C.F.R. § 36.4527, foreclosure and resale of acquired property procedures for NADLs will be conducted per the memorandum of understanding entered into by VA and the tribal organization that has jurisdiction over the veteran.
12. Upon the sale of the acquired property, ALAC will record the difference between the adjusted property value and net sales proceeds as adjustments to the allowance for subsidy costs for direct loans; or loan guarantee liability for guaranteed loans.

100503 Reporting for Property Acquired Under the Program

1. VBA APRD will ensure that the property acquired is appropriately recorded in VA’s accounting system and reported to Treasury.
2. OFP, in coordination with APRD, will:
   • Report property acquired under Direct Loans and Loan Guarantees in VA’s financial statements; and
   • Disclose the pre-1992 and post-1991 foreclosed property separately in the related financial statement notes.

1006 Authorities and References

• United States Code (U.S.C.)
  • 38 U.S.C., chapter 37
  • 38 U.S.C § 3732, Procedure on Default
• 38 C.F.R. Part 36, Loan Guaranty
• Federal Credit Reform Act of 1990
• OMB Circular A-136, Financial Reporting Requirements – Revised
• SFFAS 2: Accounting for Direct Loans and Loan Guarantees
• SFFAS 3: Accounting for Inventory and Related Property
• SFFAS 18: Amendments to Accounting Standards for Direct Loans and Loan Guarantees in Statement of Federal Financial Accounting Standards No. 2
• SFFAS 19: Technical Amendments to Accounting Standards for Direct Loans and Loan Guarantees in Statement of Federal Financial Accounting Standards No. 2
• TFM Supplemental USSGL
• Treasury Credit Reform Accounting Case Studies
• VBA Home Loan Circulars
• VBA Home Loan Materials

1007 Rescissions

VA Financial Policy, Volume V, Chapter 10A – Other Assets – Real Estate Owned dated February 2019.

1008 Policy Approval

This policy was approved by the VA Chief Financial Officers’ Council on August 10, 2023.