www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 March 14, 1990 MORTGAGEE LETTER 90-8 TO: ALL APPROVED MORTGAGEES ATTENTION: Single Family Servicing Managers SUBJECT: Implementation of Deficiency Judgment Activities Department-Wide The Department of Housing and Urban Development (HUD) has decided to expand the scope of its pursuit of deficiency judgments to a Department-wide effort. This step follows, in natural progression, the publication of a Final Rule on deficiency judgments, and the successful operation of a limited deficiency judgment pilot program. BACKGROUND HUD published its Final Rule on deficiency judgments in the Federal Register on February 16, 1988 (at 53 FR 4384). The Rule, which appears in the Code of Federal Regulations at 24 CFR 203.369, went into effect on March 28, 1988. It makes it possible for HUD to require that lenders pursue deficiency judgments, but only in cases where foreclosures involve mortgages insured pursuant to firm commitments (or direct endorsement credit worksheets) issued on or after March 28, 1988. For those mortgages insured pursuant to firm commitments (or direct endorsement credit worksheets) issued prior to March 28, 1988, the Department can continue to request that mortgagees diligently pursue deficiency judgments against selected mortgagors. Until recently, HUD was not authorized to reimburse lenders for the full expense of obtaining deficiency judgments. That situation has been rectified by new regulation 24 CFR 203.402(o), which makes the added costs (which must be reasonable and customary) of pursuing the judgments 100 percent reimbursable. HUD strongly encourages the mortgagees to cooperate with requests from Field Offices regarding the pursuit of deficiency judgments. The pilot program commenced in early 1989, with some forty HUD offices participating officially or unofficially in the program. These offices have become familiar with the procedures in their respective states for pursuing deficiency judgments against defaulting mortgagors who match a profile that includes such characteristics as investor or "walkaway" status, or multiple defaults attributable to one mortgagor. With this Mortgagee _____________________________________________________________________ 2 Letter, the deficiency judgment program has been expanded nationwide, except in those states where the law bars deficiency judgments arising from defaulted residential mortgage loans. USE OF "CLAIMS WITHOUT CONVEYANCE OF TITLE" PROCEDURES REQUIRED A crucial role is played by the "Claims Without Conveyance of Title" (CWCOT) procedure in the deficiency judgment process. When a mortgagee pursues a defaulting mortgagor for a deficiency judgment, it must use the CWCOT procedure even if the case would not otherwise come under CWCOT. We are directing mortgagees to identify each CWCOT case known to include the pursuit of a deficiency judgment by writing "D. J." in large letters at the top of Form HUD-91022 ("Mortgagee Notice of Foreclosure Sale"). The mortgagee submits a HUD-91022 to the local HUD Office to request an appraisal of the property. Based on the appraisal, HUD determines the Commissioner's Adjusted Fair Market Value (CAFMV), which is the amount the mortgagee is instructed to bid at the foreclosure sale. It is the CAFMV, or, if a third party bids higher, the consummated third-party purchase price, that is used to establish the deficiency amount when it is subtracted from the mortgagor's outstanding indebtedness at the time of foreclosure. (Refer to Mortgagee Letter 87-20, dated June 23, 1987, for a full explanation of CWCOT.) SELECTION AND NOTIFICATION PROCEDURES The Department will be using internal data to identify mortgagors against whom deficiency judgments will be sought, generally non-occupant owners, "walkaways", or those with two or more defaults or claims. Field Offices which have not heretofore participated in the program will begin contacting mortgagees to request or require them to obtain deficiency judgments against mortgagors meeting one or more of the aforementioned criteria. Alternatively, the mortgagee can initiate the process by bringing information to the attention of the local HUD office indicating that a mortgagor meets the criteria for pursuit of a deficiency judgment. This method of notification is purely optional; however, the Department encourages lenders to communicate such information to the Loan Management Branch Chief at the appropriate HUD office. Please note that only where pursuit of the deficiency judgment was requested or required by the Department, or where HUD has approved a mortgagee's request for permission to pursue a judgment, will the expenses connected with this action be reimbursable when the claim is filed. _____________________________________________________________________ 3 Mortgagees can also refer defaulting mortgagors whom they have been advised by HUD will be pursued for deficiency judgments to the local HUD office to discuss a possible compromise settlement of the debt which will be created by the foreclosure. Mortgagors can be told to contact the Loan Management Branch Chief if they wish to enter into negotiations over the deficiency that will be generated by the foreclosure of their mortgages. This interaction can occur before the judgment is formally obtained. HUD WILL PERFORM COLLECTION OF DEFICIENCY JUDGMENTS Mortgagees, if requested, required or approved by HUD Field Offices to pursue deficiency judgments, will be instructed to assign all the judgments they obtain to HUD. (Model forms facilitating this action are available from Field Offices - ATTN: Loan Management Branch.) Mortgagees are specifically directed not to engage in collection of deficiency judgments obtained in connection with any FHA-insured mortgage. The Department will utilize various methods to collect once the judgments are assigned, including conventional means of pursuing the judgment debtors by HUD personnel, use of private collection agencies and/or judicial proceedings initiated by the U.S. Department of Justice, salary or administrative offset (for active or retired Federal and military personnel), and Internal Revenue Service (IRS) offset of tax refunds. Some these measures may result in additional fees that are chargeable to the debtor. If the judgment debt is declared uncollectible, in whole or in part, by the Federal Government, the amount of the uncollectible debt will be reported by HUD to the IRS on Form 1099-G. Mortgagors who successfully negotiate compromise settlements will also be the subject of an IRS information return on Form 1099-G for any indebtedness "forgiven" under the terms of the settlement. Before the Form 1099-G can be filed, however, the debt amount must be compromised or be declared uncollectible by Federal administrative procedure, or else the applicable Statute of Limitations on enforcement of the deficiency judgment must have run. The Department now anticipates that it will have the necessary procedures in place for Form 1099-G reporting for the 1990 tax year. _____________________________________________________________________ 4 CLAIMS INFORMATION Mortgagees should refer to the existing instructions for completing and submitting the HUD-27011 claim form, and should also be aware that extensions will be granted, as necessary, beyond the twelve-month deadline for filing supplemental claims (strictly for reimbursement of expenses directly related to deficiency judgments). However, the Department expects those mortgagees that are able to include deficiency judgment-related expenses on Part B of their initial claim within the customary 45-day deadline after filing the deed for record (normally in "judicial foreclosure" states) to do so. After the judgments have been obtained, mortgagees should assign them to the Department within 30 days. Code 3 must be entered in Item 29 of Part A, to designate that a deficiency judgment was pursued--without it, the entire claim will probably be rejected by the automated system. Deficiency judgment related expenses, which are fully reimbursed, are to be entered in Item 410 of Part E of the claim form. The amount in Item 410 must be also transferred to Line 131, Part B of the claim form. The cooperation of participating mortgagees is crucial to our success, and the Department appreciates your commitment to help us accomplish important objectives. If you have questions on any deficiency judgment-related matter, you should call the Loan Management Branch of the appropriate HUD Field Office. Sincerely yours, Assistant Secretary for Housing Federal Housing Commissioner _____________________________________________________________________ _____________________________________________________________________