www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 September 25, 1991 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER MORTGAGEE LETTER 91-45 TO: ALL APPROVED MORTGAGEES ATTENTION: SERVICING MANAGERS (SINGLE FAMILY) SUBJECT: ANNOUNCEMENT OF HUD'S PRE-FORECLOSURE SALE PROGRAM DEMONSTRATION This Mortgagee Letter describes the Department's Pre-foreclosure Sale ("PFS") program demonstration. The demonstration has been designed to gauge the demand for, and the efficacy of, pre-foreclosure sales as a means of saving the Department money and of assisting qualified mortgagors in avoiding foreclosure of their FHA-insured mortgages. A successful demonstration will result in Department-wide implementation of the pre-foreclosure sale option, and its inclusion in the Department's range of HUD-approved relief provisions. The demonstration program, which will last approximately 12 months, will be conducted in five local HUD Offices: Milwaukee, Atlanta, Denver, Houston, and Phoenix. This selection includes three offices in long-term "soft" real estate markets, as well as two other offices in more typical markets. FHA-approved mortgagees and servicers around the country are being apprised of the program, but we are specifically instructing those mortgagees with significant servicing operations in one or more of the five affected areas to pay close attention to the requirements of the Pre-foreclosure Sale demonstration. The PFS demonstration in Wisconsin is being administered "in-house" by the Milwaukee HUD Office. The demonstration in the other four jurisdictions will be coordinated by contractors as yet to be selected. EFFECTIVE DATE: Effective with the date of this Mortgagee Letter the following PFS demonstration guidelines must be fully implemented in Wisconsin only. HUD will notify mortgagees at a later date when to implement these guidelines fully in the other demonstration areas. Until the contractors are selected, the remaining four demonstration offices and all other field offices have been authorized to consider potential pre-foreclosure sales on a case-by-case basis. Participating FHA mortgagees will play a crucial role in the demonstration. Mortgagee cooperation is essential for the program's smooth operation. Although it is also in the mortgagee's best interest that this program prove successful, HUD _____________________________________________________________________ 2 acknowledges that mortgagees will be faced with start-up costs for this demonstration. HUD will pay $250 to defray mortgagees' administrative costs relating to each Pre-foreclosure Sale demonstration program participant. This expenditure will be reviewed before a decision is made regarding its continuation after the demonstration. OVERVIEW The Department believes that a significant number of mortgagors who enter into a "defaulted" status on their mortgages would take advantage of the opportunity to sell their properties at current fair market value to a third party, to free themselves of the financial obligation that their mortgage represents, and also to avoid foreclosure. Of course, there will be homeowners whose first priority is to retain their properties, and those individuals should be encouraged to explore all available options, including application for mortgage assignment, discussion of forbearance or recasting possibilities with their lenders, etc. But for those mortgagors who desire to withdraw from their mortgage obligation, and who attempted to sell their properties in the past, or would have listed them for sale, but have been prevented from doing so by a decline in the value of their property that would produce insufficient sale proceeds to pay off their mortgages, the PFS option represents an opportunity to realize their objective.1/ Affording them this opportunity is in keeping with the Department's overall goal of reducing its losses resulting from defaults and foreclosures. In addition, making this option available to qualifying mortgagors will place HUD in the mainstream with other agencies that utilize pre-foreclosure sales as a servicing and loss-mitigation tool in appropriate circumstances. IMPORTANT PROGRAM PROVISIONS Eligibility Criteria: In order to be eligible for the PFS program, a mortgagor-applicant must: (1) be an owner-occupant in a single family unit with a mortgage under Sections 203(b), 221(d)(2), 234(c), 235, or 245 of the National Housing Act (12 U.S.C. 1709, 17151, 1715y, 1715z, or 1715z-10); (2) have an account in default; i.e., with three installments due and unpaid (the default must not be ____________________ 1/ At this time, a "pre-foreclosure sale" is only envisioned as an outright sale of the premises. No assumptions, regardless of provisions for release of liability, will be permitted under the program. _____________________________________________________________________ 3 the result of the mortgagor's willful abuse 2/ of the single family mortgage program); and (3) have been made aware of the assignment program, as discussed below under Notification of Program, and have been either turned down for it by HUD, or have decided not to apply for it. NOTE: In addition, those mortgagors who are small investors with only one FHA-insured mortgage (e.g., a former owner-occupant who now rents out his/her property) will be considered for eligibility under the Pre-Foreclosure Sale Program. Under no circumstances, however, will the program be made available to "walkaways" who have abandoned their mortgage obligations despite their continued ability to pay. Mortgagors determined to be eligible for, and who participate in, pre-foreclosure sales will not be pursued for deficiency judgments by the Department. Use of Contractors As Program Coordinators: The Department intends to utilize the services of one or more contractors to perform many crucial steps in the Pre-Foreclosure Sale Program. Contractors are expected to be used in four of the five demonstration sites. For purposes of comparison, the Department will have staff in one of the five local HUD offices (Milwaukee) perform the tasks of program coordination instead of a Contractor. Participating in the Pre-foreclosure Sale Program: Once a mortgagor contacts a program coordinator (Contractor or local HUD office, as appropriate), is determined to be eligible to pursue a pre-foreclosure sale and is so notified, the mortgagor is then enrolled and may pursue a pre-foreclosure sale. The coordinator will also refer the mortgagor to one or more real estate brokers in an attempt to market the property within the established time and price guidelines. These brokers will be prohibited from sharing a business interest with the Contractor. HUD's Information Sheet will explain that, while mortgagors are free to try to sell their properties themselves, the Department strongly recommends that a broker be retained because of the tight time constraints involved in the pre-foreclosure sale process. ____________________ 2/ Any attempt to enroll in this program by deliberately manufacturing a mortgage default or by misrepresenting pertinent facts about the applicant's financial or other qualifying status shall be considered "willful abuse" in the context of the pre-foreclosure sale program. _____________________________________________________________________ 4 An "As-Is" appraisal will be ordered from the local HUD Office by the coordinator. Any costs for the appraisal will be borne by the local HUD Office. The appraisal will be conveyed to the coordinator, who will forward a copy to the program participant. Homeownership Counseling Responsibilities: Before a particular pre-foreclosure sale transaction can be approved, either a HUD-approved counseling agency or program staff will do the following: (1) Provide substantive "homeownership counseling" to mortgagors considering the pre-foreclosure sale option. This will include explaining the alternatives to a pre-foreclosure sale that are available to the mortgagor at that time. (2) Advise mortgagors that they may wish to contact a financial or tax counselor to learn the specific tax consequences to them of a pre-foreclosure sale. (3) Assist in executing certifications before the actual pre-foreclosure sale is approved. These certifications shall include statements that: (a) homeownership counseling has been received; (b) the proposed pre-foreclosure sale is an "arm's length" transaction between the mortgagor and would-be purchaser; 3/ (c) the broker hired to sell the property must not share a business interest with the program coordinator; and (d) if the mortgagor has not made application for mortgage assignment, that the assignment program has been explained to him and that he desires to waive any right to apply for the program arising from his present mortgage default. ____________________ 3/ For purposes of this program, an "arm's length" transaction is a pre-foreclosure sale between two unrelated parties that is characterized by a selling price and other conditions that would prevail in an open market environment. No hidden terms or special understandings can exist between buyer and seller, or between the seller or buyer and the sales agent or program coordinator. _____________________________________________________________________ 5 Approving the Pre-foreclosure Sale: The real estate broker (or the mortgagor's attorney) should forward to the coordinator a copy of the contract of sale (including sales commission) made conditional upon HUD's approval, and the necessary certifications (if they have not yet been sent to the program office) that have been signed by the mortgagor. The coordinator will review the package for approval and render a decision within five (5) working days of receiving the proposed sales contract. A copy of the approved Sales Contract will be sent to the mortgagee to document the servicing file that a closing is imminent. Other Provisions: During the demonstration, the following additional provisions will apply: (1) The coordinator will have the authority, on a case-by-case basis, to extend a lender's foreclosure sale date to accommodate participation in the program, if it determines that it would be in HUD's best interest to do so. (2) In determining the eligibility of a mortgagor to participate in the PFS program, the coordinator shall determine whether the property's appraised value is at least 70% of the outstanding mortgage indebtedness at the time application is made for the program. In cases where the appraised value is less than 70% of the outstanding debt, the coordinator must obtain local HUD Office (ATTN: Loan Management Branch) approval to allow the mortgagor to engage in a pre-foreclosure sale. (3) The offer to purchase the property should net HUD at least 90% of the appraised value of the property. However, the coordinator may exercise discretion in cases where the bid is at least 90% of appraised value but the net to HUD, after sales commission and other adjustments, is less than 90% of appraised value. Offers which do not reach the 90% level of appraised value, but which the coordinator thinks should be accepted anyway, must be approved in advance by the local HUD Office (ATTN: Director of Housing Management). (4) All proposed sales contracts must be approved by the coordinator before a "closing" can be scheduled. _____________________________________________________________________ 6 The Closing of the Pre-Foreclosure Sale: If all applicable criteria are met, or any criteria not met are appropriately waived, the following will occur prior to closing the sale: (1) The coordinator will provide to the Closing Agent a Closing Worksheet which contains a list of financial incentives and amounts payable out of sale proceeds. These incentives are a base amount of $1500 for participation in the program; an additional $500 if the closing occurs within three (3) months of acceptance into the program, OR $200 if the closing occurs within four months. If the sales proceeds exceed the appraised market value of the property, the participant will be paid 50% of the excess, or $1500, whichever is greater. The Closing Agent will enter these incentives on lines 1303-1305 of the form HUD-1, "Settlement Statement." (2) The Closing Agent will calculate the actual net sale proceeds and provide a copy of the HUD-1 to the coordinator. The coordinator will ascertain whether the actual terms of the transaction are in accordance with the proposed sale that had been previously approved. (3) If the coordinator approves the transaction, and "closing" occurs, the Closing Agent will pay the listed incentives. The Closing Agent will send the net proceeds of sale and a completed form HUD-1 to the mortgagee. A copy of the HUD-1 and an executed "Closing Worksheet\Recap," certifying that the appropriate incentives have been paid, will be sent by the Closing Agent to the coordinator. RESPONSIBILITIES OF MORTGAGEES "DOING BUSINESS" IN THE DEMONSTRATION AREAS Mortgagees will be involved in the following important activities relating to, or affected by, pre-foreclosure sales: (1) Notification and referral. HUD has prepared a brief Bulletin (see Appendix), which shall be reprinted by each mortgagee as necessary, that explains the basic nature of the Pre-foreclosure Sale program, and provides mortgagors with a toll-free number to call to contact program coordinators in their area. These _____________________________________________________________________ 7 half-sheet notices must be inserted in the envelopes along with the following mailed materials: (a) Pamphlet HUD-426-H(12), "Avoiding Mortgage Default," typically sent to mortgagors who fall two mortgage payments behind; (b) HUD Exhibit #1 Letter, sent after a mortgagor's account becomes 3 or more payments in arrears; and (c) HUD Exhibit #2 or Exhibit #3 Letter. Generally, mortgagees may, at their discretion, alert homeowners to the PFS program if the mortgagee believes that the homeowners, situation is worthy of consideration by the coordinator. Any mortgagors who initiate an inquiry about the pre-foreclosure sale option at other times should be directed by mortgagee personnel to call the toll-free number for further information. (In addition, the local HUD Office will be responsible for sending a similar notification to mortgagors who lose the right to apply for mortgage assignment or are turned down during the processing of their applications. Finally, HUD-approved housing counseling agencies and local HUD Offices will be circulating an Information Sheet describing the Pre-foreclosure Sale demonstration, and containing the toll-free number to contact program coordinators.) (2) Liaison with PFS program coordinators. Mortgagees will have periodic contact with program coordinators, (either the Contractors working for HUD or the local HUD offices overseeing the pre-foreclosure sale program). (a) There may be a need for servicing staff to "trouble shoot" certain situations that can arise while a mortgagor is participating in the PFS program. Examples include answering inquiries from the mortgagor about other available options, such as a forbearance agreement, reinstatement, etc. There may be questions about form letters and other mailings sent to the mortgagors automatically, but perhaps erroneously in some cases, by the mortgagee while the mortgagor is still participating in the PFS program (for example, Notices of Intent to Foreclose, or applications for occupied conveyance). Assurances may have to be given to mortgagors or program _____________________________________________________________________ 8 coordinators that not all provisions or language contained in the mailings is appropriately directed to a mortgagor still engaged in the Pre-foreclosure Sale program. (b) There may also be a need to respond to inquiries from the program coordinators about issues relating to the accounts of program participants; for example, knowledge by servicing staff of secondary liens and encumbrances that could affect whether a pre-foreclosure sale can be approved. (3) Executing a deed-in-lieu in the context of the Pre-foreclosure Sale program. (a) The PFS demonstration utilizes the option to accept a deed-in-lieu of foreclosure from qualified program participants who, despite a good faith effort, fail to find a qualified buyer for their properties. The deed-in-lieu is thus considered the "second most desirable" outcome under this program, and the program coordinator will be in a position to strongly recommend that the mortgagee execute a deed-in-lieu, rather than to continue taking steps leading to foreclosure. Although this procedure does not alter the existing criteria that apply to decisions regarding deeds-in-lieu, it does change the party making the recommendation--but only in the context of the Pre-foreclosure Sale program. In situations involving mortgagors who are not participating in Pre-foreclosure Sales, the mortgagee will continue to follow procedures as set forth in Handbook 4330.1, REV-2, paragraph 9-4. (b) In furtherance of this deed-in-lieu provision, HUD has decided to implement several changes--as part of the demonstration only--in the processing, and in the reimbursement of expenses relating to, deeds-in-lieu of foreclosure. See 24 CFR 203.357 and 203.402(f). (i) For participants in the PFS program who fail to execute sales transactions despite a good faith effort, as determined by the program coordinator, the consideration payable to the mortgagor for executing the deed-in-lieu will be $500. (ii) The consideration payable to the mortgagor in such cases will be fully reimbursable to the mortgagee via the Single Family Claims for Insurance Benefits. Detailed instructions on the filing of claims involving participants in the PFS program will be issued separately. _____________________________________________________________________ 9 (4) Possible postponement of foreclosure-related actions. If, in the judgment of the program Coordinator, by giving a participant a limited amount of additional time, he or she would have a good chance of executing a pre-foreclosure sale, a request will be made to the mortgagee to postpone a scheduled foreclosure sale date. Any request to the mortgagee for a delay in scheduling a foreclosure sale date will be made, or followed up, in writing, for the documentation of the mortgagee's case file. A failure to comply with such a request where the basis for the request is the prospect of a pre-foreclosure sale, could result in a finding by HUD of a failure to protect HUD's interest. (5) Claims. (a) Claims instructions for use in cases where a pre-foreclosure sale does result from participation in the program will be distributed shortly. (b) In cases where there is no pre-foreclosure sale transaction despite participation in the program, the claim will be treated as a conveyance claim, with the following exceptions: (i) Mortgagees will receive full reimbursement of the $500 consideration paid to program participants who qualify for a deed-in-lieu of foreclosure. (ii) Mortgagees will receive the amount of $250 from HUD, for every program participant (regardless of outcome), to defray the mortgagees, initial administrative expenses relating to enrollment in the PFS program. Payment of this fee will be reviewed as part of HUD's analysis of the demonstration. If you have questions regarding pre-foreclosure sales or the demonstration program, please direct your inquiries to the Insured Servicing Branch at HUD Headquarters at 202-708-1719. Very sincerely yours, Arthur J. Hill Assistant Secretary for Housing-Federal Housing Commissioner Attachment _____________________________________________________________________ APPENDIX HOMEOWNER: PLEASE READ THIS IMPORTANT BULLETIN! There is another way that you might be able to avoid the foreclosure of your mortgage and its effect on your credit record. If you believe that you can no longer handle your mortgage obligation, you may want to consider selling your home before the foreclosure occurs. This is known as a "Pre-Foreclosure Sale." Even if you are not able to sell your home for enough money to pay off your mortgage, you could qualify for the Department of HUD to pay off the remainder of your mortgage debt after the sale, if you meet certain eligibility criteria. These criteria are different from those for HUD's Mortgage Assignment Program. (If you want HUD to consider accepting an assignment of your mortgage, you must apply for that program -- separately -- while you are still eligible to do so.) If you want to learn more about the "Pre-Foreclosure Sale" Program and whether you are eligible to participate in it, call HUD at the following telephone number: 1-800-800-3088. The number is TOLL FREE and there is NO OBLIGATION on your part as a result of making this call. Your prompt action could increase your chances of success in the Pre-foreclosure Sale Program. Don't delay! 08/5/91 APPDX1.PFS