HUD Moves To Help FHA Borrowers Facing Bankruptcy

by Peter G. Miller
October 22nd, 2008

What comes after a foreclosure? In too many it’s bankruptcy and now HUD has come out with a policy that may help some homeowners.

The bankruptcy standards were changed in 2005 under the so-called Bankruptcy Abuse Prevention and Consumer Protection Act. This law actually made bankruptcy far more difficult for consumers and greatly benefited mortgage lenders, credit card companies, student lenders and other creditors.

The important point for FHA mortgage borrowers was that the new law prohibited bankruptcy courts from modifying home loans — though mortgages on second homes, yachts and planes could be changed. Because of the 2005 law HUD issued regulations which generally prohibited lenders from offering loss mitigation to borrowers in bankruptcy.

Now, however, HUD has come out with new standards which encourage lenders to speak with borrowers and to try to work out something. This is a substantial change — and one the benefits FHA borrowers, lenders and HUD itself (because insurance claims can be reduced).

Portions of the new HUD standard are below:

This Mortgagee Letter updates the Department’s position on the use of FHA Loss Mitigation while a borrower is in bankruptcy. The guidance regarding mortgagors in bankruptcy provided on pages 9 and 25 of Mortgagee Letter 2000-05, is superseded by this Mortgagee Letter. Mortgagee Letter 2000-05, generally prohibited mortgagees from offering loss mitigation to a borrower in bankruptcy. That guidance was predicated on the concern that HUD did not want to influence mortgagees to take any action that would be considered by the Bankruptcy Court as a violation of the automatic stay.

The Department was recently approached by the mortgage industry and bankruptcy experts regarding the Department’s current guidance on mortgagors in bankruptcy. As a result of these discussions, the Department understands that contact with debtor’s counsel or a bankruptcy trustee does not constitute a violation of the automatic stay and that waiting until a bankruptcy is discharged or dismissed before offering loss mitigation may be injurious to the interests of the borrower, the mortgagee and the FHA insurance funds.

Effective immediately, mortgagees must, upon receipt of notice of a bankruptcy filing, send information to debtor’s counsel indicating that loss mitigation may be available, and provide instruction sufficient to facilitate workout discussions including documentation requirements, timeframes and servicer contact information. Working through debtor’s counsel, mortgagees may offer appropriate loss mitigation options prior to discharge or dismissal, without requiring relief from the automatic stay and in the case of a Chapter 7 bankruptcy, without requiring re-affirmation of the debt. It is strongly recommended that the bankruptcy trustee be copied on all such communications. All loss mitigation actions must be approved by the Bankruptcy Court prior to final execution.

Nothing in this mortgagee letter requires that mortgagees make direct contact with any borrower under bankruptcy protection. However, the information required to file a bankruptcy petition (now a matter of public record) will often include sufficient financial information for the mortgagee to properly evaluate the borrower’s eligibility for loss mitigation. Using this financial information, many mortgagees have been able to complete the loss mitigation evaluation before the bankruptcy plan is confirmed and have offered a pre-approved loan modification agreement. For those mortgagors that sought bankruptcy protection solely to avoid foreclosure of their homes, this solution allowed the mortgagor to have the bankruptcy dismissed and begin fresh with a mortgage obligation that is both current and with payments that the mortgagor can afford. For those mortgagors with other financial problems, the resolution of the mortgage problem will put them in a better position to resolve the remaining financial issues.

Where the mortgagor filed the bankruptcy Pro Se, (without an attorney), the Department recommends that information relating to the availability of loss mitigation be provided to the mortgagor with a copy to the bankruptcy trustee. This communication must not infer that it is in any way an attempt to collect a debt. Mortgagees must consult their legal counsel for appropriate language.

The Department cautions mortgagees not to report current loans to HUD’s Single Family Default System (SFDMS) simply to alert HUD that a bankruptcy has been filed. Loans must be at least one full payment due and unpaid (30 days delinquent) before reporting to SFDMS is required. Where the mortgagee is successful and is able to utilize loss mitigation on an account in bankruptcy, it must continue to report the appropriate status codes in SFDMS to reflect loss mitigation actions. Please ensure that should the loss mitigation initiative result in reinstatement or payment in full that the appropriate status code is reported to SFDMS.

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This entry was posted on Wednesday, October 22nd, 2008 at 6:39 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

One Response to “HUD Moves To Help FHA Borrowers Facing Bankruptcy”

  1. John Says:

    Thanks for the info. also note that Bank of America/Countrywide have committed to helping over 400,000 homeowners keep their homes. More info on the programs here.

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