HUD Extends Help To Troubled Borrowers

What should you do if you have an FHA loan and face foreclosure?

HUD has come out with a new letter for lenders which explains how to handle situations where a property owner cannot make their payments.

“The Pre-Foreclosure Sale (PFS) option,” says HUD, “allows mortgagors in default (resulting from an adverse and unavoidable financial situation) to sell their home at FMV and use the sale proceeds to satisfy the mortgage debt even if the proceeds are less than the amount owed. This option is appropriate for mortgagors whose financial situation requires that they sell their home, but they are unable to do so without FHA relief because the gross recovery on the sale of their property (i.e., sales price minus sales expenses) is less than the amount owed on the mortgage. HUD’s home retention alternatives such as Special Forbearance, Mortgage Modification, or Partial Claim must first be considered and determined unlikely to succeed due to the mortgagor’s financial situation. Mortgagees must maintain supporting documentation to demonstrate that a comprehensive review of the mortgagor’s financial records was completed, and that the mortgagor did not have sufficient income to sustain the mortgage. Under no circumstances shall the PFS option be made available to mortgagors who have abandoned their mortgage obligation despite their continued ability to pay.

“To participate in the program, mortgagors must be willing to make a commitment to actively market their property for a period of 3 months, during which time the mortgagee delays foreclosure action. Mortgagors who successfully sell to a third party within the required time may receive a cash consideration of up to $1,000. Mortgagees also receive a $1,000 incentive for successfully avoiding the foreclosure and complying with all the requirements of this ML. If the property does not sell, mortgagors are encouraged to use the deed-in-lieu of foreclosure (DIL) option, providing the title on the property is marketable. By following procedures and time frames included in this ML, a mortgagee may submit a FHA insurance claim and be compensated for the difference between the sale proceeds and the amount owed on the mortgage (including accrued interest and reimbursable costs).

“A PFS sale must be an outright sale of the property. If a foreclosure occurs after the mortgagor unsuccessfully participated in the PFS process in good faith, neither the mortgagee nor HUD will pursue the mortgagor for a deficiency judgment.”

Translation: If you run into hard times, have an FHA mortgage and the property must be sold for less than the mortgage amount then HUD will not come after you for the unpaid balance.

This is a realistic and reasonable approach to foreclosures, a recognition that no one wins and that someone who has lost their home has enough problems without being sued for outstanding mortgage debt.

One of the quirky ideas in the letter concerns what happens when an owner is not a resident.

Lenders, says HUD, “are authorized to grant reasonable exceptions to non-occupant mortgagors when documentation indicates a property was not purchased as a rental or used as a rental for more than 18 months, immediately preceding the approval into the PFS program.”

In other words, lenders can try to help even investors, provided the house was originally used as a personal residence and has not been rented for more than 18 months.

You read this and you wonder: What possible difference does it make whether the owner is an occupant or the property has been used as an investment for more than 18 months? If the home is foreclosed HUD will eat the loss in either case and the local neighborhood will have one more foreclosure on the books that hold’s down area home values.

To read the entire letter, press here.

This entry was posted on Tuesday, December 30th, 2008 at 2:57 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.