FHA IS ALLOWING FOR SHORT SALES

 

FHA loans have a "built in" loss mitigation requirement that the servicers of FHA loans can explore with borrowers who are in default.  This one of the HUGE advantages of FHA. 

I have a PDF of the HUD letter that explains the process. REMEMBER THINGS CAN CHANGES WITH THE GOVERNMENT AT ANYTIME.  DON'T RELY ON THIS INFORMATION FOR LEGAL ADVICE OR GUIDANCE.  IT IS PROVIDE AS "GOOD TO KNOW" INFORMATION ONLY.

http://images.agentcenter.com/client/4/7/9/20974/FHAPartialClaims.pdf

Here is the actual text of the letter.  It is a little squished, so the PDF is better.

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D.C. 20410-8000
OFFICE OF THE ASSISTANT SECRETARY
FOR HOUSING-FEDERAL HOUSING COMMISSIONER
November 20, 2003
MORTGAGEE LETTER 2003-19
TO: ALL APPROVED MORTGAGEES
ATTENTION: Single Family Servicing Managers
SUBJECT: Partial Claims: Program Changes and Updates
The purpose of this Mortgagee Letter is to remind mortgagees of the proper use of the
partial claim as a loss mitigation tool for defaulted FHA mortgagors, and to introduce several
changes in the partial claim program which include:
• a reminder that mortgagees shall lose the incentive payment when loss mitigation
claims are not submitted within 60 days of the date the partial claim subordinate
lien is executed, or where the partial claim security documents are not forwarded
timely,
• a “One-Time Amnesty ” which is being provided to accept all outstanding
partial claim related legal documents without penalty;
• additional guidance for calculating pre-foreclosure sale ratios where a partial
claim had been provided to the mortgagor in a previous default.
This Mortgagee Letter supersedes the portion of Mortgagee Letter (ML) 2000-05 that
addresses partial claims, starting on page 24 through page 29. The other loss mitigation
provisions within ML 2000-05 were left intact. Several additional sections have been provided
to clarify time frame and address document delivery issues.
Definition and Existing Guidance
Under the partial claim option, a mortgagee will advance funds on behalf of a mortgagor
in an amount necessary to reinstate a delinquent loan (not to exceed the equivalent of 12 months
worth of principal, interest, taxes, and insurance (PITI)). The mortgagor, upon acceptance of the
advance, will execute a promissory note and subordinate mortgage payable to HUD. Currently,
these promissory or “partial claim” notes carry no interest and are not due and payable until the
mortgagor either pays off the first mortgage or no longer owns the property.
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Following reinstatement, the mortgagee will file a partial claim for the amount of the
advance plus the mortgagee’s incentive fee, and forward a copy of the recorded documents to
HUD. A contractor retained by HUD will service the partial claim notes.
HUD approval is not required in order for mortgagees to advance funds and file a partial
claim, as long as the requirements detailed in this section are satisfied. This option provides
mortgagees with a powerful tool to assist mortgagors threatened with foreclosure. However, this
loss mitigation option should be used only if the mortgagee is confident that:
• The mortgagor has the long-term financial stability to support the mortgage debt; and,
• The mortgagor does not have the ability to repay the arrearage through a special
forbearance or modification.
A. Loan Default
The loan must be at least four (4) payments due and unpaid, but may not be more than 12
months due and unpaid at the time the partial claim note is executed. The loan may not be in
foreclosure when the partial claim note is executed. However, a mortgagee may remove a loan
from foreclosure if the mortgagor’s financial situation has improved sufficiently to justify a
partial claim.
B. Mortgagor Qualifications
Partial claims may be offered to mortgagors who satisfy all of the following
requirements:
• Have overcome the cause of the default;
• Have sufficient income to resume monthly mortgage payments;
• Do not have sufficient surplus income to repay the arrearage through a repayment
plan;
• A mortgage modification is not appropriate;
• The mortgagor is an owner-occupant(s) committed to continuing occupancy of the
property as a primary residence. A partial claim may not be used to reinstate a
loan prior to a sale or assumption.
A mortgagee may consider a mortgagor who has filed a petition in Bankruptcy
Court under Chapter 13 for a partial claim, only after obtaining the approval of the
Bankruptcy Court. If the mortgagor has filed a bankruptcy petition under Chapter 7, the
mortgagee must obtain Bankruptcy Court approval. In addition, the mortgagor must
reaffirm the debt.
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C. Property Condition
While the partial claim option does not include a loan-to-value restriction and
no appraisal or broker’s price opinion is required, the mortgagee must conduct a review
sufficient to verify for FHA that the property has no physical condition(s) which
adversely impact the mortgagor’s continued use or ability to support the debt.
A mortgagor may not be able to support payments under a partial claim if the
property is in such a deteriorated condition that repairs drain the mortgagor’s monthly
resources. An analysis of the mortgagor’s surplus income should consider anticipated
property maintenance expenses. If the mortgagee’s inspection identifies a property in
extremely poor physical condition, a partial claim may not offer a permanent resolution
to the default.
D. Financial Analysis
The mortgagee is required to assess the mortgagor’s financial status as described
in Section H, page 10, of ML 00-05. HUD expects the mortgagee to project the
mortgagor’s surplus monthly income for a minimum of three months, and calculate the
surplus income percentage.
If the financial analysis determines that the mortgagor does not have the ability to
support the normal monthly payment, the partial claim option may not be used. In no
case may a partial claim be used if the mortgagor’s surplus income percentage is 0% or
less than 0%. If the mortgagor has low surplus income (< 5%), mortgagees are
encouraged to combine a partial claim with a special forbearance plan allowing the
mortgagor to demonstrate the ability to make regular payments for a period of three (3) or
more months prior to origination of the partial claim note.
Mortgagees must use good business judgment to determine if the mortgagor has
the adequate surplus income to repay the arrearage through a special forbearance or
mortgage modification before approving a partial claim. Mortgagees are encouraged to
require mortgagors to contribute all available funds toward paying down the default,
thereby reducing the amount of the partial claim debt. The lender must retain the
financial analysis and supporting documentation in the claim review file that supports the
decision that a partial claim was the appropriate loss mitigation option.
E. Combining Options
A partial claim may be utilized as a stand-alone tool, or incorporated as part of a
special forbearance agreement. For example, if a mortgagor needs time to resolve the
default, but will eventually be able to support the normal monthly payment but no more
than that, a repayment plan or special forbearance may culminate in a partial claim. An
existing repayment plan or special forbearance may also be converted to partial claim if
the mortgagor’s circumstances change. A partial claim may not be used in conjunction
with a mortgage modification.
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On August 29, 2002, the Department published Mortgagee Letter (ML) 2002-17,
Special Forbearance: Program Changes and Updates which provided new guidance for
a Type II Special Forbearance. The Type II Special Forbearance combines a short-term
special forbearance plan and a modification or partial claim as a single loss mitigation
plan. It is an appropriate loss mitigation tool to utilize when there is any concern about
the mortgagor’s ability or commitment to keep the payments current following
reinstatement. For more information on this related issue, please refer to ML 2002-17.
F. Allowable Provisions
The following provisions apply to all partial claim notes:
• The partial claim must fully reinstate the loan;
• The partial claim advance may include only principal, interest and escrow
advances required to reinstate the loan;
• In no event may the total arrearage exceed the equivalent of 12 months PITI.
The maximum partial claim advance for an Adjustable Rate Mortgage
(ARM), Graduated Payment Mortgage (GPM), and Growing Equity Mortgage
(GEM) loans is calculated by adding the specific PITI requirement for each of
the monthly installments to be included in the partial claim.
The mortgagee may not include late fees, legal fees or other administrative
expenses in the partial claim note. However, mortgagees may only collect legal costs
and fees resulting from a canceled foreclosure action directly from the mortgagor to the
extent not reimbursed by HUD and in accordance with HUD limitations. These
requirements are provided in Chapter 4 of Handbook 4330.1, REV-5, Administration of
Insured Home Mortgages, Mortgagee Letter 2001-19, Single Family Foreclosure Policy
and Procedural Changes, or subsequent guidance, if any. As a reminder, under no
circumstances will the mortgagor be required to pay the mortgagee more than the
Department identified as customary and reasonable for claim purposes.
Although HUD does not prescribe a lien priority requirement for partial
claims, the mortgagee must ensure timely recordation of the subordinate mortgage.
G. Repayment Terms
The partial claim advance will be secured by a note and subordinate mortgage
with the following repayment terms:
• The note is interest free. (The Secretary reserves the right to assess interest on
partial claim notes originated in the future.);
• No monthly or periodic payments are required, however, mortgagors may
voluntarily submit partial payments;
• The note is due at the earlier of 1) the payoff of the first mortgage, or 2) when the
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mortgagor no longer owns the property;
• There is no prepayment penalty;
• A mortgagor is only eligible to apply for a mortgage insurance premium (MIP)
refund when the partial claim note has been paid in full;
• The Partial Claim Note and security documents must be payable to HUD;
• Voluntary payments or prepayments should be delivered via a cashier’s check or
other certified funds to the Department’s servicing contractor at the following
address.
U.S. Department of HUD
c/o First Madison Services, Inc.
4111 South Darlington
Suite 300
Tulsa, OK 74135
H. Required Documentation
A promissory note must be executed in the name of the Secretary and a
subordinate mortgage must be obtained and recorded. The mortgagee must include the
provisions of HUD’s model form of note and subordinate mortgage (as provided in ML
97-17) and make any amendments required by state laws. While HUD does not endorse
the products or services of vendors, the Department is aware that state specific documents
are commercially available. Mortgagees who take advantage of the convenience of
purchasing these documents should review them prior to use.
I. Disclosures
FHA requires mortgagees to comply with any disclosure or notice requirements
applicable under State or Federal law.
J. Use of Pre-Foreclosure Sale where a Partial Claim was provided on an
earlier default
Some mortgagees have erroneously failed to include the amount of the Partial
Claim when calculating total indebtedness for the purpose of a pre-foreclosure sale. In
order to be in compliance, mortgagees must include both the first mortgage and the
partial claim amounts to correctly calculate the total outstanding mortgage indebtedness.
K. Loan Payoff or Refinance- Mortgagee Responsibilities
Mortgagees will be responsible for notifying HUD when the first mortgage is being
paid in full or refinanced in order for HUD to provide a payoff figure on the Partial
Claim. HUD’s Servicing Contractor, identified in Section G of this mortgagee letter,
should be contacted to request a payoff quote on the outstanding Partial Claim. The
purpose of this requirement is to ensure that no partial claim is overlooked when
preparations are made to pay the first mortgage in full.
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L. Mortgagee Incentives
FHA will pay mortgagees a $250 incentive fee for each partial claim. The
mortgagor may not be charged any additional costs for receiving this loss mitigation
workout option, however, it is acceptable that legal costs and fees related to a canceled
foreclosure action may be collected directly from the mortgagor. Mortgagees are
reminded that all such costs must be reflective of work actually completed to the date of
the foreclosure cancellation and the attorney fees may not be in excess of the fees that
HUD has identified as customary and reasonable for claim purposes. Please refer to
Mortgagee Letter 2001-19, issued August 24,2001, or subsequent issuance, if any, for
guidance.
M. Failure by the mortgagor on a Partial Claim
In the event the mortgagor becomes delinquent following reinstatement via a
partial claim, it shall be treated as a new default and serviced accordingly.
N. Limitations on Use
If a loan has been modified or reinstated using a partial claim within the past three
years, re-default risk is presumed to increase following a subsequent partial claim. Prior
to allowing a partial claim in this circumstance, the mortgagee must prepare a written
justification, and retain a copy along with supporting documents in the claim review file.
It is anticipated that this will be a highly unusual occurrence, and that the cause of the
second default will be unrelated to the original problem. There is a lifetime limitation of
12 monthly installments of PITI. Once 12 full monthly installments have been paid by
HUD on a claim type 33 (partial claim) for a given case number, no further partial
claims will be honored on a specific case.
O. Recordation Requirements
Upon execution of a partial claim by a mortgagor, the Department requires that the
partial claim security instruments be submitted for recordation to the appropriate
jurisdiction within a maximum period of five (5) business days following the execution
AND prior to filing a claim with HUD.
The responsibility for servicing of the Partial Claim remains with the mortgagee
until the security interests are legally recorded in the appropriate jurisdiction.
P. Claim Filing
In accordance with 24 CFR 203.371 (d) “along with the prescribed application for
partial claim insurance benefits, the mortgagee shall forward to HUD the original credit
and security instruments requirements by paragraph (c) of this section.” Provided that the
mortgagee has complied with the regulations, the mortgagee must file the claim within 60
days of the date the subordinate lien to HUD is executed. The claim may include the
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amount of the partial claim note and the $250 incentive fee. HUD will pay no other costs
or fees. Failure to file the claim within 60 days will result in loss of the $250
incentive fee.
Q. Document Delivery
It is the responsibility of the mortgagee to deliver the original promissory note and
recorded mortgage to HUD’s servicing contractor’s business address listed in Section G
of this Mortgagee Letter, as soon as possible, but in any case, no later than six (6) months
from the execution date of the partial claim note and security instruments.
HUD expects the mortgagee or its agent to periodically check on the status of all
unreturned recorded documents and that mortgagees advise HUD of all such delayed
deliveries. Where it appears that recorded documents cannot be forwarded due to delays
in the land records office, mortgagees must request an extension of time. HUD’s
National Servicing Center (NSC) shall grant time extensions in the event document
delivery is delayed by events beyond the control of the mortgagee. Except in extreme
circumstances, late requests will be denied.
HUD Form 50012 is to be used for extension requests. Box 7, titled “Other”
(specify) must be checked and the following wording is recommended for specification
purposes: “Requesting an extension of time to return recorded Partial Claim documents
to HUD” and must enter the number of days needed. Under the sections “Basis for
Extension Request”, the mortgagee must indicate the reason for the delay.
R. One-Time Amnesty for accepting outstanding Partial Claim related legal documents
without penalty.
HUD shall provide a “One-Time Amnesty” to allow mortgagees to submit
overdue Partial Claim documents without penalty. The Department is emphasizing
HUD’s willingness to partner with the mortgage industry on overdue partial claim related
legal documents that remain outstanding because of a delay in receipt of recorded
documents.
HUD expects mortgagees to exercise prudent and consistent diligence to ensure
that all documents are promptly submitted for recordation and are then forwarded to
HUD as required. HUD will accept without penalty, all overdue partial claim documents
received within 45 days of the issuance date of this Mortgagee Letter. Once the 45-day
grace period has expired, on the 46th day HUD will begin issuing demand letters for the
submission of overdue partial claim security instruments and notes and reimbursement of
related incentives paid.
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Any questions regarding this Mortgagee Letter may be directed to HUD’s National
Servicing Center (NSC) at (888) 297-8685 or hsg-lossmit@hud.gov. These clarifications are
effective immediately.
____________
John C. Weicher
Assistant Secretary for Housing-
Federal Housing Commissioner