[Federal Register Volume 59, Number 189 (Friday, September 30, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24262]
[[Page Unknown]]
[Federal Register: September 30, 1994]
_______________________________________________________________________
Part VIII
Department of Housing and Urban Development
_______________________________________________________________________
Office of the Assistant Secretary for Housing-Federal Housing
Commissioner
_______________________________________________________________________
24 CFR Parts 200 and 203
Nationwide Pre-Foreclosure Sale Procedure; Interim Rule
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Office of the Assistant Secretary for Housing-Federal Housing
Commissioner
24 CFR Parts 200 and 203
[Docket No. R-94-1749; FR-2682-I-01]
RIN 2502-AE72
Nationwide Pre-Foreclosure Sale Procedure
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Interim rule.
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SUMMARY: This interim rule sets forth the requirements and procedures
that govern the Department's Pre-Foreclosure Sale (PFS) Procedure
beginning in Federal fiscal year 1995 (October 1, 1994 through
September 30, 1995). The requirements and procedures contained in this
interim rule are based on the Pre-Foreclosure Sale Demonstration
Program established by a notice published in the Federal Register. This
interim rule takes into consideration the public comments received on
that notice. It also incorporates changes in the PFS requirements and
procedures based on the experience of the Department under the
Demonstration.
DATES: Effective Date: October 31, 1994. Comments due date: November
14, 1994.
ADDRESSES: Interested persons are invited to submit comments regarding
this interim rule to the Rules Docket Clerk, Office of General Counsel,
Room 10276, Department of Housing and Urban Development, 451 Seventh
Street, S.W., Washington, D.C. 20410. Communications should refer to
the above docket number and title. A copy of each communication
submitted will be available for public inspection and copying between
7:30 a.m. and 5:30 p.m. weekdays at the above address.
FOR FURTHER INFORMATION CONTACT: Joseph Bates, Director, Single Family
Servicing Division, Office of Insured Single Family Housing, Department
of Housing and Urban Development, 451 Seventh Street, S.W., Washington,
D.C. 20410. Telephone (202) 708-3680. A telecommunications device for
deaf persons (TDD) is available at (202) 708-1112. (These are not toll-
free telephone numbers.)
SUPPLEMENTARY INFORMATION: The information collection requirements
contained in this interim rule have been submitted to the Office of
Management and Budget for review under the provisions of the Paperwork
Reduction Act of 1980 (44 U.S.C. 3501-3520). No person may be subjected
to a penalty for failure to comply with these information collection
requirements until they have been approved and assigned an OMB control
number. The OMB control number, when assigned, will be announced in the
Federal Register. Information on the estimated public reporting burden
is provided later in this Interim Rule under Other Matters. Send
comments regarding this burden estimate or any other aspect of this
collection of information, including suggestions for reducing this
burden, to the Department of Housing and Urban Development, Rules
Docket Clerk, 451 Seventh Street, S.W., Room 10276, Washington, D.C.
20410; and to the Office of Information and Regulatory Affairs, Office
of Management and Budget, Attention: Desk Officer for HUD, Washington,
D.C. 20503.
Background
Sometimes, a mortgagor must confront the twin realities of not
being able to meet his or her mortgage obligation and static or
declining property values. Such a situation makes it virtually
impossible for a financially distressed mortgagor to sell the home and,
using the proceeds, to fully discharge the mortgage debt. Foreclosure
of the mortgage is often the method of resolving these difficulties.
Over the past few years, much interest has been expressed by
mortgagors and real estate agents in a transaction known as the ``pre-
foreclosure sale.'' In a successful pre-foreclosure sale, neither
foreclosure nor conveyance of the property to the Department occur. A
third party buys the home from a defaulting mortgagor at its
approximate fair market value (with certain adjustments, as approved by
the Secretary), which is less than the owner's outstanding indebtedness
at the time of sale.
Section 1064 of the McKinney Homeless Assistance Amendments Act of
1988 (Pub. L. 100-628) amended section 204(a) of the National Housing
Act (12 U.S.C. 1710(a)) to authorize HUD to pay a claim to a lender
equal to the difference between the fair market sale price and the
outstanding indebtedness (with certain adjustments). A successfully
completed pre-foreclosure sale benefits the mortgagor, who avoids the
stigma of foreclosure on his or her credit record, and also benefits
HUD, which can expect to save by not paying foreclosure-related costs.
HUD also saves on maintenance costs and marketing expenses for
properties which would otherwise be conveyed to the Department
following foreclosure. Finally, mortgagees also benefit through
incorporating this loss-mitigation technique into their overall loan
servicing, by frequently being able to file their claim for insurance
benefits sooner, following a successful pre-foreclosure sale, than they
would following a post-foreclosure conveyance claim.
On May 29, 1991, the Department published in the Federal Register,
at 56 FR 24324, a notice which announced a limited demonstration
program to gauge the demand for, and the efficacy of, pre-foreclosure
sales as a means of assisting qualified mortgagors in avoiding
foreclosure of their FHA-insured mortgages and of saving the Department
money.
The Department has decided to implement the pre-foreclosure sale
procedure nationwide by incorporating it into the overall approach of
servicing FHA-insured loans by FHA-approved lender/servicers. The
Demonstration now concluding has been successful in that the demand for
this alternative to foreclosure was found to be very substantial; the
efficacy of the pre-foreclosure sale transaction was found to be cost-
beneficial to HUD; and feedback obtained from participating local HUD
offices, program coordinators, mortgagees, homeowners and the general
public, was quite favorable. By expanding the options available to
financially distressed mortgagors and not adversely affecting any
mortgagor rights or interests under existing FHA-insured loan servicing
regulations, the Department has not only acted responsibly toward the
homeowners with FHA-insured mortgages, but also has operated with an
eye to the cost-effectiveness of its own policies and procedures. This
interim rule will make pre-foreclosure sales an even more efficient
servicing tool by streamlining procedures and, in some respects,
reducing the Department's cost of following this course of action.
Among the regulatory changes being implemented is a new
Sec. 203.370, which provides for the payment of FHA insurance benefits
to mortgagees upon the filing of claims following successful pre-
foreclosure sales. (It also contains notification and eligibility
provisions, noted below.) Other sections governing claim submission,
calculation and payment--24 CFR 200.155, 203.360, 203.365, 203.401,
203.402, 203.403, and 203.410--are being amended to recognize the
possibility of a pre-foreclosure sale as an outcome of the servicing of
a defaulted mortgage.
Public Comments
The public was given 60 days to comment on the requirements and
procedures set forth in the May 29, 1991 notice that established the
Pre-Foreclosure Sale Demonstration discussed above. Comments were
received from 22 commenters: 12 mortgagees/servicers, three counseling
agencies, two real estate service companies, one national association
of real estate sales professionals, one quasi-governmental
organization, one financial services company, one local HUD office, and
one individual. Below is a listing of the comments received and the
Department's responses to those comments.
1. With the exception of one mortgagee, all other comments had at
least some positive aspects and were supportive of the fact that HUD
was engaging in an effort to mitigate losses through pre-foreclosure
sales. Typically, commenters believed that PFS was ``overdue,'' ``a
much needed program,'' ``an attractive alternative to loan
foreclosure,'' and that the ``program nationwide should help reduce
foreclosures and encourage sales where the market is not strong.'' [two
mortgage servicers, one real estate service company, one national
association of real estate sales professionals]
Response: It is because of the overall response of this nature that
the Department has decided to implement the pre-foreclosure sale
procedure nationwide.
2. Seven commenters stressed the need for trained, proficient
professionals to be involved in PFS; e.g., contractors, program
administrators, local HUD staff, or HUD Headquarters staff overseeing
the Demonstration. [one national association of real estate sales
professionals, two real estate service companies, four mortgagees]
Response: It has come to HUD's attention that a number of
mortgagees have added, or otherwise identified, loss-mitigation teams
to their respective servicing staffs, in an effort to improve the
responsiveness to mortgagor defaults and to apply alternatives to
foreclosure where feasible and cost-beneficial. HUD applauds and
encourages these efforts; they comport with the Department's own
evolving philosophy regarding foreclosure avoidance and with expanding
concepts of ``prudent mortgage servicing'' and ``protecting HUD's
interests.'' The Department expects that the benefits of such an
approach will be marked and far-reaching, extending not only to HUD,
but also to homeowners and mortgagees. In particular, the move to
increase the mortgagees' role in HUD's pre-foreclosure sale procedure
is being taken to utilize the mortgagees' growing ability to manage or
mitigate loss in a responsible fashion. HUD will provide sufficient
information and/or training to its own staff involved in pre-
foreclosure sales to enable them to make prudent decisions and to
disseminate accurate details about the PFS procedure.
3. One element of the Demonstration that was criticized was the
eligibility criterion requiring mortgagors to be at least three months
in arrears before they could be considered for the program. It was felt
that this was counterproductive to the goal of loss mitigation, and
that in many cases, a case-by-case determination of need and
qualifications could be performed at virtually any time before allowing
mortgagors to become program participants. Several commenters urged
that a comprehensive determination be made, using financial statements,
etc. [six mortgagees]
Response: The experience of the PFS Demonstration has provided the
basis for the decision to retain the eligibility criterion pertaining
to the defaulted status of a PFS candidate's mortgage loan. There must
still be a determination made in every case that the mortgagor is in
default, and that, at a minimum, three monthly installments are in
arrears. As a practical matter, however, this means that a candidate
for PFS could satisfy this criterion as early as the 62nd day of
default, i.e., because the third payment can be due and unpaid at that
time. Retaining this criterion as the new nationwide PFS procedure as
implemented does keep the administration of pre-foreclosure sales from
possibly impinging on servicing requirements related to HUD's mortgage
assignment program. Notification of the mortgagor of his right to apply
for assignment assistance from HUD (which mortgagees are required to
perform at or after the third payment is due and unpaid), will occur at
a time when homeowners can choose between a course of action directed
toward homeownership retention OR one whose objective is to dispose of
the property and relieve the mortgagor of his mortgage obligation. It
is the Department's intent that defaulting mortgagors make such an
informed decision. Permitting participation in the PFS procedure at an
earlier juncture will be evaluated in the future, however, and could be
implemented if found not to be detrimental.
4. Another element of the Demonstration that received criticism was
the allowance of a ten day period for review of the proposed pre-
foreclosure sale. [three mortgagees, one real estate service company,
one individual]
Response: The ten day period for review of the proposed pre-
foreclosure sale, as described in the Notice, was reduced to five (5)
working days during the Demonstration, and will remain a maximum of 5
working days when the function is transferred to the mortgagee. The
period might be further reduced (e.g., to three working days) after
evaluating the experience of the nationwide PFS procedure.
5. Another criticized provision was the series of cash incentives
payable to mortgagors who consummate a pre-foreclosure sale after
participating in the program, although several commenters did support
this concept. Four commenters opposed seller incentives [two
mortgagees, one individual, one quasi-governmental organization]; three
supported them [one mortgagee, one real estate services company, one
national association of real estate sales professionals]; one supported
case-by-case determinations of amounts [a mortgagee]; and one suggested
that cash ``incentives'' be applied toward property improvements only
[a real estate services company]. One commenter [a mortgagee] also
criticized the expanded deed-in-lieu incentive as being over-generous
and inappropriate. Another [a mortgagee] suggested that mortgagors were
prepared to pay money towards accomplishing a deed-in-lieu. A third [a
mortgagee] suggested that the mortgagor assign any and all refunds of
insurance, etc. to HUD as a provision of enrollment in the PFS program.
Response: Cash incentives for mortgagors are being reduced for the
nationwide implementation of the PFS procedure. The amount payable to a
mortgagor who has successfully marketed and sold his home will be $750,
with an additional $250 if the time needed to go to closing is 90 days
or less from the date the mortgagor was advised that he could
participate in the PFS procedure. HUD is retaining the policy of paying
incentives to mortgagors in return for a successful pre-foreclosure
sale as a means of providing moving assistance or the promise of
reimbursement for cosmetic repairs and maintenance undertaken by
homeowners who may still be experiencing financial problems. In
addition, the Department wishes to encourage the maximum number of
interested and qualified mortgagors to take advantage of the PFS
option, because of the savings this generates for HUD.
The payment of $500 consideration for a deed-in-lieu of foreclosure
to a good-faith participant in the PFS procedure whose participation
does not conclude with a pre-foreclosure sale is being retained. Since
the commencement of the Demonstration in 1991, HUD has raised the limit
for cash consideration payable for any deed-in-lieu from $200 to $500.
This was done to motivate mortgagors, and to encourage mortgagees to
process deeds-in-lieu in as many appropriate cases as possible, because
of the saving HUD experiences in most instances. For mortgagors who
have made efforts to market their homes, payment of the maximum amount
otherwise authorized will underscore HUD's interest in seeing as many
appropriate deeds-in-lieu processed as possible instead of normally
costlier foreclosures.
The assignment to the mortgagee of all refunds due the mortgagor
(for example from hazard insurance refunds) is being incorporated into
the application form for participation in the PFS procedure. The
provision will apply to mortgagors in the event their participation
concludes with either a pre-foreclosure sale or a deed-in-lieu. The
mortgagee will deduct any such refunds received from the mortgagor from
their claim for FHA insurance benefits submitted to HUD.
6. There was considerable support for payment of one sort or
another to the mortgagee/servicer for the inconvenience of
administering the case to facilitate participation by the mortgagor in
the PFS program. The method of payment varied from calculating the
claim using note rate interest, as though there were a formal
forbearance in effect, to following the FNMA $500-to-$1000 payment in
each case resulting in a closed PFS. [three mortgagees, one real estate
services company, one quasi-governmental organization]
Response: With the commencement of the nationwide PFS procedure,
HUD will pay an administrative fee to the mortgagees of $1000, via the
Single Family Claims process, for each pre-foreclosure sale that goes
to settlement (``closes''). This should provide the mortgagees ample
motivation to utilize this servicing tool whenever it is appropriate to
do so. It will also defray mortgagee expenses related to the duties
that must be performed with regard to all participants in the PFS
procedure, not just the successful ones. Payment of this administrative
fee, and the amount paid, are subject to change in the future, in the
sole discretion of the Department.
7. One commenter suggested that HUD consider making it possible for
original homeowners to benefit from the program by allowing them to
have their mortgages modified to reflect the current, lower value of
the property, which would result in a more bearable financial
obligation for them. [one individual] Two others suggested that we
engineer the program to permit assumptions of the existing loans, after
HUD has ``bought down'' the value of the obligation (involving partial
payoff of the mortgagee). [one national association of real estate
sales professionals, one mortgagee]
Response: ``Retention of ownership'' and assumption provisions are
not being considered as part of the Department's pre-foreclosure sale
procedure. The PFS procedure is designed to result in an outright sale
at the property's current value, and in cancellation of the original
mortgage instrument. If HUD were to implement the ``buy down''
recommendation, it would in effect be insuring the purchase values of
the properties and not the mortgages. Properties depreciate in value
for various reasons and it is not practicable for HUD to compensate
homeowners for losses in that way. The Department is exploring various
other servicing activities designed to assist homeowners to avoid
foreclosure, retain their properties, and also to mitigate HUD's
losses.
8. Another idea that received considerable support was the
performance of a title search early on in the participant's exposure to
the program, to eliminate many candidates from the program who would
not be approved for either a PFS or a deed-in-lieu. [three mortgagees]
Response: The desirability of an early title search is stressed in
the latest instructions being issued to mortgagees regarding the PFS
procedure. This is especially true in cases where suspicions are
aroused that significant secondary liens or encumbrances exist.
9. Several commenters supported the idea of relying on Brokers'
Price Opinions (BPOs) either singly, severally, or in combination with
appraisals conducted under program auspices. [one quasi-governmental
organization, two mortgagees, one real estate services company]
Response: HUD is not closing the door regarding the use of BPOs,
alone or in conjunction with more formal property appraisals, in the
future. However, at this time, appraisals are the only method of
establishing property valuation under the PFS procedure. The costs are
higher for appraisals, but the reliability may also be greater. The
Department also values the fact that the appraisers will be
credentialed as well as ``neutral'' parties, otherwise uninvolved with
the sale unlike the BPOs, which are frequently provided by real estate
brokers that have a relationship with one or more parties to the sale.
This reliability and neutrality is especially important during the
initial period when mortgagees are becoming acclimated to their central
role in facilitating pre-foreclosure sales. The Department may add BPOs
to the PFS procedure after evaluating the performance of appraisers,
comparing their cost to BPOs, and taking other factors into account.
10. Several commenters criticized the ``70% appraisal of the
indebtedness'' criterion and the ``90% net proceeds of the appraised
value'' criterion as unworkable in many areas, requiring delays for HUD
office intervention to decide whether to waive. Most wanted the formula
to change, downward, or at least have the discretion to waive them
placed firmly in the hands of the coordinator. [three mortgagees]
Response: When preparing the legislation which authorized HUD to
engage in pre-foreclosure sales, Congress issued a strong warning that
HUD should avoid a ``fire sale'' atmosphere in administering the PFS
program. The Department's experience during the Demonstration supports
retaining the 70% criterion, which is the ratio of as-is appraised
value to outstanding loan indebtedness. In rare instances, it will be
possible for the local HUD Office to grant an inquiring mortgagee a
variance from the 70% criterion, based on a consideration of the facts
of that case.
The expectation of netting 90% of appraised value was an internal
rule of thumb. That figure has been reduced to 87% as more workable and
realistic, given the typical transactional costs of pre-foreclosure
sales during the Demonstration. Mortgagees will be able to request a
variance from the local HUD Office with jurisdiction over the property,
to permit a sale that would net less than 87%.
11. Two commenters [two mortgagees] supported the idea of parallel
processing of foreclosure while a participant was enrolled in the PFS
program. Two commenters [two mortgagees] were also concerned that the
deadline for initiation of foreclosure be explicitly lifted in cases
involving participation in the PFS program, or else HUD would run the
risk of non-cooperation from mortgagees who would expect to be
penalized for missing this deadline.
Response: If participation in the PFS procedure is unsuccessful and
does not result in a sale, a mortgagee has nine months after default or
sixty (60) days after the date of termination of PFS participation,
whichever is later, to initiate foreclosure or accept a deed-in-lieu of
foreclosure. The mortgagee must also meet conveyance time requirements.
If the pre-foreclosure sale does go to closing, neither foreclosure nor
conveyance of the property occur; the mortgagee has 30 days after the
sale closing date to file its claim. If these time frames cannot be
met, the mortgagee must file Form HUD-50012, Extension Request, with
the Loan Management Branch of the local HUD Office.
Apart from the issue of obtaining extensions, and the customary
timeframes in which to initiate foreclosure, and submit a claim, it is
still possible for mortgagees to opt to continue steps leading to
foreclosure while a mortgagor is engaged in marketing the property for
sale under the PFS procedure. This decision must be weighed by the
mortgagee in light of the cost-effectiveness (i.e., the ``loss
mitigation perspective'') of such actions. Proceeding with such steps
in the face of a mortgagor's participation in the PFS procedure--which
has a high likelihood of ending either in the sale of the property or a
deed-in-lieu--is frequently not justified, because of the outlay of
time and money required to accomplish them. In the meantime, the
experiences of the PFS procedure will be observed and evaluated. HUD
may in the future direct mortgagees to desist from concurrently taking
foreclosure-related steps unless certain criteria are met.
Mortgagees are reminded that they must always explain their
concurrent foreclosure-related actions to the mortgagors participating
in the PFS procedure, because such actions may be misconstrued by the
mortgagor and may jeopardize the pre-foreclosure sale.
12. There was a serious division of opinion as to whether
mortgagees should be expected to participate in the mechanics of the
program. One commenter [a mortgagee] said that HUD shouldn't ask
lenders to, or expect that they would, prepare the PFS sale package for
submission to the program coordinator. Two other commenters [two
mortgagees] indicated that it was appropriate for HUD to designate the
mortgagee as a principal player in the administration of the pre-
foreclosure sale, as a means of loss-mitigation and appropriate loan
servicing.
Response: The difference of opinion over the appropriate level of
mortgagee participation in the Pre-foreclosure Sale procedure has been
resolved by substantially increasing the mortgagees' engagement in the
process over what was expected during the Demonstration, and also by
significantly increasing the administrative fee payable to mortgagees
for facilitating each pre-foreclosure sale. During the course of the
Demonstration, many mortgagees did express a willingness to expand the
level of their involvement in the pre-foreclosure sale procedure. HUD
has decided to implement its nationwide PFS procedure by using the
mortgagees in the central role of PFS ``facilitators'' because of the
mortgagees' existing loan servicing role; the savings generated by
authorizing mortgagees to carry out the PFS procedure under express HUD
procedures and criteria; and the Department's evolving policy that
mortgagees explore alternatives to foreclosure, whenever appropriate.
13. Other recommendations included wider circulation of the
program's Information Sheet [one mortgagee]; quicker nationwide
implementation of the program [one mortgagee]; greater publicizing of
the PFS alternative to maximize the number of participants [one
mortgagee]; combining mandatory notification by lender with other
mandatory HUD correspondence that gets sent to mortgagor [one
mortgagee]; and relying on the lender for homeownership counseling [one
mortgagee].
Response: A new PFS Information Sheet will be distributed, and be
generally available, to real estate brokers, housing counseling
agencies, mortgagees, and local HUD offices. Although nationwide
implementation of the PFS option is now imminent, during the
Demonstration all local HUD offices other than those ``officially''
designated as being involved in the PFS Demonstration were nonetheless
able to activate the pre-foreclosure sale procedure ``unofficially'' in
their jurisdictions, and a significant number did. There will be more
publicizing of the nationwide PFS procedure as it starts up.
Many forms have been eliminated or streamlined, and the mandatory
notification forms have been combined with other correspondence that
mortgagees must send to mortgagors. While it is not appropriate to
depend exclusively on lenders to provide homeownership counseling
(there is a network of HUD-approved housing counseling agencies whose
duties include homeownership counseling), lenders are free to provide
homeownership counseling and other information related to pre-
foreclosure sales if requested by the mortgagor to do so.
14. Other recommendations also included allowing participants to
select their own brokers independently [one national association of
real estate sales professionals], and also deciding on how HUD will
determine ``qualified'' real estate brokers to put on the program's
referral list [one HUD field office].
Response: PFS participants are permitted to select their own
brokers--the required list of cooperating brokers has been eliminated
as too cumbersome for mortgagees to produce and update, and also as
possibly confusing to some PFS participants. Thus the issue of whether
and how ``qualified'' are the brokers on the list is rendered moot.
This Interim Rule
This interim rule takes into consideration the public comments
received on the notice announcing the PFS demonstration published on
May 29, 1991, 56 FR 24324. It also incorporates changes in the PFS
requirements and procedures based on the Department's experience under
the Demonstration.
Eligibility Criteria
In order to be eligible for the pre-foreclosure sale procedure, a
mortgagor must:
(1) be an owner-occupant in a single family residence that is
security for a mortgage insured under 24 CFR part 203, unless otherwise
prescribed by the Secretary;
(2) have an account in default with at least three monthly
installments past due and unpaid; (The default must be the result of a
documentable involuntary reduction in income or an unavoidable increase
in his or her expenses, including job relocation.);
(3) have been made aware of the assignment program, as discussed
below under Notification of PFS Procedure, and have been either turned
down for it by HUD, or have decided not to apply for it;
(4) have, at the time application is made to pursue a pre-
foreclosure sale, a mortgaged property whose current fair market value,
compared to the amount needed to discharge the mortgage, meets the
criterion established by the Secretary, unless a variance is granted by
the Secretary; and
(5) have received homeownership counseling, as defined by the
Secretary, and have executed a certification to that effect.
These criteria are contained in new section 24 CFR 203.370(c).
The Department has decided to continue a policy begun during the
PFS Demonstration, under which those mortgagors who are small investors
with only one FHA-insured mortgage (e.g., a former owner-occupant who
may be renting out the property) can be considered for PFS eligibility.
Under no circumstances, however, will the pre-foreclosure sale option
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, the pre-
foreclosure sale procedure will not be pursued for deficiency judgments
by the Department.
Use of Mortgagees To Facilitate Pre-foreclosure Sales
The Department is adding the pre-foreclosure sale to the list of
existing foreclosure alternatives that can be offered by mortgagees to
mortgagors facing financial difficulties and who meet certain
qualifying criteria. Although offering the pre-foreclosure sale option
to a qualified mortgagor is arguably a part of ``normal'' servicing
under FHA procedures and guidelines which require mortgagees to act
prudently and with HUD's interests in mind, the Department is
encouraging mortgagees to incorporate pre-foreclosure sales without
delay into their overall servicing procedures by paying mortgagees an
administrative fee for each successful pre-foreclosure sale that they
facilitate. Payment of the administrative fee via the claims process is
provided for in 24 CFR 203.402(t), which is being implemented as part
of this interim rule.
Justification of Incentive Paid to Mortgagors
The Department has decided to retain the practice used during the
Demonstration of paying certain cash incentives drawn from sale
proceeds to qualified mortgagors who close a pre-foreclosure sale;
however, the amount of this incentive is being reduced from that which
was used in the Demonstration. Also, in cases where a deed-in-lieu of
foreclosure follows bona fide but unsuccessful participation in the PFS
procedure, the Department's policy of strongly encouraging mortgagees
to offer such mortgagors the full $500 consideration payable for a
deed-in-lieu (authorized in HUD Mortgagee Letter 93-16) is being
continued.
The Department is aware that other mortgage insurers and financial
institutions have not authorized the use of a portion of sale proceeds
for consideration payable to the mortgagor, and do not otherwise reward
mortgagors who engage in a pre-foreclosure sale or deed-in-lieu of
foreclosure, beyond the fact that PFS necessarily precludes the
foreclosure. However, the proportion of pre-foreclosure sales occurring
in these other agencies and institutions among defaulting mortgagors is
generally much lower than the level of participation which HUD would
prefer for its nationwide pre-foreclosure sale procedure. Furthermore,
although the Department acknowledges that the avoidance of a
foreclosure on their credit records is a prime motivation for
mortgagors to dispose of their properties via pre-foreclosure sales,
HUD has a number of other justifications for offering monetary
consideration to participants in the PFS procedure.
--PFS participants must make considerable efforts and undergo
significant inconvenience in seeking out buyers, making the property
presentable, and allowing the public access to their home as they
attempt to reach an approved sale transaction before the participation
period has run.
--Cash incentives for expedited pre-foreclosure sales occurring within
three months of commencing the PFS procedure represent a small portion
of the estimated savings to the Department of interest that would
otherwise have to be paid to mortgagees as part of the insurance
contract.
--It is HUD's objective to maximize the number of interested
participants in pre-foreclosure sales, because of the estimated
aggregate savings to the Department that successful pre-foreclosure
sales transactions represent. We estimate that the PFS-related
consideration will be more than offset by the savings in pre- and post-
acquisition costs for the properties affected by participation in the
pre-foreclosure sale procedure.
--Mortgagors can request deeds-in-lieu of foreclosure without first
attempting to execute pre-foreclosure sales and might request deeds-in-
lieu of foreclosure rather than the pre-foreclosure sale option, when
they become fully apprised of the efforts involved in the pre-
foreclosure sale, as well as possible tax implications. If a mortgagor
meets prevailing criteria and the mortgagee is willing to cooperate, a
deed-in-lieu of foreclosure can occur. This would benefit the mortgagor
but would represent only modest savings to the Department. Therefore,
it is in HUD's interest to make the pre-foreclosure sale option as
attractive as possible in order to maximize the number of interested
participants.
Although payment of such consideration is warranted by the
anticipated savings to the Department, HUD acknowledges the need for
vigilance to head off abuse of the process by opportunistic parties.
Deed-In-Lieu of Foreclosure as Feature of the PFS Procedure
At the time he or she requests to participate in the Pre-
Foreclosure Sale procedure, the mortgagor is asked whether there are
encumbrances on the mortgage, or whether there are title problems of
which he or she is aware. The mortgagee should order a title search
during the mortgagor's participation in the PFS procedure. The
existence of encumbrances or title problems may preclude or result in a
refusal to permit either a pre-foreclosure sale or a deed-in-lieu. For
those mortgagors who can deliver clear title, but who, despite a good
faith effort, do not consummate a pre-foreclosure sale, the mortgagee
will customarily process a deed-in-lieu of foreclosure upon the failure
of the participant to execute a pre-foreclosure sale. A deed-in-lieu
action will leave the mortgagor without a foreclosure on his or her
credit history.
Notification of PFS Procedure
HUD will circulate an Information Sheet on pre-foreclosure sales
among mortgagees and housing counseling agencies, and the mortgagees
and housing counseling agencies will be encouraged to distribute the
document among mortgagors who might be interested in, and possibly
qualified to participate in, the Pre-Foreclosure Sale procedure. It
will contain basic information about pre-foreclosure sales and will
instruct mortgagors or others interested in PFS to contact the
homeowner's mortgagee for more information or an application.
Mortgagees are required to notify mortgagors about the pre-
foreclosure sale procedure by sending a prescribed communication (HUD-
426) when the mortgagors fall two payments behind, and a copy of the
Information Sheet when the mortgagors become three or more payments in
arrears. The requirement that mortgagees provide notification of the
pre-foreclosure sale option to mortgagors in default is contained in 24
CFR 203.370(b).
Commencing the Pre-foreclosure Sale Procedure
Once a mortgagor is found to be eligible to participate in the pre-
foreclosure sale procedure, and is so notified by the mortgagee, the
mortgagor may begin marketing the property. Section 203.356(b) requires
mortgagees to notify HUD of that change in status of the mortgagor. The
mortgagee will also direct the mortgagor to retain the services of a
real estate broker in an attempt to market the property within the
established time and price guidelines. These brokers are prohibited
from sharing a business interest with the mortgagee or mortgagor
(seller).
An appraisal will be ordered by the mortgagee from an appraiser who
meets standard eligibility requirements for performing FHA Single
Family appraisals. The appraisal will contain ``as is'' and ``as
repaired'' valuations of the property. Reasonable costs for the
property appraisal will be reimbursed through the FHA claims process.
Section 203.402(l) has been revised to include the cost of an appraisal
performed as part of the Pre-foreclosure Sale procedure. The Department
reserves the right, in the future, to authorize mortgagees to
substitute or add the use of Broker Price Opinions (BPOs) to the
valuation process under the Pre-Foreclosure Sale procedure.
Homeownership Counseling Responsibilities
Before a mortgagor's participation in the Pre-foreclosure Sale
procedure can be approved by the mortgagee, either a HUD-approved
counseling agency located in the mortgagor's geographic area, the
mortgagee, or the local HUD Office will be available to do the
following:
(1) Provide mandatory ``homeownership counseling'' to the mortgagor
considering the pre-foreclosure sale option. This will include
explaining the alternatives available to the mortgagor, including a
payment plan negotiated with the lender, foreclosure and deed-in-lieu
of foreclosure, the assignment program (if still an option), and
changes in household income, expenses, or composition that might have a
bearing on the ability of the mortgagor to retain ownership of the
property. The homeownership counseling and certification requirement is
contained in Sec. 203.370(c)(5).
(2) Advise mortgagors considering a pre-foreclosure sale that they
may wish to contact a financial or tax counselor to assess the specific
tax consequences (if any) to them of a pre-foreclosure sale.
(3) Assist in executing certifications for the mortgagors to sign
before they can be permitted to participate in the pre-foreclosure sale
procedure. These certifications shall include statements that:
(a) Homeownership counseling has been received;
(b) The mortgagor understands that any proposed pre-foreclosure
sale must be an ``arm's length'' transaction; i.e., a sale between
two unrelated parties that is characterized by a selling price and
other conditions which would prevail in an open market environment,
without hidden terms or special understandings between any of the
parties connected to the transaction, including the appraiser, sales
agent, closing agent and mortgagee; and
(c) 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 he has to apply for the
program. The provision regarding consideration of (and for) mortgage
assignment is contained in 24 CFR 203.370(c)(3). (This waiver
applies to assignment rights arising only from his present mortgage
default, and only if he is permitted to participate in the Pre-
foreclosure Sale procedure.)
Responsibilities of the Real Estate Broker or the Mortgagor's
Attorney
The real estate broker or the mortgagor's attorney should forward
to the mortgagee a copy of the contract of sale made conditional upon
approval by HUD or the mortgagee, acting under the Secretary's
instructions. The contract package should identify the sales
commission, and include the necessary certifications (if they are in
the broker's or attorney's possession) that have been signed by the
mortgagor. The mortgagee will review the package and render a decision
within five (5) days of receiving the completed package.
Monitoring Responsibilities of HUD Personnel
The determination by the mortgagee of the mortgagor's eligibility
to pursue a pre-foreclosure sale or a deed-in-lieu, as well as the
mortgagee's final approval of a proposed sale, shall be reviewed by the
appropriate HUD personnel. These reviews may occur at any time, and
will be performed on-site by local HUD office or Headquarters
personnel. Mortgagees' submission of data pertaining to individual
participants in the PFS procedure, as well as monthly Single Family
Default Monitoring System (SFDMS) reports, will also be subject to
review. The speed and effectiveness with which mortgagees incorporate
the pre-foreclosure sale procedure into their overall servicing
techniques will be evaluated on-site during mortgagee reviews conducted
by HUD staff. A pre-foreclosure sale component will also be
incorporated into HUD's regular claim reviews.
General Responsibilities of Mortgagees
(1) Mortgagees will be responsible for implementing correct
notification procedures (in particular, sending appropriate notices to
defaulting mortgagors and providing information as requested to
mortgagors about the PFS procedure).
(2) Mortgagees will be responsible for determining the eligibility
of mortgagors to participate in the pre-foreclosure sale procedure,
including those whose assignment applications are turned down or for
whom the opportunity for assignment has expired or been waived.
(3) Mortgagees will be responsible for responsive and timely
servicing in taking the necessary steps for, and cooperating with all
aspects of, the PFS procedure, including the expediting of sale
transactions; the processing of deeds-in-lieu of foreclosure from
qualified participants who did not close a pre-foreclosure sale despite
a good faith effort; and the timely resumption of appropriate servicing
of those loans when participation in the PFS procedure ends and neither
a sale nor a deed-in-lieu has occurred.
(4) The mortgagee will have the authority, on a case-by-case basis,
to determine the mortgagor's participation deadline (up to four months
to obtain a signed contract of sale, or up to six months to go to
closing) when it determines that granting that period is in the best
interest of the Department.
(5) In determining the eligibility of a mortgagor to participate in
the Pre-foreclosure Sale procedure, the mortgagee shall arrange for the
valuation of the property according to instructions issued by the
Secretary, to assist in determining whether the property's as-is
appraised value is at least 70% of the outstanding mortgage
indebtedness (principal and accrued interest only) at the time
application is made to pursue a pre-foreclosure sale. In cases where
the appraised value is less than 70% of the outstanding debt, the
mortgagee must obtain local HUD Office approval for a ``variance'' from
this criterion before the mortgagor can be permitted to participate in
the pre-foreclosure sale procedure.
(6) The offer to purchase the property should net HUD at least 87%
of the appraised value of the property. However, the mortgagee may
exercise discretion in cases where the net proceeds would be less than
87%, if the mortgagee believes that it would still be in HUD's best
interest to permit the sale to occur. In such cases, the mortgagee must
refer the matter to the Chief of Loan Management at the local HUD
Office with the recommendation that the sale be approved by granting a
``variance'' in that case from the ``net proceeds'' criterion.
Consideration
Mortgagors who qualify for the pre-foreclosure sale procedure and
who close an approved sale shall be able to retain from the sales
proceeds before disbursement to the mortgagee, the base amount of $750
(seven hundred fifty dollars).
In addition to the base amount, the mortgagor will be able to
retain an additional amount of $250 (two hundred fifty dollars) from
the proceeds of sale if the closing of an approved pre-foreclosure sale
occurs within three (3) months of the commencement of the mortgagor's
participation in the pre-foreclosure sale procedure (i.e., from the
time the mortgagor is advised in writing that he may participate in the
procedure),
If, despite a good faith effort--as determined by the mortgagee--a
property does not sell during the mortgagor's period of participation
in the PFS procedure, the mortgagee will authorize a title search of
the participant's mortgage for title problems and encumbrances (if one
was not already performed during the period of participation). If any
obstacles to obtaining clear and marketable title are resolved pursuant
to instructions from the Secretary, the mortgagee will process a deed-
in-lieu of foreclosure from the mortgagor. The mortgagee shall follow
prescribed methods of processing the deed-in-lieu and will disburse
consideration in the amount of $500 to the mortgagor upon completion of
the deed-in-lieu transaction. This consideration is 100% reimbursable
to the mortgagee through the FHA claims process.
Other Provisions
(1) All sales contracts submitted for consideration under the pre-
foreclosure sale procedure shall contain a clause which provides that
HUD approval (directly or through the mortgagee, as prescribed by the
Secretary) is a pre-condition of the sale.
(2) Purchasers in approved pre-foreclosure sales may qualify for
FHA mortgage insurance.
The Closing of the Pre-Foreclosure Sale; Payment of Claims
Prior to closing the sale:
(1) The mortgagee will provide to the Closing Agent a list of those
parties entitled to receive financial consideration and the amounts
payable out of sale proceeds.
(2) The Closing Agent will calculate the net sale proceeds and
communicate this data to the mortgagee, so that the mortgagee can
ascertain that the actual terms of the transaction are in accordance
with the proposed sale that the mortgagee had approved earlier.
If the mortgagee approves the transaction, and closing occurs, the
Closing Agent will pay the consideration set forth in the list
previously provided by the mortgagee, and will send the net proceeds of
sale and a form HUD-1 to the mortgagee.
Upon receipt of the payoff funds, the mortgagee will file a claim
for the balance due to it under the terms of the contract for
insurance. In addition, an administrative fee of $1,000 will be
payable, as part of the claim, to the mortgagee for each approved pre-
foreclosure sale that goes to closing. Payment of this fee, which is
not subject to debenture interest, will be made under the provisions of
Section 204(a) of the National Housing Act (12 U.S.C. 1710(a)), as
amended by Section 1064 of the McKinney Homeless Assistance Amendments
Act of 1988 (P.L. 100-628).
For proposed pre-foreclosure sales that ``fall through,'' or are
sought without positive result, the mortgagee should file its claim
under existing procedures for conveyance claims, and in compliance with
any additional provisions which may be applicable to conveyance claims
that follow a mortgagor's unsuccessful participation in the PFS
procedure. Section 203.355 has been amended to include definitions of
the ``end of participation'' in the Pre-foreclosure Sale procedure, so
mortgagees can calculate the appropriate timeframe within which they
must initiate foreclosure or accept a deed-in-lieu of foreclosure where
no actual pre-foreclosure sale has resulted.
Other Changes
A conforming amendment is also being made to Sec. 200.155(a). That
section provides for the various methods by which a mortgagee may
perfect a claim for the payment of mortgage insurance benefits. The
case of a pre-foreclosure sale is being added to this list.
Section 203.501 is being added to set forth the Department's policy
that mortgagees must consider the financial consequences of their
elective servicing action and that HUD expects mortgagees to take those
appropriate actions which will generate the smallest financial loss to
the Department.
Other Matters
Justification for Interim Rule and for the 45-day Comment Period
The Department has determined that it is impracticable and contrary
to the public interest to have notice and public procedure before
making the provisions of this interim rule effective, and that
expeditious promulgation of this interim rule provides a benefit to all
the parties involved.
A successfully completed pre-foreclosure sale benefits the
mortgagor, who avoids the stigma of foreclosure on his or her credit
record, and also benefits HUD, which can expect to save by not paying
foreclosure-related costs. HUD also saves on maintenance costs and
marketing expenses for properties which would otherwise be conveyed to
the Department following foreclosure. Mortgagees also benefit through
incorporating this loss-mitigation technique into their overall loan
servicing, by earning an additional administrative fee and by
frequently being able to file claims for insurance benefits sooner,
following a successful pre-foreclosure sale, than they would following
a post-foreclosure conveyance claim.
Because the requirements and procedures contained in this interim
rule are based on the Pre-Foreclosure Sale Demonstration Program
established by a notice published in the Federal Register on May 29,
1991, at 56 FR 24324, and because this interim rule takes into
consideration the public comments received on that notice, the
Department believes there is adequate justification for shortening the
public comment period to 45 days.
Sunset Provision
The Department has adopted a policy of setting a date for
expiration of an interim rule unless a final rule is published before
that date. Therefore, this interim rule will expire on a date 18 months
from the date of publication.
Environmental Finding
A Finding of No Significant Impact with respect to the environment
has been made in accordance with HUD regulations at 24 CFR Part 50,
which implement section 102(2)(C) of the National Environmental Policy
Act of 1969. The Finding of No Significant Impact is available for
public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the
Office of the Rules Docket Clerk, Office of the General Counsel,
Department of Housing and Urban Development, Room 10276, 451 Seventh
Street, S.W., Washington, D.C. 20410.
Information Collection Requirements
The collection of information requirements contained in this
interim rule have been submitted to OMB for review under section
3504(h) of the Paperwork Reduction Act of 1980. The public reporting
burden for the collection of information requirements contained in this
interim rule is estimated to include the time for reviewing the
instructions, searching existing data sources, gathering and
maintaining the data needed, and completing and reviewing the
collection of information. Information on these requirements is
provided as follows:
Tabulation of Annual Reporting Burden--Nationwide Pre-Foreclosure Sale Procedure
----------------------------------------------------------------------------------------------------------------
Number of
Number of responses Total Hours per
Description of information collection respondents per annual response Total hours
respondent responses
----------------------------------------------------------------------------------------------------------------
Disclosure by Applicants.......................... 14,040 1 14,040 .50 7020
Certifications by Participants.................... 10,800 1 10,800 .05 540
Transactional:
Mortgagees (approving Participation).......... 10,800 1 10,800 .15 1620
Variance Requests............................. 2,700 1 2,700 .25 645
Closings...................................... 6,480 2.30 14,904 .75 11,178
Reporting......................................... 10,800 1 10,800 .30 3240
Total (annual) burden....................... 55,620 64,044 24,273
----------------------------------------------------------------------------------------------------------------
Regulatory Flexibility Act
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed this interim rule before publication and
by approving it certifies that this interim rule does not have a
significant economic impact on a substantial number of small entities
because this interim rule pertains to a limited number of single-family
mortgage situations. It expands the options available to financially
distressed mortgagors and does not adversely affect any mortgagor
rights or interests under existing FHA-insured loan servicing
regulations.
Executive Order 12612, Federalism
The General Counsel, as the Designated Official under section 6(a)
of Executive Order 12612, Federalism, has determined that this interim
rule does not have ``federalism implications'' because it does not have
substantial direct effects on the States (including their political
subdivisions), or on the distribution of power and responsibilities
among the various levels of government. The purpose of this interim
rule is to implement the requirements and methods of pre-foreclosure
sales as a means of assisting qualified mortgagors in avoiding
foreclosure of their FHA-insured mortgages and of saving the Department
money.
Executive Order 12606, the Family
The General Counsel, as the Designated Official under Executive
Order 12606, the Family, has determined that this interim rule does not
have potential significant impact on family formation, maintenance, and
general well-being.
Semiannual Agenda
This interim rule was listed as item 1587 in the Department's
Semiannual Agenda of Regulations published on April 25, 1994 (59 FR
20424, 20440), pursuant to Executive Order 12866 and the Regulatory
Flexibility Act.
List of Subjects
24 CFR Part 200
Administrative practice and procedure, Claims, Equal employment
opportunity, Fair housing, Housing standards, Incorporation by
reference, Lead poisoning, Loan programs--housing and community
development, Minimum property standards, Mortgage insurance,
Organization and functions (Government agencies), Penalties, Reporting
and recordkeeping requirements, Social security, Unemployment
compensation, Wages.
24 CFR Part 203
Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and
recordkeeping requirements, Solar energy.
Accordingly, the Department amends parts 200 and 203 in chapter II
of title 24 of the Code of Federal Regulations as follows:
PART 200--INTRODUCTION
1. The authority citation for part 200 is revised to read as
follows:
Authority: 12 U.S.C. 1701-1715z-18, 1701s, and 1715z-11; 42
U.S.C. 3535(d), 3543, and 3544.
2. In Sec. 200.155, paragraph (a) is amended by adding at the end
the following sentence, to read as follows:
Sec. 200.155 Claim requirements.
(a) * * * The mortgagee may also perfect its claim for the payment
of the insurance benefits in the case of a Pre-Foreclosure Sale
conducted in accordance with 24 CFR 203.370.
* * * * *
PART 203--SINGLE FAMILY MORTGAGE INSURANCE
3. The authority citation for Part 203 is revised to read as
follows:
Authority: 12 U.S.C. 1701q, 1709, 1710, 1715b; 42 U.S.C.
3535(d). In addition, subpart C is also issued under 12 U.S.C.
1715u.
4. Section 203.355 is amended by revising the introductory sentence
of paragraph (a); by revising the first sentence of paragraph (c); and
by adding a new paragraph (g), to read as follows:
Sec. 203.355 Acquisition of property.
(a) In general. Upon default of a mortgage, except as provided in
paragraphs (b) through (g) of this section, the mortgagee shall take
one of the following actions within nine months from the date of
default, or within any additional time approved by the Secretary or
authorized by Secs. 203.345, 203.346, or 203.650 through 203.660: * * *
* * * * *
(c) Law prohibiting foreclosures within nine months. If the laws of
the State in which the mortgaged property is located or if Federal
bankruptcy law does not permit the commencement of foreclosure within
the time limits described in paragraphs (a), (b), and (g) of this
section, the mortgagee must commence foreclosure within 60 days after
the expiration of the time during which foreclosure is prohibited. * *
*
* * * * *
(g) Pre-foreclosure sale procedure. Within 60 days of the end of a
mortgagor's participation in the pre-foreclosure sale procedure, or
nine (9) months after default, whichever is later, if no closing of an
approved pre-foreclosure sale has occurred, the mortgagee must obtain a
deed-in-lieu of foreclosure, with title being taken in the name of the
mortgagee or the Secretary, or commence foreclosure. The end-of-
participation date is defined as:
(1) Four months after the date of commencement of participation, if
there is no signed Contract of Sale at that time, unless extended by
the Commissioner;
(2) Six months after the date of commencement of participation, if
there is a signed contract but settlement has not occurred by that
date, unless extended by the Commissioner;
(3) The date the mortgagee is notified of the mortgagor's
withdrawal from the Pre-foreclosure Sale procedure; or
(4) The date of the letter sent by the mortgagee to the mortgagor
prior to the expiration of the customary participation period,
terminating the mortgagor's opportunity to participate in the Pre-
foreclosure Sale procedure.
5. Section 203.356 is amended by revising the section heading; by
redesignating the existing text as paragraph (a); and by adding a new
paragraph (b), to read as follows:
Sec. 203.356 Notice of foreclosure; reasonable diligence requirements;
notice of pre-foreclosure sale.
* * * * *
(b) The mortgagee must give written notice to the Secretary within
the time frame prescribed by the Secretary of the acceptance of any
mortgagor into the pre-foreclosure sale procedure.
6. Section 203.360 is amended by revising the section heading; by
redesignating the existing text as paragraph (a); and by adding a new
paragraph (b), to read as follows:
Sec. 203.360 Notice of property transfer or pre-foreclosure sale and
application for insurance benefits.
* * * * *
(b) Within 30 days of the closing of an approved pre-foreclosure
sale, the mortgagee shall notify the Commissioner on a form prescribed
by him of the pre-foreclosure sale.
7. Section 203.365 is amended by revising paragraph (a), to read as
follows:
Sec. 203.365 Documents and information to be furnished the Secretary;
claims review.
(a) Items to be furnished the Secretary. Within 45 days after the
deed is filed for record, in the case of a conveyance claim; or, in the
case of a claim arising from a pre-foreclosure sale, within 30 days
after the closing of the pre-foreclosure sale, unless extended by the
Commissioner, the mortgagee must forward to the Secretary:
(1) A copy of the deed to the Secretary that has been filed for
record and the title evidence continued so as to include recordation of
the deed; or evidence, as prescribed by the Secretary, of the closing
of the pre-foreclosure sale.
(2) Fiscal data pertaining to the mortgage transaction.
(3) Any additional information or data that the Secretary may
require.
* * * * *
8. A new Sec. 203.370 is added immediately after Sec. 203.369 and
before the undesignated center heading, ``Condition of Property'', to
read as follows:
Sec. 203.370 Pre-foreclosure sales.
(a) General. HUD will pay FHA insurance benefits to mortgagees in
cases where, in accordance with all regulations and procedures
applicable to pre-foreclosure sales, the mortgaged property is sold by
the mortgagor, after default and prior to foreclosure, at its current
fair market value (less adjustments as the Commissioner may deem
appropriate) but for less than the mortgage loan amount currently
outstanding.
(b) Notification of mortgagor. The mortgagee shall give notice,
according to prescribed procedures, of the opportunity to be considered
for the pre-foreclosure sale procedure to each mortgagor in default.
All notices to mortgagors must be in an accessible format, if
requested, or if required by the person's known disability, as required
by 24 CFR part 9.
(c) Eligibility for the Pre-foreclosure Sale Procedure. In order to
be considered for the pre-foreclosure sale procedure, a mortgagor:
(1) Must be an owner occupant in a single family residence that is
security for a mortgage insured under this part, unless otherwise
prescribed by the Secretary.
(2) Must have an account in default, for such period as determined
by the Secretary, which default is the result of an adverse and
unavoidable financial situation.
(3) Must have been provided notice of the Mortgage Assignment
Program (24 CFR 203.650, et seq), and either have been found ineligible
by HUD, or have made an informed decision not to apply for an
assignment.
(4) Must have, at the time application is made to pursue a pre-
foreclosure sale, a mortgaged property whose current fair market value,
compared to the amount needed to discharge the mortgage, meets the
criterion established by the Secretary, unless a variance is granted by
the Secretary.
(5) Must have received homeownership counseling, as defined by the
Secretary, and have executed a certification to that effect.
9. Section 203.401 is amended by redesignating paragraph (c) as
paragraph (d); by adding a new paragraph (c); and by revising the newly
redesignated paragraph (d), to read as follows:
Sec. 203.401 Amount of payment--conveyed and non-conveyed properties.
* * * * *
(c) Pre-foreclosure Sales. Where a claim for insurance benefits is
filed in accordance with this subpart, based on a pre-foreclosure sale
approved by or on behalf of the Secretary (under the provisions of
Sec. 203.370), the amount of insurance benefits shall be computed by
adding to the original principal balance of the mortgage (as increased
by the amount of open-end advances made by the mortgagee and approved
by the Commissioner) which was unpaid on the date of closing of the
pre-foreclosure sale, the amount of all applicable items set forth in
Sec. 203.402; provided however that appropriate adjustment shall be
made for any such items covered by proceeds of the pre-foreclosure
sale.
(d) Final Payment. (1) The mortgagee may not file for any
additional payments of its mortgage insurance claim after six months
from payment by the Commissioner of the final payment except for:
(i) Cases where the Commissioner requests or requires a deficiency
judgment.
(ii) Other cases where the Commissioner determines it appropriate
and expressly authorizes an extension of time.
(2) For the purpose of this section, the term final payment shall
mean, in the case of claims filed for conveyed properties, the payment
under subpart B of this part which is made by the Commissioner based
upon the submission by the mortgagee of all required documents and
information filed pursuant to Sec. 203.365. In the case of claims filed
under claims without conveyance of title, final payment shall mean the
payment which is made by the Commissioner based upon submission by the
mortgagee of all required documents and information filed pursuant to
Secs. 203.368 and 203.401(b). In the case of claims filed pursuant to
pre-foreclosure sales, final payment shall mean the payment which is
made by the Commissioner based upon submission by the mortgagee of all
required documents and information filed pursuant to Secs. 203.370 and
203.401(d).
10. Section 203.402 is amended by revising the introductory
paragraph; by adding a new paragraph (k)(3); by revising paragraph (l);
and by adding new paragraphs (s) and (t), to read as follows:
Sec. 203.402 Items included in payment--conveyed and non-conveyed
properties.
The insurance benefits paid in connection with foreclosed
properties, whether or not conveyed to the Commissioner; and those
properties conveyed to the Commissioner as a result of a deed in lieu
of foreclosure; and those properties sold under an approved pre-
foreclosure sale shall include the following items:
* * * * *
(k) * * *
(3) Where a claim for insurance benefits is being paid following a
pre-foreclosure sale, without foreclosure or conveyance to the
Commissioner in accordance with Sec. 203.370, an amount equivalent to
the sum of:
(i) The debenture interest which would have been earned, as of the
date of the closing of the pre-foreclosure sale, on an amount equal to
the amount by which an insurance claim determined in accordance with
Sec. 203.401(a) exceeds the amount of the actual claim being paid in
debentures; plus
(ii) The debenture interest which would have been earned, from the
date of the closing of the pre-foreclosure sale to the date when
payment of the claim is made, on the portion of the insurance benefits
paid in cash if such portion had been paid in debentures, except that
if the mortgagee fails to meet any of the applicable requirements of
Sec. 203.365 within the specified time and in a manner satisfactory to
the Commissioner (or within such further time as the Commissioner may
approve in writing), the interest allowance in such cash payment shall
be computed only to the date on which the particular required action
should have been taken or to which it was extended.
(l) Reasonable costs of appraisal under Sec. 203.368(e) or pursuant
to Sec. 203.370;
* * * * *
(s) Reasonable costs of the title search ordered by the mortgagee,
in accordance with procedures prescribed by the Secretary, to determine
the status of a mortgagor meeting all other criteria for approval to
participate in the Pre-foreclosure Sale procedure.
(t) The administrative fee as authorized by the Secretary and
payable to the mortgagee for its role in facilitating a successful pre-
foreclosure sale, said fee not to be subject to the payment of
debenture interest thereon.
11. Section 203.403 is amended by adding a new paragraph (d), to
read as follows:
Sec. 203.403 Items deducted from payment--conveyed and non-conveyed
properties.
* * * * *
(d) With regard to claims filed pursuant to successful pre-
foreclosure sales, all amounts received by the mortgagee relating to
the sale of the property.
12. Section 203.410 is amended by revising the introductory text in
paragraph (a); by removing the word ``or'' from the end of paragraph
(a)(1)(ii); by removing the period at the end of paragraph (a)(1)(iii),
and adding in its place ``; or''; and by adding a new paragraph
(a)(1)(iv), to read as follows:
Sec. 203.410 Issue date of debentures.
(a) Conveyed properties, claims without conveyance, pre-foreclosure
sales--Where the property is conveyed to the Commissioner, or the
mortgagee or other party acquires title to the property under the claim
without conveyance procedure or the pre-foreclosure sale procedure,
debenture shall be dated:
* * * * *
(1) * * *
(iv) The property was acquired after default by a third party under
the pre-foreclosure sale procedure.
13. A new Sec. 203.501 is added to read as follows:
Sec. 203.501 Loss mitigation.
Mortgagees must consider the comparative effects of their elective
servicing actions, and must take those appropriate actions which can
reasonably be expected to generate the smallest financial loss to the
Department.
Dated: September 12, 1994.
Jeanne K. Engel,
General Deputy Assistant Secretary for Housing-Federal Housing
Commissioner.
[FR Doc. 94-24262 Filed 9-29-94; 8:45 am]
BILLING CODE 4210-27-P
