Updated Requirements Issued for FHA Pre-Foreclosure Sales and Deeds in Lieu of Foreclosure
On July 10, 2014, the U.S. Department of Housing and Urban Development (HUD) released a new Mortgagee Letter, 2014-15, addressing updated requirements for pre-foreclosure sales and deeds in lieu of foreclosure. While the letter restates many previously implemented criteria, it does include new regulations. Although these new regulations can, in some cases, be immediately implemented if participating lenders choose to do so, the new rules must be in effect for all lenders by October 1, 2014.
One of the most important new sections of Mortgagee Letter 2014-15 addresses when a borrower may be eligible for a deed-in-lieu or a pre-foreclosure sale. In the event that none of FHA’s loss mitigation home retention options are applicable to the borrower, the FHA has prioritized the non-home retention options that must be offered by FHA approved lenders. First, a borrower in default or at imminent risk of default must be evaluated for a pre-foreclosure sale option. If unable to qualify for this form of relief, the lender must then consider the borrower for a deed-in-lieu of foreclosure.
By way of its new mortgagee letter, HUD carefully distinguishes standard pre-foreclosure sales and streamlined pre-foreclosure sales. Notably, a standard pre-foreclosure sale is available only to owner occupants experiencing a hardship as determined by the Deficit Income Test (DIT). Under this test, DIT is calculated by subtracting the borrower’s total monthly expenses from total monthly net income. A DIT yielding a negative amount would indicate a financial hardship justifying a standard pre-foreclosure sale. While some borrowers have shied away from non-home retention options based on credit concerns, the letter specifically states that mortgagees must not report pre-foreclosure sales or deeds in lieu to credit bureaus as foreclosures.
As for streamlined pre-foreclosure sales and deeds in lieu of foreclosure, these options are available to both owner occupants and non-owner occupants and can be processed without verification of the borrower’s hardship and without review of a complete mortgagor workout packet. However, lenders can only approve these options if: (1) the borrower is 90 days or more delinquent on their FHA-insured loan; and (2) each borrower has a credit score of 620 or below.
Of interest to real estate licensees are new requirements imposed upon listing agents and listing brokers. First, the property must be listed in the Multiple Listing Service for 15 calendar days before offers are evaluated. Second, if multiple offers are being evaluated, listing agents and brokers “must forward to the mortgagee or its designee the offer that: (1) yields the highest net return to HUD; and (2) meets HUD’s guidelines regarding bid requirements detailed in ML 2008-43 or successive MLs.”
Of additional importance is that portion of the letter that expressly permits dual agency in all pre-foreclosure sales. As explained by Sara Young of the National Association of REALTORS®, “Dual agency includes transactions in which two agents are working for the same broker and one agent represents the seller and the other agent represents the buyer. Dual agency also applies to a single agent who represents both the buyer and the seller in a short sale transaction.”
To reflect the changes implemented by Mortgagee Letter 2014-15, revisions have been made to HUD’s Sample Pre-Foreclosure Sale Addendum. Among the changes, the name of the listing broker and the buyer’s broker are to be identified in the addendum. Language has also been added by which the parties acknowledge that real estate agents and brokers are permitted to serve in more than one capacity, such as a dual agent. Finally, by way of the addendum, the listing agent and broker must now certify compliance with: (1) the 15-day listing requirement; and (2) their obligation to submit the offer that yields the highest net return and meets HUD’s bid requirements.
Additional information concerning Mortgagee Letter 2014-15 can be found at www.hud.gov/answers and questions can be directed to the HUD National Servicing Center at (877) 622-8525.