PRE-FORECLOSURE SALE
The pre-foreclosure sale (”PFS”) option allows a borrower in
default to sell his or her home 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 borrowers whose financial situation
requires that they sell their home, but who are unable to sell without
FHA relief, because the value of the property has declined to less
than the amount owed on the mortgage.
Borrowers must make a commitment to actively market their
property for a period of 4 to 6 months, during which time the lender
delays foreclosure action. Owner-occupant borrowers who successfully
sell to a third party within the required time, are paid a cash
consideration up to $1,000. Lenders also receive a $1,000 incentive
for successfully avoiding the foreclosure. If the property does not
sell, borrowers are encouraged to convey the property to FHA through a
deed-in-lieu of foreclosure.
Since PFS was introduced in 1994, it has helped thousands of
borrowers in default avoid foreclosure and make a smooth transition to
more affordable housing. The changes described below are intended to
increase the number of borrowers who can take advantage of the PFS
option.
In an effort to open PFS eligibility up to more borrowers, this
Mortgagee letter changes two critical ratios used to determine
property eligibility and minimum acceptable proceeds. Where Section
E(4) of Mortgagee letter 94-45 , HUD’s Nationwide Pre-foreclosure Sale
Procedure, established the minimum ratio of appraised value to
outstanding mortgage indebtedness at 70%, effective February 1, 2000
the minimum ratio of appraised value to outstanding mortgage
indebtedness is 63%. Where Section G(4) of Mortgagee letter 94-45,
required minimum acceptable net sales proceeds of 87%, effective
February 1, 2000 minimum acceptable net sales proceeds are 82%.
Concurrent with these changes there will be no variances from the
above stated ratios.
Unlike other options, borrowers wishing to participate in the PFS
program must submit an Application to Participate HUD-90036, along
with the financial information required by the lender. The lender
will also obtain a recent FHA appraisal and preliminary title report.
After reviewing all relevant information, the lender will notify
borrowers whether or not they meet the program requirements described
below. Acceptance into the program is indicated by issuance by the
lender of an Approval to Participate HUD-90045.
The forms associated with the PFS program, Information Sheet HUD-
90035, Application to Participate HUD-90036, Approval to Participate
HUD-90045, and Variance Request HUD-90041, are currently being revised
to incorporate the ratio changes, provide the disclosure language
described above, and to delete references to the assignment program.
These forms will be released in a subsequent mortgagee letter. In the
meantime, lenders may continue to use current versions of the forms.
A. Loan Default At the time the pre-foreclosure sale is closed, the loan
must be in default (delinquent more than 30 days). Lenders may
exercise their discretion to accept applications from borrowers
who are facing imminent default, but by the time the pre-
foreclosure sale is completed, the loan must be in default.
Lenders should document this decision in the claim review file.
Under no circumstances shall PFS be available to borrowers who
have abandoned their mortgage obligation despite their continued
ability to pay. Lenders may exercise their discretion to accept applications from borrowers who are facing imminent default, but by the time the pre- foreclosure sale is completed, the loan must be in default. Lenders should document this decision in the claim review file. Under no circumstances shall PFS be available to borrowers who have abandoned their mortgage obligation despite their continued ability to pay. Home Equity Conversion Mortgages are not eligible pre-
foreclosure sale.
Lenders may exercise their discretion to accept applications from borrowers who are facing imminent default, but by the time the pre- foreclosure sale is completed, the loan must be in default. Lenders should document this decision in the claim review file. Under no circumstances shall PFS be available to borrowers who have abandoned their mortgage obligation despite their continued ability to pay. Home Equity Conversion Mortgages are not eligible pre- foreclosure sale. B. Borrower Qualifications
The PFS option may be extended to borrowers who satisfy the
following requirements:
• Are in default due to a verifiable increase in living
expenses or decrease in income.
• Have negative equity of not more than 63% of the outstanding
mortgage balance including unpaid principal and accrued
interest. (PFS may be considered if the property’s
appraised value slightly exceeds the mortgage payoff figure,
but net proceeds, after deducting the costs of the sale,
will fall short of the amount needed to discharge the
mortgage by more than $1,000.)
• Occupy the property as a primary residence. Lenders are
authorized to grant reasonable exceptions to non-occupant
borrowers when it is verifiable that the need to vacate was
related to the cause of the default (job loss, transfer,
divorce, death), and the subject property was not purchased
as a rental investment, or used as a rental for more than 12
months.
C. Application to Participate
Any borrower in default who expresses interest in the pre-
foreclosure sale program should be sent a copy of the PFS
Information Sheet, and Application to Participate. Additionally,
lenders are encouraged to proactively solicit participation by
borrowers who are in default on an FHA insured first mortgage and
are unable to cure the default through reinstatement.
By signing and returning the application with the required
financial information, borrowers are acknowledging that they have
received housing counseling, and are agreeing to:
• List the property with a licensed real estate broker,
unrelated to the borrower. The listing agreement must
include a specific cancellation clause in the event the
terms of a sale are not acceptable to HUD.
• Make a good faith effort to aggressively market the
property.
• Perform all normal property maintenance and repairs until
closing of the pre-foreclosure sale.
D. Property Value
The lender must obtain a standard FHA appraisal from an
appraiser who does not share any interest with the mortgagor or
mortgagor’s agent. The appraisal must contain both “As Is” and
“As Repaired” values for the property, and will be valid for six
months. A copy of the appraisal must be shared with the
homeowner or sales agent, if requested. Appraisals or opinions
of value provided by the borrower, or borrower’s real estate
agent are not acceptable. The lender must review the appraisal
and satisfy itself that the opinion represents the fair market
value of the subject property.
E. Property Condition
Properties which have sustained serious damage (fire, flood,
earthquake, tornado) are not eligible for PFS if the cost of
repair exceeds 10% of the As Repaired appraised value. Lenders
may exercise their discretion to accept or reject damaged
properties when repair costs are less than the 10% threshold, but
should document their decision in the claim review file.
F. Condition of Title
The property must have marketable title. Prior to execution
of the Approval to Participate, the lender must obtain a title
search or preliminary report to verify that the title is not
impaired with un-resolvable title problems, or junior liens that
cannot be discharged as allowed by HUD. If the lender determines
that junior liens and other title issues can be resolved, the
borrower may be accepted into the PFS program and resolution of
the title issues can be pursued concurrent with marketing.
It is frequently in HUD’s interest to aid in the discharge
of secondary liens in order to facilitate the sale. Lenders are
expected to provide such assistance to the borrower. In some
cases junior lien creditors will release a lien in return for a
partial cash payment or a promissory note from the borrower.
Where the amount required to satisfy or release the lien(s) is in
line with the borrower’s ability to pay, the borrower should be
required to do so. The incentive consideration payable to the
borrower should first be applied toward the discharge of liens.
If this is not sufficient, the lender can obligate an additional
amount not to exceed $1,000 from sale proceeds towards the
discharge of liens or encumbrances, if that will result in clear
title and allow the sale to proceed. If the borrower has a HUD
Title I loan secured by the property, the lender must negotiate a
release of the Title I lien in order to proceed with a PFS.
G. Financial Analysis
The lender is required to assess the borrower’s financial
condition as described in Section H, page 10. HUD expects the
lender to project the borrower’s surplus monthly income and use
good business judgment to determine that the borrower is unable
to support the mortgage debt.
H. Approval to Participate
When an application is accepted, the Approval to Participate
form must be used. The date of this form becomes the starting
date of PFS participation. The Approval to Participate must
include the date by which a signed contract for sale must be
obtained, and the minimum acceptable net sales price.
I. Timing of Initiation
The lender must either issue an Approval to Participate,
commence foreclosure, or initiate another loss mitigation option
within 6 months of the date of default, unless the lender
qualified for an extension by trying another loss mitigation
option.
If the PFS follows a failed special forbearance agreement,
the Approval to Participate must be granted, or foreclosure or
other option initiated within 90 days of the failure. If the PFS
follows any other option, the Approval to Participate must be
granted, or foreclosure or other option initiated within 9 months
of the date of default.
J. Duration of the Pre-Foreclosure Sale Period
The pre-foreclosure sale period shall be three months
beginning upon lender approval (automatically extended two months
for lenders scoring in the top 25th percentile). The lender
should review marketing efforts with the mortgagor on a monthly
basis. After 90 days without a scheduled closing, the lender
must discuss the likelihood of a sale with the real estate broker
and make a determination to either end the pre-foreclosure sale
period, or extend it for an additional 30 days if a sale is
likely. Documentation for this decision should be retained in
the claim review file.
If the property is under contract at the end of the
marketing period, the lender may extend the PFS period for 60
days not to exceed a total of 6 months (8 months for lenders in
the top 25th percentile).
K. Other Lender Responsibilities
The lender is responsible for inspection, protection, and
preservation of the property between the 45th day of default and
the date of the Approval to Participate. Funds expended for
preservation and protection will be reimbursed.
L. Early Termination
Borrower participation in the PFS program may be terminated
at the discretion of the lender, for any of the following
reasons:
• Un-resolvable title problems.
• Determination that the borrower is not acting in good faith
to market the property.
• Voluntary withdrawal by the borrower.
M. Failure
Within 90 days of the expiration of the pre-foreclosure sale
period (or 6 months of the date of default, whichever is later),
if no closing of an approved PFS has occurred, the lender must
commence foreclosure or obtain a deed-in-lieu. If the borrower’s
financial condition has improved to the point that reinstatement
is a viable option, the lender may undertake one of the
reinstatement loss mitigation tools. However, the lender must
fully justify this decision in the claim review file, and must
complete the action within the 90 day period.
N. Lender Incentives
FHA will pay lenders an incentive fee of $1,000 for each
successful pre-foreclosure sale.
O. Borrower Consideration
Borrowers who successfully sell their properties using this
option are relieved of their mortgage obligation, and are
entitled to receive consideration in the amount of $750. If the
closing occurs within three months of the Approval to
Participate, the borrower will be entitled to $1,000. Unless the
borrower’s consideration is required to release junior liens, the
borrower may elect to accept cash paid at closing, or may apply
some or all of the amount to offset sales costs not paid by FHA,
including home warranty plans, optional repairs, and seller’s
closing expenses.
Borrowers who become good-faith participants in the PFS
program shall not be pursued for deficiency judgments by either
the lender or the Department in the event that the PFS is
unsuccessful and foreclosure occurs.
P. Contract Approval
The lender will have 5 working days from receipt of a signed
Contract for Sale, to respond using the Sale Contract Review form
HUD-90051. The transaction must be an outright sale of the
premises. No sale by assumption, regardless of provisions for
release of liability, may be considered.
Lenders may approve a sale contract in which the net sales
proceeds are at least 82% of As Is appraised value. “Net Sales
Proceeds” is defined as the contract price less:
• Sales commission (usually 6% or less).
• Consideration paid to the seller ($750 or $1,000).
• Discharge of junior liens not to exceed $1,000.
• Property repairs required by the appraisal.
• Local/state transfer tax stamps and other customary closing
costs including the seller’s costs for a title search and
title insurance.
Examples of settlement costs which may not be included in
the net sales proceeds calculation are:
• Tax service fees and other property transfer costs normally
paid by the buyer.
• Home warranty fees.
• Repairs not stipulated in the appraisal.
• Survey costs.
• Lawyer’s fees for representing the seller (apart from
conducting the settlement or review of documents).
There must not be any hidden terms or special understandings
that exist between any of the parties involved in the
transaction: buyer, seller, appraiser, sales agent, closing
agent, and lender.
Q. Closing and Post Responsibilities
Prior to closing, the lender will provide the closing agent
with a Closing Worksheet, HUD-90052, which lists all amounts
payable out of sale proceeds. Before giving final approval for a
closing, the lender must review the HUD-1 to ensure that it
complies with earlier closing cost estimates.
A pre-foreclosure sale must be reported to national credit
bureaus as a “short sale.” Lenders will be responsible for filing
information return Form 1099-A with the IRS and reporting any
discharge of indebtedness, in accordance with the Internal
Revenue Code.
R. Claim Filing
The claim for insurance benefits must be submitted to HUD
within 30 days after the date of the PFS closing. HUD will
reimburse the lender for reasonable and customary costs of the
appraisal, title search (if not included in the settlement
statement), and the allowable percentage of legal fees for a
foreclosure postponed pending completion of PFS. Disbursements
for taxes, assessments, hazard insurance, and other allowable
items payable before the date of the PFS closing are
reimbursable. FHA will not pay costs related to the property
which were incurred after the closing date.
The consideration paid to the borrower and allowable
amounts, not to exceed $1,000,paid to release all junior liens
should be reflected on the HUD-1 and not included on the claim.
The mortgagee’s incentive fee shall still be reflected on line
129 of the claim form HUD-27011. (See Mortgagee letter 94-45 ,
Pre-Foreclosure Sale Program.)