Greetings,

If you have clients that currently have an FHA loan and are likely to default or have defaulted on their loan and must Sell their home, you and they need to know about FHA’s PFS program. Here’s the HUD link to the full Mortgagee Letter, and excerpts are below.

http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/  

December 24, 2008                                                                Mortgagee Letter 2008-43

TO:                             ALL HUD-APPROVED MORTGAGEES 

ATTENTION:            Single Family Servicing Managers

SUBJECT:                             Pre-Foreclosure Sale (PFS) Program - Utilizing the PFS Loss Mitigation Option to Assist Families Facing Foreclosure

High foreclosure rates continue to have devastating effects on families and neighborhoods. The Federal Housing Administration (FHA) remains committed to taking actions to help families avoid foreclosure.  Since being introduced as a national program in 1994[1], the PFS Program has helped thousands of mortgagors in default to avoid foreclosure and transition to more affordable housing. The PFS Program can help many families who today are facing foreclosure.  The PFS loss mitigation option allows a mortgagor in default to Sell his or her home and use the sale proceeds in satisfaction of the mortgage debt when the proceeds are less than the amount owed. 

This Mortgagee Letter (ML) serves to remind mortgagees of the relief that the PFS Program can bring to borrowers with FHA-insured mortgages. To facilitate greater use of this program, FHA has consolidated in this ML the requirements of the PFS Program that have been issued over the years, and has updated and clarified those requirements where needed, to better address the problems faced by mortgagors today and provide greater flexibility in considering a mortgagor’s candidacy for participation in this program.

Pre-Foreclosure Sale Introduction

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

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

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

If you have any questions, please give me a call today.