www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 September 30, 1994 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER MORTGAGEE LETTER 94-45 TO: ALL APPROVED MORTGAGEES ATTENTION: SERVICING MANAGERS (SINGLE FAMILY) SUBJECT: HUD'S Nationwide PRE-FORECLOSURE SALE (PFS) PROCEDURE A.EFFECTIVE DATE Effective November 1, 1994, in the course of servicing FHA-insured mortgage loans in their portfolios, mortgagees must implement the approach described in this Mortgagee Letter with homeowners they permit to participate in HUD's Pre-foreclosure Sale procedure. B.INTRODUCTION This Mortgagee Letter rescinds Mortgagee Letter 93-1, issued January 6, 1993. It implements nationwide methods mortgagees must follow when employing the pre-foreclosure sale procedure. All forms issued as attachments to this Mortgagee Letter can be freely reproduced for use in the PFS procedure. HUD expects mortgagees to utilize loss-mitigation measures whenever appropriate in servicing their FHA-Insured loans. The Department further recommends that servicers designate loss-mitigation specialists -- or develop staff specifically to carry out such efforts. To promote the lenders' function in the loss mitigation area, HUD is offering "pre-foreclosure sales" as another workout mechanism that can be used to avoid foreclosure of FHA-insured mortgage loans. A pre-foreclosure sale is a sale of property, at fair market value, in which the lender agrees to accept the proceeds of the sale in satisfaction of a defaulted mortgage -- even though this is less than the amount owed on the mortgage -- to avoid foreclosure. By following the procedures contained in this document, a lender can then submit a claim to FHA and be compensated for the difference between the proceeds received from the sale, and the amount owed on the mortgage (plus interest and other reimbursable costs). The Department believes that a significant number of financially troubled homeowners whose mortgage loans are in a "defaulted" status would take advantage of an opportunity to dispose of their properties if doing so would free them from their mortgage obligation and also avoid foreclosure. Of course, there are homeowners whose first priority is to 2 retain ownership of their properties, and mortgagees must encourage those individuals to explore all available options, including application for mortgage assignment, a forbearance (payment plan) or refinancing/modifying the mortgage, etc. However, for those mortgagors who clearly prefer to end their mortgage obligation, and are prevented from doing so by stagnant or declining property values (also known as "negative equity") that would produce insufficient sale proceeds to pay off the mortgage, the PFS option represents an opportunity to realize their objective. NOTE: A pre-foreclosure sale must be an outright sale of the premises. No sale by assumption, regardless of provisions for release of liability, may be considered under this procedure. (Of course, if a homeowner brings the loan current, the loan can be assumed by a buyer who qualifies under credit-worthiness standards and who is willing to purchase the property subject to the existing mortgage. Such a transaction is not considered a "pre-foreclosure sale," however.) The Department's recent Pre-foreclosure Sale Demonstration has confirmed the beneficial nature of the pre-foreclosure sale option for distressed homeowners, for mortgagees, and for HUD. For that reason, HUD is aggressively introducing pre-foreclosure sales on a nationwide scale, and with an enhanced role for mortgagees, in accordance with the instructions below. (An Interim Rule describing HUD's nationwide PFS procedure was published on September 30, 1994 in the Federal Register at 59 FR 50136.) C.WHO IS ELIGIBLE FOR PRE-FORECLOSURE SALES? In order to be considered for a pre-foreclosure sale, a mortgagor: (1)Must be an owner-occupant in a single family unit with a mortgage insured under Title II of the National Housing Act (12 U.S.C. 1709, 1715I, 1715y, 1715z, or 1715z-10), except Home Equity Conversion Mortgages (HECMs). Those mortgagors with only one FHA-insured mortgage but who do not occupy the residence (e.g., a former owner-occupant who may be renting out his/her property) can be considered for the pre-foreclosure sale procedure. Also, coinsured loans (Section 244) do not qualify until after the 60th payment is made. (2)Must have an account in default, with three (3) or more monthly installments due and unpaid: the default must have been the result of a documentable involuntary reduction in income or an unavoidable increase in his or her expenses (including job relocation). The mortgagor should never be encouraged to default on his payment obligation in order to qualify for HUD's PFS procedure. HUD will respect mortgagees' discretion, in evaluating the financial situation of applicants, to determine their eligibility to participate in the PFS procedure. (a)A mortgagor who is in a defaulted status and is permitted to engage in the PFS procedure can voluntarily make mortgage installment payments during the period of PFS participation, in order to minimize the arrearage. (b)Any attempt to engage in this procedure by deliberately manufacturing a mortgage default or by misrepresenting pertinent facts about the 3 mortgagor's financial or other qualifying status shall be considered "willful abuse" and will disqualify the mortgagor from participation in the pre-foreclosure sale procedure. (3)Must have been provided notice of the Mortgage Assignment Program, and either have been found to be ineligible by HUD, or have made an informed decision not to apply for an assignment. (See pages 4-5, item E(2), below.) REMINDERS: (a) Under no circumstances shall "walkaways" who have abandoned their mortgage obligations despite their continued ability to pay be given the opportunity to pursue a pre-foreclosure sale. (b) Mortgagors who become good-faith participants in the pre-foreclosure sale procedure shall not be pursued for deficiency judgments by either the mortgagee or the Department, in the event that foreclosure occurs after participation. This is because such mortgagors must have met PFS eligibility criteria that include financial difficulties and preclude investor status and willful abuse. D.WHEN IS A PRE-FORECLOSURE SALE APPROPRIATE? Prudent and appropriate servicing requires that mortgagees explore the pre-foreclosure sale option with mortgagors whose financial situation requires that they sell their home, but who expect to have problems doing so because the value of the property is normally less than the amount owed on the mortgage. If other foreclosure alternatives, such as special forbearance plans or mortgage modification, are unlikely to succeed because of the mortgagor's financial situation and/or no desire by the mortgagor to retain ownership of the property, then the pre-foreclosure sale may be the most suitable course of action. There must be a verified need to vacate the mortgaged property (e.g., the result of job loss or transfer, divorce, death, reduced income insufficient to maintain a modified mortgage, etc.). Mortgagees should include the consideration of a pre-foreclosure sale as part of their Management/Pre-foreclosure Review activities, and document its inclusion on the checklist as described in Handbook 4330.1 REV-4 ("Administration of Insured Home Mortgages"), Paragraph 7-11. NOTE: "Borderline" cases can exist where the property's appraised value slightly exceeds the mortgage payoff figure, but net proceeds, after deducting the costs of the sale (such as the agent's sales commission and other typical seller's costs) will fall short of the amount needed to discharge the mortgage. These cases can be considered for the PFS procedure, but mortgagees must be particularly careful to protect HUD from mortgagors who might use PFS merely as an expedient way to end their mortgage obligation. However, where the difference between the net sale proceeds and the loan payoff figure is minimal, i.e., $1000 or less, HUD expects the mortgagee, mortgagor and sales agent to work out a compromise to absorb the shortfall among themselves: the FHA will not become involved in the pre-foreclosure sale transaction under those circumstances. 4 E. STEPS LEADING TO - AND PARTICIPATION IN - THE PFS PROCEDURE (Refer to Table 1, below, for a flow chart summarizing these steps.) (1)Mortgagee's Notification of Mortgagor An Information Sheet (Attachment A to this Mortgagee Letter) advising homeowners of the existence of the pre-foreclosure sale option for people whose mortgage loans are FHA-insured must be inserted in the envelopes along with each of the following mailed materials: (a) Pamphlet HUD-426-H(12)*, "Avoiding Foreclosure," typically sent to mortgagors who fall two mortgage payments behind; and [* this publication will soon contain a reference to pre-foreclosure sales, making inclusion of a separate form unnecessary] (b)the letter to defaulting mortgagors that requests financial information (Form HUD-92068F, "Request for Financial Information"), sent after the account becomes three (3) or more payments in arrears. Before distributing the Information Sheet, mortgagees must add their toll-free or collect-call number that mortgagors can use to receive additional information about the PFS procedure. Also, at both events (a) and (b), mortgagors must be permitted to confer with HUD-approved housing counseling agencies before taking steps toward pursuing pre-foreclosure sales. (2) Mortgagor's Request to Participate in the PFS Procedure; Discussion of Foreclosure Alternatives; Certification of Homeownership Counseling After a mortgagor expresses interest in the Pre-foreclosure Sale procedure, but before an application is submitted and reviewed, the mortgagee must discuss the full spectrum of foreclosure-avoidance options with the mortgagor. The mortgagee must explain, and the homeowner must understand, the two fundamentally different courses of action from which he or she is about to choose. The first is geared to a retention of homeownership through a repayment plan (forbearance), mortgage modification, refinancing, HUD's Mortgage Assignment Program, etc. The second is geared to disposing of the subject property, relieving the homeowner of the financial obligation of making mortgage payments, and avoiding foreclosure. Any homeowner who is not clear about the difference between these two objectives, or who is unable to make up his mind as to which he prefers, must be referred to a HUD-approved housing counseling agency in his area. A Certification form provided by the Department (Attachment B) must be signed by the mortgagor to document that he or she has received information relating to homeownership and to foreclosure alternatives. Explaining all existing options enables the homeowner to make an informed decision. This includes an explanation, by the mortgagee or a HUD-approved housing counseling agency, of HUD's Assignment Program. If the homeowner remains eligible to apply for the Assignment Program but wishes to waive that right in favor of immediately pursuing a pre-foreclosure sale, that waiver can also be executed on the same form. The waiver extends only to the right to apply for mortgage assignment that 5 is created by the mortgagor's present default, and applies only if the mortgagor is approved for participation in the PFS procedure. (If the mortgagor is determined to be ineligible for PFS, or withdraws his application before a decision is made, the mortgagee is still required to send the HUD letters detailing the Assignment Program.) A copy of the executed Counseling Certification/Assignment Waiver form must be retained in the case file; another must be provided to the mortgagor. If a mortgagor affirms his interest in the pre-foreclosure sale option, he should be requested to fill out an Application (Attachment C of this Mortgagee Letter) along with Form HUD-92068F ("Request for Financial Information"), if one has not recently been submitted. The mortgagee can request other documentation appropriate to evaluate the mortgagor's financial situation and to determine whether basic eligibility criteria are met. (a) TIMING. Time is always "of the essence" in carrying out the pre-foreclosure sale procedure. If mortgagors are made aware of the PFS option timely by the mortgagee, many will decide to pursue a sale at an early juncture. However, some mortgagors will express a serious interest in PFS only after being rejected for mortgage assignment by HUD; these cases should be considered on their own merits for inclusion in the PFS procedure. On the other hand, those mortgagors who opt for bankruptcy status are not good candidates for pre-foreclosure sales and should not be offered that option, even after emerging from the bankruptcy stay. (b) POSSIBLE TAX CONSEQUENCES. Choosing a pre-foreclosure sale as a course of action may result in tax consequences for "discharge of indebtedness" income flowing from the short payoff that is part of the pre-foreclosure sale. (NOTE: It is now also possible to sustain a similar tax liability following a foreclosure or a deed-in-lieu.) It is believed that the issue of tax liability depends on whether the homeowner was "solvent" at the time of the transaction bringing about the discharge of indebtedness. It is felt that many PFS candidates will have been rendered "insolvent" because of negative equity in their homes, among other factors. Mortgagees should advise homeowners to consult with a professional tax or financial advisor if they have questions about this issue. (3)Mortgagee Orders a Property Valuation (Appraisal) If the mortgagor satisfies the preliminary eligibility criteria described above, an appraisal shall be ordered by the mortgagee from an appraiser who meets standard eligibility requirements for performing Single Family appraisals. Again, time Is of the essence in obtaining appraisal results. The appraiser cannot share a business interest with the mortgagee. The appraisal shall contain both "as is" and "as repaired" values for the property, and will be valid for six (6) months. Costs for the appraisal will be reimbursed through the Single Family claims procedure. These costs must be "reasonable and customary" for the area, as established by individual HUD Field Offices, and published in Circular Letters. A copy of the appraisal must be shared with the homeowner or sales agent, if requested. That is because it may not be possible to perform another FHA 6 appraisal of that property for up to six months, and a prospective buyer who wishes to purchase the home with an FHA-insured mortgage loan will need this appraisal to proceed. (4) Mortgagee's Decision Regarding Mortgagor's Eligibility for PFS; Minimum Ratio of Appraised Value to Outstanding Mortgage Indebtedness; Mortgagors Required to Use Real Estate Sales Professional If the property's "as-is" appraised value meets the criterion regarding the minimum proportion to the homeowner's present unpaid balance (principal and accrued interest only), as determined by the Secretary (a figure of 70%), the mortgagor is notified that he has been accepted into the PFS procedure, and being given time to market his property, during which the foreclosure sale will be delayed. The mortgagee must notify the homeowner in a written, dated communication, and explain the steps it is taking. If an application is denied, a letter on mortgagee stationery, giving the reason, will suffice. When an application is accepted, Attachment D, Approval to Participate, must be used. It includes the permission to participate in the pre-foreclosure sale procedure, the length of time the mortgagee is delaying the foreclosure process, and other important information. This date of this form becomes the starting date of PFS participation. The mortgagee must instruct the mortgagor to retain the services of a real estate broker or agent within 7 days in an attempt to market the property within the established time and price guidelines. Any broker selected is prohibited from sharing a business interest with the mortgagee or the appraiser. Mortgagees must explain that the requirement to retain a professional is because of the tight time constraints involved, and because special knowledge of real estate is needed to close the sale. (5) Mortgagee's Delay of Foreclosure to Allow Pursuit of a Pre-foreclosure Sale; Mortgagor's Period of Participation In PFS Procedure Keeping loss mitigation factors in mind, mortgagees may decide to suspend further action leading to foreclosure, or to continue taking steps up to but not including the actual foreclosure sale, during the period the homeowner is marketing the home. It is in the Department's interest as well as in the mortgagee's to keep foreclosure-related expenses from accumulating unnecessarily, because many mortgagors participating in the PFS procedure will ultimately either sell their properties or will qualify for a deed-in-lieu of foreclosure (see below). Furthermore, as in other types of claims, mortgagees will be reimbursed at the level of two-thirds of incurred foreclosure expenses. The servicing mortgagee must decide how long to delay the foreclosure sale to perform a title search and enable the homeowner to market his/her property. The initial period of time given a mortgagor to obtain a signed contract of sale should ordinarily be three months from the date contained in the Approval to Participate form that is sent to the homeowner. Mortgagees will be permitted reasonable extensions to initiate foreclosure if the need for additional time is because of the 7 mortgagor's actual participation in the PFS procedure. (See page 15, item K(2), TIME REQUIREMENTS AND EXTENSION REQUESTS, Acquisition of the Property After Unsuccessful Participation in the PFS Procedure.) Of course, it is necessary for the mortgagee to follow up periodically on the progress being made by the homeowner in marketing the property. A homeowner aggressively marketing a property which is attracting prospective buyers may be given an additional month (raising the total to four months) to obtain a signed contract OR, up to a total of six (6) months to close a sale, from the date the mortgagee notified the homeowner that he could participate in the PFS procedure. Exceeding that timeframe requires a "variance" from the local HUD Office (ATTN: Chief, Loan Management). Generally, delays that result from extensions granted to bona fide PFS participants will not cause the mortgagee to be curtailed debenture interest on its claim. This maximum six month period of PFS participation can begin at any appropriate point in the nine month timeframe after default within which mortgagees must commence foreclosure, execute a deed-in-lieu or begin the pre-foreclosure sale procedure. (See page 15, item K(1), TIME REQUIREMENTS AND EXTENSION REQUESTS, Commencement of PFS Procedure.) However, mortgagees must never take additional time for the PFS procedure unless such action is supported by the facts of the case. (6) Mortgagee's Review of Mortgagor's Efforts; Termination of Participation in PFS Procedure; Withdrawal (a)Mortgagees shall periodically review each homeowner's efforts to sell the home: (i)with the mortgagor on at least a monthly basis, and, (ii)after 90 days without a scheduled closing, with the real estate broker to discuss the likelihood of a sale. (b)The mortgagee must afford qualified mortgagors who are granted permission to pursue a pre-foreclosure sale a reasonable period of time to market their properties. The mortgagee must use its best judgment in determining whether the homeowner is participating "in good faith" in the PFS procedure. If difficulties are observed, a plan of action to rectify the situation shall be formulated and communicated to the homeowner or sales agent. The case file shall contain entries reflecting these periodic progress reviews. (c)If, despite a "good faith" effort made by the homeowner, the property appears not to have viable sales prospects under the criteria of the PFS procedure -- based on (i)the opinion of the sales broker retained to sell the property, or the opinion of other real estate professionals, and/or 8 (ii)the pattern of traffic of potential buyers viewing the property, or overall market activity or conditions in the area in which the property is located, the mortgagee shall contact the mortgagor and relay its finding, and then follow instructions contained in pp. 13-14, item I, that pertain to processing of a deed-in-lieu of foreclosure in the aftermath of the PFS procedure. (d)Lack of good faith. At any point where the mortgagor is expending insufficient effort to market the home, or the mortgagee concludes that it is no longer realistic to expect that an approvable pre-foreclosure sale will result, the mortgagee must withdraw the mortgagor's opportunity to pursue a pre-foreclosure sale and must inform the homeowner in a dated letter of its decision and the reason. (This becomes the end-of-participation date for establishing the timeframe for future mortgagee actions.) The mortgagee shall then resume whatever servicing actions it deems appropriate. Examples of specific criteria for terminating a mortgagor's participation in the PFS procedure include the following: (i)when a title search has turned up significant junior liens that cannot be discharged or negotiated for release under prescribed PFS procedures, or other unresolvable title problems; (ii)if the mortgagor fails to retain the services of a real estate sales professional within the required period, or the mortgagee learns that the mortgagor has demonstrated a pattern of failing to honor appointments to show the property or otherwise fails to cooperate with the effort to market and sell the property under the PFS procedure. (These are examples of "bad faith" participation.) (e)Withdrawal. If a mortgagor withdraws voluntarily from the PFS procedure, the date the mortgagee is notified of the withdrawal becomes the end-of-participation date for the purpose of establishing a timeframe for future mortgagee actions. MORTGAGOR'S DUTY TO MARKET AND MAINTAIN THE PROPERTY; CONSIDERATION TO SUCCESSFUL SELLER; ETHICS PROVISIONS (1)The homeowner will be principally responsible for mounting an aggressive sales campaign, with the sales agent's assistance, intended to result in an approved pre-foreclosure sale. Consequently, guidance from mortgagees, sales agents, housing counselors, and others toward that end is encouraged. Local HUD Offices can also elect to circulate, through counseling agencies or real estate professionals, "Fact Sheets" containing helpful advice to mortgagors participating in the PFS procedure. (2)The homeowner will be responsible for maintaining the property until it is sold and the settlement has occurred. This includes winterizing where necessary, grass 9 cutting, etc. Information relating to these duties in contained in Attachment D, Approval to Participate. (3)The homeowner must retain the services of a professional real estate broker or sales agent and execute a listing agreement within one week of being informed that he or she may participate in the pre-foreclosure sale procedure. (4)The homeowner will be expected to execute all the documents that are necessary to sell the property -- listing agreement, sales contract, closing documents, etc. -- even though the sales proceeds will be forwarded to the mortgagee. The listing agreement must include the following specific cancellation clause: "Seller may cancel this agreement prior to the ending date of the listing period without advance notice to the broker, and without payment of a commission or any other consideration, if the property is conveyed to the mortgage insurer or the mortgage holder." (5)No pre-foreclosure sale (that is, one resulting in a "short payoff" where HUD will make up the difference) can proceed without the mortgagee's approval, based on HUD's guidelines. However, the homeowner may sign a contract before the mortgagee approves the sale as long as the contract includes a contingency clause stating that the contract is subject to the approval of the mortgagee. NOTE: When established criteria cannot be met, the mortgagee can seek local HUD Office approval for a "variance" in the interest of permitting the homeowner to pursue or to close a pre-foreclosure sale. See page 12, item G(5), below, for procedures. (6)A Seller's consideration of $750 will be payable to the homeowner out of sale proceeds for having successfully marketed the property under HUD's PFS procedure; and an additional $250 will be paid to the homeowner if the closing occurs within three (3) months of the homeowner's notification by the mortgagee of being approved for participation in the PFS procedure. The PFS Application form, Attachment C, contains a provision requiring the mortgagor(s) to assign all refunds which may be due them to the mortgagee, in the event that their participation ends with a pre-foreclosure sale OR a deed-in-lieu. (7)Mortgagors and mortgagees must adhere to ethical standards of conduct in their dealings with all the parties to pre-foreclosure sales. Specifically, (a)any pre-foreclosure sale proposed by the mortgagor or his agent, and approved by the mortgagee, must be an "arm's length" transaction between the mortgagor and would-be purchaser. HUD defines "arm's length" transaction as a pre-foreclosure sale between two unrelated parties that is characterized by a selling price and other conditions that would prevail in an open market environment. Also, no hidden terms or special understandings can exist between any of the parties 10 involved in the transaction: buyer, seller, appraiser, sales agent, closing agent and mortgagee. (b)the broker hired to sell the property may not share a business interest with the mortgagee (if a shared interest exists between appraiser and sales agent and is known to the mortgagee, it must be noted in the servicing file); and (c)all doubts will be resolved in a manner to avoid a conflict of interest, the appearance of a conflict, or self-dealing by any of the parties (e.g., a real estate agent shall never be permitted to claim a sales commission on the sale of his own property, or that of an immediate family member [spouse, sibling, parent, or child], under the PFS procedure). NOTE: It is possible for a relocation service affiliated with the mortgagor's employer to contribute a fixed sum towards the proceeds of the pre-foreclosure sale, without altering the "arm's length" nature of the sale. This contribution simply reduces the shortfall between the proceeds and the amount owed on the mortgage note. As with any other PFS, such a transaction must result in an outright sale of the property and cancellation of the FHA mortgage insurance. The relocator must agree to utilize the standard HUD-1, which the Closing Agent will need to complete the transaction. G. STEPS LEADING TO THE MORTGAGEE'S APPROVAL OF A PROPOSED PRE-FORECLOSURE SALE (1)Discharge or Release of Liens. After establishing the eligibility of a mortgagor under all other criteria to pursue a buyer under the PFS procedure, the mortgagee must perform a title search to uncover junior liens and other encumbrances. It is frequently in HUD's interest to aid in the discharge of secondary liens in order to facilitate the sale of the property where other criteria have been met. The title search expense is reimbursable in full under the Single Family Claims process (use Block 305 in the Claim Form). Where the amount required to satisfy or to release small-to-moderate liens is in line with the Seller's ability to pay, along with the mortgagee's authority to use a portion of sales proceeds for that purpose, the removal of such liens and encumbrances must be pursued. Mortgagees must document their review and decisions regarding the disposition of liens and encumbrances, prior to entering into negotiations with the secondary lienholders. The consideration payable to the Seller is available, and should be applied toward the discharge of liens, wherever possible. In addition, a mortgagee can agree to obligate up to a total of $1,000.00 from sale proceeds toward the discharge of existing liens or encumbrances if that will result in clear title and the opportunity to proceed with a pre-foreclosure sale with an otherwise qualified homeowner. Moneys approved by the mortgagee for discharge of junior liens will be forthcoming from sale proceeds at the closing; these funds should not be expended in 11 some other way, with the expectation of reimbursement through the Single Family Claims process. Mortgagee actions taken in regard to junior liens will be monitored by HUD to determine that they were appropriate. REMINDER: In some cases the junior lien creditor will release the lien in return for a partial cash payment and a promissory note from the mortgagor for the remainder of the (possibly compromised) debt amount. Mortgagees should not overlook this option when confronted by junior liens. (2)Repairs to the Property. Generally speaking, cosmetic repairs should be made by the homeowner as a means of improving the property's salability. More significant repairs that are required before the prospective buyer's mortgage loan can be approved by the lender, must be stipulated in the proposed contract of sale. If funds for repairs are escrowed, the work may not commence until after the pre-foreclosure sale closing has occurred. The cost of these repairs can be deducted from the purchase price as a Seller's expense, but the net proceeds of sale must still meet the applicable criterion (normally at least 87% of as-is appraised value) before the mortgagee can approve the pre-foreclosure sale. Sellers can always agree to contribute their own funds, including the consideration paid under the PFS procedure (available at the closing), for the purpose of making repairs necessary to conclude the sale. IMPORTANT: Properties which have sustained serious damage, as set out in 24 CFR 203.378 (fire, flood, earthquake, tornado or other surchargeable property condition) are not eligible for the PFS procedure. The expense and delay involved in making significant repairs to the property to facilitate a pre-foreclosure sale may not be cost-effective, from HUD's point of view, especially if there is also to be an outlay from sale proceeds to discharge junior lien(s). Although mortgagees have some discretion in this area, when the cost of repairs exceeds 10% of the property's "as-is" appraised value, the lender must deny the pre-foreclosure sale option. Accordingly, if such damage occurs after a mortgagor is permitted to begin marketing the home, the opportunity to participate in the PFS procedure must be withdrawn unless a variance is granted by the local HUD Office. If including the repair costs results in a failure to meet the minimum arithmetic criterion governing net proceeds, and the mortgagee believes that the pre-foreclosure sale should still occur, the Chief of Loan Management in the local HUD Office with jurisdiction over the property must approve a variance from that criterion. The facts must be clearly set forth in writing (which can be faxed to the HUD Office) and the local HUD Office's response must also be in writing. (3)The real estate broker (or the homeowner's attorney) must forward to the mortgagee a copy of the Contract of Sale (specifying sales commission, repairs and all other terms) made conditional upon the mortgagee's approval, along with any required certifications signed by the homeowner that have not already been sent to the mortgagee. The mortgagee will review the package and shall communicate its decision within five (5) working days of receiving the proposed sales contract. A copy of the approved Sales Contract shall be retained in the servicing file. 12 (4)The net sale proceeds must be at least 87% of the property's as-is appraised value. "Net sale proceeds" is defined, under the PFS procedure, as the gross selling price minus the following: (a) sales commission (customarily 6% or less); (b) consideration payable to Seller (normally $750-1000); (c) amount (to come from sale proceeds at settlement) to discharge any junior liens (not to exceed $1000); and (d) local/State transfer taxes/stamps and other customary seller's closing costs. NOTE: Examples of settlement costs which are not considered Seller's expenses for purposes of the PFS procedure, and therefore cannot be deducted from the selling price, are tax service fees; home warranty fees; repairs not stipulated in the appraisal or sales contract; survey costs; and attorney fees for the sole purpose of representing the Seller (apart from conducting the settlement or reviewing the documents). (5)Any variance from HUD guideline, whether a failure to meet the minimum 70% ratio of appraised value to outstanding indebtedness; a failure to meet the minimum 87% ratio of net sales proceeds to appraised value; deduction of items other than those listed in G(4), above, in the calculation of the net proceeds; or any other deviation from the criteria stated in this Mortgagee Letter, must be approved in writing by the Chief of Loan Management in the local HUD Office with jurisdiction over the property affected by the proposed pre-foreclosure sale. Attachment E, Request for Variance, is the form which the mortgagee must use. Local HUD Offices are being instructed to expedite their responses to these variance requests. H.CLOSING THE PRE-FORECLOSURE SALE If all applicable criteria are met, and any variances made necessary by a failure to meet those criteria have been approved in writing by the Chief of Loan Management in the local HUD Office, the following must occur prior to closing the sale: (1)The mortgagee will provide to the Closing Agent a Closing Worksheet (Attachment F of this document) which contains a list including the Seller's consideration and all other amounts payable out of sale proceeds. These shall be: (a)A Seller's consideration of $750 to the homeowner for successfully marketing the property; and an additional $250 if the closing occurs within three (3) months of the date of the Approval to Participate in the PFS procedure. NOTE: The Closing Agent must enter the consideration in the section labeled "Additional Settlement Charges" (lines 1303-1305) of the form HUD-1, "Settlement Statement." (b)The moneys required from the sale proceeds (not to exceed $1000) to release existing junior liens and encumbrances (other funds may come from 13 the homeowner, or from the Seller's consideration - do not list the same funds twice). (c)Sales commission (customarily 6% or less). (d)Local and State transfer taxes/stamps and other customary Seller's closing costs. (e)Any funds, coming from sales proceeds, approved for property repairs. REMINDER: Do not Include the following items, all of which are paid through the Single Family Claims process: the fee HUD will pay the mortgagee for facilitating the successful Pre-foreclosure Sale; the amount paid by the mortgagee for the appraisal; and the cost of the title search paid for by the mortgagee as part of the homeowner's participation in the PFS procedure. (2)The Closing Agent will calculate the actual net sale proceeds and provide a copy of the HUD-1 ("Settlement Statement") to the mortgagee. Before giving final approval, the mortgagee must review the actual terms of the transaction to ensure that they are in accordance with the earlier estimates or proposed figures that the mortgagee had approved. The Settlement Statement should always contain (and clearly identify) the old FHA Case Number, in addition to the new FHA Case Number if the Buyer is obtaining an FHA-insured mortgage loan. The mortgagee's decision regarding the proposed pre-foreclosure sale shall be communicated to the homeowner or sales agent using the Sales Contract Review form, Attachment G to this Mortgagee Letter. (3)If the mortgagee gives final approval to the transaction, and closing/settlement occurs, the Closing Agent must pay the above-listed expenses out of the proceeds, and must forward the net proceeds of sale and a completed form HUD-1 to the mortgagee. A copy of the HUD-1 and an executed Closing Worksheet (Attachment F) certifying that the appropriate consideration has been paid, must be sent by the Closing Agent to the mortgagee. (4)Upon receipt of the portion of the sales proceeds available for mortgage satisfaction, and, possessing a copy of the approved HUD-1, the mortgagee will then satisfy the mortgage. (5)Once the above steps have been followed and closing has occurred, the mortgagee can file its claim for FHA insurance benefits. I.EXECUTING A DEED-IN-LIEU IF THE PFS PROCEDURE IS UNSUCCESSFUL As a reward to those homeowners who make a serious ("good faith") but unsuccessful effort to sell their homes under the pre-foreclosure sale procedure, and a further means of mitigating the Department's losses, HUD strongly encourages mortgagees to process a deed-in-lieu of foreclosure. HUD presumes that mortgagors who have been approved for the PFS procedure will meet the general deed-in-lieu criteria without the mortgagee having to evaluate them further, subject to the following instructions. 14 (1)The PFS procedure provides for the acceptance of a deed-in-lieu of foreclosure from most homeowners who make a good faith effort to sell their homes under this procedure but fail to find a qualified buyer within the time given them to do so. The standard approach that governs when the deed-in-lieu would occur is after either a four-month period of participation without a signed contract of sale on the subject property, OR after a six-month participation where a proposed sale contract has been approved but no sale closing has yet occurred. One of these two milestones becomes the "end of PFS participation" for calculating the timeframe during which to process the deed-in-lieu (that is, 9 months after default OR 60 days after the end of PFS participation, whichever is later). See Item K (2), TIME REQUIREMENTS AND EXTENSION REQUESTS. HUD considers the deed-in-lieu to be the second-most desirable outcome under the PFS procedure, and expects FHA-approved mortgagees to accept deeds-in-lieu as part of the overall Pre-foreclosure Sale procedure and loss mitigation efforts. Of course, if existing liens cannot be compromised through negotiation or otherwise released, or if other major obstacles arise before the deed-in-lieu is accepted that were not known earlier in the process (e.g., fraud or misrepresentation of a material fact by the homeowner), then the deed-in-lieu must be denied. All decisions to accept or deny deeds-in-lieu must be documented in the servicing file, and will be subject to Departmental review. (2)For homeowners who do execute a deed-in-lieu, the consideration to the homeowner will be $500, payable upon final acceptance of the deed-in-lieu of foreclosure. (The mortgagor and mortgagee can agree to use this amount to discharge junior liens, if necessary, instead of as a direct cash payment to the mortgagor.) The consideration payable to the mortgagor in such cases (that is, after a good-faith try at PFS) coincides with the maximum amount now authorized by HUD for any deed-in-lieu. It will be reimbursable in full to the mortgagee through the Single Family Claims for Insurance Benefits. This expense should be reported on Block 305 of the claim. J.CLAIMS ISSUES (Refer to Attachment I, Claims Instructions) (1)Claims instructions for use in cases where a pre-foreclosure sale has occurred are contained in the attached revisions to Chapter 8 of Handbook 4330.4, FHA Single Family Insurance Claims. Also included is information regarding claims filed after participation in the PFS procedure does not result in a sale of the property. Existing claims instructions are being modified as follows: (a)HUD will pay an administrative fee of $1,000.00 to mortgagees for each completed pre-foreclosure sale. This amount should be included in Block 408 of the claim form. (This provision is applicable to mortgagors approved for PFS participation by the mortgagees on or after the effective date of this Mortgagee Letter.) 15 (b)The $250 administrative fee previously paid to mortgagees - during the PFS demonstration period - whether or not a sale resulted from a mortgagor's participation in the PFS procedure will no longer be allowed. (For cases already in process on the date this Mortgagee Letter becomes effective, mortgagees will receive this fee upon filing of the claim.) (c)Mortgagees will be reimbursed for the reasonable cost of the property appraisal performed as part of the PFS procedure. (Enter in Block 409 of the claim form.) (2)In cases where no pre-foreclosure sale results from participation in the PFS procedure, and the mortgagee files a claim, it must be a Conveyance (Type 01) Claim. This is true whether the outcome was a deed-in-lieu of foreclosure or a foreclosure. (Enter appraisal costs for the PFS procedure in Block 409.) (3)In certain cases, it is possible that mortgagees will incur limited expenses where neither a pre-foreclosure sale nor a claim filing ultimately results, because a PFS participant subsequently reinstates or pays off the mortgage loan. If this happens after an appraisal and/or title search has been ordered and performed, the mortgagee is permitted to pass along the actual cost of these services to the mortgagor (these costs must also be "reasonable and customary"). K.TIME REQUIREMENTS AND EXTENSION REQUESTS Generally, mortgagees must follow existing instructions with regard to time frames and extension requests. (1)Commencement of PFS procedure. In cases where the date of mortgage default is on or after December 1, 1992, mortgagees have nine months to commence foreclosure, execute a deed-in-lieu, or begin the pre-foreclosure sale procedure with a mortgagor (i.e., indicate to the mortgagor in writing that he or she is qualified to pursue a buyer under the PFS procedure, and delay the foreclosure sale date.) If the PFS procedure commences within the nine-month period, but is not completed within that time frame, mortgagees are not required to request prior written approval from the local HUD Office for an extension. However, commencement of the pre-foreclosure sale procedure near the nine-month deadline should be avoided except in cases where other types of mortgagor relief have been tried and failed (e.g., application for assignment; special forbearance). (2)Acquisition of the Property After Unsuccessful Participation In the Pre-foreclosure Sale Procedure. Mortgagees have 60 days from the date a mortgagor's bona fide participation in the pre-foreclosure sale procedure ends [see item E(6), Termination of Participation] or 9 months after default, whichever is later, either to accept a deed-in-lieu of foreclosure or to initiate foreclosure proceedings against that mortgagor. This 60-day period is applicable regardless of whether the nine month timeframe has run, so long as the homeowner was participating in the pre-foreclosure sale procedure during the affected period. (If foreclosure was initiated before the date the mortgagor began participating in the PFS procedure, and is legally required to be "re-initiated," the same time frame applies.) 16 NOTE: The servicing file should contain documentation that the reason for the extension was the mortgagor's actual participation in the pre-foreclosure sale procedure. The mortgagee need not obtain approval from the local HUD Office to extend the date of foreclosure for up to 60 days after termination. The termination date from the pre-foreclosure sale procedure must be entered in Block 21 of the Part A, Form HUD-27011. A date 60 days after that date must then be entered in Block 19, in order to receive this extension. If more than 60 days is needed to initiate foreclosure, complete a deed-in-lieu or resume foreclosure, mortgagees must follow regular extension procedures and request an extension from the local HUD Office. The expiration date of the approved extension must be entered in Block 19. (3)Filing a Claim After a Successful Pre-foreclosure Sale. The claim for insurance benefits (Parts A and B of Form HUD-27011) must be submitted to HUD within 30 days after the date of the pre-foreclosure sale closing. If the sale proceeds have not been received from the Closing Agent, an extension must be requested. The expiration date of the approved extension must be recorded in Block 20. (4)Submission of Extension Requests. Each request must be submitted to the local HUD field office having jurisdiction over the property. Non-conveyance claims-related requests (that is, where a pre-foreclosure sale did occur) should be submitted to the local HUD Office, ATTN: Single Family Loan Management Branch. Extension requests related to conveyance claims (where a pre-foreclosure sale has not occurred, and the property is being deeded to HUD), should be submitted to the local HUD Office, ATTN: Single Family Property Disposition Branch. (5)Claim Review File. A copy of HUD's written response to each extension request must be maintained in the mortgagee's claim review file. L. SINGLE FAMILY DEFAULT (SFDMS) REPORTING REQUIREMENTS Two additional codes have been added to the SFDMS to reflect more accurately cases that are under the Pre-foreclosure Sale (PFS) procedure. They are: Status P: Accepted into the Pre-foreclosure Sale (PFS) Procedure Status S: Pre-foreclosure Sale (PFS) Completed Previously, the mortgage loan of a homeowner accepted into the Pre-Foreclosure Sale (PFS) procedure, would have customarily been reported to the SFDMS as Status A in the month the loan became 90 days delinquent. Upon acceptance of the mortgagor into the PFS procedure, the affected mortgage loan should be reported to the SFDMS as Status P. (NOTE: There may be occasions when the first requirement of SFDMS reporting occurs with acceptance of the case into the PFS.) The account should continue to be reported to the SFDMS as Status P while in the PFS procedure. If a pre-foreclosure sale "closes," the account should be reported to the SFDMS as Status S. However, if there is no successful PFS sale, and a deed-in-lieu of 17 foreclosure is obtained, the case should be reported as Status F in the month the deed-in-lieu is recorded. Where there is neither a successful PFS sale or deed-in-lieu, foreclosure may need to be instituted. These SFDMS reporting requirements were set forth in Mortgagee Letter 9324. M.ERRONEOUS TERMINATIONS OF MORTGAGE INSURANCE Mortgagees should never file Form HUD-27050A, "Mortgage Insurance Termination," in situations where a pre-foreclosure sale has occurred, and where the mortgagee has filed, or intends to file, a claim for FHA insurance benefits. Erroneously terminating the mortgage insurance may jeopardize the mortgagee's ability to receive payment of its claim. N.REPORTING PRE-FORECLOSURE SALES TO CREDIT BUREAUS Pre-foreclosure sales must be reported to national credit bureaus. Mortgagees must be careful to use the appropriate language or code to describe the transaction as a "short sale." It should not be reported as a foreclosure, deed-in-lieu or simply as a "paid-in-full." O.COINSURED LOANS Coinsured loans are not eligible for pre-foreclosure sales prior to the payment of the sixtieth (60th) mortgage installment. After that, they may be considered for PFS if all other applicable criteria are met. Coinsured loan-related claims filed under the PFS procedure prior to the 60th mortgage installment will be denied and returned to the mortgagee without the benefit of payment. P.TITLE I LIENS If the mortgagee discovers that a mortgagor also has a HUD Title I (property improvement) loan secured by the property, the mortgagee must negotiate a release of the Title I lien in order to proceed with a pre-foreclosure sale. Several different situations can exist with Title I loans, depending on (1) whether the loan is being serviced by a Title I lender or has been assigned to HUD, and (2) whether HUD has paid an insurance claim on the loan. However, the following basic information is required in addressing any Title I case: Name and Social Security Number of all borrowers (including co-makers, co-signers or assumptors) Last known addresses for all borrowers Name of Title I lender and Title I Case Number Date of loan origination and loan amount Negotiations for release of the Title I lien must include a monetary consideration, to be paid either to the Title I lender or to HUD, depending on whether HUD has paid a Title I insurance claim or not. The pre-foreclosure sale procedure permits a total of $1,000 from the sales proceeds to be applied to all junior liens to effect their release, including a Title I 18 lien, if one exists. The mortgagor also receives a cash consideration which can be used to reduce the Title I loan in exchange for a release of that lien. In most cases, the Title I lender or HUD will agree to release the lien if all or part of these funds are applied toward the Title I indebtedness. This will remove the barrier to clear title and will enable the sale of the property to proceed. However, all parties to the note remain liable for the remaining balance, and they will be required to sign a "reaffirmation" of the debt before the lien is released. (1)If the Title I loan is being serviced by the Title I lender, the mortgagee must inform the Title I lender of the homeowner's participation in the pre-foreclosure sale procedure, and request that the lender contact HUD's Title I Insurance Division in Washington, DC (telephone 202-755-7400, ext. 110) for guidance. With HUD's approval, the Title I lender can release the lien in exchange for a reduction in the principal balance, and may be able to return a defaulted loan to a current status. (The benefit to the Title I lender is the possible avoidance of a claim or, in the event a claim must be filed, a reduction in the lender's coinsurance loss.) (2)If the Title I loan has been assigned to HUD and an insurance claim has been paid to the lender, the mortgagee should obtain the Title I Claim Number from the lender and make contact with one of the following HUD Debt Management Centers to negotiate a release of the lien. The mortgagee should call the Center whose jurisdiction includes the last known location of the borrower(s). Albany, New York: phone 518-464-4200. This Center handles ME, VT, NH, MA, RI, CT, NY, NJ, PA, DE, MD, DC, VA, WV, NC, SC, KY, TN, MS, AL, GA and FL. Chicago, Illinois: phone 312-353-6236. This Center handles MN, WI, MI, OH, IN, IL, IA, NE, KS and MO. Seattle, Washington: phone 206-220-5310. This Center handles WA, OR, ID, MT, WY, ND, SD, CA, NV, UT, CO, AZ, NM, TX, OK, AR, LA, AK and HI. (3)There will be some cases where the Title I loan has been assigned to HUD but a claim has not yet been paid. HUD cannot negotiate for a release of the lien until the claim is paid and the case is sent to a Debt Management Center for servicing. Unfortunately, the time period between assignment of the loan and receipt of the case by the Debt Management Center for servicing may be too long to react timely in approving a proposed pre-foreclosure sale. NOTE: If there was fraud or misrepresentation in applying for a Title I loan, or misuse of the loan proceeds by the borrower, HUD usually will not agree to a release of the Title I lien, and consequently, no pre-foreclosure sale will be permitted. Q.235 (Subsidy) MORTGAGES Section 235 Mortgages are eligible to be considered for pre-foreclosure sales. For mortgages subject to "recapture" provisions, it is generally true that a mortgagor who has no equity in the property will not result in any "recapture" amount owed to HUD under the subsidy provisions of those mortgages. If upon calculation, however, it appears that a 19 "recapture" amount will be owed to HUD upon the pre-foreclosure sale of the property, the matter must be referred to the local HUD Office with jurisdiction over the property (ATTN: Chief, Loan Management Branch) for processing. The applicable "recapture" amount would be payable by the mortgagor if feasible. Finally, in all cases involving 235 mortgages subject to recapture provisions, regardless of whether a recapture amount results, the 235 recapture lien (also known as second note and mortgage or deed-of-trust) must be satisfied. The local HUD Office with jurisdiction over the property (ATTN: Chief, Loan Management Branch) will provide this service. R.REPORTING PRE-FORECLOSURE SALE PROCEDURE DATA TO HUD Please refer to Attachment H, HUD Preforeclosure Sale Data Reporting, and the two-page explanation of the data elements which follows, for a description of the data which must be collected and periodically reported to HUD. S.FILING FORM 1099-A WITH THE INTERNAL REVENUE SERVICE Mortgagees will be responsible for filing information return Form 1099-A with the I.R.S. and to report the pre-foreclosure sale transaction and any discharge of indebtedness, in accordance with the Internal Revenue Code. Mortgagor notification of this action can be accomplished by the mortgagee concurrently with its end-of-year reporting provided to mortgagors for tax purposes. Mortgagees must use the official form name and number to clearly identify the 1099-A information. If one page is used for both the end-of-year data and the 1099-A information, no perforation is necessary. However, a separation of the information must be clearly visible. T. MONITORING BY HUD OF MORTGAGEE ACTIVITIES RELATED TO PRE-FORECLOSURE SALES HUD will incorporate into its regular claim reviews and monitoring of mortgagee servicing activities a review of the actions taken by servicing mortgagees pertaining to the Pre-foreclosure Sale procedure. HUD acknowledges that the Pre-foreclosure Sale Procedure involves some discretionary decisionmaking by mortgagees. HUD will accept the outcome of such mortgagee decisionmaking if the judgment was based on criteria and procedures issued by the Department. Failure to fulfill mortgagee responsibilities pertaining to pre-foreclosure sales may result in civil money penalties, limited denials of participation (LDP), or stronger sanctions, in cases of fraud. If you have questions regarding pre-foreclosure sales, please direct your inquiries to the Single Family Loan Management Branch at the local HUD Office with jurisdiction over the subject property. Sincerely yours, Nicolas P. Retsinas Assistant Secretary for Housing - Federal Housing Commissioner Attachment TABLE 1 ___________________________________________________________________________ MORTGAGEE STEPS IN THE PRE-FORECLOSURE SALE PROCEDURE ******************************************************************** * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * ******************************************************************** ___________________________________________________________________________ ATTACHMENT A ___________________________________________________________________________ Information Sheet Pre-foreclosure Sale Procedure ******************************************************************** * CLICK HERE FOR FORM * ******************************************************************** ___________________________________________________________________________ form HUD-90035 (10/94) ref. Handbook 4330.1 ATTACHMENT B ___________________________________________________________________________ Homeownership Counseling Certification Pre-foreclosure Sale Procedure ******************************************************************** * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * ******************************************************************** ___________________________________________________________________________ form HUD-90038 (10/94) ATTACHMENT C ___________________________________________________________________________ Application to Participate Pre-foreclosure Sale Procedure ******************************************************************** * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * ******************************************************************** ___________________________________________________________________________ form HUD-90036 (10/94) ref. Handbook 4330.1 ATTACHMENT D ___________________________________________________________________________ Approval to Participate Property Sales Information Property Occupancy & Maintenance Pre-foreclosure Sale Procedure ******************************************************************** * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * ******************************************************************** ___________________________________________________________________________ form HUD-90045 (10/94) ref. Handbook 4330.1 ATTACHMENT E ___________________________________________________________________________ Request for Variance Pre-foreclosure Sale Procedure ******************************************************************** * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * ******************************************************************** ___________________________________________________________________________ form HUD-90041 (10/94) ref. Handbook 4330.1 ATTACHMENT F ___________________________________________________________________________ Closing Worksheet Pre-foreclosure Sale Procedure ******************************************************************** * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * ******************************************************************** ___________________________________________________________________________ form HUD-90052 (10/94) ref. Handbook 4330.1 ATTACHMENT G ___________________________________________________________________________ Sales Contract Review Pre-foreclosure Sale Procedure ******************************************************************** * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * ******************************************************************** ___________________________________________________________________________ form HUD-90051 (10/94) ref. Handbook 4330.1 ATTACHMENT H ___________________________________________________________________________ Pre-foreclosure Sale Data Reporting Pre-foreclosure Sale Procedure ******************************************************************** * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * ******************************************************************** ___________________________________________________________________________ form HUD-90054 (10/94) ref. Handbook 4330.1 ATTACHMENT H (page 2) ___________________________________________________________________________ ******************************************************************** * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * ******************************************************************** ___________________________________________________________________________ ATTACHMENT H (page 3) ___________________________________________________________________________ ******************************************************************** * GRAPHICS MATERIAL IN ORIGINAL DOCUMENT OMITTED * ******************************************************************** ___________________________________________________________________________ ATTACHMENT I PRE-FORECLOSURE SALES -- Claims Instructions ___________________________________________________________________________ 8-1GENERAL. These instructions are effective for mortgagors whose permission to participate in the Pre-foreclosure Sale ("PFS") procedure is granted on or after November 1, 1994. The instructions are to be used for claims submitted after the pre-foreclosure sale of properties subject to FHA-insured mortgages. In a successful pre-foreclosure sale, neither foreclosure nor conveyance of the property to the Department occurs. The defaulting mortgagor sells the property at fair market value (with certain adjustments, as approved by the Secretary), which is less than the outstanding indebtedness at the time of sale. A mortgagee is eligible to file a claim for insurance benefits after a successful pre-foreclosure sale if the sale and related actions were conducted in accordance with applicable HUD guidelines and all HUD qualifying criteria were met. HUD will pay a claim equal to the difference between the net proceeds from the sale of the property and the outstanding indebtedness; plus approved costs and expenses, and debenture interest. The method by which the claim is calculated is described in Paragraph 8-17, and allowable reimbursable costs and expenses are identified in Paragraph 8-14. IMPORTANT! Guidance is also provided in this chapter for cases which are accepted for participation in the pre-foreclosure sale procedure but are foreclosed or a deed-in-lieu of foreclosure is accepted because a sale did not result. 8-2PROCEEDS OF PFS IN RELATION TO THE CLAIM; SATISFACTION OF THE MORTGAGE. Following a successful pre-foreclosure sale, the Closing Agent will distribute the sale proceeds as provided in the sales contract and the approved Closing Worksheet. The Closing Agent will forward to the mortgagee a copy of Settlement Statement, HUD-1, and the portion of sale proceeds available for satisfaction of the mortgage. Upon receipt of the portion of sale proceeds available for mortgage satisfaction and, possessing a copy of the approved HUD-1, the mortgagee will then satisfy the mortgage. The amount received will be entered in Item 108 of Part B, Form HUD-27011. 8-3CLAIM TYPE. Within 30 days after the date of the pre-foreclosure sale closing the mortgagee must file its claim for insurance benefits on Form HUD-27011, as provided in this Chapter. Do not file Form HUD-27050A "Mortgage Insurance Termination" following the sale. If a pre-foreclosure sale does not result from participation in the PFS procedure, and a deed-in-lieu of foreclosure is accepted or the mortgage is foreclosed, the mortgagee must file its claim as a conveyance claim (see Chapter 2). The conveyance claim filed after acceptance of a deed-in-lieu from a good-faith PFS participant who did not end up with a pre-foreclosure sale, may include consideration paid to the mortgagor for the deed-in-lieu, and title search costs. 8-4TIME REQUIREMENTS. The claim for insurance benefits (Parts A and B of Form HUD-27011) must be submitted to HUD within 30 days after the date of the pre-foreclosure sale closing. If the sale proceeds have not been received from the Closing Agent, an extension of time must be requested. Failure to comply will result in curtailment of debenture interest to the date the claim should have been submitted or to the date extended by HUD. If the pre-foreclosure sale is unsuccessful -- if the mortgagor withdraws or his participation in the Pre-foreclosure Sale procedure is terminated -- the mortgagee must initiate foreclosure within 9 months after default OR 60 days after the date of the termination, whichever is later; and must meet the conveyance time requirements (paragraph 2-2). Refer to instructions contained in Mortgagee Letter 94-____ regarding dates to be entered in Item 21 (PFS termination date) and Item 19 (the date 60 days after termination). 8-5EXTENSION OF TIME REQUIREMENTS. If the mortgagee cannot comply with the requirements of Paragraph 8-4 for a particular action because of circumstances beyond its control, it should submit an extension request to the local HUD office, using form HUD-50012. The request should be made as soon as possible and must be made before the time limit for that action expires. If the pre-foreclosure sale procedure is unsuccessful and the mortgagee cannot initiate foreclosure or acquire a deed-in-lieu within the 9-month/PFS participation + 60 days time frame specified in Paragraph 8-4, the mortgagee must file an Extension Request, Form HUD-50012, with the Loan Management Branch of the local HUD office. Evidence of the start and end dates of the mortgagor's participation in the PFS procedure must be attached to the Form HUD-50012. The normal time frames for institution of foreclosure will apply should the case result in a conveyance to HUD. However, participation in the Pre-foreclosure Sale procedure might constitute grounds for approving an extension request depending on the individual circumstances of the case. Legal costs incurred for foreclosure-related actions, will be reimbursed at the regular two-thirds rate. If foreclosure was initiated within the conveyance time requirements but further action was delayed because of the mortgagor's participation in the PFS procedure, a brief note of the cause of delay should be entered in the Mortgagee's Comments of Part A and supporting documents should be retained in the claim review file. 8-6TITLE REQUIREMENT. Since the property is not conveyed to the Secretary, title evidence procedures are not applicable. The mortgagee must order a title search, during the mortgagor's period of PFS participation, to determine the existence of liens or encumbrances on the property. The report shall indicate the name and address of any lienholder, and the amount of the lien or encumbrance. The cost of the search will be reimbursed by entering it in Item 305. 2 8-7 CONSIDERATION PAYABLE TO MORTGAGORS; ADMINISTRATIVE FEE PAYABLE TO MORTGAGEES. (24 CFR 203.402(t)) A.An amount will normally be payable to the mortgagor at the closing as consideration for selling the property: 1.$ 750, plus 2.$ 250 if the closing occurs within three months of the date the mortgagor is notified that he may participate in the Pre-foreclosure Sale procedure. Such consideration is payable at the sales closing by the Closing Agent and will reduce the net proceeds of the sale. No entry should be made in the insurance claim for these payments. B.If the property is not sold, the mortgagee is authorized to pay the mortgagor consideration in the amount of $500 upon acceptance of a deed-in-lieu of foreclosure which conveys good marketable title to the mortgagee or to HUD. Such allowance should be entered in Item 305. C.The mortgagee is entitled to receive as a part of the insurance settlement an administrative fee of $1000 for each completed pre-foreclosure sale. Such allowance should be entered in Item 408 of Part E and carried over to Item 129 of Part B. 8-8DISCHARGE OF JUNIOR LIENS. The mortgagee is authorized to pay an amount prescribed by the Secretary for the discharge of junior liens or encumbrances which restrict the sale of the property under the Pre-foreclosure Sale procedure. This amount must come from sale proceeds and be paid at the closing. It will not be reimbursed through the FHA claims process. Currently, the maximum amount payable by the mortgagee (not including any contribution from the mortgagor, or from his PFS Seller's consideration) is $ 1,000. It may be possible for the mortgagee or the mortgagor to negotiate a satisfaction or release of a junior lien for less than the full amount of the lien. The lien holder may be willing to compromise the amount of the lien to avoid discharge by a foreclosure action. Satisfaction or release of the lien may permit a pre-foreclosure sale which would otherwise be unacceptable. 8-9PROTECTION AND PRESERVATION OF PROPERTIES. The mortgagee is responsible for inspection, protection and preservation of the property when the mortgage is in default and a payment is not received within 45 days of the due date. The responsibility continues until the decision is made by the mortgagee to allow the mortgagor to participate in the PFS procedure, which will coincide with the delay or postponement of the foreclosure sale. Funds expended for preservation and 3 protection will be reimbursed on filing Part C with the application for insurance benefits. Consequently, the mortgagee will not be reimbursed for inspection, protection and preservation of the property after the date a mortgagor is notified that he may commence marketing the home under the PFS procedure. If the mortgagee terminates the mortgagor's participation in the PFS procedure, or the mortgagor withdraws from the procedure without reinstating or paying off the mortgage, or the mortgagor's period of participation ends (4 months without a sale contract, or 6 months without a closing, unless extended by the Commissioner), the mortgagee resumes responsibility, and will be reimbursed for inspection, protection and preservation of the property. The mortgagee is accountable for damage suffered by the property after such time as the mortgagee's responsibility starts again for protection and preservation, resulting from the failure of the mortgagee to take required action. Properties which have sustained serious damage, as set out in 24 CFR 203.378 (fire, flood, earthquake, tornado or other surchargeable property condition) are not eligible for the Pre-foreclosure Sale procedure. 8-10DEED-IN-LIEU OF FORECLOSURE. The PFS procedure contains a provision that strongly encourages mortgagees to accept deeds-in-lieu of foreclosure from mortgagors who fail to close a sale despite their good faith efforts in the PFS procedure. If a deed-in-lieu results, the mortgagee continues to be responsible for compliance with the requirements of Handbook 4330.1, REV-2, paragraph 9-4, and must transfer good marketable title to HUD within 30 days after the mortgagee acquires good marketable title to and possession of the property. The deed may be in the form of a direct conveyance. Although the deed-in-lieu is a conveyance claim, the following provision is specifically authorized for deeds-in-lieu which are processed after a mortgagor's good-faith participation in the PFS procedure fails to result in a sale. The conveyance claim procedures should be followed except for: A $500 payment to the mortgagor which is the standard consideration when the deed-in-lieu is processed accepted. This amount should be entered in Item 305 to assure 100% reimbursement. 8-11HAZARD INSURANCE. There will be no reimbursement from HUD for any hazard insurance premiums allocated to the period after the pre-foreclosure sale closing. Otherwise appropriate advances by the mortgagee for hazard insurance premiums are reimbursable. 8-12SPECIAL FORBEARANCE. If a claim for insurance benefits is filed pursuant to a default under a special forbearance agreement entered into between the mortgagee 4 and the mortgagor, the debenture or cash payment will include all unpaid mortgage interest computed to the earlier of 90 days following the date the mortgagor failed to meet the requirements of the forbearance agreement or the date the mortgagee notifies the mortgagor that he or she can participate in the Pre-foreclosure Sale procedure. 8-13DEFICIENCY JUDGMENTS. Mortgagors determined to be eligible for, and who participate in the Pre-foreclosure Sale procedure, are not to be pursued for deficiency judgments. 8-14REIMBURSABLE COSTS AND EXPENSES. It is anticipated that claims for the reimbursement of expenses on pre-foreclosure sale claims will be minimal and that most expenses which are normally incurred when conveying a property to HUD will not be necessary. However, expenses which are appropriately advanced by the mortgagee on behalf of the mortgaged property may be claimed for reimbursement. A.Disbursements for taxes, assessments, hazard insurance and other allowable items payable before the date of the pre-foreclosure sale closing. B.Costs of foreclosure initiation (subject to the two-thirds limitation) if foreclosure was initiated and further action was postponed pending completion of a pre-foreclosure sale. C.The cost of inspections, protection and preservation actions, subject to regional limitations, performed prior to participation in the Pre-foreclosure Sale procedure if established criteria required such actions. D.Reasonable and customary costs of a title search performed to determine the status of a mortgagor who has met all other eligibility requirements for participation in the PFS procedure, in order to establish whether junior liens exist prior to approving a pre-foreclosure sale of the property. E.$1000 to be paid to the mortgagee for facilitating a successful pre-foreclosure sale. No debenture interest shall be computed on this amount. F.If the pre-foreclosure sale is successful and the property is sold, HUD will not pay for any of the following costs incurred by the mortgagee: 1.Costs to maintain, protect, and preserve the property after the pre-foreclosure sale closing, 2.Eviction costs, or 3.Any other costs related to the property which were incurred after the closing date. 5 8-15DEBENTURE INTEREST ALLOWANCE. The issue date of debentures, or the beginning date for computation of the debenture interest allowance if settlement of the claim is made in cash, will be the date of default as such term is defined in 24 CFR 203.331, provided the insurance settlement does not include unpaid mortgage interest resulting from a default under a special forbearance agreement. When a default under a special forbearance agreement is involved, the debentures will be dated, or the debenture interest allowance will be computed from the last date of the mortgage interest calculation. When the claim is settled in cash, the cash payment will include an amount equivalent to the interest the debentures would earn, if they were issued, at the debenture rate. Debenture interest will be paid on the unpaid principal balance from the date of default to the date of the closing of the pre-foreclosure sale. Debenture interest continues on the difference between the unpaid principal balance and the net pre-foreclosure sale proceeds, to the date of final payment of the claim. Further debenture interest is paid on allowable costs and advances from the date of expenditure to the date of final payment of the claim. If the mortgagee fails to take the actions set forth under "Time Requirements" within the time specified, or at such further time as may be approved by HUD in writing, the interest allowance shall be computed only to the date the particular action should have been taken or to which it was extended (24 CFR 203.402 (k)(3)(ii)). 8-16DOCUMENTS TO BE SUBMITTED. It is very important that all required documentation be forwarded to the appropriate location in a timely manner. Failure to meet any of the documentation requirements could jeopardize all or part of the claim reimbursement. The various documentation requirements imposed on the mortgagee are designed to provide critical control and notification functions which enable HUD to expedite the payment of claim. All documents must be sent to HUD Headquarters or the local HUD Office within 30 days of the sale closing date. A.To HUD Headquarters. 1.The original of Parts A and B. 2.Copies of Parts C, D and E. 3.The original Mortgage Insurance Certificate. 6 4.A copy of Form HUD-1. 5.A copy of the "special forbearance" agreement, if any. 6.A worksheet showing reallocation of mortgage payments if capitalization method of accounting is used. B.To the Local HUD Office: 1.Copies of Parts A and B. 2.The original of Parts C, D and E. 3.A copy of Form HUD-1. 8-17 CLAIM PAYMENT. Upon receipt of Parts A and B, Form HUD-27011, and the required attachments in Headquarters, HUD will pay to the mortgagee the unpaid principal balance of the mortgage and an amount determined by: A.Adding the following items: 1.Allowable costs and advances. 2.Debenture interest on the unpaid principal balance from the date of default to the date of closing of the pre-foreclosure sale. 3.Debenture interest on allowable costs and advances from the date of expenditure to the date of closing of the pre-foreclosure sale. 4.Debenture interest on the difference between the unpaid principal balance plus allowable costs and advances, less the net proceeds of the sale, from the date of closing of the pre-foreclosure sale to the date of claim settlement. 5.$1000 to compensate the mortgagee for facilitating a successful sale under the Pre-foreclosure Sale procedure. 6.Allowable mortgage interest if the mortgagor failed to meet the requirements of a special forbearance agreement. B.Deducting the following items: 1.All amounts received by the mortgagee on account of the mortgage 7 after closing of the pre-foreclosure sale. 2.All amounts received by the mortgagee from any source relating to the property on account of rent or other income after deducting handling expenses. 3.All cash retained by the mortgagee for the account of the mortgagor that have not been applied to reduction of principal. 4.All amounts received by the mortgagee relating to the sale of the property. 8-18 CLAIM PREPARATION - PRE-FORECLOSURE SALES. The claim must be completed as described below using HUD Form-27011, Single Family Application for Insurance Benefits. In order to avoid delay in payment, the claim must be complete and accurate and contain all information requested. In many instances, the instructions for conveyance claims apply equally in pre-foreclosure sales cases. When this occurs the words "Same as Conveyance" appear after the Item title and the conveyance instructions for that item are repeated verbatim for convenience. As Pre-foreclosure Sales is a new procedure, some of the item titles on the claim form may not adequately describe the information to be entered. Pending revision of the claim form, enter information as instructed in this chapter notwithstanding inaccurate item titles. NOTE: If the property is acquired by the mortgagee and conveyed to HUD (although the Pre-foreclosure Sale procedure was followed but no sale resulted) the claim must be prepared using the conveyance instructions (Chapter 2), except that the special provision contained in Paragraph 8-10 pertaining to the standard consideration payable to mortgagors for deeds-in-lieu of foreclosure that were accepted after good-faith participation in the PFS procedure did not produce a sale, must be followed. If the property is sold pursuant to the requirements of the Pre-foreclosure Sale procedure, the following instructions must be used. A.Instructions for the Completion of HUD Form 27011, Part A, Initial Application. The following item by item instructions are to be used when completing HUD Form 27011, Part A, for claims involving an authorized pre-foreclosure sale. 8 PART A INITIAL APPLICATION Item 1 Claim Type. Place an "X" in the space for Claim Type 07=PFS. Items 2 and 3 FHA Case Number and Section of Act Code (Same as Conveyance). Enter the FHA Case Number and the ADP code for the Section of the National Housing Act under which the mortgage was insured. There are five acceptable FHA case number formats which are illustrated below, including the Section of the Act (SOA) ADP codes. The format of each FHA insured case number appears on the Mortgage Insurance Certificate or the advanced notice of S/F Annual MIP unless the case is included in CHUMS, in which case, see "5" below. (1)XXX-XXXXXX XXX FHA Case No. SOA ADP Code (2)XX-XXXXXX XXX FHA Case No. SOA ADP Code (3)XXXXXX-XX XXX FHA Case No. SOA ADP Code (4)XXX-XXXXX XXX FHA Case No. SOA ADP Code (5)XXXXXXXXXX XXX FHA Case No. SOA ADP Code (used in CHUMS) Item 4 Default Reason Code (Same As Conveyance). Enter the applicable code number from the default reasons listed below. If code 12 is used, explain the reason on the reverse of Part A under "Mortgagee's Comments." 9 CODE REASON 01 = Death of principal mortgagor 02 = Illness of principal mortgagor 03 = Illness of mortgagor's family member 04 = Death of mortgagor's family member 05 = Marital difficulties 06 = Curtailment of income (reduction of income of a borrower) 07 = Excessive obligations - same income, including habitual non-payment of debts 08 = Abandonment of property 09 = Distant employment transfer 10 = Neighborhood problem 11 = Property problem 12 = Inability to sell property 13 = Inability to rent property 14 = Military service 15 = Other (explain in Mortgagee Comments) Item 5 Endorsement Date (Same as Conveyance). Enter the endorsement date that appears on the Mortgage Insurance Certificate. If the mortgage was insured before MIC's were issued, enter the endorsement date that appears on the note. Item 6 Date Form Prepared. Enter the date this form is completed and submitted to HUD. To avoid debenture interest curtailment, Part A must be submitted within 30 days after the date of the pre-foreclosure sale closing. 10 Item 7 Due Date of First Payment to Principal and Interest (Same as Conveyance). Enter the date the first payment to Principal and Interest is due. Obtain this date from the mortgage note. Item 8 Due Date of Last Complete Installment Paid (Same as Conveyance). Enter the date the last complete installment paid was due, not the date it was paid. This item should be taken from the payment ledger. If no payments have been made, enter the date in Item 7 (Due Date of the First Payment to Principal and Interest). Note that the date in this item will always be the first of the month. Item 9 Date of Possession and Acquisition of Marketable Title. Enter the date the mortgagee advised the mortgagor that he/she could participate in the PFS procedure. Item 10 Date Deed or Assignment Filed for Record or Date of Closing or Appraisal. Enter the date of the pre-foreclosure sale closing. Item 11 Date Foreclosure Proceedings (a) Instituted or (b) Date of Deed In Lieu. If foreclosure proceedings were instituted enter the date. If a deed-in-lieu is accepted or if foreclosure was completed the claim must be filed as conveyance. Item 12 Holding Mortgagee Number (Payee) (Same as Conveyance). Enter the complete 10-digit mortgagee number of the holding mortgagee. Note: This number determines the payee's name and the address to which the insurance benefits check and claim payment data are mailed. Item 13 Servicing Mortgagee Number (Same as Conveyance). Enter the complete 10-digit mortgagee number of the servicing mortgagee. Note: This number determines the name and address to which all computer generated letters and claim payment 11 data is mailed. Information will be mailed only to the holding mortgagee if this item is not completed. Item 14 Mortgagee Reference Number (Same as Conveyance). Enter the loan number (maximum 15 digits) used by the mortgagee for identifying the case if any. This number will be printed on the benefits check. If the mortgagee is FNMA or GNMA, the FNMA or GNMA loan number must be entered. Item 15 Original Mortgage Amount (Same as Conveyance). Enter the original mortgage amount. This figure should be taken from the mortgage note. If there has been a recast of the mortgage, make a notation of the recasting on the reverse side of Part A under "Mortgagee's Comments" and make reference to 24 CFR 203.342. Item 16 Holding Mortgagee EIN. Not applicable. Item 17 Unpaid Loan Balance as of Date in Item 8 (Item 11 if coinsurance) (Same as Conveyance). Enter the unpaid mortgage balance after crediting the last complete monthly installment paid. This figure is taken from the mortgagee's payment ledger. Partial payments insufficient to complete a full monthly installment are to be reported in Part B, Item 109 as escrow funds. Item 18 Date of Firm Commitment (Same as Conveyance). Enter the date of the firm commitment. This date should be taken from the firm commitment document, if available. The debenture interest rate is determined by the firm commitment date or the date of endorsement, whichever yields the higher rate. If the case was insured under the Direct Endorsement Program or the commitment date is not available, this item must be left blank. Direct endorsement mortgages may be identified by the suffix code 700 through 799. Do not enter a date here if this is a Direct Endorsement or a converted coinsurance loan. Item 19 Expiration Date of Extension of Foreclose/Assign. Not applicable. Item 20 Date of Notice/Extension to Convey. Enter date of 12 approved extension to submit claim. Item 21 Date of Release of Bankruptcy. If Applicable (Same as Conveyance). Enter the date the bankruptcy stay or the local law prohibition was released. Note: When there is more than one bankruptcy, and the mortgagee is entitled to a 60 day extension to begin foreclosure, enter the release date which applies to the extension. Item 22 Is Property Vacant? Yes or No - Not applicable. Item 23 If Item 22 is "No," Date of Local HUD Office Approval - Not applicable. Item 24 Is Property Conveyed Damaged? Yes or No - Not applicable. Item 25 If Item 24 is "Yes," Date of (a) Local HUD Office Approval (Pursuant to 203.379 (a)) or (b) Certification (pursuant to 203.379(b) - Not applicable. Item 26 Type of Damage. Not applicable. Item 27 Recovery or Estimate of Damage. Not applicable. Item 28 Is Mortgagee Successful Bidder? Yes or No - Not applicable. Item 29 Deficiency Judgment Code. Not applicable. Item 30 Authorized Bid Amount. Enter the selling price of the property from HUD-1. Item 31 Mortgagee Reported Curtailment Date (Same as Conveyance) - Not applicable. Item 32 Schedule of Tax Information. Not applicable. Item 33 Mortgagor's Name and Property Address (Same 13 as Conveyance). - Enter the name of the mortgagor in default as it appears on the ledger record. Enter the property address as it appears on the security instrument or the mortgage insurance certificate. Enter the social security numbers of all mortgagors, if known. At least one social security number is required. Item 34 Brief Legal Description of Property. Enter a brief description of the property. This information is found on the mortgage. Item 35 Name and Address of Mortgagee (Same as Conveyance). Enter the name and address of the mortgagee, including the ZIP code. Item 36 Name and Address of Mortgagee's Servicer (Same as Conveyance). Enter the name and address of the mortgagee's servicer, including the ZIP code, if applicable. Include the name and telephone number of a contact person who can answer questions about the claims. Items 37 and 38 Mortgagee Official Signature, Date and Title, and Servicer Signature, Date and Title (Same as Conveyance). The claim must be signed and dated by an official of the holding mortgagee if the holding mortgagee is filing the claim. If a servicer is filing the claim on behalf of the mortgagee, an official of the servicer must sign and date the form. The application will be returned if it is not signed or if it contains a stamped or duplicated signature. Item 39 Amount of Monthly Payment to: (a) FHA insurance, (b) Taxes, (c) Hazard Insurance and (d) Interest and Principal. Not applicable. Item 40 If Bankruptcy Filed, Enter Date. Enter the date of the last bankruptcy action. This is required if Item 21 is completed. Item 41 If Conveyed/Assigned Damaged, Date Damage Occurred. Not applicable. 14 Item 42 Date HIP Cancelled or Refused, if Applicable. Not applicable. Item 43 Number of Living Units. Not applicable. Item 44 Status of Living Units. Not applicable. Mortgagee's Comments, if Any. Use this area to justify unusual circumstances as well as other information required by the instructions. Enter the name and phone number of the staff person most familiar with this mortgagor's participation in the Pre-foreclosure Sale procedure. HUD's Comments, if any. HUD USE ONLY. B.Instructions for the Completion of HUD Form 27011, Part B, Fiscal Data. The following item-by-item instructions are to be used when completing HUD Form 27011, Part B, for pre-foreclosure sales cases. Prepare this Part after Parts C, D and E have been completed. The information entered in this part is transferred from those parts. PART B FISCAL DATA Item 100 Mortgagor's Name and Property Address. (Same as Conveyance) Enter the mortgagor's name and property address as they appear in Item 33 of Part A. Items 101 and 102 FHA Case Number and Section of Act Code (Same as Conveyance). Enter the FHA Case Number and Section of the Act Code as they appear in Items 2 and 3 of Part A. Item 103 Mortgagee's Reference Number (Same as Conveyance). Enter the mortgagee's Reference Number as it appears in Item 14 of Part A. Item 104 Date Form Prepared. Enter the date Parts A and B are prepared and submitted to HUD. 15 Item 105 Expiration Date to Submit Title Evidence, if Applicable. Not applicable. Item 106 Check if Supplemental. Not applicable. Item 107 Adjustment to Loan Balance (if different from block 17 on Part A). Not applicable. Item 108 Sale/Bid Price or Appraisal Value (for Coinsurance or Nonconveyances). Enter the amount of proceeds received from the Closing Agent. Item 109 Escrow Balance (as of Date in Block 10, Part A). Enter amount remaining in escrow account as of the date of the pre-foreclosure sale closing. Also include any funds received on account of the mortgage which have not been applied to reduce the indebtedness, e.g., partial payments, hazard insurance refunds, buydown monies, funds held in escrow for on-site repairs (pursuant to Form HUD-92300, Assurance of Completion Agreement). DO NOT SEND ESCROW FUNDS TO HUD. (CONFIRM IF THE ESCROW BALANCE WAS INCLUDED IN THE FUNDS RETAINED TO SATISFY THE MORTGAGE) oSee Item 123 for unapplied Section 235 assistance payments. oPayment of expenses for which funds are escrowed shall be charged to the escrow account in full or in part until the escrow account balance equals zero. Expenses paid from available escrow funds are not to be recorded on Part D. oDO NOT ENTER A NEGATIVE BALANCE. Advances by the mortgagee for expense payments normally charged to the escrow account shall be recorded under Part D, Items 305 or 311, as appropriate. When the first occurrence of an expense results in a negative balance to escrow, enter the negative amount in Item 305 or 311, whichever is appropriate. Interest on advances shall be computed from the date of disbursement to the date the claim is mailed. If there were any advances from escrow prior to the date of default, interest is calculated from the date of default. 16 oIllustration of Mortgagee Advances: Date Date Due Paid Interest Principal Escrow Balance Balance Forward -------- -------- ------ $151.60 1/01/83 2/03/83 $73.32 $21.07 $70.69 222.29 8/03/83 198.98- 23.31 12/11/83 51.19- (27.88)/1 Item 110 Total Disbursements for Protection and Preservation from Line 264, Part C. Enter the total amount appearing in Part C, Item 264. Item 111 Total Disbursements from line 305, Part D. Enter the total amount appearing in Part D, Item 305. Item 112 Attorney/Trustee Fees Paid From Line 306, Part D. Enter the total amount appearing in Part D, Item 306. Item 113 Foreclosure, Acquisition, Conveyance and Other Costs from Line 307, Part D. Enter the total amount appearing in Part D, Item 307. Item 114 Bankruptcy Fee (if applicable) from Line 310, Part D. Enter the amount of bankruptcy fees appearing in Part D, Item 310. Item 115 Rental Income. Enter any income from the rent of the property between the date of default and the date of sales closing. Item 116 Rental Expense (Same as Conveyance). Enter rental expenses incurred, if any. If there is no entry in Item 115, make no entry in this item. Item 117 Total Taxes on Deed from Line 308, Part D. Not applicable. Item 118 Recovery or Damage (if not reported on Part A). Use Line 119 if Reported on Part A. Not applicable. _____________________________ 1First amount to be entered on Part D, Item 305 or 311, as applicable. Interest should only be calculated on $27.88, not the $51.19. 17 Item 119 Estimate or Recovery from Part A. Not applicable. Item 120 Special Assessments (DO NOT USE FOR COINSURANCE) from Line 309, Part D (Same as Conveyance). Enter the total amount paid and debenture interest which appear in Item 309, Part D. Item 121 Mortgage Note Interest. Mortgage note interest will be included in the insurance benefits if a mortgagor fails to meet the requirements of a special forbearance agreement and the failure continues for at least 60 calendar days. From. Enter the date of the last completely paid installment after all funds received under the agreement are applied according to the terms of the mortgage (Item 8, Part A). If no mortgage payments were made, enter a date 30 days prior to the due date of the first scheduled payment (Item 7, Part A). To. Enter the earliest of the following dates: 1.the date of sales closing, 2.90 calendar days following the date the mortgagor fails to meet the requirements of the forbearance agreement, or 3.the date the mortgagee advises the mortgagor in Writing that he or she can participate in the Pre-foreclosure Sale procedure. Rate. Enter the mortgage interest rate as it appears on the mortgage note. Show fractions in decimals to three places. Computation method. To obtain the amount of accrued mortgage interest due, multiply the Daily Interest Rate Factor by the amount of the unpaid principal balance. The Daily Interest Rate Factor is provided in Appendix 8. This result is then multiplied by the number of days from the due date of the last completely paid installment to the date selected as the "ending date". To assist in 18 determining the number of days refer to the Julian Date Calendars provided in Appendix 9. Item 122 Mortgage Insurance Premiums (Same as Conveyance) Enter total from Item 311, Part D. Item 123 Unapplied Section 235 Assistance Payments (Same as Conveyance). Enter unapplied assistance payments in Column A, if applicable. Item 124 Overpaid Section 235 Assistance Payments (Same as Conveyance). Enter the amount of any funds advanced by the mortgagee to repay to HUD assistance to which the mortgagor was not entitled and which was not recovered from the mortgagor, unless the overpayment was the result of error on the part of the mortgagee. Amount is to be entered in Column B. Do not calculate debenture interest for Column C. Items 125 Overhead Costs. Not applicable. Item 126 Uncollected Interest (Approved Forbearance Agreements Only). Not applicable. Item 127 Amount Due from Buyer at Closing or at Appraisal Notice Date (From Line 406, Part E). Not applicable. Item 128 Amount Owed to Buyer at Closing or at Appraisal Notice Date (From Line 407, Part E). Not applicable. Item 129 Additional Closing Costs at Settlement. Enter the "Total" from Line 408, Part E. NOTE: Do not calculate debenture interest on the administrative fee. Mortgagees are not entitled to debenture interest on this item. Item 130 Enter the cost for appraisal/property valuation in Column B. Use Column C to claim debenture interest from date of expenditure. (Refer to Part E, Item 409.) 19 Item 131 Not applicable. Item 133 Contact: Holding Mortgagee, Name and Telephone Number; or Contact: Servicing Mortgagee, Name and Telephone Number (Same as Conveyance). Enter the name and telephone number of a person in the holding or servicing mortgagee's office who can answer questions concerning the information reported on this claim form. Include the Holding Mortgagee number which you entered in Item 12 of Part A. Items 134 to 136 Enter the totals of Columns A - Deductions; B - Additions; and C - Interest. Item 137 Net Claim Amount (Columns B - A + C). The net claim amount calculated by the mortgagee will differ from the actual amount HUD will pay due to possible interest curtailment, disallowed expenses, and additional debenture interest calculated to the date of claim settlement. Items 138 and 139 Mortgagee's Official Signature, Date and Title (signature not necessary if signed by a servicer) and Servicer Signature, Date, and Title. Enter a signature in at least one of these blocks. C.Instructions for the Completion of HUD Form 27011, Part C, Support Document. There should be no entry in Part C unless inspections, preservation or protection costs were incurred before the mortgagee delayed or postponed the foreclosure sale because of the mortgagor's participation in the PFS procedure. Any debenture interest calculated on such expenses should run from the date of expenditure or default, if later, to the date of the pre-foreclosure sale closing. D.Instructions for the Completion of HUD Form 27011, Part D, Support Documentation (Continuation 1). The following item-by-item instructions are to be used when completing Form HUD-27011, Part D, for pre-foreclosure claims. The general instructions for the preparation of Part D in conveyance claims are applicable in pre-foreclosure cases except that the property is not conveyed to the Secretary. Expenditures may be entered on Part D as they occur; however, debenture interest 20 calculations should not be made until after the date of pre-foreclosure sale closing, because interest allowance is computed by the mortgagee from the date of expenditure (or default if later) to the date of the pre-foreclosure sale closing. oDate Paid. A separate entry must be made for each payment. Enter the date the check was disbursed. If an expenditure or advance was made prior to the date of default, enter the date of default and enter the actual date paid in parentheses following the description. oDescription of Service Performed. Enter a description of the items or types of services performed. Additional space is provided on the reverse of the form. oAmount Paid. Actual payment amounts are to be entered. This information will be transferred to Part B, Fiscal Data. oDebenture Interest. To obtain the amount of interest due on an expenditure, multiply the daily interest rate factor by the amount paid. Multiply this result by the number of days from the date paid for each line item to the date of closing of the pre-foreclosure sale (Item 10, Part A). Daily Interest Rate Factor tables are provided in Appendix 8 to assist in converting the debenture interest rates. In addition, Julian date calendars are provided in Appendix 9 to assist in determining the number of days from the date the expenditure was paid to the date of the pre-foreclosure sale closing or the curtailment date. oTotal the "Amount Paid" and "Debenture Interest" columns. PART D SUPPORT DOCUMENT (Continuation 1) Items 300 and 301 FHA Case Number and Section of Act Code (Same as Conveyance). Enter the FHA case number and Section of the Act Code as they appear in Items 2 and 3 of Part A. Item 302 Mortgagee's Reference Number (Same as Conveyance). Enter the mortgagee's reference number as it appears in Item 14 of Part A. Item 303 Debenture Interest Rate (Same as Conveyance). Using the Debenture Interest Rate Table provided in the Form HUD-27011 Instructions, determine the rate at the date of firm commitment and the rate at the date of endorsement, then enter the higher rate. In Direct 21 Endorsement cases, enter the rate in effect on the date of endorsement. Item 304 Date (Same as Conveyance). Enter the date entered in Part B, Item 104 if all actions taken by the mortgagee are within the time requirements or the automatic extensions specified in Paragraph 2-13 or within the extended time requirements (See Paragraph 1-3). If the mortgagee failed to comply with a time requirement (including actions reported in Part A) or its approved extension, enter the date the action should have been taken. Debenture interest will be computed to this date. If there was more than one failure, enter the earliest date on which a required action should have been taken (See paragraph 1-8). Item 305 Disbursements for HIP, Taxes, Ground Rents and Water Rates (which were liens prior to mortgage), Eviction Costs and Other Disbursements Not Shown Elsewhere. (Do not include any penalties for late payment). Itemize all disbursements in these categories including for each item the date paid, the period covered, the description, and the amount paid. Enter the costs of title search and other fees related to the pre-foreclosure sale (but not the $1000 administrative fee payable to the mortgagee for facilitating a successful pre-foreclosure sale--see Item 408.) Do not include disbursements which were paid from available escrow funds or sale proceeds. No expense should be incurred after the date of sale closing, except where the local HUD office instructs you to take an action. See explanation for escrow account, Part B, Item 109. Item 306 Attorney/Trustee Fee. Itemize the fees paid to attorneys in connection with the initiation of foreclosure action, if any. Do not enter fees for bankruptcy. HUD WILL CALCULATE THE TWO-THIRDS ALLOWANCE (24 CFR 203.402). Item 307 Foreclosure and/or Acquisition, Conveyance and Other Costs. Enter all disbursements for actions taken, if any, prior to or during the mortgagor's participation in the PFS procedure, which would have been required to vest title to the property in the name of the purchaser in 22 the event of a foreclosure or a deed-in-lieu. If additional space is needed, attach a separate sheet to Part D. HUD WILL CALCULATE THE TWO-THIRDS ALLOWANCE FOR EXPENSES AND INTEREST (24 CFR 203.402). Item 308 Taxes on Deed. Not applicable. Item 309 Special Assessments (Do not use for Coinsurance, see Part E). For each item in this category, enter the date the lien was attached or would be attached. Do not include any special assessments which became liens before the mortgage was endorsed for insurance, if not noted in the application for insurance. Item 310 Bankruptcy (Same as Conveyance). Itemize the bankruptcy fees paid. There must be an entry in Item 40. HUD WILL CALCULATE THE TWO-THIRDS ALLOWANCE FOR EXPENSES AND INTEREST (24 CFR 203.402). Item 311 Mortgage Insurance Premiums. Itemize all MIP disbursements, including the period covered. Only include the "advanced" MIP disbursements paid after the due date of the last completely paid installment to the date of closing. E.Instructions for the Completion of HUD Form 27011, Part E Support Document (Continuation 2). Part E is to be completed for a pre-foreclosure sale to claim the $1000 administrative fee for facilitating a successful pre-foreclosure sale only. PART E SUPPORT DOCUMENT (Continuation 2) Items 400 and 401 FHA Case Number and Section of Act Code (Same as Conveyance). Enter the FHA case number and Section of the Act Code as they appear in Items 2 and 3 of Part A. 23 Item 402 Mortgagee's Reference Number (Same as Conveyance). Enter the mortgagee's reference number as it appears in Item 14 of Part A. Item 403 Debenture Interest Rate. Not applicable. Item 404 Date. Enter the date entered in Part B in Item 104 if all actions taken by the mortgagee are within the time requirements or the automatic extensions specified in Paragraph 2-13 or within the extended time requirements (See Paragraph 1-3). If the mortgagee failed to comply with a time requirement (including actions reported in Part A) or its approved extension, enter the date the action should have been taken. Debenture interest will be computed to this date. If there was more than one failure, enter the earliest date on which a required action should have been taken (See paragraph 1-8). Items 405 thru 407 Overhead Costs; Amounts Due from Buyer at Closing; Amounts Owed to Buyer at Closing. Not applicable. Item 408 Additional Closing Costs. Enter the $1000 administrative fee payable to the mortgagee for facilitating a successful pre-foreclosure sale only. (Carry over to Part B, Item 129.) Item 409 Appraisal Fee. Enter the cost of the appraisal/property valuation performed to determine the eligibility of the mortgagor to participate in the PFS procedure, if paid for by the mortgagee. (Carry over to Part B, Item 130.) Item 410 Deficiency Judgment Costs/Fees. Not applicable. Items 411 and 412 Reserved. 24