Preforeclosure Sale Q&A

The Preforeclosure Sale (PFS) Program allows mortgagors in default to sell their homes and use net sale proceeds to satisfy mortgage debts, even though these proceeds are less than the amounts owed.

Question 1 - Can a mortgagee use the buyer's appraisal to review the property accepted into the PFS or must the mortgagee get an independent appraisal?

Answer - The property must be appraised on an "as-is" and "as-repaired" basis. If the buyer has secured an FHA-insured appraisal, the mortgagee can use it, as an appraisal for HUD property can't be duplicated within a six-month period. Otherwise, the mortgagee is required to obtain an independent appraisal. (HUD Mortgagee Letter 94-45, paragraph E, "Steps Leading to - and Participation in - The PFS Procedure", Item #3, pages 5-6)

Question 2 - How does the mortgagee determine the 63% ratio of "as is" appraised value to outstanding debt and the 82% ratio of estimated sales proceeds to appraised value?

Answer -

• To arrive at the 63% ratio:
  
  Divide the "as is appraised value" (APV) by the outstanding indebtedness (unpaid principal balance, plus delinquent interest, plus any partial claim payoff amount, if applicable).
  
  A result of 63% or higher meets that standard.
  
  
• To arrive at the 82% ratio:
  
  Contract sales price minus (allowable PFS expenses and partial claim junior lien amount, if applicable) divided by APV equals net sales proceeds.
  
  Net sales proceeds of 82% or higher meet that standard.
  
  Exceptions from the above stated ratios are prohibited.

Question 3 - The mortgagor is deceased and his father has been making the payments for eight months on his tenant-occupied property. Can the father acquire the property under the PFS Program?

Answer - Mortgagee Letter 1994-45, paragraph F, Item 7(a), states in part any PFS 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 between two unrelated parties that are characterized by a selling price and other conditions that would prevail in an open market environment. No hidden terms or special understandings can exist between any of the parties involved in the transaction. Consequently, the deceased mortgagor's father cannot buy the property using the PFS Program.

Question 4 - If a mortgagee is the holder of both the first and second mortgages, is the mortgagee able to use the available $1,000 towards the settlement of the second mortgage?

Answer - Yes. The incentive consideration payable to the mortgagor should first be applied toward the discharge of liens. If this is not sufficient, the mortgagee can obligate an additional amount not to exceed $1,000 from sales proceeds towards the discharge of liens or encumbrances, if that will result in clear title and allow the sale to proceed. (HUD Mortgagee Letter 2000-05, page 31-32, paragraph F, "Condition of Title")

Question 5 - Can a mortgagee proceed through the PFS program process if one of the mortgagors is uncooperative and won't participate in the required housing counseling session?

Answer - The mortgagee can facilitate counseling for the uncooperative mortgagor and obtain the mandatory mortgagor's signature on HUD form 90038 certifying homeownership counseling was received before PFS transaction approval. Participant is interpreted to include all mortgagors of record.

Question 6 - Is it possible to do a PFS after the mortgagee has already completed a partial claim?

Answer - PFS may follow a partial claim if there is a new reason for default and the mortgagor lacks the financial ability to cure the present default. Refer to the PFS calculations above in Question 2.

Question 7 - Can a buyer use Nehemiah-like financing programs in conjunction with a purchase of a home that has been approved to participate in the PFS Program?

Answer - No. The Nehemiah Housing Opportunity Grants Program (NHOP), no longer in effect, awarded grants to nonprofit organizations to provide mortgage loans to individuals for homes located in depressed metropolitan areas. Nehemiah-like mortgages are not permitted when the buyer is obtaining FHA financing to purchase a home that is participating in the PFS Program.

Question 8 - A mortgagor approved to participate in the PFS Program has listed the property with a real estate agent who is a relative, but has agreed not to charge a sales commission to handle the transaction. Would this be considered an arm's length transaction?

Answer - Yes, Mortgagee Letter 1994-45, Paragraph F. (7) (c) states "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 by 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 procedures)."

Question 9 - What kind of "hardships" does a mortgagor has to have experienced in order to qualify for the PFS Program?

Answer - Mortgagee Letter 2000-05, Paragraph B. Cause of Default, page 4, states "HUD does not have a "hardship" test. Mortgagees may offer FHA relief options to mortgagors who have experienced a verifiable loss of income or increase in living expenses to the point where the mortgage payments are no longer sustainable."

Question 10 - Is it the responsibility of the mortgagee to acquire marketable title?

Answer - Mortgagee Letter 2000-05, Paragraph F. Condition of Title, Page 31, states in part, "..the lender must obtain a title search or preliminary report to verify that the title is not impaired with un-resolvable title problems, or junior liens that cannot be discharged as allowed by HUD...If the borrower has a HUD Title I loan secured by the property, the lender must negotiate a release of the Title I lien in order to proceed with a PFS."

The mortgagor is then accepted into the PFS program and resolution of the title issues can be pursued concurrent with marketing. The incentive consideration payable to the mortgagor should first be applied toward the discharge of liens. If this is not sufficient, the mortgagee can obligate an additional amount not to exceed $1,000 from sale proceeds towards the discharge of liens or encumbrances.