The Pre-Foreclosure Sale (PFS) option allows the mortgagor in default to sell his or her home and use the sale proceeds to satisfy the mortgage debt even if the proceeds are less than the amount owed.
Question 1: I’ve ordered an appraisal but my appraisal company is seeking to charge $1,000 for the appraisal because it’s an FHA property, a duplex and the fees are higher in the State of Washington. Please advise how I get approval for this?
Answer: Consult with the REO Division of the HUD Homeownership Center (HOC) that has jurisdiction over the State in which the property is located. The HOC can advise if this is a reasonable and customary charge.
Question 2: Can I use the buyer’s appraisal to review this or must I get my own, independent one?
Answer: The lender is required to obtain an appraisal per ML 94-45, Paragraph E, “Steps Leading to - and Participation In - The PFS Procedure”, Item #3, Pages 5-6. The requirement is due to the fact that the property must be appraised on an As-Is, as well as an As-Repaired basis; however, if the borrower had an FHA-insured appraisal because he/she intends to acquire an FHA-insured mortgage, use of the borrower’s appraisal would be allowed since acquisition of an appraisal for HUD property can not be duplicated within a six-month period.
Question 3A: How does the lender arrive at the 63% ratio of “as is” appraised value to outstanding debt and the 82% ratio of estimated sales proceeds to appraised value?
Answer 3A: To arrive at the 63% ratio:
Divide the “as is appraised value” (APV) by the outstanding indebtedness (unpaid principal balance, plus delinquent interest).
If the result is 63% or higher, that criterion has been met. If a Partial Claim subordinate lien exists, the Partial Claim payoff amount must be added to the outstanding indebtedness to properly calculate the 63% ratio.
Question 3B : How does one calculate the 82% ratio?
Answer 3B: To arrive at the 82% ratio:
Contract sales price minus (allowable PFS expenses + Partial Claim junior lien amount)(if applicable) divided by as-is appraised value = Net Sales Proceeds. Net Sales Proceeds result must equal or be greater than 82%.
Remember that no variances can be granted as the 63% and 82%) percentages are the lowest HUD allows.
Question 4: Mortgagor is deceased; his father has been making the payments; property was tenant-occupied for eight months, father wants to know if he can acquire the property under the Pre-Foreclosure Sale Program?
Answer: Regarding the deceased mortgagor’s father wanting to purchase the property through the PFS Program, see Mortgagee Letter 94-45, paragraph F, Item 7(a), any Pre-foreclosure 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 defined “arm’s length” transaction as a Pre-foreclosure between two unrelated parties that is 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 Pre-foreclosure Program.
Question 5: If a lender is the holder of the first mortgage and the second mortgage, would the lender be able to utilize the $1,000 that is available to pay towards the settlement of a second mortgage?
Answer: Yes, Mortgagee Letter 00-05, page 31-32, paragraph F, “Condition of Title” states, “The incentive consideration payable to the borrower should first be applied toward the discharge of liens. If this is not sufficient, the lender can obligate an additional amount not to exceed $1,000 from sales proceeds towards the discharge of liens or encumbrances, if that will result in clear title and allow the sale to proceed.
Question 6: What happens if we have a PFS contract pending for several months and then it falls through, causing us to exceed the 9-month deadline to initiate foreclosure? By the time we know it is going to fall through, it is too late to request an extension.
Answer: ML 00-05, page 33, Section M, PFS Failure, states, “Within 90 days of the expiration of the pre-foreclosure sale period or within 6 months of the date of default (whichever is later), if no closing of an approved PFS has occurred, the lender must commence foreclosure or obtain a deed-in-lieu.”
The PFS sale period is 4-6 months as defined in ML 00-05, Page 29. If there is no signed Sale Contract within 4 months of the authorization to participate date or no closing within 6 months of the signed Sale Contract date, the PFS option has failed and the 90-day period mentioned above begins.
Question 7: Recently, a client was approved for a PFS and now all he needs is the 90038 Form. He participated in the counseling session, but his ex-wife did not come. Her name is on the mortgage as well. He advised me that she is being uncooperative and he is worried that if she does not come in for her session that he will lose his home to foreclosure (He has an offer on the property now). I advised him that I could not sign off on the form unless his ex-wife participated as well. I did note that in the divorcee decree it states that the property must be sold. Please advise.
Answer: Form HUD-90038 declares, “EVERY participant in the Pre-foreclosure Sale procedure must sign a certification that he or she has received homeownership counseling before a proposed pre-foreclosure sale transaction can be approved.”
“Participant(s)” is interpreted as all signers listed on the Mortgage. Perhaps Mrs. would cooperate enough to indicate in writing that she refused PFS counseling. Having this declaration in the file will protect the lender and the cooperating mortgagor.
Question 8: Is it possible to do a short sale after the lender has already completed a partial claim?
Answer: PFS may follow a partial claim (PC) if there is a new reason for default unrelated to the default reason given for the previous delinquency, and the mortgagor lacks the financial ability to cure the default. See PFS Question #3 for calculations to meet the PFS ratios
Question 9: We are having a hard time getting any FHA-approved Appraiser to conduct appraisals for $350. Can we exceed the $350 limit? Is there a maximum allowable cost for FHA appraisals?
Answer: ML 00-05 states, in part: “HUD will reimburse the lender for reasonable and customary costs of the appraisal, title search (if not included in the settlement statement), and the allowable percentage of legal fees for a foreclosure postponed pending completion of PFS. Disbursements for taxes, assessments, hazard insurance, and other allowable items payable before the date of the PFS closing are reimbursable. FHA will not pay costs related to the property, which were incurred after the closing date.”
Question 10: Should 1st legal be met even if there is a review being completed for pre-foreclosure sale but a sale agreement has not been executed?
Answer: If the PFS review cannot be completed within the automatic 90-day extended period, you must formally request an additional extension of time before expiration of the 90-day time frame.
Question 11: In ML 00-05 there is mention of suspending foreclosure during pre-foreclosure sale, but no mention of automatic 90-day extension for first-legal for pre-foreclosure sale. So if the sale agreement is not executed but in progress, does that means “no automatic 90-day extension of time”?
Answer: If foreclosure has already been initiated and the property is located in a nonjudicial jurisdiction, the lender is then under the due diligence time constraints. Of significance is whether the PFS process can conclude prior to expiration of that time period. The response in Question 10 above addresses the automatic 90-day time extension. (See Appendix 7, HB 4330.4)
Question 12: Can Nehemiah type financing programs be used in conjunction with the PFS Program?
Answer: The Nehemiah-type loans are available for origination of FHA-insured mortgages, however, when the buyer is obtaining FHA financing, and utilizing the HUD/FHA Pre-Foreclosure process, the two programs cannot be mixed.
This does not mean that a Nehemiah-type financing program is prohibited when PFS is involved if the buyer is seeking other than FHA financing.
Question 13: A borrower approved to participate in the PFS program has listed the property with a relative, who has agreed not to take a commission to handle the transaction. Is this still an arm’s length transaction?
Answer: As an assurance against collusion between the related parties, it might be wise to have them certify in writing, before a Notary Public, that they will not violate all arms length criteria required by the HUD PFS Program, as well as no intent to receive the broker’s commission. That way, should it come to light that there were violations, the certified statement will be on file.
For Mortgagee Letters and additional guidance pertaining to Servicing and Loss Mitigation, see NSC’s Loss Mitigation Policy & Guidance page.
