[Federal Register Volume 59, Number 189 (Friday, September 30, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24262]


[[Page Unknown]]

[Federal Register: September 30, 1994]


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Part VIII





Department of Housing and Urban Development





_______________________________________________________________________



Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner



_______________________________________________________________________



24 CFR Parts 200 and 203




Nationwide Pre-Foreclosure Sale Procedure; Interim Rule
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner

24 CFR Parts 200 and 203

[Docket No. R-94-1749; FR-2682-I-01]
RIN 2502-AE72

 
Nationwide Pre-Foreclosure Sale Procedure

AGENCY: Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner, HUD.

ACTION: Interim rule.

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SUMMARY: This interim rule sets forth the requirements and procedures 
that govern the Department's Pre-Foreclosure Sale (PFS) Procedure 
beginning in Federal fiscal year 1995 (October 1, 1994 through 
September 30, 1995). The requirements and procedures contained in this 
interim rule are based on the Pre-Foreclosure Sale Demonstration 
Program established by a notice published in the Federal Register. This 
interim rule takes into consideration the public comments received on 
that notice. It also incorporates changes in the PFS requirements and 
procedures based on the experience of the Department under the 
Demonstration.

DATES: Effective Date: October 31, 1994. Comments due date: November 
14, 1994.

ADDRESSES: Interested persons are invited to submit comments regarding 
this interim rule to the Rules Docket Clerk, Office of General Counsel, 
Room 10276, Department of Housing and Urban Development, 451 Seventh 
Street, S.W., Washington, D.C. 20410. Communications should refer to 
the above docket number and title. A copy of each communication 
submitted will be available for public inspection and copying between 
7:30 a.m. and 5:30 p.m. weekdays at the above address.

FOR FURTHER INFORMATION CONTACT: Joseph Bates, Director, Single Family 
Servicing Division, Office of Insured Single Family Housing, Department 
of Housing and Urban Development, 451 Seventh Street, S.W., Washington, 
D.C. 20410. Telephone (202) 708-3680. A telecommunications device for 
deaf persons (TDD) is available at (202) 708-1112. (These are not toll-
free telephone numbers.)

SUPPLEMENTARY INFORMATION: The information collection requirements 
contained in this interim rule have been submitted to the Office of 
Management and Budget for review under the provisions of the Paperwork 
Reduction Act of 1980 (44 U.S.C. 3501-3520). No person may be subjected 
to a penalty for failure to comply with these information collection 
requirements until they have been approved and assigned an OMB control 
number. The OMB control number, when assigned, will be announced in the 
Federal Register. Information on the estimated public reporting burden 
is provided later in this Interim Rule under Other Matters. Send 
comments regarding this burden estimate or any other aspect of this 
collection of information, including suggestions for reducing this 
burden, to the Department of Housing and Urban Development, Rules 
Docket Clerk, 451 Seventh Street, S.W., Room 10276, Washington, D.C. 
20410; and to the Office of Information and Regulatory Affairs, Office 
of Management and Budget, Attention: Desk Officer for HUD, Washington, 
D.C. 20503.

Background

    Sometimes, a mortgagor must confront the twin realities of not 
being able to meet his or her mortgage obligation and static or 
declining property values. Such a situation makes it virtually 
impossible for a financially distressed mortgagor to sell the home and, 
using the proceeds, to fully discharge the mortgage debt. Foreclosure 
of the mortgage is often the method of resolving these difficulties.
    Over the past few years, much interest has been expressed by 
mortgagors and real estate agents in a transaction known as the ``pre-
foreclosure sale.'' In a successful pre-foreclosure sale, neither 
foreclosure nor conveyance of the property to the Department occur. A 
third party buys the home from a defaulting mortgagor at its 
approximate fair market value (with certain adjustments, as approved by 
the Secretary), which is less than the owner's outstanding indebtedness 
at the time of sale.
    Section 1064 of the McKinney Homeless Assistance Amendments Act of 
1988 (Pub. L. 100-628) amended section 204(a) of the National Housing 
Act (12 U.S.C. 1710(a)) to authorize HUD to pay a claim to a lender 
equal to the difference between the fair market sale price and the 
outstanding indebtedness (with certain adjustments). A successfully 
completed pre-foreclosure sale benefits the mortgagor, who avoids the 
stigma of foreclosure on his or her credit record, and also benefits 
HUD, which can expect to save by not paying foreclosure-related costs. 
HUD also saves on maintenance costs and marketing expenses for 
properties which would otherwise be conveyed to the Department 
following foreclosure. Finally, mortgagees also benefit through 
incorporating this loss-mitigation technique into their overall loan 
servicing, by frequently being able to file their claim for insurance 
benefits sooner, following a successful pre-foreclosure sale, than they 
would following a post-foreclosure conveyance claim.
    On May 29, 1991, the Department published in the Federal Register, 
at 56 FR 24324, a notice which announced a limited demonstration 
program to gauge the demand for, and the efficacy of, pre-foreclosure 
sales as a means of assisting qualified mortgagors in avoiding 
foreclosure of their FHA-insured mortgages and of saving the Department 
money.
    The Department has decided to implement the pre-foreclosure sale 
procedure nationwide by incorporating it into the overall approach of 
servicing FHA-insured loans by FHA-approved lender/servicers. The 
Demonstration now concluding has been successful in that the demand for 
this alternative to foreclosure was found to be very substantial; the 
efficacy of the pre-foreclosure sale transaction was found to be cost-
beneficial to HUD; and feedback obtained from participating local HUD 
offices, program coordinators, mortgagees, homeowners and the general 
public, was quite favorable. By expanding the options available to 
financially distressed mortgagors and not adversely affecting any 
mortgagor rights or interests under existing FHA-insured loan servicing 
regulations, the Department has not only acted responsibly toward the 
homeowners with FHA-insured mortgages, but also has operated with an 
eye to the cost-effectiveness of its own policies and procedures. This 
interim rule will make pre-foreclosure sales an even more efficient 
servicing tool by streamlining procedures and, in some respects, 
reducing the Department's cost of following this course of action.
    Among the regulatory changes being implemented is a new 
Sec. 203.370, which provides for the payment of FHA insurance benefits 
to mortgagees upon the filing of claims following successful pre-
foreclosure sales. (It also contains notification and eligibility 
provisions, noted below.) Other sections governing claim submission, 
calculation and payment--24 CFR 200.155, 203.360, 203.365, 203.401, 
203.402, 203.403, and 203.410--are being amended to recognize the 
possibility of a pre-foreclosure sale as an outcome of the servicing of 
a defaulted mortgage.

Public Comments

    The public was given 60 days to comment on the requirements and 
procedures set forth in the May 29, 1991 notice that established the 
Pre-Foreclosure Sale Demonstration discussed above. Comments were 
received from 22 commenters: 12 mortgagees/servicers, three counseling 
agencies, two real estate service companies, one national association 
of real estate sales professionals, one quasi-governmental 
organization, one financial services company, one local HUD office, and 
one individual. Below is a listing of the comments received and the 
Department's responses to those comments.
    1. With the exception of one mortgagee, all other comments had at 
least some positive aspects and were supportive of the fact that HUD 
was engaging in an effort to mitigate losses through pre-foreclosure 
sales. Typically, commenters believed that PFS was ``overdue,'' ``a 
much needed program,'' ``an attractive alternative to loan 
foreclosure,'' and that the ``program nationwide should help reduce 
foreclosures and encourage sales where the market is not strong.'' [two 
mortgage servicers, one real estate service company, one national 
association of real estate sales professionals]
    Response: It is because of the overall response of this nature that 
the Department has decided to implement the pre-foreclosure sale 
procedure nationwide.
    2. Seven commenters stressed the need for trained, proficient 
professionals to be involved in PFS; e.g., contractors, program 
administrators, local HUD staff, or HUD Headquarters staff overseeing 
the Demonstration. [one national association of real estate sales 
professionals, two real estate service companies, four mortgagees]
    Response: It has come to HUD's attention that a number of 
mortgagees have added, or otherwise identified, loss-mitigation teams 
to their respective servicing staffs, in an effort to improve the 
responsiveness to mortgagor defaults and to apply alternatives to 
foreclosure where feasible and cost-beneficial. HUD applauds and 
encourages these efforts; they comport with the Department's own 
evolving philosophy regarding foreclosure avoidance and with expanding 
concepts of ``prudent mortgage servicing'' and ``protecting HUD's 
interests.'' The Department expects that the benefits of such an 
approach will be marked and far-reaching, extending not only to HUD, 
but also to homeowners and mortgagees. In particular, the move to 
increase the mortgagees' role in HUD's pre-foreclosure sale procedure 
is being taken to utilize the mortgagees' growing ability to manage or 
mitigate loss in a responsible fashion. HUD will provide sufficient 
information and/or training to its own staff involved in pre-
foreclosure sales to enable them to make prudent decisions and to 
disseminate accurate details about the PFS procedure.
    3. One element of the Demonstration that was criticized was the 
eligibility criterion requiring mortgagors to be at least three months 
in arrears before they could be considered for the program. It was felt 
that this was counterproductive to the goal of loss mitigation, and 
that in many cases, a case-by-case determination of need and 
qualifications could be performed at virtually any time before allowing 
mortgagors to become program participants. Several commenters urged 
that a comprehensive determination be made, using financial statements, 
etc. [six mortgagees]
    Response: The experience of the PFS Demonstration has provided the 
basis for the decision to retain the eligibility criterion pertaining 
to the defaulted status of a PFS candidate's mortgage loan. There must 
still be a determination made in every case that the mortgagor is in 
default, and that, at a minimum, three monthly installments are in 
arrears. As a practical matter, however, this means that a candidate 
for PFS could satisfy this criterion as early as the 62nd day of 
default, i.e., because the third payment can be due and unpaid at that 
time. Retaining this criterion as the new nationwide PFS procedure as 
implemented does keep the administration of pre-foreclosure sales from 
possibly impinging on servicing requirements related to HUD's mortgage 
assignment program. Notification of the mortgagor of his right to apply 
for assignment assistance from HUD (which mortgagees are required to 
perform at or after the third payment is due and unpaid), will occur at 
a time when homeowners can choose between a course of action directed 
toward homeownership retention OR one whose objective is to dispose of 
the property and relieve the mortgagor of his mortgage obligation. It 
is the Department's intent that defaulting mortgagors make such an 
informed decision. Permitting participation in the PFS procedure at an 
earlier juncture will be evaluated in the future, however, and could be 
implemented if found not to be detrimental.
    4. Another element of the Demonstration that received criticism was 
the allowance of a ten day period for review of the proposed pre-
foreclosure sale. [three mortgagees, one real estate service company, 
one individual]
    Response: The ten day period for review of the proposed pre-
foreclosure sale, as described in the Notice, was reduced to five (5) 
working days during the Demonstration, and will remain a maximum of 5 
working days when the function is transferred to the mortgagee. The 
period might be further reduced (e.g., to three working days) after 
evaluating the experience of the nationwide PFS procedure.
    5. Another criticized provision was the series of cash incentives 
payable to mortgagors who consummate a pre-foreclosure sale after 
participating in the program, although several commenters did support 
this concept. Four commenters opposed seller incentives [two 
mortgagees, one individual, one quasi-governmental organization]; three 
supported them [one mortgagee, one real estate services company, one 
national association of real estate sales professionals]; one supported 
case-by-case determinations of amounts [a mortgagee]; and one suggested 
that cash ``incentives'' be applied toward property improvements only 
[a real estate services company]. One commenter [a mortgagee] also 
criticized the expanded deed-in-lieu incentive as being over-generous 
and inappropriate. Another [a mortgagee] suggested that mortgagors were 
prepared to pay money towards accomplishing a deed-in-lieu. A third [a 
mortgagee] suggested that the mortgagor assign any and all refunds of 
insurance, etc. to HUD as a provision of enrollment in the PFS program.
    Response: Cash incentives for mortgagors are being reduced for the 
nationwide implementation of the PFS procedure. The amount payable to a 
mortgagor who has successfully marketed and sold his home will be $750, 
with an additional $250 if the time needed to go to closing is 90 days 
or less from the date the mortgagor was advised that he could 
participate in the PFS procedure. HUD is retaining the policy of paying 
incentives to mortgagors in return for a successful pre-foreclosure 
sale as a means of providing moving assistance or the promise of 
reimbursement for cosmetic repairs and maintenance undertaken by 
homeowners who may still be experiencing financial problems. In 
addition, the Department wishes to encourage the maximum number of 
interested and qualified mortgagors to take advantage of the PFS 
option, because of the savings this generates for HUD.
    The payment of $500 consideration for a deed-in-lieu of foreclosure 
to a good-faith participant in the PFS procedure whose participation 
does not conclude with a pre-foreclosure sale is being retained. Since 
the commencement of the Demonstration in 1991, HUD has raised the limit 
for cash consideration payable for any deed-in-lieu from $200 to $500. 
This was done to motivate mortgagors, and to encourage mortgagees to 
process deeds-in-lieu in as many appropriate cases as possible, because 
of the saving HUD experiences in most instances. For mortgagors who 
have made efforts to market their homes, payment of the maximum amount 
otherwise authorized will underscore HUD's interest in seeing as many 
appropriate deeds-in-lieu processed as possible instead of normally 
costlier foreclosures.
    The assignment to the mortgagee of all refunds due the mortgagor 
(for example from hazard insurance refunds) is being incorporated into 
the application form for participation in the PFS procedure. The 
provision will apply to mortgagors in the event their participation 
concludes with either a pre-foreclosure sale or a deed-in-lieu. The 
mortgagee will deduct any such refunds received from the mortgagor from 
their claim for FHA insurance benefits submitted to HUD.
    6. There was considerable support for payment of one sort or 
another to the mortgagee/servicer for the inconvenience of 
administering the case to facilitate participation by the mortgagor in 
the PFS program. The method of payment varied from calculating the 
claim using note rate interest, as though there were a formal 
forbearance in effect, to following the FNMA $500-to-$1000 payment in 
each case resulting in a closed PFS. [three mortgagees, one real estate 
services company, one quasi-governmental organization]
    Response: With the commencement of the nationwide PFS procedure, 
HUD will pay an administrative fee to the mortgagees of $1000, via the 
Single Family Claims process, for each pre-foreclosure sale that goes 
to settlement (``closes''). This should provide the mortgagees ample 
motivation to utilize this servicing tool whenever it is appropriate to 
do so. It will also defray mortgagee expenses related to the duties 
that must be performed with regard to all participants in the PFS 
procedure, not just the successful ones. Payment of this administrative 
fee, and the amount paid, are subject to change in the future, in the 
sole discretion of the Department.
    7. One commenter suggested that HUD consider making it possible for 
original homeowners to benefit from the program by allowing them to 
have their mortgages modified to reflect the current, lower value of 
the property, which would result in a more bearable financial 
obligation for them. [one individual] Two others suggested that we 
engineer the program to permit assumptions of the existing loans, after 
HUD has ``bought down'' the value of the obligation (involving partial 
payoff of the mortgagee). [one national association of real estate 
sales professionals, one mortgagee]
    Response: ``Retention of ownership'' and assumption provisions are 
not being considered as part of the Department's pre-foreclosure sale 
procedure. The PFS procedure is designed to result in an outright sale 
at the property's current value, and in cancellation of the original 
mortgage instrument. If HUD were to implement the ``buy down'' 
recommendation, it would in effect be insuring the purchase values of 
the properties and not the mortgages. Properties depreciate in value 
for various reasons and it is not practicable for HUD to compensate 
homeowners for losses in that way. The Department is exploring various 
other servicing activities designed to assist homeowners to avoid 
foreclosure, retain their properties, and also to mitigate HUD's 
losses.
    8. Another idea that received considerable support was the 
performance of a title search early on in the participant's exposure to 
the program, to eliminate many candidates from the program who would 
not be approved for either a PFS or a deed-in-lieu. [three mortgagees]
    Response: The desirability of an early title search is stressed in 
the latest instructions being issued to mortgagees regarding the PFS 
procedure. This is especially true in cases where suspicions are 
aroused that significant secondary liens or encumbrances exist.
    9. Several commenters supported the idea of relying on Brokers' 
Price Opinions (BPOs) either singly, severally, or in combination with 
appraisals conducted under program auspices. [one quasi-governmental 
organization, two mortgagees, one real estate services company]
    Response: HUD is not closing the door regarding the use of BPOs, 
alone or in conjunction with more formal property appraisals, in the 
future. However, at this time, appraisals are the only method of 
establishing property valuation under the PFS procedure. The costs are 
higher for appraisals, but the reliability may also be greater. The 
Department also values the fact that the appraisers will be 
credentialed as well as ``neutral'' parties, otherwise uninvolved with 
the sale unlike the BPOs, which are frequently provided by real estate 
brokers that have a relationship with one or more parties to the sale. 
This reliability and neutrality is especially important during the 
initial period when mortgagees are becoming acclimated to their central 
role in facilitating pre-foreclosure sales. The Department may add BPOs 
to the PFS procedure after evaluating the performance of appraisers, 
comparing their cost to BPOs, and taking other factors into account.
    10. Several commenters criticized the ``70% appraisal of the 
indebtedness'' criterion and the ``90% net proceeds of the appraised 
value'' criterion as unworkable in many areas, requiring delays for HUD 
office intervention to decide whether to waive. Most wanted the formula 
to change, downward, or at least have the discretion to waive them 
placed firmly in the hands of the coordinator. [three mortgagees]
    Response: When preparing the legislation which authorized HUD to 
engage in pre-foreclosure sales, Congress issued a strong warning that 
HUD should avoid a ``fire sale'' atmosphere in administering the PFS 
program. The Department's experience during the Demonstration supports 
retaining the 70% criterion, which is the ratio of as-is appraised 
value to outstanding loan indebtedness. In rare instances, it will be 
possible for the local HUD Office to grant an inquiring mortgagee a 
variance from the 70% criterion, based on a consideration of the facts 
of that case.
    The expectation of netting 90% of appraised value was an internal 
rule of thumb. That figure has been reduced to 87% as more workable and 
realistic, given the typical transactional costs of pre-foreclosure 
sales during the Demonstration. Mortgagees will be able to request a 
variance from the local HUD Office with jurisdiction over the property, 
to permit a sale that would net less than 87%.
    11. Two commenters [two mortgagees] supported the idea of parallel 
processing of foreclosure while a participant was enrolled in the PFS 
program. Two commenters [two mortgagees] were also concerned that the 
deadline for initiation of foreclosure be explicitly lifted in cases 
involving participation in the PFS program, or else HUD would run the 
risk of non-cooperation from mortgagees who would expect to be 
penalized for missing this deadline.
    Response: If participation in the PFS procedure is unsuccessful and 
does not result in a sale, a mortgagee has nine months after default or 
sixty (60) days after the date of termination of PFS participation, 
whichever is later, to initiate foreclosure or accept a deed-in-lieu of 
foreclosure. The mortgagee must also meet conveyance time requirements. 
If the pre-foreclosure sale does go to closing, neither foreclosure nor 
conveyance of the property occur; the mortgagee has 30 days after the 
sale closing date to file its claim. If these time frames cannot be 
met, the mortgagee must file Form HUD-50012, Extension Request, with 
the Loan Management Branch of the local HUD Office.
    Apart from the issue of obtaining extensions, and the customary 
timeframes in which to initiate foreclosure, and submit a claim, it is 
still possible for mortgagees to opt to continue steps leading to 
foreclosure while a mortgagor is engaged in marketing the property for 
sale under the PFS procedure. This decision must be weighed by the 
mortgagee in light of the cost-effectiveness (i.e., the ``loss 
mitigation perspective'') of such actions. Proceeding with such steps 
in the face of a mortgagor's participation in the PFS procedure--which 
has a high likelihood of ending either in the sale of the property or a 
deed-in-lieu--is frequently not justified, because of the outlay of 
time and money required to accomplish them. In the meantime, the 
experiences of the PFS procedure will be observed and evaluated. HUD 
may in the future direct mortgagees to desist from concurrently taking 
foreclosure-related steps unless certain criteria are met.
    Mortgagees are reminded that they must always explain their 
concurrent foreclosure-related actions to the mortgagors participating 
in the PFS procedure, because such actions may be misconstrued by the 
mortgagor and may jeopardize the pre-foreclosure sale.
    12. There was a serious division of opinion as to whether 
mortgagees should be expected to participate in the mechanics of the 
program. One commenter [a mortgagee] said that HUD shouldn't ask 
lenders to, or expect that they would, prepare the PFS sale package for 
submission to the program coordinator. Two other commenters [two 
mortgagees] indicated that it was appropriate for HUD to designate the 
mortgagee as a principal player in the administration of the pre-
foreclosure sale, as a means of loss-mitigation and appropriate loan 
servicing.
    Response: The difference of opinion over the appropriate level of 
mortgagee participation in the Pre-foreclosure Sale procedure has been 
resolved by substantially increasing the mortgagees' engagement in the 
process over what was expected during the Demonstration, and also by 
significantly increasing the administrative fee payable to mortgagees 
for facilitating each pre-foreclosure sale. During the course of the 
Demonstration, many mortgagees did express a willingness to expand the 
level of their involvement in the pre-foreclosure sale procedure. HUD 
has decided to implement its nationwide PFS procedure by using the 
mortgagees in the central role of PFS ``facilitators'' because of the 
mortgagees' existing loan servicing role; the savings generated by 
authorizing mortgagees to carry out the PFS procedure under express HUD 
procedures and criteria; and the Department's evolving policy that 
mortgagees explore alternatives to foreclosure, whenever appropriate.
    13. Other recommendations included wider circulation of the 
program's Information Sheet [one mortgagee]; quicker nationwide 
implementation of the program [one mortgagee]; greater publicizing of 
the PFS alternative to maximize the number of participants [one 
mortgagee]; combining mandatory notification by lender with other 
mandatory HUD correspondence that gets sent to mortgagor [one 
mortgagee]; and relying on the lender for homeownership counseling [one 
mortgagee].
    Response: A new PFS Information Sheet will be distributed, and be 
generally available, to real estate brokers, housing counseling 
agencies, mortgagees, and local HUD offices. Although nationwide 
implementation of the PFS option is now imminent, during the 
Demonstration all local HUD offices other than those ``officially'' 
designated as being involved in the PFS Demonstration were nonetheless 
able to activate the pre-foreclosure sale procedure ``unofficially'' in 
their jurisdictions, and a significant number did. There will be more 
publicizing of the nationwide PFS procedure as it starts up.
    Many forms have been eliminated or streamlined, and the mandatory 
notification forms have been combined with other correspondence that 
mortgagees must send to mortgagors. While it is not appropriate to 
depend exclusively on lenders to provide homeownership counseling 
(there is a network of HUD-approved housing counseling agencies whose 
duties include homeownership counseling), lenders are free to provide 
homeownership counseling and other information related to pre-
foreclosure sales if requested by the mortgagor to do so.
    14. Other recommendations also included allowing participants to 
select their own brokers independently [one national association of 
real estate sales professionals], and also deciding on how HUD will 
determine ``qualified'' real estate brokers to put on the program's 
referral list [one HUD field office].
    Response: PFS participants are permitted to select their own 
brokers--the required list of cooperating brokers has been eliminated 
as too cumbersome for mortgagees to produce and update, and also as 
possibly confusing to some PFS participants. Thus the issue of whether 
and how ``qualified'' are the brokers on the list is rendered moot.

This Interim Rule

    This interim rule takes into consideration the public comments 
received on the notice announcing the PFS demonstration published on 
May 29, 1991, 56 FR 24324. It also incorporates changes in the PFS 
requirements and procedures based on the Department's experience under 
the Demonstration.

Eligibility Criteria

    In order to be eligible for the pre-foreclosure sale procedure, a 
mortgagor must:
    (1) be an owner-occupant in a single family residence that is 
security for a mortgage insured under 24 CFR part 203, unless otherwise 
prescribed by the Secretary;
    (2) have an account in default with at least three monthly 
installments past due and unpaid; (The default must be the result of a 
documentable involuntary reduction in income or an unavoidable increase 
in his or her expenses, including job relocation.);
    (3) have been made aware of the assignment program, as discussed 
below under Notification of PFS Procedure, and have been either turned 
down for it by HUD, or have decided not to apply for it;
    (4) have, at the time application is made to pursue a pre-
foreclosure sale, a mortgaged property whose current fair market value, 
compared to the amount needed to discharge the mortgage, meets the 
criterion established by the Secretary, unless a variance is granted by 
the Secretary; and
    (5) have received homeownership counseling, as defined by the 
Secretary, and have executed a certification to that effect.
    These criteria are contained in new section 24 CFR 203.370(c).
    The Department has decided to continue a policy begun during the 
PFS Demonstration, under which those mortgagors who are small investors 
with only one FHA-insured mortgage (e.g., a former owner-occupant who 
may be renting out the property) can be considered for PFS eligibility. 
Under no circumstances, however, will the pre-foreclosure sale option 
be made available to ``walkaways'' who have abandoned their mortgage 
obligations despite their continued ability to pay. Mortgagors 
determined to be eligible for, and who participate in, the pre-
foreclosure sale procedure will not be pursued for deficiency judgments 
by the Department.

Use of Mortgagees To Facilitate Pre-foreclosure Sales

    The Department is adding the pre-foreclosure sale to the list of 
existing foreclosure alternatives that can be offered by mortgagees to 
mortgagors facing financial difficulties and who meet certain 
qualifying criteria. Although offering the pre-foreclosure sale option 
to a qualified mortgagor is arguably a part of ``normal'' servicing 
under FHA procedures and guidelines which require mortgagees to act 
prudently and with HUD's interests in mind, the Department is 
encouraging mortgagees to incorporate pre-foreclosure sales without 
delay into their overall servicing procedures by paying mortgagees an 
administrative fee for each successful pre-foreclosure sale that they 
facilitate. Payment of the administrative fee via the claims process is 
provided for in 24 CFR 203.402(t), which is being implemented as part 
of this interim rule.

Justification of Incentive Paid to Mortgagors

    The Department has decided to retain the practice used during the 
Demonstration of paying certain cash incentives drawn from sale 
proceeds to qualified mortgagors who close a pre-foreclosure sale; 
however, the amount of this incentive is being reduced from that which 
was used in the Demonstration. Also, in cases where a deed-in-lieu of 
foreclosure follows bona fide but unsuccessful participation in the PFS 
procedure, the Department's policy of strongly encouraging mortgagees 
to offer such mortgagors the full $500 consideration payable for a 
deed-in-lieu (authorized in HUD Mortgagee Letter 93-16) is being 
continued.
    The Department is aware that other mortgage insurers and financial 
institutions have not authorized the use of a portion of sale proceeds 
for consideration payable to the mortgagor, and do not otherwise reward 
mortgagors who engage in a pre-foreclosure sale or deed-in-lieu of 
foreclosure, beyond the fact that PFS necessarily precludes the 
foreclosure. However, the proportion of pre-foreclosure sales occurring 
in these other agencies and institutions among defaulting mortgagors is 
generally much lower than the level of participation which HUD would 
prefer for its nationwide pre-foreclosure sale procedure. Furthermore, 
although the Department acknowledges that the avoidance of a 
foreclosure on their credit records is a prime motivation for 
mortgagors to dispose of their properties via pre-foreclosure sales, 
HUD has a number of other justifications for offering monetary 
consideration to participants in the PFS procedure.

--PFS participants must make considerable efforts and undergo 
significant inconvenience in seeking out buyers, making the property 
presentable, and allowing the public access to their home as they 
attempt to reach an approved sale transaction before the participation 
period has run.
--Cash incentives for expedited pre-foreclosure sales occurring within 
three months of commencing the PFS procedure represent a small portion 
of the estimated savings to the Department of interest that would 
otherwise have to be paid to mortgagees as part of the insurance 
contract.
--It is HUD's objective to maximize the number of interested 
participants in pre-foreclosure sales, because of the estimated 
aggregate savings to the Department that successful pre-foreclosure 
sales transactions represent. We estimate that the PFS-related 
consideration will be more than offset by the savings in pre- and post-
acquisition costs for the properties affected by participation in the 
pre-foreclosure sale procedure.
--Mortgagors can request deeds-in-lieu of foreclosure without first 
attempting to execute pre-foreclosure sales and might request deeds-in-
lieu of foreclosure rather than the pre-foreclosure sale option, when 
they become fully apprised of the efforts involved in the pre-
foreclosure sale, as well as possible tax implications. If a mortgagor 
meets prevailing criteria and the mortgagee is willing to cooperate, a 
deed-in-lieu of foreclosure can occur. This would benefit the mortgagor 
but would represent only modest savings to the Department. Therefore, 
it is in HUD's interest to make the pre-foreclosure sale option as 
attractive as possible in order to maximize the number of interested 
participants.

    Although payment of such consideration is warranted by the 
anticipated savings to the Department, HUD acknowledges the need for 
vigilance to head off abuse of the process by opportunistic parties.

Deed-In-Lieu of Foreclosure as Feature of the PFS Procedure

    At the time he or she requests to participate in the Pre-
Foreclosure Sale procedure, the mortgagor is asked whether there are 
encumbrances on the mortgage, or whether there are title problems of 
which he or she is aware. The mortgagee should order a title search 
during the mortgagor's participation in the PFS procedure. The 
existence of encumbrances or title problems may preclude or result in a 
refusal to permit either a pre-foreclosure sale or a deed-in-lieu. For 
those mortgagors who can deliver clear title, but who, despite a good 
faith effort, do not consummate a pre-foreclosure sale, the mortgagee 
will customarily process a deed-in-lieu of foreclosure upon the failure 
of the participant to execute a pre-foreclosure sale. A deed-in-lieu 
action will leave the mortgagor without a foreclosure on his or her 
credit history.

Notification of PFS Procedure

    HUD will circulate an Information Sheet on pre-foreclosure sales 
among mortgagees and housing counseling agencies, and the mortgagees 
and housing counseling agencies will be encouraged to distribute the 
document among mortgagors who might be interested in, and possibly 
qualified to participate in, the Pre-Foreclosure Sale procedure. It 
will contain basic information about pre-foreclosure sales and will 
instruct mortgagors or others interested in PFS to contact the 
homeowner's mortgagee for more information or an application.
    Mortgagees are required to notify mortgagors about the pre-
foreclosure sale procedure by sending a prescribed communication (HUD-
426) when the mortgagors fall two payments behind, and a copy of the 
Information Sheet when the mortgagors become three or more payments in 
arrears. The requirement that mortgagees provide notification of the 
pre-foreclosure sale option to mortgagors in default is contained in 24 
CFR 203.370(b).

Commencing the Pre-foreclosure Sale Procedure

    Once a mortgagor is found to be eligible to participate in the pre-
foreclosure sale procedure, and is so notified by the mortgagee, the 
mortgagor may begin marketing the property. Section 203.356(b) requires 
mortgagees to notify HUD of that change in status of the mortgagor. The 
mortgagee will also direct the mortgagor to retain the services of a 
real estate broker in an attempt to market the property within the 
established time and price guidelines. These brokers are prohibited 
from sharing a business interest with the mortgagee or mortgagor 
(seller).
    An appraisal will be ordered by the mortgagee from an appraiser who 
meets standard eligibility requirements for performing FHA Single 
Family appraisals. The appraisal will contain ``as is'' and ``as 
repaired'' valuations of the property. Reasonable costs for the 
property appraisal will be reimbursed through the FHA claims process. 
Section 203.402(l) has been revised to include the cost of an appraisal 
performed as part of the Pre-foreclosure Sale procedure. The Department 
reserves the right, in the future, to authorize mortgagees to 
substitute or add the use of Broker Price Opinions (BPOs) to the 
valuation process under the Pre-Foreclosure Sale procedure.

Homeownership Counseling Responsibilities

    Before a mortgagor's participation in the Pre-foreclosure Sale 
procedure can be approved by the mortgagee, either a HUD-approved 
counseling agency located in the mortgagor's geographic area, the 
mortgagee, or the local HUD Office will be available to do the 
following:
    (1) Provide mandatory ``homeownership counseling'' to the mortgagor 
considering the pre-foreclosure sale option. This will include 
explaining the alternatives available to the mortgagor, including a 
payment plan negotiated with the lender, foreclosure and deed-in-lieu 
of foreclosure, the assignment program (if still an option), and 
changes in household income, expenses, or composition that might have a 
bearing on the ability of the mortgagor to retain ownership of the 
property. The homeownership counseling and certification requirement is 
contained in Sec. 203.370(c)(5).
    (2) Advise mortgagors considering a pre-foreclosure sale that they 
may wish to contact a financial or tax counselor to assess the specific 
tax consequences (if any) to them of a pre-foreclosure sale.
    (3) Assist in executing certifications for the mortgagors to sign 
before they can be permitted to participate in the pre-foreclosure sale 
procedure. These certifications shall include statements that:

    (a) Homeownership counseling has been received;
    (b) The mortgagor understands that any proposed pre-foreclosure 
sale must be an ``arm's length'' transaction; i.e., a sale between 
two unrelated parties that is characterized by a selling price and 
other conditions which would prevail in an open market environment, 
without hidden terms or special understandings between any of the 
parties connected to the transaction, including the appraiser, sales 
agent, closing agent and mortgagee; and
    (c) If the mortgagor has not made application for mortgage 
assignment, that the assignment program has been explained to him 
and that he desires to waive any right he has to apply for the 
program. The provision regarding consideration of (and for) mortgage 
assignment is contained in 24 CFR 203.370(c)(3). (This waiver 
applies to assignment rights arising only from his present mortgage 
default, and only if he is permitted to participate in the Pre-
foreclosure Sale procedure.)

Responsibilities of the Real Estate Broker or the Mortgagor's 
Attorney

    The real estate broker or the mortgagor's attorney should forward 
to the mortgagee a copy of the contract of sale made conditional upon 
approval by HUD or the mortgagee, acting under the Secretary's 
instructions. The contract package should identify the sales 
commission, and include the necessary certifications (if they are in 
the broker's or attorney's possession) that have been signed by the 
mortgagor. The mortgagee will review the package and render a decision 
within five (5) days of receiving the completed package.

Monitoring Responsibilities of HUD Personnel

    The determination by the mortgagee of the mortgagor's eligibility 
to pursue a pre-foreclosure sale or a deed-in-lieu, as well as the 
mortgagee's final approval of a proposed sale, shall be reviewed by the 
appropriate HUD personnel. These reviews may occur at any time, and 
will be performed on-site by local HUD office or Headquarters 
personnel. Mortgagees' submission of data pertaining to individual 
participants in the PFS procedure, as well as monthly Single Family 
Default Monitoring System (SFDMS) reports, will also be subject to 
review. The speed and effectiveness with which mortgagees incorporate 
the pre-foreclosure sale procedure into their overall servicing 
techniques will be evaluated on-site during mortgagee reviews conducted 
by HUD staff. A pre-foreclosure sale component will also be 
incorporated into HUD's regular claim reviews.

General Responsibilities of Mortgagees

    (1) Mortgagees will be responsible for implementing correct 
notification procedures (in particular, sending appropriate notices to 
defaulting mortgagors and providing information as requested to 
mortgagors about the PFS procedure).
    (2) Mortgagees will be responsible for determining the eligibility 
of mortgagors to participate in the pre-foreclosure sale procedure, 
including those whose assignment applications are turned down or for 
whom the opportunity for assignment has expired or been waived.
    (3) Mortgagees will be responsible for responsive and timely 
servicing in taking the necessary steps for, and cooperating with all 
aspects of, the PFS procedure, including the expediting of sale 
transactions; the processing of deeds-in-lieu of foreclosure from 
qualified participants who did not close a pre-foreclosure sale despite 
a good faith effort; and the timely resumption of appropriate servicing 
of those loans when participation in the PFS procedure ends and neither 
a sale nor a deed-in-lieu has occurred.
    (4) The mortgagee will have the authority, on a case-by-case basis, 
to determine the mortgagor's participation deadline (up to four months 
to obtain a signed contract of sale, or up to six months to go to 
closing) when it determines that granting that period is in the best 
interest of the Department.
    (5) In determining the eligibility of a mortgagor to participate in 
the Pre-foreclosure Sale procedure, the mortgagee shall arrange for the 
valuation of the property according to instructions issued by the 
Secretary, to assist in determining whether the property's as-is 
appraised value is at least 70% of the outstanding mortgage 
indebtedness (principal and accrued interest only) at the time 
application is made to pursue a pre-foreclosure sale. In cases where 
the appraised value is less than 70% of the outstanding debt, the 
mortgagee must obtain local HUD Office approval for a ``variance'' from 
this criterion before the mortgagor can be permitted to participate in 
the pre-foreclosure sale procedure.
    (6) The offer to purchase the property should net HUD at least 87% 
of the appraised value of the property. However, the mortgagee may 
exercise discretion in cases where the net proceeds would be less than 
87%, if the mortgagee believes that it would still be in HUD's best 
interest to permit the sale to occur. In such cases, the mortgagee must 
refer the matter to the Chief of Loan Management at the local HUD 
Office with the recommendation that the sale be approved by granting a 
``variance'' in that case from the ``net proceeds'' criterion.

Consideration

    Mortgagors who qualify for the pre-foreclosure sale procedure and 
who close an approved sale shall be able to retain from the sales 
proceeds before disbursement to the mortgagee, the base amount of $750 
(seven hundred fifty dollars).
    In addition to the base amount, the mortgagor will be able to 
retain an additional amount of $250 (two hundred fifty dollars) from 
the proceeds of sale if the closing of an approved pre-foreclosure sale 
occurs within three (3) months of the commencement of the mortgagor's 
participation in the pre-foreclosure sale procedure (i.e., from the 
time the mortgagor is advised in writing that he may participate in the 
procedure),
    If, despite a good faith effort--as determined by the mortgagee--a 
property does not sell during the mortgagor's period of participation 
in the PFS procedure, the mortgagee will authorize a title search of 
the participant's mortgage for title problems and encumbrances (if one 
was not already performed during the period of participation). If any 
obstacles to obtaining clear and marketable title are resolved pursuant 
to instructions from the Secretary, the mortgagee will process a deed-
in-lieu of foreclosure from the mortgagor. The mortgagee shall follow 
prescribed methods of processing the deed-in-lieu and will disburse 
consideration in the amount of $500 to the mortgagor upon completion of 
the deed-in-lieu transaction. This consideration is 100% reimbursable 
to the mortgagee through the FHA claims process.

Other Provisions

    (1) All sales contracts submitted for consideration under the pre-
foreclosure sale procedure shall contain a clause which provides that 
HUD approval (directly or through the mortgagee, as prescribed by the 
Secretary) is a pre-condition of the sale.
    (2) Purchasers in approved pre-foreclosure sales may qualify for 
FHA mortgage insurance.

The Closing of the Pre-Foreclosure Sale; Payment of Claims

    Prior to closing the sale:
    (1) The mortgagee will provide to the Closing Agent a list of those 
parties entitled to receive financial consideration and the amounts 
payable out of sale proceeds.
    (2) The Closing Agent will calculate the net sale proceeds and 
communicate this data to the mortgagee, so that the mortgagee can 
ascertain that the actual terms of the transaction are in accordance 
with the proposed sale that the mortgagee had approved earlier.
    If the mortgagee approves the transaction, and closing occurs, the 
Closing Agent will pay the consideration set forth in the list 
previously provided by the mortgagee, and will send the net proceeds of 
sale and a form HUD-1 to the mortgagee.
    Upon receipt of the payoff funds, the mortgagee will file a claim 
for the balance due to it under the terms of the contract for 
insurance. In addition, an administrative fee of $1,000 will be 
payable, as part of the claim, to the mortgagee for each approved pre-
foreclosure sale that goes to closing. Payment of this fee, which is 
not subject to debenture interest, will be made under the provisions of 
Section 204(a) of the National Housing Act (12 U.S.C. 1710(a)), as 
amended by Section 1064 of the McKinney Homeless Assistance Amendments 
Act of 1988 (P.L. 100-628).
    For proposed pre-foreclosure sales that ``fall through,'' or are 
sought without positive result, the mortgagee should file its claim 
under existing procedures for conveyance claims, and in compliance with 
any additional provisions which may be applicable to conveyance claims 
that follow a mortgagor's unsuccessful participation in the PFS 
procedure. Section 203.355 has been amended to include definitions of 
the ``end of participation'' in the Pre-foreclosure Sale procedure, so 
mortgagees can calculate the appropriate timeframe within which they 
must initiate foreclosure or accept a deed-in-lieu of foreclosure where 
no actual pre-foreclosure sale has resulted.

Other Changes

    A conforming amendment is also being made to Sec. 200.155(a). That 
section provides for the various methods by which a mortgagee may 
perfect a claim for the payment of mortgage insurance benefits. The 
case of a pre-foreclosure sale is being added to this list.
    Section 203.501 is being added to set forth the Department's policy 
that mortgagees must consider the financial consequences of their 
elective servicing action and that HUD expects mortgagees to take those 
appropriate actions which will generate the smallest financial loss to 
the Department.

Other Matters

Justification for Interim Rule and for the 45-day Comment Period

    The Department has determined that it is impracticable and contrary 
to the public interest to have notice and public procedure before 
making the provisions of this interim rule effective, and that 
expeditious promulgation of this interim rule provides a benefit to all 
the parties involved.
    A successfully completed pre-foreclosure sale benefits the 
mortgagor, who avoids the stigma of foreclosure on his or her credit 
record, and also benefits HUD, which can expect to save by not paying 
foreclosure-related costs. HUD also saves on maintenance costs and 
marketing expenses for properties which would otherwise be conveyed to 
the Department following foreclosure. Mortgagees also benefit through 
incorporating this loss-mitigation technique into their overall loan 
servicing, by earning an additional administrative fee and by 
frequently being able to file claims for insurance benefits sooner, 
following a successful pre-foreclosure sale, than they would following 
a post-foreclosure conveyance claim.
    Because the requirements and procedures contained in this interim 
rule are based on the Pre-Foreclosure Sale Demonstration Program 
established by a notice published in the Federal Register on May 29, 
1991, at 56 FR 24324, and because this interim rule takes into 
consideration the public comments received on that notice, the 
Department believes there is adequate justification for shortening the 
public comment period to 45 days.

Sunset Provision

    The Department has adopted a policy of setting a date for 
expiration of an interim rule unless a final rule is published before 
that date. Therefore, this interim rule will expire on a date 18 months 
from the date of publication.

Environmental Finding

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations at 24 CFR Part 50, 
which implement section 102(2)(C) of the National Environmental Policy 
Act of 1969. The Finding of No Significant Impact is available for 
public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the 
Office of the Rules Docket Clerk, Office of the General Counsel, 
Department of Housing and Urban Development, Room 10276, 451 Seventh 
Street, S.W., Washington, D.C. 20410.

Information Collection Requirements

    The collection of information requirements contained in this 
interim rule have been submitted to OMB for review under section 
3504(h) of the Paperwork Reduction Act of 1980. The public reporting 
burden for the collection of information requirements contained in this 
interim rule is estimated to include the time for reviewing the 
instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information. Information on these requirements is 
provided as follows:

                Tabulation of Annual Reporting Burden--Nationwide Pre-Foreclosure Sale Procedure                
----------------------------------------------------------------------------------------------------------------
                                                                  Number of                                     
                                                     Number of    responses     Total     Hours per             
      Description of information collection         respondents      per        annual     response  Total hours
                                                                 respondent   responses                         
----------------------------------------------------------------------------------------------------------------
Disclosure by Applicants..........................       14,040        1          14,040        .50         7020
Certifications by Participants....................       10,800        1          10,800        .05          540
Transactional:                                                                                                  
    Mortgagees (approving Participation)..........       10,800        1          10,800        .15         1620
    Variance Requests.............................        2,700        1           2,700        .25          645
    Closings......................................        6,480        2.30       14,904        .75       11,178
Reporting.........................................       10,800        1          10,800        .30         3240
      Total (annual) burden.......................       55,620                   64,044                 24,273 
----------------------------------------------------------------------------------------------------------------

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this interim rule before publication and 
by approving it certifies that this interim rule does not have a 
significant economic impact on a substantial number of small entities 
because this interim rule pertains to a limited number of single-family 
mortgage situations. It expands the options available to financially 
distressed mortgagors and does not adversely affect any mortgagor 
rights or interests under existing FHA-insured loan servicing 
regulations.

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that this interim 
rule does not have ``federalism implications'' because it does not have 
substantial direct effects on the States (including their political 
subdivisions), or on the distribution of power and responsibilities 
among the various levels of government. The purpose of this interim 
rule is to implement the requirements and methods of pre-foreclosure 
sales as a means of assisting qualified mortgagors in avoiding 
foreclosure of their FHA-insured mortgages and of saving the Department 
money.

Executive Order 12606, the Family

    The General Counsel, as the Designated Official under Executive 
Order 12606, the Family, has determined that this interim rule does not 
have potential significant impact on family formation, maintenance, and 
general well-being.

Semiannual Agenda

    This interim rule was listed as item 1587 in the Department's 
Semiannual Agenda of Regulations published on April 25, 1994 (59 FR 
20424, 20440), pursuant to Executive Order 12866 and the Regulatory 
Flexibility Act.

List of Subjects

24 CFR Part 200

    Administrative practice and procedure, Claims, Equal employment 
opportunity, Fair housing, Housing standards, Incorporation by 
reference, Lead poisoning, Loan programs--housing and community 
development, Minimum property standards, Mortgage insurance, 
Organization and functions (Government agencies), Penalties, Reporting 
and recordkeeping requirements, Social security, Unemployment 
compensation, Wages.

24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy.

    Accordingly, the Department amends parts 200 and 203 in chapter II 
of title 24 of the Code of Federal Regulations as follows:

PART 200--INTRODUCTION

    1. The authority citation for part 200 is revised to read as 
follows:

    Authority: 12 U.S.C. 1701-1715z-18, 1701s, and 1715z-11; 42 
U.S.C. 3535(d), 3543, and 3544.

    2. In Sec. 200.155, paragraph (a) is amended by adding at the end 
the following sentence, to read as follows:


Sec. 200.155  Claim requirements.

    (a) * * * The mortgagee may also perfect its claim for the payment 
of the insurance benefits in the case of a Pre-Foreclosure Sale 
conducted in accordance with 24 CFR 203.370.
* * * * *

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

    3. The authority citation for Part 203 is revised to read as 
follows:

    Authority: 12 U.S.C. 1701q, 1709, 1710, 1715b; 42 U.S.C. 
3535(d). In addition, subpart C is also issued under 12 U.S.C. 
1715u.

    4. Section 203.355 is amended by revising the introductory sentence 
of paragraph (a); by revising the first sentence of paragraph (c); and 
by adding a new paragraph (g), to read as follows:


Sec. 203.355  Acquisition of property.

    (a) In general. Upon default of a mortgage, except as provided in 
paragraphs (b) through (g) of this section, the mortgagee shall take 
one of the following actions within nine months from the date of 
default, or within any additional time approved by the Secretary or 
authorized by Secs. 203.345, 203.346, or 203.650 through 203.660: * * *
* * * * *
    (c) Law prohibiting foreclosures within nine months. If the laws of 
the State in which the mortgaged property is located or if Federal 
bankruptcy law does not permit the commencement of foreclosure within 
the time limits described in paragraphs (a), (b), and (g) of this 
section, the mortgagee must commence foreclosure within 60 days after 
the expiration of the time during which foreclosure is prohibited. * * 
*
* * * * *
    (g) Pre-foreclosure sale procedure. Within 60 days of the end of a 
mortgagor's participation in the pre-foreclosure sale procedure, or 
nine (9) months after default, whichever is later, if no closing of an 
approved pre-foreclosure sale has occurred, the mortgagee must obtain a 
deed-in-lieu of foreclosure, with title being taken in the name of the 
mortgagee or the Secretary, or commence foreclosure. The end-of-
participation date is defined as:
    (1) Four months after the date of commencement of participation, if 
there is no signed Contract of Sale at that time, unless extended by 
the Commissioner;
    (2) Six months after the date of commencement of participation, if 
there is a signed contract but settlement has not occurred by that 
date, unless extended by the Commissioner;
    (3) The date the mortgagee is notified of the mortgagor's 
withdrawal from the Pre-foreclosure Sale procedure; or
    (4) The date of the letter sent by the mortgagee to the mortgagor 
prior to the expiration of the customary participation period, 
terminating the mortgagor's opportunity to participate in the Pre-
foreclosure Sale procedure.
    5. Section 203.356 is amended by revising the section heading; by 
redesignating the existing text as paragraph (a); and by adding a new 
paragraph (b), to read as follows:


Sec. 203.356  Notice of foreclosure; reasonable diligence requirements; 
notice of pre-foreclosure sale.

* * * * *
    (b) The mortgagee must give written notice to the Secretary within 
the time frame prescribed by the Secretary of the acceptance of any 
mortgagor into the pre-foreclosure sale procedure.
    6. Section 203.360 is amended by revising the section heading; by 
redesignating the existing text as paragraph (a); and by adding a new 
paragraph (b), to read as follows:


Sec. 203.360  Notice of property transfer or pre-foreclosure sale and 
application for insurance benefits.

* * * * *
    (b) Within 30 days of the closing of an approved pre-foreclosure 
sale, the mortgagee shall notify the Commissioner on a form prescribed 
by him of the pre-foreclosure sale.
    7. Section 203.365 is amended by revising paragraph (a), to read as 
follows:


Sec. 203.365  Documents and information to be furnished the Secretary; 
claims review.

    (a) Items to be furnished the Secretary. Within 45 days after the 
deed is filed for record, in the case of a conveyance claim; or, in the 
case of a claim arising from a pre-foreclosure sale, within 30 days 
after the closing of the pre-foreclosure sale, unless extended by the 
Commissioner, the mortgagee must forward to the Secretary:
    (1) A copy of the deed to the Secretary that has been filed for 
record and the title evidence continued so as to include recordation of 
the deed; or evidence, as prescribed by the Secretary, of the closing 
of the pre-foreclosure sale.
    (2) Fiscal data pertaining to the mortgage transaction.
    (3) Any additional information or data that the Secretary may 
require.
* * * * *
    8. A new Sec. 203.370 is added immediately after Sec. 203.369 and 
before the undesignated center heading, ``Condition of Property'', to 
read as follows:


Sec. 203.370  Pre-foreclosure sales.

    (a) General. HUD will pay FHA insurance benefits to mortgagees in 
cases where, in accordance with all regulations and procedures 
applicable to pre-foreclosure sales, the mortgaged property is sold by 
the mortgagor, after default and prior to foreclosure, at its current 
fair market value (less adjustments as the Commissioner may deem 
appropriate) but for less than the mortgage loan amount currently 
outstanding.
    (b) Notification of mortgagor. The mortgagee shall give notice, 
according to prescribed procedures, of the opportunity to be considered 
for the pre-foreclosure sale procedure to each mortgagor in default. 
All notices to mortgagors must be in an accessible format, if 
requested, or if required by the person's known disability, as required 
by 24 CFR part 9.
    (c) Eligibility for the Pre-foreclosure Sale Procedure. In order to 
be considered for the pre-foreclosure sale procedure, a mortgagor:
    (1) Must be an owner occupant in a single family residence that is 
security for a mortgage insured under this part, unless otherwise 
prescribed by the Secretary.
    (2) Must have an account in default, for such period as determined 
by the Secretary, which default is the result of an adverse and 
unavoidable financial situation.
    (3) Must have been provided notice of the Mortgage Assignment 
Program (24 CFR 203.650, et seq), and either have been found ineligible 
by HUD, or have made an informed decision not to apply for an 
assignment.
    (4) Must have, at the time application is made to pursue a pre-
foreclosure sale, a mortgaged property whose current fair market value, 
compared to the amount needed to discharge the mortgage, meets the 
criterion established by the Secretary, unless a variance is granted by 
the Secretary.
    (5) Must have received homeownership counseling, as defined by the 
Secretary, and have executed a certification to that effect.
    9. Section 203.401 is amended by redesignating paragraph (c) as 
paragraph (d); by adding a new paragraph (c); and by revising the newly 
redesignated paragraph (d), to read as follows:


Sec. 203.401  Amount of payment--conveyed and non-conveyed properties.

* * * * *
    (c) Pre-foreclosure Sales. Where a claim for insurance benefits is 
filed in accordance with this subpart, based on a pre-foreclosure sale 
approved by or on behalf of the Secretary (under the provisions of 
Sec. 203.370), the amount of insurance benefits shall be computed by 
adding to the original principal balance of the mortgage (as increased 
by the amount of open-end advances made by the mortgagee and approved 
by the Commissioner) which was unpaid on the date of closing of the 
pre-foreclosure sale, the amount of all applicable items set forth in 
Sec. 203.402; provided however that appropriate adjustment shall be 
made for any such items covered by proceeds of the pre-foreclosure 
sale.
    (d) Final Payment. (1) The mortgagee may not file for any 
additional payments of its mortgage insurance claim after six months 
from payment by the Commissioner of the final payment except for:
    (i) Cases where the Commissioner requests or requires a deficiency 
judgment.
    (ii) Other cases where the Commissioner determines it appropriate 
and expressly authorizes an extension of time.
    (2) For the purpose of this section, the term final payment shall 
mean, in the case of claims filed for conveyed properties, the payment 
under subpart B of this part which is made by the Commissioner based 
upon the submission by the mortgagee of all required documents and 
information filed pursuant to Sec. 203.365. In the case of claims filed 
under claims without conveyance of title, final payment shall mean the 
payment which is made by the Commissioner based upon submission by the 
mortgagee of all required documents and information filed pursuant to 
Secs. 203.368 and 203.401(b). In the case of claims filed pursuant to 
pre-foreclosure sales, final payment shall mean the payment which is 
made by the Commissioner based upon submission by the mortgagee of all 
required documents and information filed pursuant to Secs. 203.370 and 
203.401(d).
    10. Section 203.402 is amended by revising the introductory 
paragraph; by adding a new paragraph (k)(3); by revising paragraph (l); 
and by adding new paragraphs (s) and (t), to read as follows:


Sec. 203.402  Items included in payment--conveyed and non-conveyed 
properties.

    The insurance benefits paid in connection with foreclosed 
properties, whether or not conveyed to the Commissioner; and those 
properties conveyed to the Commissioner as a result of a deed in lieu 
of foreclosure; and those properties sold under an approved pre-
foreclosure sale shall include the following items:
* * * * *
    (k) * * *
    (3) Where a claim for insurance benefits is being paid following a 
pre-foreclosure sale, without foreclosure or conveyance to the 
Commissioner in accordance with Sec. 203.370, an amount equivalent to 
the sum of:
    (i) The debenture interest which would have been earned, as of the 
date of the closing of the pre-foreclosure sale, on an amount equal to 
the amount by which an insurance claim determined in accordance with 
Sec. 203.401(a) exceeds the amount of the actual claim being paid in 
debentures; plus
    (ii) The debenture interest which would have been earned, from the 
date of the closing of the pre-foreclosure sale to the date when 
payment of the claim is made, on the portion of the insurance benefits 
paid in cash if such portion had been paid in debentures, except that 
if the mortgagee fails to meet any of the applicable requirements of 
Sec. 203.365 within the specified time and in a manner satisfactory to 
the Commissioner (or within such further time as the Commissioner may 
approve in writing), the interest allowance in such cash payment shall 
be computed only to the date on which the particular required action 
should have been taken or to which it was extended.
    (l) Reasonable costs of appraisal under Sec. 203.368(e) or pursuant 
to Sec. 203.370;
* * * * *
    (s) Reasonable costs of the title search ordered by the mortgagee, 
in accordance with procedures prescribed by the Secretary, to determine 
the status of a mortgagor meeting all other criteria for approval to 
participate in the Pre-foreclosure Sale procedure.
    (t) The administrative fee as authorized by the Secretary and 
payable to the mortgagee for its role in facilitating a successful pre-
foreclosure sale, said fee not to be subject to the payment of 
debenture interest thereon.
    11. Section 203.403 is amended by adding a new paragraph (d), to 
read as follows:


Sec. 203.403  Items deducted from payment--conveyed and non-conveyed 
properties.

* * * * *
    (d) With regard to claims filed pursuant to successful pre-
foreclosure sales, all amounts received by the mortgagee relating to 
the sale of the property.
    12. Section 203.410 is amended by revising the introductory text in 
paragraph (a); by removing the word ``or'' from the end of paragraph 
(a)(1)(ii); by removing the period at the end of paragraph (a)(1)(iii), 
and adding in its place ``; or''; and by adding a new paragraph 
(a)(1)(iv), to read as follows:


Sec. 203.410  Issue date of debentures.

    (a) Conveyed properties, claims without conveyance, pre-foreclosure 
sales--Where the property is conveyed to the Commissioner, or the 
mortgagee or other party acquires title to the property under the claim 
without conveyance procedure or the pre-foreclosure sale procedure, 
debenture shall be dated:
* * * * *
    (1) * * * 
    (iv) The property was acquired after default by a third party under 
the pre-foreclosure sale procedure.
    13. A new Sec. 203.501 is added to read as follows:


Sec. 203.501  Loss mitigation.

    Mortgagees must consider the comparative effects of their elective 
servicing actions, and must take those appropriate actions which can 
reasonably be expected to generate the smallest financial loss to the 
Department.

    Dated: September 12, 1994.
Jeanne K. Engel,
General Deputy Assistant Secretary for Housing-Federal Housing 
Commissioner.
[FR Doc. 94-24262 Filed 9-29-94; 8:45 am]
BILLING CODE 4210-27-P