**December 24, 2008** **Mortgagee Letter 2008-43**

## 

## TO: ALL HUD-APPROVED MORTGAGEES

**ATTENTION:** Single Family Servicing Managers

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

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

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

**Key Features of the PFS Program**

-   [Establishing Market Value]{.underline} --Mortgagees are reminded to
    ensure that properties in the PFS program are sold at or near fair
    market value as established by an independent appraisal, prepared by
    an appraiser on the FHA Appraisal Roster.

-   [Minimum List Price Requirements]{.underline} -- Properties offered
    for sale under the PFS program are to be listed for sale at no less
    than the "as-is" appraised value as determined by a current FHA
    appraisal, obtained and reviewed by the mortgagee.

-   [Negative Equity]{.underline} -- The ratio of 63% for the fair
    market value (FMV) to the outstanding mortgage balance (including
    unpaid principal and accrued interest) has been updated to address
    events in the current housing market, and replaced with tiered net
    sales proceeds.

-   [Tiered Net Proceeds Requirement]{.underline} -- This ML
    incorporates guidelines for varying minimum net sales proceeds based
    on the length of time a property has been competitively marketed for
    sale.

-   [Marketing Documentation]{.underline} -- Prior to accepting a
    discounted offer, evidence of competitive marketing from the selling
    broker is to be presented and mortgagees are to retain this
    documentation in the claim review file.

-   [Non-owner Occupant Exceptions]{.underline} -- Mortgagees are
    authorized to grant reasonable exceptions to non-occupant mortgagors
    when documentation indicates a property was not purchased as a
    rental or used as a rental for more than 18 months, immediately
    preceding the approval into the PFS program.

-   [Removal of Repair Limitations]{.underline} --With prior approval
    from HUD, properties with surchargeable damage (i.e., damage caused
    by fire, flood, earthquake, hurricane, boiler explosion or mortgagee
    neglect) may be eligible for the PFS program if funds - sufficient
    to cover the government's estimated repair costs - are applied to
    reduce the outstanding debt when a claim is filed.

-   [Increase in Funds Available for Discharge of Subordinate
    Liens]{.underline} -- In instances where a mortgagor has made an
    initial contribution/incentive of \$750 or \$1,000, the amount that
    can be used from sales proceeds for the discharge of liens or
    encumbrances (which represent an impediment to conveyance of
    marketable title) has been raised from \$2,000 to \$2,500.

    -   [Change in Allowable Closing Costs]{.underline} -- Subject to
        the stated ratios, HUD allows up to 1% of the buyer's mortgage
        amount for closing costs to be included in the "Seller's Costs"
        on the HUD-1 for all transactions that involve a new FHA-insured
        mortgage.

**Superseded and Updated Mortgagee Letters and Forms**

This ML supersedes in its entirety ML 1994-45, "HUD's Nationwide
Pre-Foreclosure Sale (PFS) Procedure". It also supersedes the section
(pages 29-35) of ML 2000-05, "Loss Mitigation Program-Comprehensive
Clarification of Policy and Notice of Procedural Changes" that describes
Pre-Foreclosure Sale requirements.

Additionally, this ML updates, consolidates and/or eliminates the
following HUD forms:

Form HUD-90035 (*Information Sheet)* and Form HUD-90036 (*Application to
Participate)* have been consolidated to reflect updates made to the
program and to delete any reference to HUD's former Assignment Program.
The new Form HUD-90035 (*Information/Disclosure)* no longer requires the
signature of the party providing homeownership counseling to the
mortgagor. Form HUD-90036, *Application to Participate* is obsolete and
no longer required.

Form HUD-90038 (*Homeownership Counseling Certificate)* is now obsolete.
Form HUD-90054 (*Pre-Foreclosure Sale Data Reporting)* and Form
HUD-92068-F (*Mortgage Assignment Program Request for Financials)* were
both previously declared obsolete.

Form HUD-90041 (*Request for Variance)* has been slightly modified to
reflect the new minimum net sales proceeds of 84%.

Form HUD-90045 (*Approval to Participate)* has been modified to provide
a signature block for the mortgagor's signature(s) and new language
describing HUD's current PFS Program.

**Monitoring of Appraisals**

Mortgagees are reminded that HUD performs monitoring reviews of
appraisals and holds mortgagees accountable for the quality of
appraisals on properties securing FHA-insured mortgages. As such, HUD
may request electronically-formatted appraisals to review and ensure
their accuracy. Mortgagees who submit appraisals that do not meet HUD's
requirements are subject to the imposition of sanctions by the HUD
Mortgagee Review Board in accordance with 24 CFR Part § 25.9 (ee) and
Part § 203.5 (e)(3).

**Information Collection Requirements**

Paperwork reduction information collection requirements contained in
this document have been approved by the Office of Management and Budget
(OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520)
and assigned OMB Control Number 2502-0464. In accordance with the
Paperwork Reduction Act, HUD may not conduct or sponsor, and a person is
not required to respond to, a collection of information unless the
collection displays a currently valid OMB Control Number.

Mortgagees may direct questions or concerns regarding the Department's
PFS procedures to the Customer Call Center for HUD's National Servicing
Center (NSC). The toll free number is (888) 297-8685. Persons with
hearing or speech impairments may reach this number via TDD/TTY by
calling 1-877-TDD-2HUD (1-877-833-2483).

Sincerely,

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

> Brian D. Montgomery
>
> Assistant Secretary for Housing-

Federal Housing Commissioner

###### 

###### [Table of Contents]{.underline} [Page]{.underline}

Pre-foreclosure Sale Introduction 5

A.  Loan Default 5

B.  Mortgagor Qualifications 6

C.  PFS Program Participation 6

D.  Financial Analysis 7

E.  Property Value 8

F.  Property Condition 8

G.  Condition of Title 9

H.  Approval to Participate 10

I.  Participation Requirements 10

J.  Contract Approval 11

K.  Duration of the Pre-Foreclosure Sale Period 13

L.  Property Inspections 14

M.  Early Termination 14

N.  Failure to Complete a PFS 14

O.  Mortgagee Incentive 14

P.  Mortgagor Consideration 15

Q.  Closing and Post Responsibilities 15

R.  Claim Filing 16

S.  Reporting Requirements 17

T.  Erroneous Termination of Mortgage Insurance 17

**Pre-Foreclosure Sale Introduction**

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

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

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

Home Equity Conversion Mortgages (HECM) are not eligible for the PFS
Program. The Code of Federal Regulations (CFR) provides special
provisions for HECM short sales. Mortgagees should refer to 24 CFR Part
§ 206.125 (c) or contact HUD's NSC at the address below (Attention: HECM
Housing Specialist) or email **hecmhelp@hud.gov**.

######### **Loan Default**

At the time the PFS closes, the loan must be in default (i.e.,
delinquent more than 30 days). Mortgagees may exercise their discretion
to accept applications from mortgagors who are current but facing
imminent default. However, by the date the PFS settlement occurs, the
loan must be in default. Mortgagees should document this decision in the
claim review file.

A.  **Mortgagor Qualifications**

The PFS option may be extended to mortgagors who:

-   Are in default as a result of an adverse and unavoidable financial
    situation. Adverse and unavoidable financial situations may include
    but are not limited to loss of job or verifiable income reduction
    and extensive medical expenses;

    -   Have negative equity as determined by an "as-is" FHA appraisal
        that indicates a property value less than 100% of the
        outstanding mortgage balance (including unpaid principal and
        accrued note rate interest) and any outstanding Partial Claim
        amounts, which are secured by a subordinate lien and/or a note.
        A PFS may be considered if the property's "as-is" appraised FMV
        slightly exceeds the mortgage payoff figure, but gross sales
        proceeds fall short of the amount needed to discharge the
        mortgage by more than \$1,000;

```{=html}
<!-- -->
```
-   Are owner-occupants of a one-to-four unit single-family dwelling
    with a FHA-insured mortgage under Title II of the National Housing
    Act. Mortgagees are authorized to grant reasonable exceptions to
    non-occupant borrowers when it can be demonstrated that the need to
    vacate was related to the cause of default (e.g., job loss,
    transfer, divorce, death), and the subject property was not
    purchased as a rental or used as a rental for more than 18 months
    prior to the mortgagor's acceptance into the PFS Program;

-   Have only one FHA-insured loan. Mortgagees are authorized to make
    reasonable exceptions for mortgagors who have acquired an
    FHA-insured property through inheritance or co-signed a FHA-insured
    loan to further enhance the credit of another mortgagor; or

```{=html}
<!-- -->
```
-   Are not a corporation or partnership (i.e., unless a written request
    to utilize the PFS has been approved by HUD's National Servicing
    Center (NSC)). Requests for such approvals should be submitted to:

> U.S. Department of Housing and Urban Development
>
> National Servicing Center

ATTENTION: Branch Chief

> 301 NW 6^th^ Street, Suite 200

Oklahoma, OK 73102

> Phone Number: (888) 297-8685
>
> Fax Number: (405) 609-8405

## PFS Program Participation 

On the 32^nd^ day but, no later than the 60^th^ day of delinquency, the
mortgagee shall send the delinquent borrower a pamphlet (HUD-PA-426,
*How to Avoid Foreclosure)* about foreclosure avoidance. This pamphlet
provides mortgagors with important information about loss mitigation
alternatives, which include the pre-foreclosure sale option.

Mortgagees must inform mortgagors of the full spectrum of
foreclosure-avoidance options prior to mortgagors' participation in the
PFS Program. The mortgagee shall also advise that default counseling is
available and highly recommended, though not required.

A mortgagor who has expressed an interest in the PFS option or who has
been identified by the mortgagee as a qualified candidate for the PFS
Program must be mailed a copy of the revised Form HUD-90035
(*Information/Disclosure).* Prior to mailing Form HUD-90035, the
mortgagee must add its toll-free or collect telephone number to the
form. Form HUD-90035 provides the mortgagor with appropriate PFS
disclosures, information on housing counseling, and information about
tax consequences. This disclosure form, the aforementioned pamphlet, and
other HUD forms can be found on HUDclips at:
**[http://www.hudclips.org](http://www.hudclips.org/).**

A.  **Financial Analysis**

    Prior to signing Form HUD-90045 (*Approval to Participate),* the
    mortgagee must request financial documentation to evaluate the
    mortgagor's ability to support the mortgage debt. The PFS option may
    not be offered to mortgagors who have sufficient personal resources
    to pay off their mortgage commitment.

### 

The mortgagee may prescribe the form that the mortgagor must use to
submit its financial information. Mortgagors may provide financial
information during a telephone interview, electronically, via the
regular mail, or in person. Regardless of how the mortgagor's financial
information is obtained, the mortgagee must independently verify the
financial information. Mortgagors with surplus income and/or other
assets are required to re-pay the indebtedness through the use of a
repayment plan.

The mortgagee must analyze the mortgagor's ability to meet the monthly
mortgage obligation by:

-   Estimating the borrower's fixed monthly expenses (e.g., mortgage
    payment, food, utilities, car payment, outstanding obligations,
    etc.);

-   Estimating the borrower's anticipated monthly net income (making
    necessary adjustments for income fluctuations); and

-   Subtracting expenses from income to determine the amount of surplus
    income available each month.

    If the mortgagee's evaluation indicates that the mortgagor is not
    eligible for a PFS or another loss mitigation option, the mortgagee
    must immediately advise the mortgagor of this decision in writing,
    explaining the reason for denial and giving the mortgagor at least
    seven calendar days to respond. In the servicing or claim review
    file, the mortgagee must maintain all evidence (i.e., supporting
    documentation, including all communication logs) of compliance with
    HUD's Loss Mitigation Program requirements.

    A.  **Property Value**

        Properties offered for sale through the PFS Program are to be
        listed at no less than the "As Is" value as determined by an
        appraisal completed in accordance with the requirements of HUD
        Handbook 4150.2 (Valuation Analysis for Single Family One-to
        Four-Unit Dwellings). To this end, mortgagees must:

```{=html}
<!-- -->
```
-   Obtain a standard electronically-formatted appraisal from an
    appraiser on FHA's Appraiser Roster. The selected appraiser must not
    share any business interest with the mortgagor or the mortgagor's
    agent. Appraisals obtained by the buyer, seller, real estate agent,
    or other interested parties may not be used to establish the FMV of
    the property for the PFS Program. It also important to note that:

    1.  The appraisal must contain an "as-is" FMV for the subject
        property;

    2.  The appraisal will be valid for six months; and

    3.  Distress sales may not be used by the appraiser to establish
        comparable values unless they represent the only comparables
        within reasonable proximity of the subject property.

```{=html}
<!-- -->
```
-   Provide a copy of the appraisal to the homeowner, sales agent, or
    HUD, upon request.

-   Mortgagees are reminded that in accordance with HUD regulations at
    24 CFR Part § 203.365 (c) they are responsible for the accuracy of
    all documentation used in the PFS decision, including accurate and
    complete appraisal information.

In an effort to ensure that the most current FMV is used for the PFS, a
mortgagee may obtain a new FHA appraisal, even if the property was
appraised by an FHA Roster Appraiser within the preceding 6 months.

To be reimbursed through HUD's claim filing process, the cost of the
appraisal must be reasonable and customary for the market area where the
appraisal is performed. The appraisal must be retained in the
claim/servicing file, even if the PFS is not approved or completed.

######### **Property Condition** 

Properties that have sustained damage may be eligible for the PFS
option. If the cause of the damage is fire, flood, earthquake, tornado,
boiler explosion (for condominium's only) or mortgagee neglect (i.e.,
surchargeable damages as defined in 24 CFR Part § 203.378) mortgagees
must obtain prior approval from the NSC at the address above. Prior to
seeking this approval, the mortgagee must obtain the government's
estimate of the cost to repair the surchargeable damage by contacting
the HUD Management and Marketing (M&M) Contractor with jurisdiction for
the geographic area where the property is located. A list of M&M
Contractors can be found on the Internet at:
<http://www.hud.gov/offices/hsg/sfh/reo/mm/mmingo.cfm>.

Upon receipt of the government's repair estimate, the mortgagee must
submit a Form HUD-90041 (*Request for Variance)* to the NSC to obtain
the approval needed to enter into a PFS Agreement with the mortgagor.

In accordance with 24 CFR Part § 203.379 mortgagees are responsible for
the cost of surchargeable property damage. If the property is being sold
"As Is" subject to the damage, the mortgagee will be required to deduct
the government's estimate of the cost of the damage from its PFS claim
(See Appendix A - Claim Filing Instructions for Item 109).

If the property is being sold "As Repaired" and funds for surchargeable
repairs will be escrowed or provided as a credit to the borrower at
closing, the amount of the repair escrow or repair credit is not an
allowable settlement cost as defined in Section J of this ML and may not
be included in the net sales proceeds calculation.

If the damage is not surchargeable it is not necessary to obtain
approval from NSC prior to approving the PFS Agreement. Regardless of
the cause of the damage, the mortgagee must work with the mortgagor to
file a hazard insurance claim and either use the proceeds to repair the
property or adjust the claim by the amount of the insurance settlement
(non-surchargeable damage) or the government's repair cost estimate.

Mortgagors are required to disclose any property damage to the mortgagee
during the application or after the PFS approval. In the event a
property sustains significant damage after a mortgagor has received
approval to participate in the PFS program, the mortgagee must
re-evaluate the property to determine if it continues to qualify for the
PFS Program and terminate participation if the extent of the damage
changes the property's FMV. .

A.  **Condition of Title**

    All properties sold under the PFS Program must have marketable
    title. Prior to execution of Form HUD-90045 ( *Approval to
    Participate)* the mortgagee must obtain a title search or
    preliminary report verifying that the title is not impaired with
    un-resolvable title problems or with junior liens that cannot be
    discharged as permitted by HUD. If the mortgagee determines that
    these issues can be resolved, the mortgagor may be accepted into the
    PFS Program and resolution of said issues may be pursued while the
    property is being marketed.

Frequently, it is in the interest of all parties to facilitate the
discharge of secondary liens in order to clear title. In some cases,
junior lien holders will release a lien for a partial cash payment or a
promissory note from the mortgagor. Mortgagors who have the financial
ability to do so must be required to satisfy or obtain release of liens.
Additionally, any incentive consideration payable to the mortgagor
(\$750 to \$1,000) may be applied toward discharging liens.

If no other source of funds is available after applying the mortgagor's
incentive amount, the mortgagee may obligate up to an additional
\$1,500 - for a total of \$2,500 - from sale proceeds towards
discharging liens or encumbrances to meet all required ratios.

-   **Title I Liens** -- If the first mortgagee discovers that a
    mortgagor has a HUD Title I (property improvement) loan secured by
    the property, the first mortgage holder must contact the Title I
    subordinate lien holder to advise of the mortgagor's participation
    in a PFS. The first mortgagee may be required to negotiate the
    release of the lien in order to proceed with a PFS.

> If the Title I loan has been assigned to HUD, the first mortgagee
> should contact HUD's Financial Operations Center for guidance. The
> Center's contact information is as follows:
>
> U.S. Department of Housing and Urban Development
>
> Financial Operations Center
>
> 52 Corporate Circle
>
> Albany, New York 12203.
>
> 1-800-669-5152/ fax (518) 862-2806

-   **Section 235 Recapture -** Mortgagors with Section 235 mortgages
    may be eligible to participate in the PFS Program. However, the
    mortgagee must first determine if the loan is subject to recapture
    as referenced in Chapter 11 of HUD Handbook 4330.1, Rev. 4
    (*Administration of Insured Home Mortgages)*. Generally, if the
    mortgagor has no equity in the property, there will be no recapture
    amount owed to HUD under the subsidy provisions of the 235 mortgage.
    If a recapture amount is owed to HUD after completing the
    calculation, the mortgagee should contact HUD's NSC prior to
    approving the PFS.

-   **Partial Claim --** The partial claim (unpaid subordinate mortgage)
    amount must be included in the total delinquency when calculations
    are made. Any outstanding balance on a partial claim note must be
    deducted from the net sale proceeds based on the tiered structure of
    88%, 86% or the minimum of 84% of "as-is" appraised FMV.

    A.  **Approval to Participate**

        After determining that a mortgagor and property meet the
        participation requirements herein, the mortgagee must notify the
        mortgagor using Form HUD-90045 (*Approval to Participate).* The
        form shall include the date by which the mortgagor's sales
        contract must be executed.

    B.  **Participation Requirements**

A mortgagor must acknowledge their decision to participate in the PFS
program by signing and returning Form HUD-90045 (*Approval to
Participate)* to the mortgagee within 7 days of receiving the form. The
mortgagor's signature on Form HUD-90045 confirms their agreement to
comply with the PFS Program requirements listed below. Mortgagees must
monitor the PFS transaction in its entirety to ensure the mortgagors'
compliance with these requirements and, should terminate a mortgagor's
participation in the PFS Program in the event of noncompliance.

######### **Use of Real Estate Broker** -- The services of a real estate broker/agent must be retained to market a property within 7 days of the date the approval to participate is granted. The broker/agent must market the property within the pre-established time frame and list the property for the established sales price. The broker/agent selected should have no conflict of interest with the mortgagor, the mortgagee, the appraiser or the purchaser associated with the PFS transaction. Any conflict of interest, appearance of a conflict, or self-dealing by any of the parties to the transaction is strictly prohibited. A broker/agent shall never be permitted to claim a sales commission on a PFS of his or her own property or that of an immediate family member (e.g., spouse, sibling, parent, or child).

######### **Pre-Existing Purchasers** -- The requirement to engage a real estate professional does not apply if a mortgagor located a buyer for the property prior to being approved to participate in the PFS Program, providing all PFS requirements are met concerning appraisal requirements and minimum ratios for net sales proceeds.

-   **Required Listing Disclosure** -- The Listing Agreement must
    include the cancellation clause which reads as follows: \"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. The sale completion is
    subject to approval by the mortgagee."

-   **Property Maintenance** -- Until the PFS transaction has closed,
    the mortgagor must maintain the property in "ready to show"
    condition, make basic property repairs, and perform all normal
    property maintenance activities (e.g., interior cleaning, lawn
    maintenance, etc.).

    -   **Arms-Length Transaction** -- Mortgagors and mortgagees must
        adhere to ethical standards of conduct in their dealings with
        all parties involved in a PFS transaction. The PFS must be
        between two unrelated parties and be characterized by a selling
        price and other conditions that would prevail in a typical real
        estate sales transaction.

-   **Relocation Services** -- A relocation service affiliated with the
    mortgagor\'s employer may contribute a fixed sum towards the
    proceeds of the PFS, without altering the arms- 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 the outright sale of the
    property and cancellation of the FHA mortgage insurance.

## Contract Approval

The mortgagee will have 5 working days from receipt of an executed
Contract for Sale to respond back to the mortgagor using the Form
HUD-90051 (*Sales Contract Review)*. The PFS transaction must be an
outright sale of the premises.

No sale by assumption, regardless of provisions for release of
liability, may be considered. The contract must not include
contingencies that might delay or jeopardize a timely settlement.

Before approving any sales contract, the mortgagee must review the sales
documentation to determine that there are no hidden terms or special
agreements existing between any of the parties involved in the
transaction. Additionally, the mortgagee must determine if the property
was marketed at the gross offering price (close to FMV) and the minimum
net sales proceeds' requirements (described herein) have been met. The
mortgagee will be liable for any insurance claim overpayment on a PFS
transaction that closes with net sales proceeds less than the
percentages indicated below.

-   **Net Sale Proceeds** -- Regardless of the property's sale price, a
    mortgagee may not approve a PFS contract if the net sale proceeds
    fall below the minimum allowable thresholds stated herein. HUD has
    established guidelines for varying minimum net sales proceeds based
    on the length of time a property has been competitively marketed for
    sale.

1.  For the first 30 days of marketing, mortgagees may only approve
    offers that will result in minimum net sale proceeds of 88% of the
    "as-is" appraised FMV.

2.  During the next 30 days of marketing, mortgagees may only approve
    offers that will result in minimum net sale proceeds of 86% of the
    "as-is" appraised FMV.

3.  For the duration of the PFS marketing period, mortgagees may only
    approve offers that will result in minimum net sale proceeds of 84%
    of the "as-is" appraised FMV.

4.  Mortgagees have the discretion to deny or delay sales where an offer
    may meet or exceed the 84%, if it is presumed that continued
    marketing would likely produce a higher sale amount. However, the
    mortgagee is still limited to 4 to 6 months after the date of the
    mortgagor's approval to participate in the PFS Program.

-   **Allowable Settlement Costs** -- The term "Net Sale Proceeds" is
    defined as the sales price minus closing/settlement costs (i.e.,
    reasonable and customary costs per jurisdiction that are deducted at
    settlement). Allowable settlement costs include:

    1.  Sales commission consistent with the prevailing rate but, not to
        exceed 6%;

    2.  Real estate taxes prorated to the date of closing;

    3.  Local/state transfer tax stamps and other closing costs
        customarily paid by the seller including the seller's costs for
        a title search and owner's title insurance;

    4.  Consideration payable to seller of \$750 or \$1,000 (i.e., if
        such consideration is not used to discharge junior liens);

    5.  Up to \$2,500 to be used for the discharge of junior liens if
        closing occurs within 90 days. Within 90 days, the first \$1,000
        represents the mortgagor's consideration and the additional
        \$1,500 represents FHA's consideration for a total of \$2,500.
        If settlement occurs after 90 days, the first \$750 represents
        the mortgagor's consideration and the additional \$1,500
        represents FHA's consideration for a total of \$2,250;

    6.  Outstanding partial claim amount. This entire amount must be
        paid when calculating the net sales proceeds. The seller, buyer,
        or other interested party may contribute the difference if the
        net sales proceeds' amount falls below the allowable threshold;
        and

    7.  Up to 1% of the buyer's first mortgage amount if the sale
        includes FHA financing.

        -   **Unacceptable Settlement Costs** -- The following costs may
            not be included in the net sales proceeds calculation,
            however, the seller may use their consideration of \$750 or
            \$1,000 for these settlement costs.

1.  Repair reimbursements or allowances;

2.  Home Warranty fees;

3.  Discount points or loan fees for non FHA-financing; and

4.  Lender's Title Insurance fee.

**K. Duration of the Pre-Foreclosure Sale Period**

Unless an extension has been approved by NSC, mortgagees have 4 months
from the date of the mortgagor's approval to participate in the PFS
Program. Mortgagees have a pre-approved extension of 2 additional months
to complete the PFS if one of the following exists:

-   The mortgagee is in the Tier 1 category under the Department's Tier
    Ranking System (TRS); or

-   There is a signed Contract of Sale, but settlement has not occurred
    by the end of the fourth month following the date of the mortgagor's
    approval to participate in the PFS Program.

Mortgagees are reminded that, on a monthly basis, they must review a
property's marketing status with the mortgagor and/or real estate
broker.

**L.** **Property Inspections**

Mortgagees have a responsibility to ensure that insured properties are
not subject to abandonment or waste, and are required to conduct
property inspections on the 45^th^ day following default if there has
been no contact with the mortgagor. Property preservation and protection
(P&P) inspections are not required during the PFS period if contact with
the mortgagor is maintained, unless there is reason to suspect that the
property has become vacant. Inspections to verify occupancy are
reimbursable using Part C of the Form HUD-27011 (*Single Family
Application for Insurance Benefits)*. However, funds expended for P&P
work on an occupied property are not reimbursable.

**M. Early Termination**

A mortgagor may voluntarily terminate participation in the PFS Program
at any time. PFS Program participation may also be terminated at the
discretion of the mortgagee, for any of the following reasons:

-   Un-resolvable title problems;

-   Determination that the mortgagor is not acting in good faith to
    market the property;

-   Significant change in property condition or value; and

-   Re-evaluation of the information provided by the mortgagor indicates
    that the case does not qualify for the PFS option.

The mortgagee must forward the mortgagor a date-stamped written
explanation for terminating his/her program participation. This letter
shall also include the "end-of-participation" date for the mortgagor.
The mortgagee must then resume appropriate servicing actions.

####### **N. Failure to Complete a PFS** 

At the expiration of the PFS period, the mortgagee must re-evaluate
available loss mitigation options. If the mortgagor's financial
condition has improved to the point that reinstatement is a viable
option, the mortgagee may undertake one of the home retention loss
mitigation tools. If reinstatement is not feasible, the mortgagee should
try to obtain a DIL of foreclosure before commencing foreclosure. An
alternate loss mitigation option or first legal action to initiate
foreclosure must be completed within 90 days of the expiration of the
PFS period. If more than 90 days are needed to complete a DIL or
initiate foreclosure or resume foreclosure, mortgagees must follow HUD's
standard extension procedures and request an extension from the NSC.

**O. Mortgagee Incentive**

FHA will pay mortgagees an incentive fee of \$1,000 for each completed
PFS transaction that complies with all of the requirements in this ML.
This fee may be claimed on line 129, Part B of Form HUD-27011.

##### 

##### Mortgagor Consideration

Mortgagors, acting in good faith, who successfully sell their properties
using this option are relieved of their mortgage obligation and are
entitled to a consideration of \$750. If the closing occurs within 3
months of the approval to participate*,* the mortgagor will be entitled
to \$1,000. Unless the mortgagor's consideration is required to release
junior liens, the mortgagor may elect to accept cash paid at closing.
The mortgagor may also apply a portion of or the entire amount of
consideration to offset sales costs not paid by HUD; including a home
warranty plan fee, costs of optional repairs, and buyer's closing
expenses. If the PFS is unsuccessful and foreclosure occurs, mortgagors
who participate in the PFS Program in good faith will not be pursued for
deficiency judgments by the mortgagee or HUD.

#####   {#section-4 .unnumbered}

## Closing and Post Closing Responsibilities 

Prior to closing, the mortgagee will provide the closing agent with a
Form HUD-90052 (*Closing Worksheet)* which lists all amounts payable
from sale proceeds. The closing agent will calculate the actual net sale
proceeds and provide a copy of the Form HUD-1 (*Settlement Statement*)
to the mortgagee. The mortgagee must review the actual terms of the
transaction to ensure that they are in accordance with the earlier
estimates prior to granting final approval of the PFS. The mortgagee is
required to ensure that:

-   The final terms of sale are consistent with the purchase contract;

-   Only allowable settlement costs have been deducted from the seller's
    proceeds;

-   The net sales proceeds will be equal to or greater than the
    allowable thresholds; and

-   The Form HUD-90052 is included in the claim/servicing file.

Once the mortgagee gives final approval for the PFS and the settlement
occurs, the closing agent must pay the expenses out of the proceeds, and
must forward the net sales proceeds to the mortgagee. The closing agent
must also forward a copy of the Form HUD-1 to the mortgagee to be
included in the claim/servicing file.

A PFS must be reported to national credit bureaus as a "short sale".
Mortgagees will be responsible for filing a Form 1099-A (*Acquisition or
Abandonment of Secured Property*) with the Internal Revenue Service and
reporting any discharge of indebtedness, in accordance with the Internal
Revenue Code.

####### **Claim Filing**

HUD will reimburse the mortgagee 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 postponed
foreclosure, pending completion of the PFS.

Disbursements for taxes, assessments, hazard insurance and other
allowable items payable before the date of the PFS closing are
reimbursable only if they are not satisfied at closing. HUD will not pay
property-related costs which were incurred after the PFS closing date.

HUD will monitor mortgagees by selecting and reviewing appraisals for
risk assessment purposes. Electronic appraisals will be reviewed for
accuracy and to ensure that FMVs were used in lieu of distressed sale
values. HUD is now requiring mortgagees to enter the FMV in Block 30 on
Part A of Form HUD-27011.

The consideration paid to the mortgagor and allowable amounts (i.e.,
which do not exceed \$2,500) paid to release all junior liens must be
reflected on the Form HUD-1 and must [not]{.underline} be included on
the Form HUD-27011. The mortgagee's incentive fee must be entered on
line 129 of Part B of the Form HUD-27011.

Upon receipt of the portion of the sales proceeds designated for
mortgage satisfaction, the mortgagee will satisfy the mortgage
obligation and file a PFS claim for FHA insurance benefits via Form
HUD-27011. The mortgagee must [not]{.underline} submit an FHA insurance
termination to the Department if a PFS claim will be filed.

If the mortgagee began the PFS process timely, then HUD will grant the
mortgagee an automatic extension of 90 days after termination of the PFS
to initiate another loss mitigation action or undertake the first legal
action to institute foreclosure as described in Section "N" of this ML.
To receive the extension, the ending date of the terminated or failed
PFS transaction must be entered in Block 21 of Part A of the Form
HUD-27011. A date that is no more than 90 days after the date listed in
Block 21 must be entered in Block 19, to receive this extension. The
claim for insurance benefits, (Parts A and B of Form HUD-27011), should
be received by HUD within 30 days after the settlement date of the PFS
transaction. If the sale proceeds have not been received from the
closing agent, an extension must be requested from the NSC. The
expiration date of the approved extension must be recorded in Block 20
on Part A of Form HUD-27011.

HUD will hold mortgagees, submitting excessive claims that do not meet
the aforementioned required minimum allowable tiered-thresholds of 88%,
86%, or 84%, liable for excessive claim amounts. Claim filing
instructions are located in Appendix A and these instructions supersede
those found in Chapter 8 of HUD Handbook 4330.1 rev 1 (*FHA Single
Family Claims*) For questions about filing a claim, please send an email
to FHA_SFClaims@hud.gov. Mortgagees must include their Servicer Number,
FHA Case Number, and a keyword phrase, such as "claim filing," "claims
status," etc., in the e-mail subject line.

P.  **Reporting Requirements**

Mortgagees are required to update HUD's Single Family Default Monitoring
System (SFDMS) with 2 default status codes when utilizing the PFS
Program. These codes are as follows:

-   Status Code 15 to indicate that the mortgagor has been accepted into
    the PFS Program; and

-   Status Code 17 to indicate that the PFS transaction has been
    completed.

Mortgagees must update SFDMS with Status Code 15 in the month that the
mortgagor is approved to participate in the PFS Program. Mortgagees must
continue to report the account under Status Code 15 during the entire
time that the mortgagor is participating in the PFS Program. Once a PFS
is complete (i.e., settlement has occurred and all funds have been
received), mortgagees must report the account as Status Code 17 within
30 days of the PFS closing date. However, if no successful PFS
transaction occurs and a DIL is obtained, the account should be reported
as Status Code 47 in the month the DIL is [recorded]{.underline}.
Information on additional status codes along with instructions referring
to bankruptcy, foreclosure, etc. are included in Mortgagee Letter
2006-15.

Mortgagees will be in compliance with HUD's reporting requirements when
reporting codes are entered into the SFDMS within the above-prescribed
timeframes. If reporting codes are not provided within the prescribed
timeframes, the mortgagee will be subject to interest curtailment.
Mortgagees are subject to interest curtailment if they do not initiate
the PFS transaction or report the initiation of the PFS transaction to
HUD via SFDMS timely.

## Erroneous Termination of Mortgage Insurance

A mortgagee must not submit a Mortgage Insurance Termination in
situations where the mortgagee has filed or intends to file a claim for
FHA insurance benefits. HUD can only pay FHA mortgage insurance benefits
when the mortgage insurance is in an "active" status. Mortgagees may
direct questions or concerns regarding the Department's PFS procedures
to the NSC's Customer Service Call Center. The center's toll free number
is 1-888-297-8685.

Attachment:

Appendix A - Claim Instructions

Active Forms:

Form HUD-90035 *Information/Disclosure*

Form HUD-90041 *Request for Variance*

Form HUD-90045 *Approval to Participate. Property Sale Information/
Property Occupancy and*

*Maintenance*

Form HUD-90051 *Sales Contract Review*

Form HUD-90052 *Closing Worksheet*

Form HUD-27011 *Single Family Application for Insurance Benefits*

[^1]: The regulations for the PFS Program are codified in 24 CFR
    203.370.