**October 17, 2008**

**MORTGAGEE LETTER 2008-32**

**TO: ALL APPROVED MORTGAGEES**

**ATTENTION: Single Family Servicing Managers**

**SUBJECT: Use of FHA Loss Mitigation During Bankruptcy**

This Mortgagee Letter updates the Department's position on the use of
FHA Loss Mitigation while a borrower is in bankruptcy. The guidance
regarding mortgagors in bankruptcy provided on pages 9 and 25 of
Mortgagee Letter 2000-05, is superseded by this Mortgagee Letter.
Mortgagee Letter 2000-05, generally prohibited mortgagees from offering
loss mitigation to a borrower in bankruptcy. That guidance was
predicated on the concern that HUD did not want to influence mortgagees
to take any action that would be considered by the Bankruptcy Court as a
violation of the automatic stay.

The Department was recently approached by the mortgage industry and
bankruptcy experts regarding the Department's current guidance on
mortgagors in bankruptcy. As a result of these discussions, the
Department understands that contact with debtor's counsel or a
bankruptcy trustee does not constitute a violation of the automatic stay
and that waiting until a bankruptcy is discharged or dismissed before
offering loss mitigation may be injurious to the interests of the
borrower, the mortgagee and the FHA insurance funds.

Effective immediately, mortgagees must, upon receipt of notice of a
bankruptcy filing, send information to debtor's counsel indicating that
loss mitigation may be available, and provide instruction sufficient to
facilitate workout discussions including documentation requirements,
timeframes and servicer contact information. Working through debtor's
counsel, mortgagees may offer appropriate loss mitigation options prior
to discharge or dismissal, without requiring relief from the automatic
stay and in the case of a Chapter 7 bankruptcy, without requiring
re-affirmation of the debt. It is strongly recommended that the
bankruptcy trustee be copied on all such communications. All loss
mitigation actions must be approved by the Bankruptcy Court prior to
final execution.

Nothing in this mortgagee letter requires that mortgagees make direct
contact with any borrower under bankruptcy protection. However, the
information required to file a bankruptcy petition (now a matter of
public record) will often include sufficient financial information for
the mortgagee to properly evaluate the borrower's eligibility for loss
mitigation. Using this financial information, many mortgagees have been
able to complete the loss mitigation evaluation before the bankruptcy
plan is confirmed and have offered a pre-approved loan modification
agreement. For those mortgagors that sought bankruptcy protection solely
to avoid foreclosure of their homes, this solution allowed the mortgagor
to have the bankruptcy dismissed and begin fresh with a mortgage
obligation that is both current and with payments that the mortgagor can
afford. For those mortgagors with other financial problems, the
resolution of the mortgage problem will put them in a better position to
resolve the remaining financial issues.

Where the mortgagor filed the bankruptcy Pro Se, (without an attorney),
the Department recommends that information relating to the availability
of loss mitigation be provided to the mortgagor with a copy to the
bankruptcy trustee. This communication must not infer that it is in any
way an attempt to collect a debt. Mortgagees must consult their legal
counsel for appropriate language.

The Department cautions mortgagees not to report current loans to HUD's
Single Family Default System (SFDMS) simply to alert HUD that a
bankruptcy has been filed. Loans must be at least one full payment due
and unpaid (30 days delinquent) before reporting to SFDMS is required.
Where the mortgagee is successful and is able to utilize loss mitigation
on an account in bankruptcy, it must continue to report the appropriate
status codes in SFDMS to reflect loss mitigation actions. Please ensure
that should the loss mitigation initiative result in reinstatement or
payment in full that the appropriate status code is reported to SFDMS.

The 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 numbers 2502-0429 and 2502-0523. 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

Any questions regarding this Mortgagee Letter or requirements for use of
the partial claim and loan modification authorities may be directed to
HUD\'s National Servicing Center (NSC) at 888-297-8685 or
hsg-lossmit@hud.gov.

> Sincerely,
>
> Brian D. Montgomery
>
> Assistant Secretary for Housing --
>
> Federal Housing Commissioner