4335.2 REV.

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CHAPTER 5 - FORECLOSURE

5-1. FIELD OFFICE RESPONSIBILITIES BEFORE RECOMMENDING FORECLOSURE

Foreclosure, or the threat of foreclosure, should not be used unless

the office intends to foreclose. Foreclosure is the last resort

after it is evident that the mortgagor cannot, or will not, meet the

mortgage obligation. Before recommending foreclosure:

A. Assure that all required and reasonable servicing actions have

been undertaken and efforts exhausted.

B. Encourage sale, by the mortgagor, as an alternative to

foreclosure (this includes sale by assumption of the mortgage),

but do not delay foreclosure for this reason.

C. Suggest the offering of a deed-in-lieu of foreclosure by the

mortgagor (see Paragraph 5-8 on deeds-in-lieu). (This does not

apply to investors.)

The encouragement of a sale or the suggested offering of a

deed-in-lieu of foreclosure should be by active (if possible

face-to-face) and direct methods rather than passively subsuming

it in the text of a letter without explanation or elaboration.

D. If the field office determines that the property has little, or

no, residual value, the case should be placed on an inactive

status and foreclosure avoided.

E. Where there are high municipal liens on a vacant/abandoned

property, which would prove a major liability to anyone acquiring

title, placement of a property on an inactive status may also be

an appropriate alternative, though the property has substantial

residual value.

5-2. PROCEEDING TOWARDS FORECLOSURE. Foreclosure actions start with the

preparation of a Notice of Intention to Foreclose.

A. Before determining the amount required to bring the mortgage

current:

1\) On all accounts with account numbers beginning with 07, check

Loan Screen 2 (LNS2) for the Code 12 indicating that a Post

Audit has been completed. Call the Service Center to request

a Post Audit if the Code 12 is missing.

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5-1 9/86

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4335.2 REV.

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2\) If the account is a Graduated Payment Mortgage (GPM), notify

the Service Center to have the account adjusted before

preparing figures.

This amount should include all known charges against the account,

for example: taxes paid but not posted. Perform a manual escrow

analysis, taking into account any shortages or excess funds.

B. Complete and mail a Notice of Intention to Foreclose and

Accelerate Mortgage Balance and to Report to Credit Bureau (NOI),

giving the bring-current amount and 30 days to respond. The NOI

must be sent to the mortgagor by certified mail. (See Exhibit

5-1.1). This is a new NOI and previous versions are obsolete.

NOTE: If the mortgagor has filed a Petition in Bankruptcy, the

Acceleration Notice may not be sent to the mortgagor

while the bankruptcy stay is effective. (See Bankruptcy,

Section 9).

C. At the time the NOI is sent, the field office must file-maintain

Loan Screen One (LNS1):

1\) Change the Pay Option Code to 9 to stop the sending of bills;

2\) Enter 21 (Accept no Payments) and 38 (Send no Mail) in the

Condition Codes to alert the System not to accept and apply

any partial payments, or send mail.

NOTE: The field office may annotate LNS3, under comment, with

the amount it considers substantial enough to consider

reinstatement.

D. Substantial Payments. In the case of the original mortgagor the

substantial payment should, at least, clear up the delinquency

under the prior forbearance agreement, or as much as 50 percent

of the mortgage delinquency, whichever is greater, unless the

field office determines that a lesser amount is appropriate.

E. Acceptance of a Partial Payment after Mailing the NOI.

1\) If the mortgagor tenders less than what the field office

considers a substantial payment towards the delinquency, it

should be accepted. But, if the field office desires to

continue with foreclosure, send a new NOI containing both a

new bring-current amount, and substantial payment amount, to

the mortgagor before requesting foreclosure. (See Exhibit

5-l.2.)

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9/86 5-2

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4335.2 REV.

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NOTE: This does not necessitate an extension of the 30-day

period, if reinstatement doesn\'t occur; however, the

NOI should state that the money will be applied

against the delinquency-but does not satisfy the

amount needed to consider reinstatement, and make it

clear that the original 30-day term applies.

2\) Where the amount tendered represents a significant

proportion of the \"substantial payment\" the field office, at

its discretion, may grant an 30-day term to allow for

resolution.

NOTE: The field office shall not use this procedure to

incrementally make up the entire delinquency by

stringing the mortgagor along beyond that point

which, originally, would have been viewed as a

substantial amount subject to 2 D.1 (above).

F. The System is designed to treat payment as an exception when a

Code 21 is in place. Therefore, OFA\'s Single Family Notes

Branch\'s Cash Control Staff will contact the Field Office to

inform you of the payment\'s receipt. All payments received prior

to actual recommendation of foreclosure shall be accepted. The

field office must than decide whether to:

1\) Act in accordance with 5-3., below, or

2\) Continue to foreclose after following the instructions in

this section (2).

5-3. MORTGAGOR RESPONSE TO THE NOI. The period between the sending of
the

NOI and the actual referral of a case to foreclosure is not the last

opportunity for resolution. However, it may be the last opportunity

to avoid incurring foreclosure costs by HUD.

A. If the mortgagor responds to the Notice, the field office shall

withhold further action leading to foreclosure under the

following conditions:

1\) The account is fully reinstated.

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5-3 9/86

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4335.2 REV.

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2\) The account is paid in full.

3\) The mortgagor tenders an acceptable deed-in-lieu of

foreclosure. (The deeding is not complete until actual title

approval.)

4\) The mortgagor has entered into a contract with a purchaser

which will result in one of the following within 60 days:

a\. Payment in full.

b\. Full reinstatement through assumption.

c\. Assumption without full reinstatement acceptable to the

field office. (See 5 below.)

d\. If the mortgage is being assumed by a mortgagor who is

not an owner-occupant, the mortgage must be brought

current.

5\) The mortgagor, or occupant assumptor, makes a substantial

lump-sum payment towards the delinquency and enters into a

forebearance agreement.

If the mortgage has been held by the Secretary for more than

36 months, or in the case of an assumptor, the forbearance

agreement must provide for no less than a regular mortgage

payment.

B. If resolution is accomplished, change Pay Option Code to 4,

remove Condition Codes 21 and 38, and establish the forbearance

screen (if appropriate). If a deed-in-lieu is accepted, see

Section 8 of this chapter.

5-4. INITIATING FORECLOSURE

A. If resolution does not occur, or if the mortgagor does not

respond after issuance of the NOI, the field office must promptly

recommend foreclosure after the 30-day period expires.

NOTE: Due to the terminal nature of a foreclosure action

recommendations must be fully supportable.

Recommendations made to achieve goals, in lieu of

appropriate servicing activities, will not be tolerated.

Similarly, system encoding must accurately reflect case

status. Each recommendation must have supervisory review

and approval, and that review may not be of a cursory

nature nor a superficial inspection of the Foreclosure

Checksheet, HUD-92218, (Exhibit 5-2).

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9/86 5-4

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4335.2 REV.

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B. In most cases forward the original foreclosure recommendation to

the Office of General Counsel, Home Mortgage Insurance (GHH)

using the memorandum in Exhibit 5-3 along with the Tax Data Card

or data from CPPS; a copy of the NOI; and, a completed

foreclosure checksheet. A completed HUD-698, Statement of

Account, and all pertinent legal instruments required for

foreclosure processing must also accompany the recommendation.

If the original Title File is unavailable the field office must

obtain certified copies of the legal instruments.

EXCEPTION: Only GPMs, Bulks, and other special loans shall

continue to be forwarded to OFA. All other cases

must be forwarded to OGC. Remember to submit the

legal file with your recommendation. Instructions

for the preparation of the HUD-698 are contained in

Exhibit 5-4.

C. Send a copy of the complete foreclosure recommendation and

checksheet to the Single Family Servicing Division in

Headquarters.

D. Simultaneously, file maintain Loan Screen One (LNS1) of the

SFMNS by entering a Status Code 41, and annotate Loan Screen 3

(LNS3) with the date foreclosure documents were sent to OGC.

E. If the account is receiving Section 235 assistance, suspend the

subsidy by file maintaining the C235 trailer. (See the SFMNS

Users Guide, at 4-31b, for further guidance.)

F. Check the system\'s HSTY screen to determine whether payments

have inadvertently been applied. If so, follow instructions at

5-2.E (above).

5-5. ACTION BY THE OFFICE OF GENERAL COUNSEL

A. The account will be assigned to a foreclosure agent by OGC.

That agent is under contract to HUD to foreclose the mortgage.

B. Field offices will receive a copy of OGC\'s referral to the

agent. Only if the field office does not receive that copy

within 60 days of the date on LNS3 (see 5-5A., above) should any

inquiry be made of OGC regarding the case\'s status. Once that

copy is received, no inquiry shall be made of OGC except in

cases of suspensions or termination of foreclosure, or

bankruptcy.

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5-5 9/86

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4335.2 REV.

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C. Foreclosure attorneys are required to obtain updated 698 data

just prior to foreclosure and, with the exception of bidding

instructions related to efforts to avoid acquiring title at the

foreclosure sale, there should be no other direct contact with

the foreclosing agent or the foreclosing attorney. All other

contacts with these agents are to occur through OGC, with the

exception of the notices of occupied or vacant conveyance (an

informal notification to the foreclosing attorney may supplement

this only where the foreclosure sale is imminent). The

foreclosing agent will be requested to notify the field office

whether the property is occupied or vacant.

NOTE: If the property is occupied, the Property Disposition

Section shall commence the occupied delivery procedures

as prescribed in outstanding instructions (memorandum

entitled: Occupied Conveyance, dated August 15, 1984).

Unless notified to the contrary, the foreclosing agent

will convey the property to HUD unoccupied.

5-6. SUSPENSION OR TERMINATION OF FORECLOSURE

If a suspension or termination of foreclosure is desired, after the

foreclosure recommendation has been sent to OGC, contact OGC

immediately by phone (FTS 755-7080), with confirmation in writing (do

not send a copy to OFA). Under no circumstance shall the foreclosure

agent, the attorney, or OFA be contacted directly. Contact OGC when

partial payments have been inadvertently applied to the mortgagor\'s

account.

A. Reasons for Suspension of Foreclosure

1\) Filing bankruptcy

2\) Fruitful negotiations with the mortgagors which will lead to

a resolution similar to those described in 5-3A (above), but

which may extend beyond the date of the sheriff\'s sale.

3\) Regional or Headquarters review, for cause, of a case in

foreclosure.

B. Reasons for Termination of Foreclosure

1\) The mortgagor performed adequately under and outside of the

bankruptcy plan.

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9/86 5-6

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4335.2 REV.

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2\) Reinstatement, payment-in-full, etc. has occurred.

(Foreclosure costs incurred by the Department must be secured

from OGC and considered as part of the resolution.)

3\) The condition of the property has been found to meet the

criteria for placement under inactive status.

4\) Acceptance of a deed-in-lieu of foreclosure. At the request

of the field office, OGC will instruct the foreclosure agent

to prepare and record the deed. As part of its foreclosure

processing, the foreclosure agent will have determined

whether there are any other outstanding liens.

C. SFMNS File Maintenance Requirements when Foreclosure is

Terminated.

When foreclosure has been terminated:

1\) Remove Condition Codes 21 and 38, and Status Code 41; and,

2\) Except for inactive cases, change the pay option code to 4.

NOTE: In the case of a reinstatement, check that

reinstatement funds have been applied (and, where

applicable, a forbearance agreement established) to

avoid the mortgage being billed as delinquent.

5-7. SPECIAL FORECLOSURE SITUATIONS. Vacant Properties, Rentals, and

Junior Liens (Special conditions not described below may require the

field office to seek advice from the Secretary-Held and Counseling

Services Branch, Headquarters (HSSL) before action).

A. Abandoned or Vacant Properties.

1\) The mortgagor\'s intent to protect the property should be

determined by contacting him/her. Under unusual

circumstances, it might be necessary for HUD to protect and

preserve the property when the mortgagor is unable or

unwilling to take protective measures.

2\) If the only payments being applied to the account result

from assistance or buy-down, then:

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5-7 9/86

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4335.2 REV.

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a\. The Section 235 assistance must be suspended and reversed to

when the vacancy occurred (unless the vacancy is temporary

and approvable); or,

b\. The buy-down escrow agent should be informed, in writing, to

suspend remittances until further notice. After foreclosure

(or a deed-in-lieu) is completed, the field office must make

demand of the escrow agent for the escrowed funds.

In both situations, noted above, OFA must be notified.

3\) Initiate foreclosure once it has been firmly established that

the property has been abandoned or vacant for more than 60

days, and the mortgagor cannot be located.

4\) In the foreclosure recommendation, advise OGC that the property

has been vacant for more than 60 days, and the mortgagor cannot

be located.

5\) Immediately, request Property Disposition to take protection and

preservation measures to avoid depreciation and vandalism.

The mortgagor continues to own the property until title has been

transferred. Also, be sure that no personal property,

regardless of its condition, is removed from the property.

The only authorized expenditures are for securing the property,

this does not include yard maintenance. The Department is to

merely take actions required to protect its mortgage security,

as permitted by the mortgage instrument. HUD Handbook 4310.5,

Property Disposition Handbook, paragraph 95, provides procedures

and authority for protection and preservation of SH mortgaged

property.

B. Rental Property. Providing that servicing standards have been met,

the fact that the property is occupied by other than the homeowner

should not be a deterrent to recommending foreclosure.

1\) Occupancy, even by other than the mortgagor, may reduce the

potential of vandalism.

2\) Prior to accepting rental payments from tenants of the

mortgagor, field offices must consult field counsel.

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9/86 5-8

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4335.2 REV.

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If counsel approves field offices may accept rent or other

payments from non-owner occupants when tendered on a delinquent

account. However, such payments must be clearly identified and

placed in an escrow account to be applied or disbursed depending

on the accounting after final disposition of the foreclosure.

Such receipt should be sent directly to the Post Insurance

Division, AFMP, with a covering instructional memorandum.

C. Foreclosing Junior Liens. Most SHMs are first liens and the

foreclosure by a junior lien holder means that the field office will

have to work with a replacement mortgagor. Field offices must be

sure that they are familiar with all foreclosure laws for the states

in which they have jurisdiction. Notice of a foreclosure action by

a junior lien holder must be referred immediately to field counsel.

The replacement mortgagor must be viewed in the same way as an

assumptor. That is, if the account is delinquent, it must be

brought current either immediately or through a forbearance

agreement.

The same conditions must be met as with an ordinary assumption that

does not bring the account current (see 5-3A above). Failure to

accomplish either requires the field office to recommend

foreclosure.

D. Federal Interest in Junior Liens

1\) Most junior liens are held by private parties. However, there

are instances where the junior lien will be federally insured,

or held by a federal agency. Such examples are Title I and

Section 312 loans.

2\) It is not in HUD\'s interest to have a junior Title I or Section

312 loan foreclosed where there is an active and successful

repayment plan addressing the problem of a delinquent SHM.

Nor, would it be in HUD\'s interest to sue to collect on a

judgment under similar circumstances.

3\) Field offices must coordinate their collection activities with

the best interests of the Secretary always in mind, especially

where Title I or Section 312 loans are involved. Case records

should be adequately \"flagged\" where HUD junior lien is known to

exist. The SFMNS loan monitoring screen should be used for this

purpose.

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5-9 9/86

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4335.2 REV.

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5-8. DEEDS-IN-LIEU OF FORECLOSURE. A deed-in-lieu, generally, is

acceptable only if the property is free of all liens other than the

Secretary-Held mortgage. This is because a deed-in-lieu obligates

HUD to those junior liens. The deed should not be recorded until it

is established by Field Counsel that there are no other liens.

However, the existence of a junior lien is not, of itself, reason to

reject a deed-in-lieu. The fact that HUD is intent upon foreclosure

can be used to negotiate compromises of smaller junior liens. As a

\"rule-of-thumb\", if junior liens can be compromised for less than the

foreclosure costs, they should. Seek guidance from Field Counsel.

If the office wishes to accept a deed-in-lieu when there are other

liens, contact Field Counsel for approval after securing the title

documents (see 5-8.B., below). One must remember that judgments

against individuals are different from liens against the property,

and seek guidance from Field Counsel.

A. General

1\) A deed given before initiation of foreclosure will rarely

affect the mortgagor adversely. When a deed-in-lieu of

foreclosure is accepted HUD will not permit the property to

be conveyed occupied.

2\) Up to \$200 may be authorized to be paid the mortgagor. The

amount to be paid (if it is a part of the negotiation) must

always be the minimum necessary to accomplish the objective.

This amount is part of the total anticipated cost of

foreclosure.

3\) Generally a deed-in-lieu will not be accepted from a

corporate mortgagor. Decisions to accept must be considered

carefully, especially if the properties are being used for

income production. This includes a mortgagor owning two or

more properties subject to an FHA-insured mortgage or SHMs

builder \"bail-out\" situations, or someone taking title

through foreclosure of a junior lien.)

4\) Generally, HUD will not accept a deed-in-lieu on the residual

properties resulting from bulk-sales. HUD\'s intent in

entering into bulk-sales agreements was not to take back the

worst properties after the purchaser spun-off and sold the

best. The mortgagor shall be informed that HUD will actively

pursue a deficiency judgment if foreclosure does occur.

(Waiver of this policy may be requested of the Director,

Office of Insured Single Family Housing, (HSS) where

documentation will support an extension of mortgage term).

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9/86 5-10

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4335.2 REV.

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If the properties are deteriorated, they should be placed on

inactive status, as you would any other property. If any

irregularities are detected concerning the mortgagor\'s handling

of a bulk sale mortgage (such as equity-skimming), the case

should be referred to the Office of the Inspector General for

investigation.

5\) Need for a title search:

a\. Deeds-in-lieu of foreclosure must be supported by a title

search indicating no subordinate liens; or,

b\. If a title search indicates subordinate liens, those liens

must be able to be compromised for less than the cost of

continuing foreclosure.

NOTE: Where the property is subject to a Section 235

Recapture Lien, a deed-in-lieu will not wipe-out

the lien. However, the mortgagor\'s disposal of

title, with no gain, eliminates the potential of

recapture.

If a property is subject to Title I or Section 312

liens a deed-in-lieu does not wipe out those liens.

Those liens must be satisfied prior to disposition.

Loan management must discuss satisfaction of these

liens with the other HUD program areas before the

deed is accepted.

B. Legal Representation Involving Deeds-in-Lieu

1\) If the case has been referred for foreclosure, inform OGC so it

may have the foreclosure agent handle the matter. Otherwise,

the field office is authorized to engage an attorney or title

company to represent HUD. In the latter event, provide the

following documents to the attorney or title company:

a\. The original security instrument and note.

b\. Title evidence held by the Secretary, if available.

c\. Form HUD-2319, Attorney\'s Certificate of Title or, Title

Policy, as appropriate.

d\. Deed to Secretary, if one has been obtained, or a request

that one be prepared for the mortgagor\'s(s\') signature.

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5-11 9/86

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4335.2 REV.

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2\) Marketable Title. Before preparation or recording the deed, the

attorney of title company must examine the condition of the

record title. The deed should not be recorded if there are

outstanding encumbrances other than the HUD mortgage, current

taxes and assessments, or customary easements, mineral

reservations or restrictions of the type waived by Section

203.389 of the HUD Regulations.

3\) Approval of Acceptance by Field Counsel. If encumbrances or

liens appear on record, the Field Counsel must be consulted

concerning acceptance of the deed. All particulars of the case,

including all available information or status of the

encumbrances, will be presented to the Field Counsel with the

recommendation of the attorney or title company, and the field

office with respect to possible compromise of the objectionable

liens.

4\) Satisfaction or Release from Liability. If there were no

questions regarding marketability, or when the Field Counsel has

approved acceptance of the deed-in-lieu where there are

objectionable liens outstanding the attorney or title company

will have a deed prepared, if not already provided by the

mortgagors, and recorded after execution. At the same time, the

Satisfaction or Release should be prepared for the field

office\'s execution and recorded immediately following the

deed-in-lieu.

5\) Title Evidence.

a\. Once the deed has been recorded, the attorney or title

company, must provide title evidence to the date of

recording that certifies good marketable title vested in the

name of the Secretary of Housing and Urban Development, c/o

(appropriate Field Office having jurisdiction) his

successors and assigns. (If evidence is provided pursuant

to the title binder program, it should insure the Secretary

of Housing and Urban Development, c/o (appropriate Field

Office having jurisdiction) his successors and assigns, or

the Secretary\'s purchaser.) The type of title evidence can

be no less than that customarily used in the area where the

property is located.

b\. The attorney or title company, should return the recorded

deed, along with the new title evidence and bill for

services and costs, to the field office. The recorded

satisfaction or release should be given to the former

mortgagor(s). The title docket and final title evidence

should be submitted to Field Counsel for approval prior to

being forwarded to the Property Disposition Branch.

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9/86 5-12

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4335.2 REV.

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5-9. BANKRUPTCY AND FORECLOSURE

A. Bankruptcy Petition. A Petition filed under the Bankruptcy Act

operates as a \"stay\" which prohibits any activity to collect a

claim against the debtor or to obtain possession of his property.

When the field office receives a Notice of Bankruptcy, there may

be no further contact initiated by HUD with the mortgagor

concerning the existing delinquency. All collection efforts

under the mortgage or forbearance agreement shall cease and

neither the Notice of Intent to Foreclose nor the Occupancy

Notice may be sent to the mortgagor. Follow the instructions

outlined in Chapter 6.

B. Bankruptcies Occurring After a Case has been Referred to

Foreclosure. OGC should be informed, immediately of the

bankruptcy. Thereafter, all actions will be the responsibility

of the foreclosure agent.

C. Bankruptcies Occurring Before the Sending of the NOI.

1\) If, after the Payment Plan is commenced, all payments under

or outside the plan are not received as scheduled for a

90-day period the field office should refer the case to OGC

for foreclosure, but shall not send the mortgagor collection

letters or a NOI. The field office may inform the

mortgagor\'s attorney or the trustee of its intent.

2\) If the mortgagor makes payments both inside and outside of

the plan for a 90-day period, OGC will reassign the case to

the field office for servicing pursuant to the terms of the

Plan, and that payments, both inside and outside the Plan,

should be sent to HUD pursuant to its instructions.

At this point, the field office would assume responsibility

for monitoring of the account as outlined in Chapter 6.

D. Foreclosures After Bankruptcy.

If the bankruptcy case has been dismissed, or the mortgagor

discharged by the Bankruptcy Court, a Notice of Intent to

Foreclose may be sent to the mortgagor and the case treated like

non-bankruptcy cases. A copy of the dismissal or discharge order

must be attached to the request for foreclosure and forwarded to

OFA along with your recommendation. The system codes must be

updated, as appropriate, by inserting Condition Codes 21, 38, and

Status Code 41. Delete Status Code 46.

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5-13 9/86

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4335.2 REV.

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RESERVED

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9/86 5-14

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4335.2 REV.

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RESERVED

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5-15 9/86

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4335.2 REV.

Exhibit 5-1.1

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NOTICE OF INTENTION TO FORECLOSE AND ACCELERATE MORTGAGE BALANCE

AND TO REPORT TO CREDIT BUREAU

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9/86 5-16

HUD-Wash., D.C.

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4335.2 REV.

Exhibit 5-1.2

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5-17 9/86

HUD-Wash., D.C.

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4335.2 REV.

Exhibit 5-2

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9/86 5-18

HUD-Wash., D.C.

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4335.2 REV.

Exhibit 5-3

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5-19 9/86

HUD-Wash., D.C.

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4335.2 REV.

Exhibit 5-4.1

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9/86 5-20

HUD-Wash., D.C.

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4335.2 REV.

Exhibit 5-4.2

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5-21 9/86

HUD-Wash., D.C.

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4335.2 REV.

Exhibit 5-4.5

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9/86 5-22

HUD-Wash., D.C.

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4335.2 REV.

Exhibit 5-4.4

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5-23 9/86

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4335.2 REV.

Exhibit 5-4.5

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9/86 5-24

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4335.2 REV.

Exhibit 5-4.6

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5-25 9/86

HUD-Wash., D.C.

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4335.2 REV.

Exhibit 5-4.7

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9/86 5-26