Does such a thing exist as "pre-foreclosure?"

Hi Hair good question! Yes there is such a thing. I was at the Hud website recently and they had some info on the subject.

The Preforeclosure Sale (PFS) Program allows the mortgagor in default to sell his/her home and use the net sale proceeds to satisfy the mortgage debt even though these proceeds are less than the amount owed. Question 1: The appraisal company is seeking to charge $1,000 for an appraisal because of where the property is located. Please advise how I get approval for this cost?

Answer: Consult with the REO Division of the HUD Homeownership Center (HOC) that has jurisdiction over the State in which the property is located. The HOC can advise if this is a reasonable and customary charge.

Question 2: Can a mortgagee utilize the buyer's appraisal to review the property that is accepted into the PFS or must I acquire an independent one?

Answer: The mortgagee is required to obtain an appraisal per Mortgagee Letter 94-45, Paragraph E, "Steps Leading to - and Participation In - The PFS Procedure", Item #3, Pages 5-6. The requirement is due to the fact that the property must be appraised on an As-Is, as well as an As-Repaired basis; however, if the buyer has an FHA-insured appraisal because he/she intends to finance the purchase with an FHA-insured mortgage, use of the buyer's appraisal would be allowed since it may not be possible to perform another FHA appraisal of the property for up to six months.
Question 3: How does the mortgagee arrive at the 63% ratio of "as is" appraised value to outstanding debt and the 82% ratio of estimated sales proceeds to appraised value?

Answer - To arrive at the 63% ratio:
Divide the "as is appraised value" (APV) by the outstanding indebtedness (unpaid principal balance, plus delinquent interest).
If the result is 63% or higher, that criterion has been met. If a Partial Claim subordinate lien exists, the Partial Claim payoff amount must be added to the outstanding indebtedness to properly calculate the 63% ratio.

Answer - To arrive at the 82% ratio:
Contract sales price minus (allowable PFS expenses + Partial Claim junior lien amount)(if applicable) divided by as-is appraised value = Net Sales Proceeds. Net Sales Proceeds result must equal or be greater than 82%.
There are no variances from the above stated ratios.

Question 4: Mortgagor is deceased, his father has been making the payments, property was tenant-occupied for eight months, and now the father wants to know if he can acquire the property under the PFS Program?

Answer: Mortgagee Letter 1994-45, paragraph F, Item 7(a), states in part any PFS proposed by the mortgagor or his agent, and approved by the mortgagee, must be an "arm's length" transaction between the mortgagor and would-be purchaser. HUD defines "arm's length" transaction as between two unrelated parties that are characterized by a selling price and other conditions that would prevail in an open market environment. No hidden terms or special understandings can exist between any of the parties involved in the transaction. Consequently, the deceased mortgagor's father cannot buy the property using the PFS Program.

Question 5: If a mortgagee is the holder of both the first and second mortgages can the mortgagee be able to utilize the $1,000 that is available to pay towards the settlement of the second mortgage?

Answer: Yes, Mortgagee Letter 2000-05, page 31-32, paragraph F, "Condition of Title" states, "The incentive consideration payable to the mortgagor should first be applied toward the discharge of liens. If this is not sufficient, the mortgagee can obligate an additional amount not to exceed $1,000 from sales proceeds towards the discharge of liens or encumbrances, if that will result in clear title and allow the sale to proceed."

Question 6: What happens if we have a PFS contract pending for several months and then it falls through, causing us to exceed the 9-month deadline to initiate foreclosure? By the time we know it is going to fall through, it is too late to request an extension.

Answer: Mortgagee Letter 2000-05, page 33, Section M, PFS Failure, states, "Within 90 days of the expiration of the PFS period or within 6 months of the date of default (whichever is later), if no closing of an approved PFS has occurred, the mortgagee must commence foreclosure or obtain a deed-in-lieu."
The PFS period is 4-6 months, if there is no signed Sale Contract within 4 months of the authorization to participate date or no closing within 6 months of the signed Sale Contract date, the PFS option has failed and the 90-day period mentioned above begins.

Question 7: Can a mortgagee proceed through the PFS Program process if one of the mortgagors is uncooperative and will not participate within the required Housing Counseling session?

Answer:Form HUD-90038 Certification allows for the homeownership counseling be provided by a HUD approved housing counseling agency, mortgagee, or from a HUD staff member. Therefore, as the mortgagee, you can facilitate this counseling to the uncooperative mortgagor and pursue their signature on above HUD form, as participants in the PFS procedure must sign a certification that he or she has received homeownership counseling before a proposed PFS transaction can be approved. Participant is interpreted as all mortgagors of record.

Question 8: Is it possible to do a PFS after the mortgagee has already completed a Partial Claim?

Answer: PFS may follow a Partial Claim if there is a new reason for default and the mortgagor lacks the financial ability to cure the present default. See PFS Question #3 for calculations to meet the PFS ratios.

Question 9: Will HUD consider first legal being met if there is an active review for PFS consideration in process, but a sale agreement has not been executed?

Answer: If the PFS review cannot be completed prior to the first legal deadline date, the mortgagee must formally request an extension of time via form HUD-50012.

Question 10: In ML 00-05 there is mention of suspending foreclosure during PFS, but no mention of automatic 90-day extension for first-legal for PFS. So if the sale agreement is not executed but in progress, does that means "no automatic 90-day extension of time"?

Answer: If foreclosure has already been initiated and the property is located in a non-judicial jurisdiction, the mortgagee is then under the due diligence time constraints. Of significance is whether the PFS process can conclude prior to expiration of that time period. The response in QUESTION 10 above addresses the automatic 90-day time extension. (See Appendix 7, HB 4330.4)

Question 11: Can a buyer utilize the Nehemiah type financing programs in conjunction with a purchase of a house that has been approved to participate in the PFS Program?

Answer: No, Nehemiah mortgages are disallowed, when the buyer is obtaining FHA financing to purchase a house that is participating in the PFS Program.

Question 12: A mortgagor approved to participate in the PFS Program has listed the property with a Realtor who is a relative, but has agreed not to charge a sales commission to handle the transaction. Would this be considered an arm's length transaction?

Answer: Mortgagee Letter 1994-45, defines "arm's length transaction" as a preforeclosure sale between two unrelated parties that is characterized by a selling price and other conditions that would prevail in an open market environment. In addition, no hidden terms or special understandings can exist between any of the parties involved in the transaction: buyer, seller, appraiser, sales agent, closing agent and mortgagee.