www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER May 3, 1989 Mortgagee Letter 89-14 TO: ALL APPROVED MORTGAGEES ATTENTION: Servicing Managers (Single Family) SUBJECT: Implementation of Deficiency Judgment Activities The Department of Housing and Urban Development (HUD) published its Final Rule on deficiency judgments in the Federal Register on February 16, 1988 (at 53 FR 4384). The Rule, which appears in the Code of Federal Regulations at 24 CFR 203.369, went into effect on March 28, 1988. It makes it possible for HUD to require that lenders pursue deficiency judgments, but only in cases where foreclosures involve mortgages insured pursuant to firm commitments (or direct endorsement credit worksheets) issued on or after March 28, 1988. For those mortgages insured pursuant to firm commitments (or direct endorsement credit worksheets) issued prior to March 28, 1988, the Department can continue to request that mortgagees diligently pursue deficiency judgments against selected mortgagors. Until recently, HUD was not authorized to reimburse lenders for the full expense of obtaining deficiency judgments. That situation has been rectified by new regulation 24 CFR 203.402(o), which makes the added costs (which must be reasonable and customary) of pursuing the judgments 100 percent reimbursable. HUD strongly encourages mortgagees to cooperate with requests from Field Offices regarding deficiency judgments. The Department has already begun requesting or requiring mortgagees to obtain deficiency judgments in instances where the mortgagors are non-occupant owners; have previously defaulted on one or more FHA-insured mortgages resulting in the payment of claim(s); or are "walkaways," having abandoned their mortgage payment obligations despite their apparent continued ability to pay. This will continue to occur where the pursuit of deficiency judgments is consistent with State law. HUD will be using data collected by the Department that identifies mortgagors with two or more FHA-insured mortgages, as well as information from the single family default monitoring system. When these reports are combined, they yield listings of FHA mortgagors who are by definition non-occupant owners and are also in a default or pending-foreclosure status (or have already experienced foreclosure) on one or more FHA-insured mortgage loans. In addition, mortgagee monitoring staff outstationed from HUD Headquarters, and loan management staff in many Field Offices around the country, will pass along information about prospective subjects for deficiency _____________________________________________________________________ 2 judgments to the staffer responsible for determining which mortgagors to pursue. He or she in turn will contact the mortgagees (first by telephone, then by follow-up letter) to advise them that HUD is requesting or requiring them to seek deficiency judgments against those mortgagors who have been selected for such treatment. Mortgagees, if requested or required by HUD Field Offices to pursue deficiency judgments against particular mortgagors, will be instructed to assign all the judgments they obtain to HUD. (Model forms facilitating this action will soon be made available by Field Offices to mortgagees, along with additional instructions.) Mortgagees are specifically directed not to engage in collection of deficiency judgments obtained in connection with any FHA-insured mortgage, effective immediately. The Department will utilize various methods to collect once the judgments are assigned, including conventional means of pursuing the judgment debtors by HUD personnel, use of private collection agencies and/or judicial proceedings initiated by the U.S. Department of Justice, salary or administrative offset (for active or retired Federal and military personnel), and Internal Revenue Service (IRS) offset of tax refunds. Some of these measures may result in additional fees that are chargeable to the debtor. If the judgment debt is declared uncollectible, in whole or in part, by the Federal Government, the amount of the uncollectible debt will be reported by HUD to the IRS on Form 1099-G. Mortgagors who successfully negotiate compromise settlements will also be the subject of an IRS information return on Form 1099-G for any indebtedness "forgiven" by the Government under the terms of the settlement. Before the Form 1099-G can be filed, however, the debt amount must be compromised or declared uncollectible by Federal administrative procedure, or else the applicable Statute of Limitations on enforcement of the deficiency judgment must have run. The Department now anticipates that it will have the necessary procedures in place for Form 1099-G reporting by the second half of 1989. The procedure of pursuing a specific mortgagor for a deficiency judgment can begin in two different ways. As discussed above, HUD may request or require the mortgagee to take this action based on data gathered "in-house." Alternatively, the mortgagee can initiate the process by bringing information to the attention of the local HUD Office indicating that a mortgagor meets the criteria for pursuit of a deficiency judgment. The Department encourages lenders to communicate the details of serious abuses of which they are aware to the Loan Management Branch Chief at the appropriate HUD Office. _____________________________________________________________________ 3 Please note that only where pursuit of the deficiency judgment was requested or required by the Department, or where HUD has approved a mortgagee's request for permission to pursue a judgment, will the expenses connected with this action be reimbursable when the claim is filed. Another noteworthy aspect of HUD's deficiency judgment initiative is the Department's use of the Claims Without Conveyance of Title (CWCOT) procedure to establish the Commissioner's Adjusted Fair Market Value (CAFMV), which is the amount the mortgagee will bid at the foreclosure sale. It is the CAFMV, or, if a third party bids higher, the consummated third-party purchase price, that is used to establish the deficiency judgment amount when it is subtracted from the mortgagor's outstanding indebtedness at the time of foreclosure. (Refer to Mortgagee Letter 87-20 , dated June 23, 1987, for a full explanation of CWCOT.) The Department will be widely publicizing its efforts to counter abuse of the FHA Single Family insurance programs through the prosecution of deficiency judgments and by the reporting of uncollectible and/or compromised amounts to the IRS. It is hoped that these initiatives, directed toward investors, repeat defaulters and "walkaways" will act as deterrents against abuse. HUD will be issuing a separate Mortgagee Letter in the near future, which provides instructions on how to include deficiency judgment-related expenses in claims for insurance benefits. The cooperation of participating mortgagees is crucial to our success, and the Department appreciates your commitment to help us accomplish this objective. Please feel free to call the Single Family Servicing Division at Headquarters if you have any questions on this matter, at (202) 755-7330. Sincerely yours, James E. Schoenberger General Deputy Assistant Secretary for Housing _____________________________________________________________________ A P P E N D I X ANSWERS TO COMMONLY ASKED QUESTIONS REGARDING DEFICIENCY JUDGMENTS 1. What is the purpose of the pilot program? During the pilot program's approximately six-month run, policies and procedures will be formulated and evaluated, and thereafter, applied Department-wide. This means that elements of HUD's deficiency judgment initiative are subject to change over the coming six months, making mortgagee cooperation and attentiveness crucial to the success of the Department's efforts. 2. To what extent will HUD be requesting or requiring the pursuit of deficiency judgments? The program is envisioned primarily as a deterrent to mortgagor abuse of the HUD Single Family insurance programs. The number of deficiency judgments sought will vary by State and by Field Office, and will be roughly comparable to the level of mortgagor abuse within a given Office's jurisdiction. 3. How should a mortgagee facing severe obstacles to complying with a HUD request or directive to seek a deficiency judgment respond? The Department desires the highest level of mortgagee cooperation that is feasible. Occasionally, legal obstacles may arise with which the Field Office is unfamiliar. There may be other factors that seriously complicate or compromise the procedure of obtaining a deficiency judgment, of which the HUD Office may be unaware. In such situations, the mortgagee must contact the Loan Management Branch Chief at the HUD Office with jurisdiction over the deficiency judgment at issue and explain the special circumstances as soon as they become known. Based on the information provided, the Field Office will respond with further instructions to the mortgagee. _____________________________________________________________________ 4 4. Will the mortgagees and their attorneys be the only parties to pursue deficiency judgments against mortgagors with FHA-insured mortgage loans? In most cases, the mortgagees and their attorneys will be exclusively involved in the pursuit of deficiency judgments. However, we anticipate that, in States where legal requirements do not make it impracticable, some Field Offices will obtain permission for in-house or contract attorneys to perform the steps leading to deficiency judgments. Mortgagees are advised, however, that such instances will be rare and to operate on the presumption that mortgagees' foreclosure attorneys will be seeking the deficiency judgments that HUD requests or requires. 5. What kind of information pertaining to FHA-insured mortgagors are mortgagees expected to share with HUD Field Offices, in the context of the deficiency judgment initiative? The Department welcomes information reflective of mortgagors meeting (or not meeting) the Department's criteria for pursuing deficiency judgments. Examples include indicating a mortgagor's status as a non-occupant owner (investor), or one that has defaulted previously on FHA-insured mortgage(s), or confirming that a candidate for deficiency judgment is currently in default, or that he or she is a "walkaway" (a mortgagor who abandons his property despite his apparent continued ability to meet his mortgage obligations, that is, for reasons other than financial hardship). This information may be volunteered by the mortgagees/servicers, or else provided to the Department when specifically requested by HUD personnel. Information regarding the mortgagor of which HUD may be unaware and which potentially demonstrates the inapplicability of the criteria to a given mortgagor should be forwarded to the Loan Management Branch Chief after the mortgagee has made a reasonable effort to verify said information (e.g., that mortgagors were in fact owner- occupants, or vacated and hence did not abandon their property after foreclosure occurred due to financial hardship). _____________________________________________________________________