HUD Extends Foreclosure Timeframes with Mortgagee Letter 2013-38
By: Krista Cooley, Kathryn M. Baugher
On October 28, 2013, with the publication of Mortgagee Letter 2013-38, HUD provided a much-needed update to the schedule of claimable attorney fees and reasonable diligence timeframes for prosecuting a foreclosure on loans insured by the FHA. These updates expressly apply to both forward mortgages and Home Equity Conversion Mortgages (“HECMs”).
As FHA servicers are aware, with respect to foreclosure on FHA-insured loans, HUD sets limits on the attorney fees that servicers can claim and requires servicers to prosecute foreclosure in a specific amount of time, referred to as the “reasonable diligence timeframe.” In light of the substantial changes in state foreclosure requirements in recent years, HUD’s guidance on fees and reasonable diligence timeframes, which was last updated in 2005, presented significant challenges for FHA servicers striving to meet reasonable diligence timeframes and recoup actual attorney fees expended in prosecuting foreclosures in connection with FHA-insured loans. The updates announced in Mortgagee Letter 2013-38 bring welcome increases for both claimable attorney fees and reasonable diligence timeframes in many jurisdictions.
With few exceptions, the amount of attorney fees claimable by servicers for prosecuting a foreclosure increased in each state, generally by at least a few hundred dollars. Several states saw significantly larger increases. For example, the amount of claimable attorney fees increased by $1,000 in Florida, from $1,250 to $2,250. FHA servicers will also be able to claim up to an additional $1,250 in Maryland for non-judicial foreclosures, and an additional $1,075 in New Jersey. As in the past, HUD’s Mortgagee Letter is careful to note that servicers can only claim amounts actually incurred. The Mortgagee Letter also clarifies that the attorney fees schedule is not intended to cover non-customary expenses, such as those related to mediation, which may vary widely depending on the jurisdiction. These additional expenses are claimable if a written justification for the expense is retained in the claim review file, along with documentation breaking down the cost.
The updates to the reasonable diligence timeframes were not as comprehensive, but still represent a positive development for servicers. The timeframes were increased in 23 jurisdictions, generally by one to two months. Several jurisdictions that have experienced significant foreclosure backlogs received larger increases, such as Florida, where HUD increased the reasonable diligence timeframe from seven months to 15 months, and New York, where HUD increased the timeframe from 13 months to 19 months. In the remaining states, the timeframe remains the same, and there are no states in which the updated timeframe provides less time for servicers to complete foreclosure.
The Mortgagee Letter makes clear that delays in the foreclosure process caused by circumstances outside the mortgagee’s control, such as mediation, may be excluded when calculating whether the mortgagee complied with the reasonable diligence timeframe. HUD also made clear that servicers are expected to comply with the Protecting Tenants at Foreclosure Act and other state and local restrictions on eviction; however, time spent complying with these requirements will not count against the servicer when determining whether the servicer exercised reasonable diligence in connection with the updated timeframes. In order to take advantage of this flexibility, the Mortgagee Letter expressly states that the servicer must maintain “a thorough audit trail and chronology” documenting that the delays were outside the servicer’s control. Thus, it is imperative that FHA servicers maintain documentation regarding all foreclosure and related actions to demonstrate adherence to the reasonable diligence timeframes and evidence any delays associated with the foreclosure process. As in the past, if a mortgagee fails to meet the reasonable diligence standard, the mortgagee must self-curtail the interest claimed. Note that no changes were made to the deadline to initiate foreclosure, so servicers still need to initiate foreclosure timely in order to avoid curtailment of interest.
The changes set forth in Mortgagee Letter 2013-38 that apply to reasonable diligence timeframes are effective for all loans in which the first legal action to initiate foreclosure occurs on or after November 1, 2013. The changes in the Mortgagee Letter that apply to attorney fees are effective for all loans in which one of the following occurs on or after November 1, 2013: the first legal action for foreclosure is initiated, a bankruptcy clearance is undertaken, a possessory action is begun, or a deed in lieu of foreclosure is recorded. This quick implementation date will permit FHA servicers to take advantage of these increases immediately.