WASHINGTON (10/29/08)—The U.S. Department of Housing and Urban Development (HUD) has changed its rules to allow Federal Housing Administration (FHA) loss mitigation while a borrower is in bankruptcy. In an Oct. 17 letter to all FHA-approved lenders, HUD’s Brian Montgomery, assistant secretary for housing-federal housing commissioner, wrote that 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 making sure to copy the bankruptcy trustee on all such communications; and * Provide instruction sufficient to facilitate workout discussions including documentation requirements, timeframes and servicer contact information.
Providing such information to debtor's counsel concerning loss mitigation options can be accomplished without requiring relief from the automatic stay and in the case of a Chapter 7 bankruptcy, without requiring reaffirmation of the debt. The advisory negates earlier Mortgagee Letter 2000-05, which generally prohibited mortgagees from offering loss mitigation to a borrower in bankruptcy. That guidance. Montgomery wrote, was based on HUD’s desire not to influence mortgagees to take any action that would be considered by the Bankruptcy Court as a violation of the automatic stay. However, the HUD letter said that its recent discussion with mortgage industry and bankruptcy experts shows that contact with debtor’s counsel or a bankruptcy trustee does not constitute a violation of the automatic stay. Further, 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. The new advisory should provide some help to those facing foreclosure because of the mortgage market meltdown. Many mortgage lenders, using information required to file a bankruptcy petition, have been able to complete a loss mitigation evaluation before the bankruptcy plan is confirmed and have offered a pre-approved loan modification agreement, according to HUD. “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,” the Montgomery letter pointed out. The lender should communicate through a borrower’s bankruptcy counsel. However, the letter noted that in cases where a borrower has filed for bankruptcy without an attorney, the lender may provide mitigation information directly to the borrower, with a copy to the bankruptcy trustee. The communication to the borrower must not infer that it is in any way an attempt to collect a debt. Mortgagees must consult their legal counsel for appropriate language, HUD advised.