Federal and State Foreclosure Assistance Programs
This chapter describes the different types of state and federal assistance programs created to help homeowners facing difficulties in servicing their loans.
§ 36.2Federal Loss Mitigation Programs
Various federal agencies and government-sponsored enterprises such as Fannie Mae, Freddie Mac, the U.S. Department of Housing and Urban Development (HUD), and the U.S. Department of Veterans Affairs (VA) have adopted homeowners assistance programs for debtors whose loans are in default or at risk. These programs, however, are constantly changing as the agencies and government-sponsored enterprises develop new strategies and program methodologies. Therefore, the best source of information for what program might be in effect at any given time is the website of the investor or servicer. Generally these sites are informative and user-friendly. The primary HUD website is https://www.hud.gov/, the VA website is https://www.va.gov/, the Fannie Mae website is https://www.fanniemae.com, and the Freddie Mac website is www.freddiemac.com.
§ 36.3Federal Homeownership Counseling
The Housing and Community Development Act of 1987, title I, subtitle B, section 170, amended section 106 of the Housing and Urban Development Act of 1968 (codified at 12 U.S.C. §§ 1701–1750g) so that all mortgagees that service conventional mortgage loans and home loans insured by HUD are subject to the requirement that an “eligible” mortgagor who is past due on his payments shall be notified of the availability of homeownership counseling.
§ 36.3:1Eligibility Requirements
Homeownership counseling is available if (1) the home loan is secured by property that is the principal residence of the homeowner; (2) the home loan is not assisted under title V of the Housing Act of 1949 (42 U.S.C. §§ 1471–1490t); and (3) the homeowner is or is expected to be unable to make payments, correct a home loan delinquency within a reasonable time, or resume full home loan payments due to a reduction in the income of the homeowner because of (a) an involuntary loss of or reduction in the employment of the homeowner, the self-employment of the homeowner, or income from the pursuit of the occupation of the homeowner; or (b) any similar loss or reduction experienced by any person who contributes to the income of the homeowner. See 12 U.S.C. § 1701x(c)(4).
The creditor holding a delinquent home loan shall notify the eligible homeowner of the availability of counseling by informing the homeowner—
1.of the name of nonprofit organizations approved by HUD,
2.that a list of nonprofit organizations approved by HUD can be obtained by calling a toll-free telephone number operated by HUD, or
3.that homeownership counseling is provided by the Administrator of Veterans Affairs for loans insured or guaranteed under chapter 37 of title 38 of the United States Code (U.S. Department of Veterans Affairs guaranteed loans).
See 12 U.S.C. § 1701x(c)(5)(A).
HUD has taken the position that the notification of the availability of homeownership counseling must be made before the forty-fifth day after any eligible homeowner fails to pay any amount by the date the amount is due under a home loan. See 12 U.S.C. § 1701x(c)(5)(B)(ii). A list of HUD-approved housing counseling agencies can be found at HUD’s website at https://apps.hud.gov/offices/hsg/sfh/hcc/hcs.cfm. HUD may be contacted by telephone at 202-708-1112 or by writing to U.S. Department of Housing and Urban Development, 451 Seventh Street SW, Washington, DC 20410-0001.
If the loan is guaranteed by the VA, the VA is required to follow the procedures outlined at 38 U.S.C. § 3732(a)(4). The VA is similarly required to provide homeownership counseling, including information on alternatives to foreclosure, possible methods of curing the default, and deeds in lieu of foreclosure. Additional information regarding VA-guaranteed loans in Texas is available from the VA Regional Loan Center, 6900 Almeda Road, Houston, TX 77030-4200, telephone number 1-888-232-2571, or at its website at https://www.benefits.va.gov/houston/regional-loan-center.asp.
A short sale occurs when a mortgage holder allows the property owner to sell the collateral property through the normal real estate market rather than go through foreclosure, even if the proceeds of the property owner’s sale will not cover the full amount due on the mortgage. A short sale may help the mortgage holder lessen its potential losses compared to those anticipated in foreclosing and then holding and reselling the property, and many of the carrying costs (utilities, landscape maintenance, etc.) are borne by the property owner during the marketing period. The short sale benefits the property owner in that the short sale does not result in a foreclosure notation on the property owner’s credit report and may potentially achieve a greater pay-down of the debt. Since a short sale does not discharge the property owner’s debt (it merely results in a release of the lien), the property owner may wish to bargain with the mortgage holder for a release of any deficiency in exchange for the property owner’s cooperation in realizing the best sales price possible. If the lender forgives the deficiency remaining after closing the short sale, however, the deficiency may be imputed as taxable income for the property owner, particularly if the mortgagee paid cash to the property owner as additional incentive for the property owner’s cooperation. See Federal Housing Finance Agency, Office of the Inspector General, An Overview of the Home Foreclosure Process, 17–18 (2012), https://www.fhfaoig.gov/Content/Files/SAR%20Home%20Foreclosure%20Process.pdf. See also chapter 23 in this manual concerning the tax consequences of the foreclosure process.
If there are junior liens on a property, all junior lienholders must approve the sale and release their liens at closing; otherwise, the junior liens will survive and remain of record after the first lienholder applies the short sales proceeds to its debt, since there is no “foreclosure” to cut off the junior liens. Without the cooperation of the junior lienholders, prospective purchasers are highly unlikely to want to close on a short sale of an already “underwater” property that leaves junior liens in place.
§ 36.4:2Cash Incentives for a Short Sale
In situations where foreclosure makes little sense for the mortgage holder because of the anticipated bid results and estimated costs to the mortgage holder of holding and reselling the property, the mortgagee may provide incentives for the property owner to participate in a short sale. For example, HUD’s short sale program allows a mortgage holder to make payments (up to $1000) to a residential homeowner to encourage a short sale. Under Fannie Mae’s short sale option, residential homeowners are eligible for cash relocation assistance. Mortgage holders typically do not volunteer this information, so the property owner should inquire about the possibility of a cash payment if a short sale process appears economically feasible for the parties.
§ 36.4:3Short Sales on Fannie Mae Loans
Under Fannie Mae’s guidelines for a preforeclosure short sale, the borrower must have experienced some permanent involuntary loss in income and all other workout options must be considered before a short sale may be considered. There must be no other relief options that will succeed in order to proceed with a short sale.
§ 36.4:4Short Sales on Freddie Mac Loans
Under Freddie Mac’s short sale payoff program, the borrower must have the property listed for sale at the current market price and show an eligible hardship. If the homeowner does not have an eligible hardship, but Freddie Mac will be made whole through mortgage insurance proceeds, a cash contribution, a promissory note from the borrower, or a combination of all three options, the servicer may recommend allowing a short sale of property under contract for less than what is owed on the mortgage. This option may also be considered if the borrower has defaulted on a previous loan modification plan. Approval from Freddie Mac and the mortgage insurer is required, unless the sale proceeds plus the mortgage insurance claim proceeds payment or a borrower contribution results in Freddie Mac receiving all sums owed on the mortgage.
§ 36.5Federal Home Loan Assistance Programs
As noted in section 36.2 above, a variety of federal programs exist to help borrowers with troubled home loans. These programs, however, are constantly changing as the agencies and government-sponsored enterprises develop new strategies and program methodologies, and many of these programs have stopped accepting applications.
Homeownership Preservation Foundation (HPF): HPF is a nonprofit organization, partnered with and supported by HUD and the U.S. Department of the Treasury, that provides comprehensive financial education and confidential foreclosure prevention counseling, free of charge. Additional information regarding HPF’s services is available through Homeowner’s HOPE Hotline at (888) 995-4673, or at the website https://995hope.org/.
NeighborWorks America: NeighborWorks America is a nonprofit organization that provides assistance for homeowners who are struggling or unable to meet their loan-repayment obligations by collaborating with numerous private and government organizations to help homeowners avoid or mitigate foreclosure through a network of HUD-certified counselors. Additional information regarding NeighborWorks is available at (202) 760-4000, or at its website www.neighborworks.org/.
§ 36.6Texas Foreclosure Consultants
Texas Business and Commerce Code chapter 21 regulates the business operations of residential foreclosure consulting services. Foreclosure consultants are defined as persons who make a representation, a solicitation, or an offer to a homeowner to perform services for a fee that involve seeking to prevent or postpone foreclosure, obtaining a forbearance agreement, curing or reinstating a delinquent mortgage, advancing or lending funds to prevent foreclosure, or ameliorating the impairment of a borrower’s credit rating. See Tex. Bus. & Com. Code § 21.001(a). For purposes of the statute, “foreclosure” commences with the filing of notice of sale under Tex. Prop. Code § 51.002(b) or commencement of a judicial foreclosure action. See Tex. Bus. & Com. Code § 21.001(b).
See section 37.3 in this manual for additional discussion.
All residential foreclosure consulting contracts involving compensation to the consultant must be in writing and contain mandatory contractual notice provisions that, among other matters, provide that (1) the consultant cannot ask the homeowner to transfer any interest in the home to the consultant or the consultant’s associates, (2) the consultant cannot take a power of attorney from the homeowner for any purpose other than to inspect documents, (3) the consultant cannot take an assignment of wages to secure his compensation, and (4) the homeowner can cancel or rescind the contract at any time without penalty. See Tex. Bus. & Com. Code §§ 21.051, 21.052, 21.102. Section 21.101 prohibits a consultant from charging or receiving compensation until the consultant has fully performed each service that the consultant contracted to perform or represented he could perform, unless the consultant has obtained a surety bond or established a surety account for each location in which the consultant conducts business. See Tex. Bus. & Com. Code § 21.101. A foreclosure consultant must retain records for at least three years. See Tex. Bus. & Com. Code § 21.103. A violation of chapter 21 is a class C misdemeanor. See Tex. Bus. & Com. Code § 21.151.
There are limited exceptions to the chapter’s scope that allow enumerated persons to provide consultant services and not be subject to the statute. These exceptions expressly include licensed attorneys who negotiate the terms of a residential mortgage loan on behalf of a client as an ancillary matter to the attorney’s representation of the client, as long as the attorney does not both take the residential mortgage loan application and offer or negotiate the terms of the residential mortgage loan. See Tex. Bus. & Com. Code § 21.002.
Federal Housing Finance Agency, Office of the Inspector General. An Overview of the Home Foreclosure Process. 2012.