According to reports by the Mortgage News Daily website, misuse of the FHA Pre-foreclosure Sale Program, may have cost the Department of Housing and Urban Development (HUD) over $1 billion in claims that did not meet program requirements. Was it short sale fraud or was it poor documentation and enforcement?
The program was introduced in December of 2008, with the release of Mortgagee Letter 2008-43. It is supposed to give home owners relief, by allowing borrowers in default due to an adverse and unavoidable financial situation sell their home at fair market value and use the proceeds to pay off an FHA-guaranteed mortgage loan, even if the debt exceeds the proceeds, and therefore avoid foreclosure, i.e. a short sale. The letter laid out in detail the qualification requirements for mortgagees, conditions of the sale and procedure to be followed. The stipulations include: Property must be owner occupied, homeowner must be 31 days or more delinquent at the time of the closing, and hardship must be verifiable through documentation. In addition, Seller can receive cash incentive of up to $1,000 dollars if closing is within 90 days of acceptance into program, lender automatically agrees to waive their right to pursue the deficiency, and lender also pays 6% real estate commissions to participating agents.
According to an audit released this week by the HUD's Region 7 Office of Inspector General (OIG), FHA paid claims on nearly 20,000 short sales from September 1, 2010 to August 31, 2011 totaling more than $1.7 billion. For the audit, OIG reviewed a sample of 80 claims from among 16,976 pre-foreclosure claims submitted by the nine largest lenders, and of the files reviewed, 76.3% were ineligible because they did not meet the participation criteria based on borrower finances. By projecting these ineligible claims to the 16,976 submitted by the lenders, it was estimated that at least 11,693 of the claims were ineligible and therefore costing HUD a loss of approximately $1.06 billion. Of the problems found, the audit determined that HUD did not have adequate controls in place to enforce the program requirements, which were found to be not well written.
In the past five years, the loss per short sale has increased as the volume of short sales has, and as this trend is expected to continue, OIG believes that HUD will continue to pay improper claims unless it changes its approach in implementing checks to ensure the qualification of participants. OIG also made recommendations to HUD that include: requiring lenders to reimburse the FHA insurance fund for some of the improper claims, strengthening controls of the pre-foreclosure sale program, including the mortgagee letter, and educating lenders on the appropriate and proper use of the program.
If the recommendations are put in place, OIG expects that HUD could save $781 million dollars. However, what would the changes mean for homeowners in need of selling their homes in a short sale? Given that some of the recent changes in mortgage lending have made it almost impossible for many home buyers to qualify for financing, could adopting the recommendations by OIG mean bracing ourselves for yet another round of unintended consequences?
Michael Hobbs, SRA, LEED GA, PahRoo Appraisal & Consultancy