FHA Loss Mitigation Requirement

If your loan is an FHA loan which is backed by HUD (the United States Department of Housing and Urban Development), then your lender is subject to many more restrictions than they would be under a conventional loan.  This type of loan contains mortgage insurance that is backed by the Federal Housing Administration.  In particular, the FHA requires that a mortgage servicer must engage in “loss mitigation” prior to foreclosing on the property.  Loss mitigation means that the servicer must take steps to attempt to help the homeowner avoid foreclosure and save their home.

Many different actions can be deemed loss mitigation.  The HUD website states that some options include HAMP and other modifications, forbearance agreements, and partial claims.  One interesting requirement states that in certain situations, the mortgage servicer might be required to conduct a face-to-face interview with the borrower to discuss options prior to the servicer foreclosing.  

It is important to note that under these FHA requirements, there is no private right of action.  This means that an individual cannot sue a servicer for failure to follow these regulations.  But this does not mean that all hope is lost.  There might be a couple options around the lack of a private right of action.  

First, several courts across the country have held that even if a borrower cannot use a violation of the FHA regulations as an affirmative claim, a violation can be used as a defense to a foreclosure.  In judicial foreclosure states (scroll to the middle of the page), this defense should be raised in the servicer’s foreclosure action.  In nonjudicial foreclosure states, it is a little trickier.  A lawsuit would probably have to be filed, but the argument should be that it is a defensive action against the foreclosure rather than an affirmative action against the lender.

Second, several FHA notes and security agreements contain provisions within the documents themselves that make the FHA provisions a part of the contract itself.  Some courts have held that when these requirements are made a part of the contract, that failure to follow these provisions could be a breach of contract by the mortgage servicer.

So failure by a mortgage servicer to follow FHA loss mitigation requirements when the note is an FHA loan could give grounds to either stop a foreclosure or set aside a foreclosure.  If you have an FHA loan and are posted for foreclosure, it would be a good idea to have an attorney in your area review your security instrument and your personal circumstances.

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