HUD released HUD ML 2006-10 on May 3, providing a special authority for use of Deed-in-Lieu of Foreclosure to victims of Hurricanes Katrina, Rita and Wilma.  This mortgagee letter is an additional loss mitigation option for properties in Presidentially-declared areas eligible for Individual Assistance in Alabama, Florida, Louisiana, Mississippi and Texas.  Mortgagees can also request approval from HUD’s National Servicing Center (Tulsa OK) to use  this special authority for properties outside the Individual Assistance Areas in areas declared eligible for Public Assistance.   

Additionally, the special Deed-In-Lieu option may be extended to individual borrowers who have an FHA-insured mortgage on an eligible property, can no longer occupy the home as a principal residence due to storm damage and have released available insurance recoveries and Community Development Block Grant (CDBG) funds for home repairs to the mortgagee for application to the mortgage debt. 

Eligible properties have either: a) suffered substantial damage attributable to Hurricanes Katrina, Rita or Wilma; or b) the cost of estimated storm damage repairs exceeds available hazard and flood insurance recoveries by the greater of $25,000 or 25%.  Borrowers must release all insurance proceeds and CDBG funds to the mortgagee for application toward the debt,  and the loan must in be in default (30 or more days past due) at the time the voluntary conveyance deed is executed and delivered.
 

Mortgagees may accept the Deed-in-Lieu and convey the hurricane-damaged property to HUD without repairing, provided that all hazard and flood insurance claims are settled before the conveyance to the Secretary and the claim filed for reimbursement is reduced by the greater of the amount of insurance proceeds or estimate of cost of the repairs.

Standard Deed-in-Lieu requirements waive the borrower's responsibilities of turning the property over to the mortgagee in broom clean condition, removing all personal property and delivering keys and other fixtures to the mortgagee at time of conveyance.

Mortgagees must document the servicing file detailing the circumstances and send written request for approval of the repair cost estimate to the M&M contractor prior to conveyance of the damaged property.  This written request must include:

1) Documentation that the property meets the eligibility criteria;

2) The request should identify the extent and cause of the damage;  

3) The amount of any insurance proceeds received or pending; 
4) A copy of a contractor or insurer estimate of the cost of repairing all damages    

5) Whenever available a copy of the insurer’s settlement statement providing a breakdown of the insurance payment and lists by item, labor costs, material costs, contractor overhead and profit and the applied sales tax and tax percentage.

The M&M contractor must review the request and confirm HUD’s estimate of the cost of repairing the damage no later than ten (10) calendar days following receipt.

Prior to executing the Deed-in-Lieu agreement, the mortgagee must have exhausted all other loss mitigation home retention options, such as those outlined in HUD ML 2005-46.  The borrower is entitled to $5,000 upon acceptance and satisfaction of all Deed-in-Lieu requirements. Included in the Mortgagee letter are instructions of how to enter the consideration and to what it may be applied.

Mortgagees must provide a letter to borrowers to use when applying for credit which explains the adverse credit reports resulting from these hurricanes.  A sample letter has been provided for use as Attachment A of the mortgagee letter.

If local government recommends or requires demolition of a property, the mortgagee must document the servicing file and submit a written request to the M&M contractor for permission to demolish prior to the actual demolition. The building must be demolished prior to conveyance of the property to HUD.  Supporting documentation to the M&M contractor must accompany this request and must include the contractor-prepared repair cost estimate and a copy of the condemnation notice.

Where the mortgagee/mortgagor believes that the property should be demolished because of substantial damage, significant structural deficiencies and/or the presence of life threatening hazard, yet the local government has not issued a letter or posted a notice due to the volume of properties damaged as a result of the hurricane, the mortgagees may still submit a request for approval of demolition or make a demolition recommendation.  In that instance, the mortgagee must provide a detailed analysis to support the recommendation or demolition request in addition to the required repair cost estimate."

Additional aspects of the Mortgagee Letter Include

• Claim Filing – The Mortgagee Letter lists several requirements on the Mortgagee for Part A claim filing.
• Financial Analysis – As discussed in ML 00-05, the assessment of the borrower’s inability to continue to support the mortgage debt is not required where the property has been deemed uninhabitable.
• Claimable Expenses - The Mortgagee Letter lists several items that may be claimed. The mortgagee may not include in its claim any foreclosure or legal fees incurred prior to acceptance of the Deed-In-Lieu.
• Tax Consequences – Due to Katrina Emergency Tax Relief Act of 2005 which may provide relief from potential federal income tax consequences of debt forgive, All borrowers should be advised to obtain independent financial advice about tax consequences of the transaction before executing a Deed-in-Lieu.
• Future Participation in FHA Programs – The Mortgagee Letter provides guidance regarding future participation in  FHA insured loan and property disposition programs along with the borrowers ability to repurchase the same property

The special Deed-in-Lieu authority expires on March 31, 2007.  To read the complete mortgagee letter and attachments please click the following link:

HUD ML 2006-10