August 7, 2009

Loan Modifications & Bankruptcy

The Department was recently approached by the mortgage industry and bankruptcy experts regarding the Department’s current guidance on mortgagors in bankruptcy.  As a result of these discussions, the Department understands that contact with debtor’s counsel or a bankruptcy trustee does not constitute a violation of the automatic stay and that 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. 

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, and provide instruction sufficient to facilitate workout discussions including documentation requirements, timeframes and servicer contact information.  Working through debtor’s counsel, mortgagees may offer appropriate loss mitigation options prior to discharge or dismissal, without requiring relief from the automatic stay and in the case of a Chapter 7 bankruptcy, without requiring re-affirmation of the debt.  It is strongly recommended that the bankruptcy trustee be copied on all such communications.  All loss mitigation actions must be approved by the Bankruptcy Court prior to final execution. 

Nothing in this mortgagee letter requires that mortgagees make direct contact with any borrower under bankruptcy protection.  However, the information required to file a bankruptcy petition (now a matter of public record) will often include sufficient financial information for the mortgagee to properly evaluate the borrower’s eligibility for loss mitigation.  Using this financial information, many mortgagees have been able to complete the loss mitigation evaluation before the bankruptcy plan is confirmed and have offered a pre-approved loan modification agreement.  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.

Where the mortgagor filed the bankruptcy Pro Se, (without an attorney), the Department recommends that information relating to the availability of loss mitigation be provided to the mortgagor with a copy to the bankruptcy trustee.  This communication must not infer that it is in any way an attempt to collect a debt.  Mortgagees must consult their legal counsel for appropriate language. 

Mortgagee Letter 2008-32

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