Claims Corner: FHA and HUD's Refusal to Accept Hold Harmless Letters

ATG has had a sharp increase in the number of claims processed involving unreleased mortgages. The increased is related to lender’s counsel refusing to accept hold harmless letters for unreleased mortgages for HUD or FHA insured mortgages. The refusal is based on 24 C.F.R. § 203.359 which states:

(a) For mortgages insured under firm commitments issued prior to November 19, 1992 or under direct endorsement processing where the credit worksheet was signed by the mortgagee's approved underwriter prior to November 19, 1992. After acquiring good marketable title to and possession of the property the mortgagee must transfer the property to the Secretary:

(1) Within 30 days after acquiring possession of the mortgaged property by foreclosure or other means; or

(2) Within such further time as may be necessary to complete the title examination and perfect the title.

(b) For mortgages insured under firm commitments issued on or after November 19, 1992, or under direct endorsement processing where the credit worksheet was signed by the mortgagee's underwriter on or after November 19, 1992—

(1) Conveyance by the mortgagee.

The mortgagee must acquire good marketable title and transfer the property to the Secretary within 30 days of the later of:

  1. Filing for record the foreclosure deed;

  2. Recording date of deed in lieu of foreclosure;

  3. Acquiring possession of the property;

  4. Expiration of the redemption period; or

  5. Such further time as the Secretary may approve in writing.

    (2) Direct conveyance.

    In cases where the mortgagee arranges for a direct conveyance of the property to the Secretary, the mortgagee must ensure that the property is transferred to the Secretary within 30 days of the reasonable diligence time frame specified in § 203.356 of this part.

HUD and FHA are interpreting this to mean that a hold harmless letter does not create “good marketable title” which the mortgagee is required to acquire.  Foreclosure counsel have been instructed on HUD or FHA files not to accept hold harmless letters as resolution for a prior, unreleased lien appearing on title.

Many of the claims have been resolved by either obtaining a release from the original lender or by ATG recording a Certificate of Release (“C.O.R.”). In cases where the mortgage is being paid off at closing, please retain a copy of the payoff statement. Also, for mortgages paid off prior to the transaction closing, please see ATG’s Underwriting Guidelines for Waiving Unreleased Mortgages.

If there is any question whether an exception can be insured over, or waived, you may contact the Underwriting Department, legal@atgf.com.

Posted on: Mon, 03/06/2017 - 1:00pm