Section 1005.753 - Pre-foreclosure sale(a)General. A pre-foreclosure sale, also known as a short sale, refers to the sale of real estate that generates proceeds that are less than the amount owed on the property and any junior lien holders have agreed to release their liens and forgive the deficiency balance on the real estate.(b)Eligibility. To be eligible for a pre-foreclosure sale, a Servicer must ensure:(1) The Section 184 Guaranteed Loan was Originated at least 12 months prior to default;(2) The default was due to an adverse and unavoidable financial situation impacting the Borrower;(3) The property has a current fair market value that is equal to or less than the unpaid principal balance;(4) The Borrower elected the pre-foreclosure sale option within 120 days, or any other date as prescribed by Section 184 Program Guidance, from default; and(5) All other requirements of the pre-foreclosure sale loss mitigation option under this section are met.(c)Surchargeable damages. Surchargeable damage is damage to the Section 184 Guaranteed Loan property caused by fire, flood, earthquake, tornado, boiler explosion (for condominiums only) or Servicer neglect. The Servicer is responsible for the cost of surchargeable damage, and these amounts are not reimbursable by HUD. The Servicer must request HUD approval before approving the use of the pre-foreclosure sale loss mitigation option when the property has sustained surchargeable damage. If the damage is not surchargeable damage, the Servicer is not required to obtain HUD approval prior to approving the Approval to Participate Agreement with Borrower. The Servicer must comply with paragraph (p) of this regulation where a hazard insurance claim must be filed.(d)Condition of title or Title Status Report.(1) For Section 184 Guaranteed Loans on fee simple lands, a Servicer must ensure the property has Good and Marketable Title. Before approving a pre-foreclosure sale loss mitigation option, the Servicer must obtain title evidence or a preliminary report verifying that the title is not impaired by unresolvable title defects or junior liens that cannot be discharged.(2) For Section 184 Guaranteed Loans on Trust Land, the Servicer shall obtain a certified Title Status Report from the BIA. Before approving a pre-foreclosure sale loss mitigation option, the Servicer must verify that the property is not encumbered by unresolvable title defects or junior liens that cannot be discharged.(e)Discharge of junior liens. The Servicer must contact all junior lienholders to verify the Borrower has secured a discharge of the junior liens.(f)Property list price and valuation-(1)List price. The Servicer must ensure that the Borrower lists the property for sale at no less than the "as-is" value, as determined by an appraisal completed in accordance with the requirements in § 1005.457 .(2)Appraisals. The Servicer must have the property appraised in accordance with § 1005.457 and pursuant to the following requirements:(i) The appraisal must contain an "as-is" fair market value for the subject property;(ii) A copy of the appraisal must be provided to HUD. A copy of the appraisal must be provided to the Borrower or sales agent, upon request;(iii) A Servicer must present HUD with a request for a variance to approve a pre-foreclosure sale transaction if one of the following conditions exists: (A) The current appraised value of the property is less than the unpaid principal balance by an amount of $75,000 or greater;(B) The appraised value is less than 50 percent of the unpaid principal balance; or(C) The appraisal is deemed unacceptable because the as-is value cannot be affirmed using a Broker's Price Opinion or Automated Valuation Model within 10 percent of the value.(iv) Paragraph (f)(2)(iii) of this section is not applicable to property on Trust Land unless there is a viable real estate market;(v) Under paragraph (f)(2)(iii) of this section, the Servicer must note on the variance request the specific reason for the request and attach any supporting documents needed for HUD review;(vi) The Servicer must obtain HUD approval before authorizing the marketing of the property; and(vii) All pre-foreclosure appraisals must be accompanied by a broker's price opinion or an automated valuation model unless the property is located on Trust Land.(g)Required documents. After determining that a Borrower and property meet the pre-foreclosure sale eligibility requirements, the Servicer shall send to the Borrower:(1)Pre-foreclosure sale approval to participate agreement. The agreement, on a form prescribed by Section 184 Program Guidance, shall list the pre-foreclosure sale requirements, including the date by which the Borrower's sales contract must be executed during the pre-foreclosure sale marketing period; and(2)Pre-foreclosure addendum. The addendum shall be in the form prescribed by Section 184 Program Guidance. The pre-foreclosure sale addendum must be fully executed at closing.(h)Delivery of documents to Borrower. Documents listed under paragraphs (g)(1) and (2) of this section must be sent to the Borrower via methods providing delivery confirmation with a date and time stamp of delivery. The Servicer must inform the Borrower that the documents must be signed and returned to the Servicer within 10 days of receipt.(i)Copies to HUD. The Servicer must send signed copies of the documents in paragraphs (g)(1) and (2) of this section to HUD within 15 days of receipt from the Borrower.(j)Tribal Notification for Properties on Trust Land. At the same time the Servicer sends the Approval to Participate Agreement to the Borrower, in accordance with the requirements as prescribed by Section 184 Program Guidance, the Servicer shall send a notice to the Tribe and the TDHE of the option to assume the Section 184 Guaranteed Loan or purchase the property.(k)Use of a real estate broker. The Borrower is responsible for retaining the services of a HUD-approved real estate broker/agent within seven days of the signed Approval to Participate Agreement. For Trust Land, the Borrower may request, through the Servicer, an exception to this section. If an exception is granted, HUD will work with the Borrower, Servicer and Tribe or TDHE to sell the property or pursue another loss mitigation option.(l)Required listing disclosure. The Servicer shall require the listing agreement between the seller and the agent/broker to include the following cancellation clause: "Seller may cancel this Agreement prior to the ending date of the listing period without advance notice to the Broker, and without payment of a commission or any other consideration if the property is conveyed to HUD or the Holder. The sale completion is subject to approval by the Servicer and HUD." This section is not applicable to property on Trust Land unless a HUD-approved real estate broker/agent is utilized.(m)Pre-foreclosure sale marketing, settlement period, failure to complete pre-foreclosure sale. The Borrower has seven days, or other timeframe as prescribed by Section 184 Program Guidance from the date of the signed approval to participate agreement to market the property in the Multiple Listing Service, or other marketing resource if the property is on Trust Land.(1) The property must be marketed in the Multiple Listing Service or other marketing resource for a period of 90 days, or other timeframe as prescribed by Section 184 Program Guidance before Borrower may consider any offers.(2) During the marketing period, Servicers must conduct a monthly review of the property's marketing status with the real estate broker/agent or the Tribe or TDHE, for property on Trust Land.(3) The maximum marketing period for the sale of the property is 120 days from the execution date of the Approval to Participate Agreement and the date of the property settlement. If there is a signed contract of sale, but property settlement has not occurred by the end of the 120 Days, the marketing period may be extended up to 60 days to allow for closing to occur.(4) Within 30 days of the end the marketing period, or no earlier than 120 days of default, whichever is later, if no settlement has occurred, Servicer shall provide electronic or written notice to the Borrower of the Borrower's default under the pre-foreclosure sale agreement and present the agreed upon deed-in-lieu/lease-in-lieu of foreclosure, with title being taken in the name of the Secretary. The Borrower shall have ten days from the date of the notice to respond in writing or by electronic means. If the Servicer receives no response or if the Servicer receives notice of the Borrower's rejection of the alternative to foreclosure, the Servicer must complete First Legal Action within 30 days or Tribal First Right of Refusal within 14 days of the Borrower's deadline to respond or actual rejection response date, whichever is sooner.(n)Property inspections and maintenance. The Servicer shall inspect the property in accordance with § 1005.735 and follow § 1005.739 , where applicable.(o)Disclosure of damage after pre-foreclosure sale approval. In the event the property becomes damaged, the Borrower must report damage to the Servicer in accordance with the pre-foreclosure sale agreement. When the Servicer becomes aware that the property has sustained damage after a Borrower has received the Approval to Participate Agreement, the Servicer must evaluate the property to determine if it continues to qualify for the pre-foreclosure sale program or terminate participation if the extent of the damage changes the property's fair market value.(p)Hazard insurance claim. Where applicable, the Servicer must work with the Borrower to file a hazard insurance claim and either: use the proceeds to repair the property; or adjust the Claim by the amount of the insurance settlement (Non-Surchargeable Damage) or the Secretary's repair cost estimate.(q)Evaluation of offers. The Servicer must receive from the listing real estate broker/agent an offer that yields the highest net return to HUD and meets HUD's requirements for bids, as follows:(1)Real estate broker/agent to ensure execution of documents. The real estate broker/agent must ensure that the accepted offer and the pre-foreclosure sale addendum are signed by all applicable parties before submitting to the Servicer for approval, and(2)Arm's length transaction. The transaction must be between two unrelated parties who are each acting in their own best interest.(3)Back-up offers. Once an offer has been submitted to the Servicer for approval, the real estate broker/agent must retain any offer that the seller elects to hold as backup offer until a determination has been made on the previously submitted offer.(r)Contract approval by Servicer - (1)Review of sales contract. In reviewing the contract of sale, the Servicer must: (i) Ensure that the pre-foreclosure sale is an outright sale of the property and not a sale by assumption.(ii) Review the sales documentation to determine that there are no hidden terms or special agreements existing between any of the parties involved in the pre-foreclosure sale transaction; and no contingencies that might delay or jeopardize a timely settlement.(iii) Determine that the property was marketed pursuant to HUD requirements.(iv) Not approve a Borrower for a pre-foreclosure sale if the Servicer knows or has reason to know of the Borrower's fraud or misrepresentation of information. (2)Sales contract review period. After receiving an executed contract of sale and pre-foreclosure sale addendum from the Borrower, the Servicer must send to the Borrower a Sales Contract Review, on a form prescribed by Section 184 Program Guidance, no later than five business days after the Servicer's receipt of an executed contract for sale.(3)Net sale proceeds.(i) Net sale proceeds are the proceeds of a pre-foreclosure sale, calculated by subtracting reasonable and customary closing and settlement costs from the property sales price.(ii) Regardless of the property sale price, a Servicer may only approve a pre-foreclosure sale contract for sale if the net sale proceeds are at or above minimum allowable thresholds established by HUD. The net sale proceeds must conform to the requirements on the Pre-Foreclosure Sale Approval to Participate Agreement.(iii) The Servicer is liable for any Claim overpayment on a pre-foreclosure sale transaction that closes with less than the required net sale proceeds unless a variance has been granted by HUD.(4)Unacceptable settlement costs. The Servicer must not include the following costs in the Net Sale Proceeds calculation: (i) Repair reimbursements or allowances;(iii) Discount points or loan fees;(iv) Servicer's title insurance fee;(v) Third-party fees incurred by the Servicer or Borrower to negotiate a pre-foreclosure sale; and(vi) Any other costs as may be prohibited in Section 184 Program Guidance.(5)Other third-party fees.(i) With the exception of reasonable and customary real estate commissions, the Servicer must ensure that third-party fees incurred by the Servicer or Borrower to negotiate a pre-foreclosure sale are not included on the Closing Disclosure or similar legal documents unless explicitly permitted by Tribal or State law.(ii) The Servicer, its agents, or any outsourcing firm it employs must not charge any fee to the Borrower for participation in the pre-foreclosure sale.(s)Closing and post-closing responsibilities. For the purpose of this section, with respect to Trust Land, the closing agent may be selected by the Tribe or TDHE. (1)Closing worksheet. Prior to closing, the Servicer must provide the closing agent with a Closing Worksheet, on a form prescribed by HUD, listing all amounts payable from net sale proceeds; and a pre-foreclosure sale addendum signed by all parties.(2)Servicer review of final terms of pre-foreclosure sale transaction. The Servicer will receive from the closing agent a calculation of the actual net sale proceeds and a copy of the Closing Disclosure or similar legal document. The Servicer must ensure that:(i) The final terms of the pre-foreclosure sale transaction are consistent with the purchase contract;(ii) Only allowable settlement costs have been deducted from the seller's proceeds;(iii) The net sale proceeds will be equal to or greater than the allowable thresholds;(iv) A Closing Worksheet form is included in the claim case binder; and(v) It reports the pre-foreclosure sale to consumer reporting agencies.(3)Closing agent responsibilities after final approval. Once the Servicer gives final approval for the pre-foreclosure sale and the settlement occurs, the closing agent must:(i) Pay the expenses out of the Net Sale Proceeds and forward the Net Sale Proceeds to the Servicer;(ii) Forward a copy of the Closing Disclosure or similar legal document to the Servicer to be included in the Claim case binder no later than three business days after the pre-foreclosure sale transaction closes; and,(iii) Sign the pre-foreclosure sale Addendum on or before the date the pre-foreclosure sale transaction closes, unless explicitly prohibited by Tribal or State statute.(4)Satisfaction of debt. Upon receipt of the portion of the net sale proceeds designated for Section 184 Guaranteed Loan satisfaction, the Servicer must apply the funds to the outstanding balance and discharge any remaining debt, release the lien in the appropriate jurisdiction, and may file a Claim.(5)Discharge of junior liens. The Servicer must verify the pre-foreclosure sale will result in the discharge of junior liens as follows: (i) If the Borrower has the financial ability, the Borrower must be required to satisfy or otherwise obtain release of liens.(ii) If no other sources are available, the Borrower may obligate up to a maximum amount from sale proceeds towards discharging the liens or encumbrances, such maximum amount will be prescribed by HUD.(t)Early termination of pre-foreclosure participation -(1)Borrower-initiated termination. The Servicer must permit a Borrower to voluntarily terminate participation in the pre- foreclosure sale loss mitigation option at any time.(2)Servicer-initiated termination. The Servicer shall terminate a Borrower's pre-foreclosure sale program participation for any of the following reasons: (i) Discovery of unresolvable title problems;(ii) Determination that the Borrower is not acting in good faith to market the property;(iii) Significant change in property condition or value;(iv) Re-evaluation based on new financial information provided by the Borrower that indicates that the case does not qualify for the pre-foreclosure sale option; or(v) Borrower has failed to complete a pre-foreclosure sale within the time limits prescribed by Section 184 Program Guidance and no extensions of time have been granted by HUD.(3)Notification of pre-foreclosure sale Program Participation Termination. The Servicer must forward to the Borrower a written explanation for terminating their program participation. This letter is to include the "end-of-participation" date for the Borrower.(4)Failure to complete a pre-foreclosure sale. Should the Borrower be unable to complete a pre-foreclosure sale transaction, the Servicer must proceed with a deed-in-lieu/lease-in-lieu of foreclosure in accordance with § 1005.755 . If the Servicer is unable to obtain a deed-in-lieu/lease-in-lieu of foreclosure, the Servicer must proceed to First Legal Action or assignment in accordance with §§ 1005.763 and 1005.765 .