A preforeclosure sale allows an FHA borrower in default to sell his or her home at fair market value and use the sales proceeds to satisfy the mortgage debt, even if the proceeds are less than the amount owed. After the property is sold, lenders submit an FHA insurance claim and are compensated for the difference between the sales proceeds and the amount owed on the mortgage. Through the insurance claim, lenders are paid interest at a specified debenture interest rate1 on the outstanding loan principal and claim expenses.
HUD paid an estimated $413 million in unnecessary interest and other costs for 27,634 preforeclosure claims because lenders failed to complete servicing actions for defaulted loans within established timeframes. As a result, the FHA insurance fund incurred unnecessary and unreasonable costs and fewer funds were available to pay other claims or apply toward reducing FHA borrower mortgage insurance premiums.Read the full report