The Federal Housing Administration insured approximately one-third of American mortgages as of 2010. FHA's popularity is in part due to the agency's flexible qualifying guidelines for acquiring and refinancing mortgages. An agency within the Department of Housing and Urban Development, FHA's insurance protects lenders. FHA borrowers may use HUD's partial claim option, which involves a one-time payment to the lender to prevent foreclosure. After a partial claim is paid, the FHA borrower may refinance their home.
A unique benefit of HUD insurance programs is lender reimbursement. HUD pays claims to lenders if homeowners default, using money from the FHA insurance fund, which is money pooled from borrower-paid mortgage insurance premiums and payments.
In a partial claim, the lender or mortgage servicer advances funds, or the amount in arrears, on behalf of the borrower to reinstate the delinquent loan. They file a claim with HUD for the amount which must be at least four month's worth of unpaid mortgage, but no more than 12 month's principal, interest, taxes and insurance (PITI). The borrower signs a promissory note payable to HUD which is interest-free and due and payable upon pay-off of the first mortgage. A refinance transaction is one such instance in which the partial claim must be repaid.
The lender or loan servicer is responsible for notifying HUD in the event of a refinance so that HUD can provide a payoff statement for the partial claim. The HUD-retained contractor that services the partial claim note provides the payoff quote on the outstanding balance. According to Mortgagee Letter 2003-19, lenders may send their payoff request to HUD's servicing contractor at:
U.S. Department of HUD c/o First Madison Services, Inc. 4111 South Darlington Suite 300 Tulsa, OK 74135
This requirement ensures that the partial claim balance is not overlooked when the first mortgage note is paid through a refinance transaction.
The lender must record the partial claim with the appropriate jurisdictional recorder's office. The partial claim note is recorded as a subordinate lien, meaning the first mortgage maintains payoff priority. HUD requires that the partial claim be submitted for recording within a maximum period of five business days after signing the note and prior to filing the claim with HUD. The claim then becomes part of public record and can be identified by a title search conducted at the time of refinance.
Although a refinance transaction triggers repayment of the partial claim, a loan modification, which alters the first loan so that borrowers can better manage their payments, does not require partial claim payoff. Loan modifications involve re-default by the borrower. In such cases, HUD may resubordinate the partial claim to allow the loan modification to be completed. The lender must contact HUD's servicing contractor for security document language and terms for resubordinating the partial claim note.