FHA Proposes to Expand Process for Release of Secretary-Held Subordinate Mortgages

FHA recently announced the posting of a Draft Mortgagee Letter (DML) to the Office of Single Family Housing Drafting Table. 

The proposed DML provides a more comprehensive response by FHA following a July 2023 decision  from the U.S. Court of Appeals for the Eighth Circuit, which held that a subordinate lien held by the U.S. cannot be extinguished by a nonjudicial foreclosure sale because such a proceeding does not qualify as a judicial sale under 28 U.S.C. § 2410(c) (Show Me State Premium Homes v. McDonnell, 74 F.4th 911 (8th Cir. 2023)).

The DML expands upon the interim guidance previously published under ML 2024-17, which is limited to the release of Secretary-held subordinate mortgages following a non-judicial foreclosure that does not result in surplus funds.  The DML provides a mechanism for mortgagees to request release of a Secretary-held subordinate mortgage following a non-judicial foreclosure which does result in surplus funds, provided specific requirements are met.

By simplifying the foreclosure process, FHA hopes to reduce costs and increase the efficiency of returning foreclosed properties to the housing market.  Interested stakeholders are invited to review the draft ML and provide feedback through November 25, 2024.