Earlier this Fall, USFN sent a letter to HUD regarding the Show Me State Premium Homes case.

We have since shared with VA and ALTA

We greatly appreciated the opportunity to discuss USFN’s concerns related to the Show Me State Premium Homes case. As promised, this letter will serve to provide a brief description of the issue, and some proposed resolutions that we ask HUD to consider.

Issue:   

In July 2023, the U.S. Court of Appeals for the 8^th Circuit issued an order affirming a Missouri federal court decision in Show Me State Premium Homes v. McDonnell, 2022 WL 970890 (E.D. Mo. Mar. 31, 2022) affirmed 74 F.4th 911 (8th Cir. 2023). Many in our industry have taken that order to hold that a subordinate lien (other than a federal tax lien) held by the United States must be foreclosed by judicial action. Prior to Show Me, servicers, insurers, and foreclosure counsel had relied on the holding in U.S. v. Brosnan, 363 U.S. 237 (1960), a U.S. Supreme Court decision that explained that nonjudicial foreclosures eliminate junior federal liens using whatever state process is available. The Show Me court did not discuss Brosnan, which seems to leave room to argue that Brosnan is still the operative authority in the nonjudicial foreclosure context. In the interest of brevity, we have not included a full legal analysis of the opinion here but are happy to do so upon request.

While we believe there are legal arguments that can be made to counter the effects of this decision (and maybe to overturn it altogether), the decision has begun to have practical, negative consequences that lead us to ask that HUD take immediate action to provide stability and clarity to all stakeholders.

Effects and Potential Effects of the Decision:

• In some cases and jurisdictions (even beyond Missouri and the 8^th Circuit), title insurers and U.S. Attorneys are calling prior practices involving the foreclosure and removal of government liens in nonjudicial states into question, and are taking the position that if the United States has a junior lien (e.g., HUD/USDA/VA second mortgage, HUD HECM second mortgages, etc.), that 28 U.S.C. 2410(c) requires the senior lienholder to name the United States as a defendant, foreclose by judicial action, and seek a judicial foreclosure sale to eliminate the junior federal lien.
  
• Because of the above interpretation and its fallout, some servicers and their counsel are making the decision to foreclose properties with junior federal liens by judicial process. In some instances, pending REO and sheriff’s sales have been canceled in favor of the decision to restart using a judicial process.
  

• The switch from a non-judicial to a judicial process will inevitably result in higher fees and costs, longer timelines (in some cases as much as a year longer), potential curtailment losses, and higher HUD claim amounts in states where the non-judicial process had been the norm. In at least one affected state (Tennessee), a judicial foreclosure process does not even exist, causing even greater uncertainty. The resultant higher costs and longer timelines associated with the  judicial process and redemption periods will necessarily have negative effects on borrowers (in particular those seeking to cure or payoff and facing higher fees and costs in the process), servicers, and HUD, with little to no corresponding benefit to HUD.

• There is the possibility that the effects of the decision could expand to include already completed and insured foreclosures. It remains to be seen how title insurers will deal with any potential insurability issues, and who will bear the cost of corrective action, if needed.

Proposed Resolutions:

1. The most practical solution would be for HUD to consider this ruling an opportunity to confirm and clarify by Mortgagee Letter that it is and has been HUD’s policy to consider junior liens in their favor to have been divested if the mortgaged property was properly foreclosed in accordance with state and local law in the jurisdiction where the property is located, whether by judicial or non-judicial process. This solution would be the most cost effective for all involved and would provide certainty for all stakeholders, including borrowers, servicers and their counsel, title insurers, and past and future third-party buyers of foreclosed properties.

2. In the alternative, HUD should develop a streamlined waiver process to reduce the cost and risks of foreclosure-related losses. This approach is supported by law, specifically 28 U.S.C. § 2410(e), which contemplates a method by which a release of a government lien may be requested. Clear, consistent, and centralized procedures for either requesting a release of lien or granting permission to proceed nonjudicially where a junior lien in favor HUD exists would resolve many of the issues and would provide a relatively cost-effective solution for all interested parties.

As a corollary to the above, USFN also proposes that HUD confirm to servicers that it will waive curtailments related to restarts or protracted timelines that were caused by the uncertainty and effect of this decision. 

We greatly appreciate HUD’s willingness to discuss this matter with USFN, and stand ready to provide any additional information that you may need to fully consider the proposed resolutions.

Sincerely,

Jeffrey Weisserman                                                                 Pamela  Donahoo

Chair, USFN Advocacy Committee                                          CEO, USFN