By Brian Liebo, Esq.
Liebo, Weingarden, Dobie & Barbee, PLLP
USFN Member (MN)
Just over a year ago, the 8th Circuit Court of
Appeals ruled that a subordinate lien held by the U.S. cannot be extinguished
by a non-judicial foreclosure sale in its Show Me State Premium Homes v.
McDonnell decision, citing 28 U.S.C. § 2410(c). However, that same statutory framework also gives
U.S. agencies the authority to release their liens.
In a highly anticipated development, HUD issued Mortgagee Letter 2024-17 providing for a work around following the Show Me State decision.
HUD, recognizing the adverse impacts of proceeding with judicial foreclosures
in states where non-judicial foreclosures are the preferred method of
foreclosure, has now established a process where mortgagees can seek releases
of subordinate Secretary-held liens.
Specifically, HUD established an optional, interim procedure where
mortgagees may request releases of subordinate Secretary-held liens, but only
in those instances where the nonjudicial foreclosure sale resulted in no
surplus funds. HUD defines surplus funds as any amount included in the winning
bid in excess of the amount required to complete the foreclosure sale, before
additional proceeds are applied to any subordinate lien.
Mortgage servicers must utilize HUD’s SMART Integrated
Portal to request these releases. The releases are available for multiple,
subordinate HUD mortgages beyond just partial claim mortgages.
The USDA previously went further than HUD by issuing an
announcement in July encouraging servicers to use the less expensive
non-judicial foreclosure method where available. It also put in place a process
for mortgage servicers to obtain releases regardless of whether there are
surplus funds after the foreclosure sale. Hopefully, HUD will soon follow the
USDA by also allowing releases in cases where there are surplus funds in its
final procedures for non-judicial foreclosures with Secretary-held liens.
Regardless, this change by HUD is a step in the right
direction to help mortgage servicers avoid the significant time and expense associated
with judicial foreclosures in those states where non-judicial foreclosures are otherwise
available. USFN’s advocacy committee had been in communication with FHA about
these concerns in the wake of Show Me and are pleased to see this
guidance in the matter.
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USFNews - Sept. 4
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