Underwriting New Policies With HUD Mortgages in Chain of Title

This month’s underwriting tip addresses a recent uptick in claims on this issue and what agents need to understand.

Claim Avoidance – The HUD Mortgage and the Need to Obtain and Make payoff Disbursements,

During the economic downturn in the late 2000’s and again during the pandemic, HUD offered assistance to homeowners in the form of mortgage modifications. Frequently, to lower the monthly payment amount, a portion of the outstanding principal balance was converted into a non-interest-bearing promissory note secured by a mortgage with a balloon payment. With the continuing rise in home values, many homeowners who had modified their mortgages are now able to sell or refinance.

If you are handling a refinance or purchase where there is an undischarged mortgage to the Secretary of Housing and Urban Development, you should not proceed without receiving a payoff statement for this mortgage and submitting payment in accordance with the statement. Often the owner will not be aware that this mortgage needs to be paid because the note does not require monthly payments; instead, it only needs to be paid off when the property is refinanced or sold. In 2017, Stewart issued a bulletin regarding these kinds of mortgages under the HAMP program, which you can see here.

We have received claims from newly insured owners who have received notification from HUD that the property they purchased is encumbered by a mortgage to HUD and that full payment is due as a result of the sale.

The only time when a mortgage to HUD does not require a separate payoff is when there is a Home Equity Conversion Mortgage to a lender recorded simultaneously with a second priority mortgage to HUD. This is called a “reverse mortgage” because the lender makes payments to the homeowner. The simultaneous mortgage to HUD is recorded so that if the original lender fails to make the required payments, HUD can step in to pay and will have a security interest for any payments made.

If you are ever asked to insure over a mortgage that is not being paid at closing, and it is not a reverse mortgage to HUD, please contact your underwriter for guidance.

Reach out to your local Stewart representative for more information, and visit virtualunderwriter.com for up to date information on the latest in underwriting.