Chapter 8-4 FHA Home Loan Defenses

8-4 FHA Home Loan Defenses

An FHA residential mortgage loan is insured by the federal government through the Federal Housing Administration (FHA).⁴⁷ This agency is part of the Department of Housing and Urban Development (HUD). The full name of this program is the HUD 203(b) Mortgage Insurance Program, commonly referred to as "FHA loans."⁴⁸

Because HUD sets all the guidelines for this program, most FHA loans contain language that reference, in varying ways, HUD regulations. Typically, FHA (form) notes and mortgages contain language that a lender's option, upon a borrower's payment default, to require immediate payment in full and to foreclose, is not authorized if not permitted by HUD regulations.⁴⁹

Based on such language, some Florida courts have ruled that an FHA loan's language referring generally to HUD regulations incorporates those regulations into the subject loans as contractual conditions precedent to foreclosure.⁵⁰ Nonetheless, federal courts uniformly have rejected attempts by borrowers to bring affirmative causes of action under HUD's mortgage servicing regulations.⁵¹

FHA loan borrowers are asserting with increasing frequency either specific denials of lenders' general allegations of compliance with conditions precedent or affirmative defenses to foreclosure claiming non-compliance with a laundry list of various HUD regulations. The regulations applicable to federally insured mortgages are found in Part 203, Title 24, C.F.R. for Single-Family Mortgage Insurance.⁵²

It is beyond the scope of this chapter to analyze each of the various regulations FHA foreclosure defendants are utilizing as a shield to foreclosure, but some are worth mentioning. Pursuant to the regulations, if the account is in default, the mortgagee is required to give notice to the mortgagor on a form approved by the HUD Secretary no later than the end of the second month of any delinquency in payments.⁵³

If the account is delinquent after the end of the second month, 24 C.F.R. § 203.604(b) requires a face-to-face interview with the mortgagor or a reasonable effort (defined as at least one letter by certified mail and at least one visit to the property) to arrange such a meeting, before three full monthly installments due on the loan are not paid. Some uncommon exceptions apply.⁵⁴ Strict compliance with 24 C.F.R. § 203.604 means that mortgagees and their servicers have only one point in time when they can comply with this regulation—after the end of the second month but before the third month that an FHA borrower has not made his mortgage payment. Thus, a literal reading of this regulation would mean that if a servicer misses this one-time deadline, foreclosure would be forever prohibited and would act as a forfeiture of the property. As at least one court has observed, it is implausible that an HUD regulation, promulgated with respect to the agency's role as an insurer of mortgages, was intended to create a permanent barrier to foreclosure of borrowers who stop making payments.⁵⁵

Lenders who incorporate the HUD regulations by reference into a note or mortgage are required to substantially comply with the regulations prior to foreclosure.⁵⁶ Indeed, substantial compliance is the correct standard to any contractual condition precedent defense, particularly in a foreclosure suit.⁵⁷ Other state courts have similarly ruled that strict compliance with these HUD regulations is not required.⁵⁸ Even if a lender fails to substantially comply with HUD regulations, they may still foreclose where no prejudice has resulted from their lack of compliance.⁵⁹

8-4:1 HUD Counseling

The National Housing Act (NHA) elucidates the criteria of those mortgagors eligible for homeowner counseling: (1) their home must be their principal residence, (2) they are, or are expected to be, unable to make payments due to an involuntary loss of income due to death, divorce, involuntary job loss, or (3) due to a significant increase in the basic expenses of the homeowner or an immediate family member of the homeowner.⁶⁰

According to § 1701x of the NHA, a creditor⁶¹ must provide notification of the availability of homeownership counseling no later than 45 days after the date on which the homeowner becomes delinquent.⁶²

The Secretary of Housing and Urban Development is required to monitor compliance of creditors with the requirements of homeowner counseling...