FHA Reverses Borrower Bankruptcy Policy

The Federal Housing Administration is reversing a long-standing policy and now it wants to help borrowers who have filed for bankruptcy stay in their homes. "Effective immediately, mortgagees must, upon receipt of notice of bankruptcy filing, send information to debtor's counsel indicating that loss mitigation may be available, and provide instruction sufficient to facilitate workout discussions, including documentation requirements, timeframes and servicer contact information," according to a FHA mortgagee letter. Previously, FHA thought the bankruptcy courts might consider such contact by the lender to be a violation of automatic stay on collection activities. But recent discussions with bankruptcy experts have persuaded FHA to change its policy so struggling homeowners that file for bankruptcy protection can benefit from FHA loss mitigation policies. Waiting until the bankruptcy is discharged or dismissed "may be injurious to the interests of the borrower, the mortgagee and the FHA insurance funds," FHA commissioner Brian Montgomery says in the letter.