The new process would remove the financial responsibility of subordinate liens for Federal Housing Administration-backed loans from mortgagees without surplus funds following a nonjudicial foreclosure sale. Among government-held subordinate liens noted in the guidance include partial claims and mortgages taken through Good Neighbor Next Door and Emergency Homeowners Loan Program. 

Recognition of how "immediate adverse financial and market impacts" may result in similar situations involving judicial foreclosure prompted the move, according to government officials. 

"HUD has determined that it is appropriate to establish optional, interim requirements for mortgagees who completed a nonjudicial foreclosure sale where a secretary-held lien exists and no surplus funds resulted from the foreclosure sale," wrote the department's assistant secretary for housing and FHA Commissioner Julia Gordon in a letter to stakeholders. 

Previously in 2023, a U.S. appeals court ruled that subordinate liens held by the federal government could not be extinguished through nonjudicial foreclosure sales. 

The interim procedures become effective beginning Sept. 4 and will remain in place until future guidance is published.

HUD's mortgagee letter also explicitly stated the procedure did not apply when surplus funds were available to pay off subordinate liens.

"HUD is developing permanent policy to provide clarity for mortgagees proceeding with foreclosures, including for situations outside the scope of this," it said. 

Lenders and servicers requesting release of a lien on an eligible foreclosure are asked to submit them through the FHA's Single-Family Mortgage Asset Recovery Technology, or SMART, portal. Details needed to process requests include an FHA case number, date of foreclosure sale, bid amounts and certification that surplus funds were unavailable.

Measures introduced during the Covid-19 pandemic helped mitigate loan distress and kept many borrowers from losing their homes since foreclosure moratoria ended. Earlier this year, the FHA launched a payment-supplement partial claims program to assist struggling mortgage holders in the current higher interest rate environment. Servicers must introduce the plan by Jan. 1.

While distressed loan numbers have risen in 2024, they remain historically low, due in part to elevated levels of tappable home equity. A recent report from real estate data provider Attom, though, showed a notable monthly increase in foreclosure filings between June and July.