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18.10 THE FORECLOSURE PROCESS [7 CFR 3555.306]
A. Initiation of Foreclosure - Referral
The servicer must refer the case to an attorney or trustee for foreclosure within 180 days of the due date of the last paid installment unless there are legal requirements that cause a delay in the foreclosure action. The servicer must exercise due diligence and manage the process by ensuring that all required actions are completed timely.
The Acceptable State Foreclosure Time Frames lists the recommended method of foreclosure and the first public action required by law to initiate foreclosure and can be
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located on the USDA Training and Resource Library in the Loan Servicing section under Loss Mitigation found at https://www.rd.usda.gov/resources/usda-linc-training-resource- library/loan-servicing. In states where more than one foreclosure method is available, but only one option is listed, the Agency selects the method that is most cost effective in reducing legal fees and accrued interest expense. The Agency does not intend to prohibit the payment of loss claims where the servicer obtains title through a method of foreclosure other than what is recommended. For example, if the recommended foreclosure method is non-judicial, but judicial foreclosures are required to preserve the servicer's right to a deficiency judgment, the servicer may determine that recovery on a deficiency judgment is expected after considering the time and cost of litigation. In such case, the judicial foreclosure method should be considered acceptable. Any such decision must be documented and placed in the servicing permanent file.
B. The Foreclosure Sale
Servicers must exercise due diligence in completing the liquidation process. This due diligence should include an estimate of the total debt, whether the security value is sufficient to cover that debt, and the potential recovery of any deficiency.
x Total Debt – Includes unpaid principal, any advances due from the borrower
including any unrecorded mortgage recovery advance, interest accrual through the liquidation process, and other potential costs such as liquidation and real estate owned (REO) expenses.
x Security Value – will be based on the current market value of the property in “as
is” condition with a 90-120-day marketing time frame. If security property is inaccessible, the valuation will be based on exterior inspection only. If a significant (20% or more) decline from the value established at loan origination and the pre-foreclosure valuation is evident, the servicer is encouraged to review the value determination in accordance with established quality controls and be prepared to support the decline in value.
x Recovery Potential – consider the borrower’s other assets, ability to pay the
deficiency, and other sources of recovery such as insurance claims or pending litigation.
x Foreclosure Bid – the servicer should consider state statutory requirements and
the relationship of the outstanding debt and potential REO costs to the market value of the property. When the total debt, including the cost of acquiring, managing, and disposing of REO property, is greater than the gross proceeds expected from a foreclosure sale at the market value of the security property and
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potential recovery from other sources, third-party bidding is encouraged by entering a foreclosure sale bid less than the value of the property. Servicer should use the USDA Individual State Based Bidding Chart, with the goal of avoiding REO and its associated management and disposition costs. This chart can be located on the USDA Training and Resource Library in the Loan Servicing section under Loss Mitigation found at https://www.rd.usda.gov/resources/usda- linc-training-resource-library/loan-servicing. The Agency does not need to concur on foreclosure bids.
x Auction Services – servicers are encouraged to use non-affiliated auction
companies during the foreclosure process including marketing the property and bidding services. The Agency will reimburse servicers for auction service fees in an amount not exceeding five percent of the property net sales price when the property is sold to a third party. Properties must be marketed for a minimum of 15 days prior to the scheduled sale date and sold for an amount equal to or greater than the “Net Value Bid.”
C. Reinstatement of Account
Unless required otherwise by state statute, the servicer may reinstate an accelerated account if the borrower meets all the following conditions:
x Pays the total amount delinquent, including protective advances, accrued interest,
any foreclosure related costs, and other expenses incurred by the servicer in a lump sum.
x Has the documented ability to resume scheduled payments on the loan.