Site Map | Text Size:
|Home||About the OCC||News and Issuances||Publications||Tools and Forms||Topics|
Subject: Foreclosed Properties
Date: December 14, 2011
To: Chief Executive Officers of All National Banks and Federal Savings Associations, Department and Division Heads, and All Examining Personnel
Description: Guidance on Potential Issues With Foreclosed Residential Properties
In the current economic environment, national banks and federal savings associations (collectively, banks) are facing challenges resulting from unprecedented numbers of troubled residential mortgage loans. Foreclosures on residential properties also are occurring in unprecedented numbers and are projected to continue this trend in the near term. Among the many consequences of high levels of foreclosures are growing inventories of foreclosed residential and commercial properties. The Office of the Comptroller of the Currency (OCC) is providing guidance to banks on obligations and risks related to foreclosed property. This guidance highlights legal, safety and soundness, and community impact considerations.1 It primarily focuses on residential foreclosed properties, but many of the same principles apply to commercial properties.
A bank’s obligations with respect to foreclosed residential properties may differ depending upon the bank’s role in the foreclosure—as owner of the foreclosed property, as servicer/property manager, or as securitization trustee—and the contractual agreements under which it operates. Understanding the requirements imposed by Fannie Mae and Freddie Mac (the Enterprises) or the U.S. Department of Housing and Urban Development (HUD) on servicers is particularly crucial, given the current role of these entities in the mortgage market.
As a matter of safe and sound banking practices, banks should have robust policies and procedures in place to address risks associated with foreclosed (or soon to be foreclosed) properties. Acquiring title to properties through foreclosure—either for the bank or as servicer for another mortgagee—results in new or expanded risks, including operating risk (which may include market valuation issues), compliance risk, and reputation risk. Banks should be sure they have identified all the risks and have policies and procedures for monitoring and controlling these risks. In establishing and implementing the policies and procedures, bank management and the board of directors should consider, at a minimum, the following obligations and risks:
Bank as Owner of Foreclosed Property
Obligations and Actions
Additional Issues as Owner
Bank as Servicer of Foreclosed Property
Obligations and Actions
Fannie Mae and Freddie Mac each have detailed servicing guides setting forth servicer obligations and responsibilities for foreclosed properties or vacant properties in the process of foreclosure. In the case of private securitizations, the obligations are detailed in a document often called a pooling and servicing agreement (PSA).
Additional Issues as Servicer
Bank as Trustee of Securitization Trust Holding Title to Foreclosed Property
The securitization trustee is primarily responsible for holding a lien on the trust assets for the benefit of the investors who purchase securities issued pursuant to the securitization and administering the trust in conformance with requisite agreements. The trustee’s duties and responsibilities are established by a PSA, trust agreement, or indenture. These agreements direct a securitization trustee to perform various complex ministerial functions. Such functions may include ensuring the timely receipt of payments from the servicer, calculating payments, remitting payments to the investors, circulating information to investors, monitoring compliance, and determining if an event of default is triggered.
As permitted by the PSA, the trustee should work with the servicer to ensure the performance of its responsibilities. The securitization agreements may require a trustee to appoint a successor servicer or to take over servicing in the event the original servicer fails to perform its duties or defaults. These agreements generally do not grant the trustee any powers or duties with respect to the foreclosure or with the maintenance, sale, or disposition of foreclosed properties. Instead, these responsibilities typically reside with the servicer.
Nevertheless, to the extent a servicer undertakes foreclosure actions in the trustee’s name as the secured party, a bank trustee should be aware of potential reputation and litigation risks. Additionally, if the securitization agreements require a bank trustee to act as a replacement servicer until a successor servicer is appointed, the bank trustee would also be exposed to credit risk.
Releasing a Lien Rather Than Foreclosing
At times, lenders may release a lien securing a defaulted loan rather than foreclose on the residential property. This decision is often based on financial considerations when the bank or servicer/investor determines that the costs to foreclose, rehabilitate, and sell a property exceed its current fair-market value. When this decision is made after a bank or servicer has initiated foreclosure, the borrower may have already abandoned the property or discontinued the care and maintenance of the property, increasing the chance of a blighted property in the community. Because the decision to release a lien is typically a financial decision, banks and servicers should ensure that their valuation of the property provides the best information practicable, while complying with investor requirements, before initiating foreclosure and subsequently deciding to release the lien. While the financial risk must be considered, banks and servicers should also consider the potential for reputation and litigation risk arising from their position as a prior mortgagee or servicer of a now-abandoned property.
If the decision is made to forego foreclosure and release the lien, the bank or servicer should notify, or attempt to notify, the borrower of the decision. Borrowers should be notified that (1) the mortgage holder is not pursuing foreclosure and has released the mortgage lien, (2) the borrower may continue to occupy the property, and (3) the borrower is obligated to maintain the property consistent with all local codes and ordinances and to pay property taxes and the debt owed. The bank or servicer should also make appropriate notifications to the local jurisdiction when it makes the decision to release a lien in lieu of foreclosure.
For additional information, please contact Steven V. Key, Assistant Director, Bank Activities and Structure Division, (202) 874–5300; or Kevin R. Russell, Director, Retail Credit Risk Division, (202) 874–5170.
1 Office of Thrift Supervision CEO Letter 319, “Tenant Protection During Foreclosure: ‘Helping Families Save Their Homes Act of 2009,’” dated September 2, 2009, is hereby rescinded, as this bulletin also references these protections.
2 For regulations and guidance applicable to banks’ authority to make additional expenditures on OREO properties, see www.occ.gov.
3 For regulations and guidance addressing the OREO holding period, see www.occ.gov.