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FHA-Insured Loan Foreclosure & HUD Conveyance — 24 C.F.R. §§ 203.604, 203.605

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FHA-Insured Loan Foreclosure & HUD Conveyance — 24 C.F.R. §§ 203.604, 203.605

Federal-authority reference page. Legal information, not legal advice. Last verified: 2026-06-02.

Overview

When the Federal Housing Administration (FHA), an arm of the U.S. Department of Housing and Urban Development (HUD), insures a single-family mortgage, the loan becomes subject to a body of federal servicing regulations at 24 C.F.R. Part 203 that condition the lender’s right to foreclose. Two are central: § 203.604 (the face-to-face interview requirement) and § 203.605 (the loss-mitigation evaluation requirement). Both impose pre-foreclosure duties on the mortgagee (the lender or its servicer) that do not exist for a conventional, uninsured loan.

These regulations are promulgated under the National Housing Act — principally 12 U.S.C. § 1715u(a), which directs that “mortgagees … shall engage in loss mitigation actions for the purpose of providing an alternative to foreclosure” (quoted verbatim in Stepp v. U.S. Bank Trust, N.A., 956 F.3d 266, 271 (4th Cir. 2020)), together with the general rulemaking authority at 12 U.S.C. § 1715b. The back end of the same program — the conveyance / claim process under 12 U.S.C. § 1710 and 24 C.F.R. §§ 203.350–203.368 — is what gives the rules teeth: after foreclosure the mortgagee typically conveys title to the Secretary of HUD and files an insurance claim, and HUD will only pay (and accept the property) if the mortgagee both complied with servicing rules and conveys good and marketable title (§ 203.366).

Three points frame how this federal layer interacts with state foreclosure law:

  • It is a federal overlay on a state-law foreclosure, not a substitute for it. FHA loans are still foreclosed under each state’s judicial or non-judicial process; the HUD regulations add pre-conditions to that process.
  • Whether a borrower can enforce §§ 203.604–203.605 turns on state contract law. The regulations create no private federal cause of action; instead, the standard FHA-form deed of trust incorporates the HUD regulations as conditions precedent to acceleration and sale, so the borrower’s remedy is a state-law breach / condition- precedent defense to the foreclosure (Mathews v. PHH Mortgage Corp., 724 S.E.2d 196 (Va. 2012)).
  • The rules do not reach tax sales. A municipal tax-lien or tax-deed sale is not a foreclosure “of an obligation owed to the mortgagee,” so §§ 203.604–203.605 do not condition it. They govern only the mortgage foreclosure of the FHA-insured loan. (Separately, HUD’s own interest as insurer/holder can be affected by a tax sale — see surplus-funds and the tax-sale interaction below.)

This page treats the servicing pre-conditions and the conveyance/claim back end. The servicemember overlay on mortgage foreclosure is on scra-foreclosure-protection; the federal-tax-lien dimension is on federal-tax-liens and federal-tax-lien-redemption.

Statutory / regulatory framework

All regulatory quotations below are from the official U.S. Government Publishing Office CFR text (govinfo.gov, Title 24, retrieved 2026-06-02), with the operative phrases also quoted in the retrieved Fourth Circuit opinion in Stepp.

24 C.F.R. § 203.604 — Contact with the mortgagor (the face-to-face interview)

Paragraph (a) is [Reserved]. The operative rule is paragraph (b):

“The mortgagee must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting, before three full monthly installments due on the mortgage are unpaid.”

The same paragraph requires, in any event, that the interview (or reasonable effort) occur “at least 30 days before foreclosure is commenced” — the phrasing the Fourth Circuit quoted from § 203.604(b) in Stepp, 956 F.3d at 268. (Source: https://www.govinfo.gov/content/pkg/CFR-2023-title24-vol2/xml/CFR-2023-title24-vol2-sec203-604.xml, GPO/govinfo, retrieved 2026-06-02; phrasing corroborated in Stepp v. U.S. Bank Trust, N.A., 956 F.3d 266, 268 (4th Cir. 2020), slip op. retrieved 2026-06-02 from https://www.ca4.uscourts.gov/opinions/191067.P.pdf.)

Paragraph (c) lists the exceptions — a face-to-face meeting is not required if:

“(1) The mortgagor does not reside in the mortgaged property, (2) The mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either, (3) The mortgagor has clearly indicated that he will not cooperate in the interview, (4) A repayment plan consistent with the mortgagor’s circumstances is entered into to bring the mortgagor’s account current thus making a meeting unnecessary, and payments thereunder are current, or (5) A reasonable effort to arrange a meeting is unsuccessful.”

Paragraph (d) defines what a “reasonable effort” to arrange the meeting means:

“A reasonable effort to arrange a face-to-face meeting with the mortgagor shall consist at a minimum of one letter sent to the mortgagor certified by the Postal Service as having been dispatched.”

(The same paragraph adds a requirement of at least one trip to see the mortgagor at the mortgaged property, unless the property is more than 200 miles away or the mortgagee knew the mortgagor was not residing there.) Paragraph (e) carries special rules for mortgages on Indian land insured under section 248 of the National Housing Act. (Source: govinfo CFR-2023-title24-vol2-sec203-604, retrieved 2026-06-02.)

24 C.F.R. § 203.605 — Loss-mitigation performance

Paragraph (a) imposes the affirmative evaluation duty:

“Before four full monthly installments due on the mortgage have become unpaid, the mortgagee shall evaluate on a monthly basis all of the loss mitigation techniques provided at § 203.501 to determine which is appropriate. Based upon such evaluations, the mortgagee shall take the appropriate loss mitigation action.”

Paragraph (b) establishes HUD’s Tier Ranking System for assessing each mortgagee’s loss-mitigation performance portfolio-wide on a quarterly basis (Tiers 1–4), with a 30-day data-based appeal for a Tier 4 ranking. Paragraph (c) makes a mortgagee that fails to engage in required loss mitigation liable for a civil money penalty (cross-referencing 24 C.F.R. § 30.35(c)). (Source: https://www.govinfo.gov/content/pkg/CFR-2023-title24-vol2/xml/CFR-2023-title24-vol2-sec203-605.xml, GPO/govinfo, retrieved 2026-06-02.)

24 C.F.R. § 203.501 — The menu of loss-mitigation techniques

Section 203.605 points to § 203.501, which directs the mortgagee to “take those appropriate actions which can reasonably be expected to generate the smallest financial loss to the Department,” and enumerates the available tools — among them “deeds in lieu of foreclosure under § 203.357,” “pre-foreclosure sales under § 203.370,” “partial claims under § 203.414,” “assumptions under § 203.512,” “special forbearance under §§ 203.471 and 203.614,” and “recasting of mortgages under § 203.616.” The Fourth Circuit in Stepp described the corresponding statutory menu — “special forbearance, loan modification, preforeclosure sale, support for borrower housing counseling, subordinate lien resolution, borrower incentives, and deeds in lieu of foreclosure” — as the loss-mitigation options “outlined by statute” in 12 U.S.C. § 1715u(a). (Source: https://www.law.cornell.edu/cfr/text/24/203.501, Cornell LII, retrieved 2026-06-02; statutory list quoted in Stepp, 956 F.3d at 271.)

12 U.S.C. § 1715u(a) — The statutory loss-mitigation mandate

The regulations above implement § 1715u(a), which the Fourth Circuit quoted as requiring mortgagees holding federally insured loans to “engage in loss mitigation actions” in order to “provid[e] an alternative to foreclosure.” HUD issued the face-to-face regulation under both this section and the general rulemaking grant at 12 U.S.C. § 1715b. (Source: 12 U.S.C. § 1715u(a) quoted verbatim in Stepp, 956 F.3d at 271 & n.2, slip op. retrieved 2026-06-02; statutory text also at https://www.law.cornell.edu/uscode/text/12/1715u, Cornell LII, retrieved 2026-06-02.)

12 U.S.C. § 1710 and 24 C.F.R. §§ 203.350–203.368 — The conveyance / claim process

When an FHA-insured loan defaults and loss mitigation fails, the mortgagee completes the state-law foreclosure and then files an insurance claim with HUD. The dominant mechanism is conveyance of title to the Secretary: under 12 U.S.C. § 1710(a), the mortgagee that acquires the property (through foreclosure or post-default purchase, or via a direct conveyance from the mortgagor) conveys it to the Secretary together with its claims against the mortgagor, and in return receives insurance benefits; the statute provides alternative claim methods including assignment of the mortgage, a foreclosure sale at fair market value with claims assigned to the Secretary, and an approved preforeclosure sale. (Source: https://www.law.cornell.edu/uscode/text/12/1710, Cornell LII, retrieved 2026-06-02.)

The conveyance is conditioned on title quality. 24 C.F.R. § 203.366 (“Conveyance of marketable title”) requires that “the deed or other instrument of conveyance shall convey good marketable title to the property,” accompanied by satisfactory title evidence; if the title HUD receives is not good and marketable, the mortgagee must cure the defect within 60 days of HUD’s notice (or such further time as HUD approves) and otherwise reimburse HUD’s holding costs and interest, with HUD able to reconvey the property to the mortgagee. (Source: https://www.law.cornell.edu/cfr/text/24/203.366, Cornell LII, retrieved 2026-06-02; eCFR mirror https://www.ecfr.gov/current/title-24/subtitle-B/chapter-II/subchapter-B/part-203/subpart-B/subject-group-ECFR1adb9721a4f592f/section-203.366, retrieved 2026-06-02.)

needs_verification — full conveyance-timeline and claim-deadline mechanics. The precise claim-filing deadlines, the “reasonable diligence” foreclosure-completion timetable, and the property-condition standards in §§ 203.355–203.402 (and HUD Handbook 4000.1) were not each run to a retrieved primary CFR subsection for this page; only §§ 1710 and 203.366 were retrieved verbatim. Treat the detailed claim timeline as needs_verification against the current CFR and Handbook.

How it interacts with tax sales and foreclosure

Mortgage foreclosure (the direct case). On a defaulted FHA loan, the servicer must have attempted a face-to-face interview (§ 203.604) and evaluated loss-mitigation options monthly (§ 203.605, § 203.501) before commencing foreclosure. These are front-end gates on the state foreclosure, not separate proceedings. In jurisdictions that treat the FHA-form deed-of-trust language as incorporating the HUD regulations, non-compliance is a condition-precedent defense: the borrower can move to dismiss a judicial foreclosure, or seek to set aside / rescind a non-judicial sale, on the ground that the lender did not satisfy a contractual condition precedent (Mathews; Stepp).

Effect on title and on any surplus. Because compliance is litigated as a condition precedent to acceleration and sale, a § 203.604/§ 203.605 defect can make a completed foreclosure vulnerable to being unwound in states following Mathews. That clouds the foreclosure purchaser’s title and, downstream, complicates any excess proceeds distribution premised on a valid sale. Conversely, the regulations do not create a surplus right; surplus distribution remains a function of state foreclosure law and the Tyler constitutional floor.

The conveyance back end shapes lender behavior. Because HUD will pay the insurance claim only on good and marketable title (§ 203.366) and conditions claims on compliant servicing, FHA servicers have a strong incentive to document §§ 203.604–203.605 compliance and to clear title defects before conveyance. A foreclosure that left a title cloud (e.g., an unresolved junior interest, or a defective notice) can trigger HUD’s reconveyance and cost-reimbursement mechanism, pushing the loss back onto the lender.

Tax sales are outside these regulations. A tax-lien or tax-deed sale by a county or municipality is not a foreclosure of the mortgagee’s obligation, so §§ 203.604–203.605 do not condition it. But the FHA insurance program still cares about tax sales because a tax lien generally has statutory priority that can extinguish the insured mortgage (and HUD’s interest). HUD servicing rules accordingly require servicers to advance and pay property taxes to protect lien position; the analysis of whether a tax sale wipes out a mortgage (and whether surplus is owed) lives on the relevant state jurisdiction page and in surplus-funds. The takeaway for diligence: do not assume FHA face-to-face or loss-mitigation rules give a former owner any defense to a tax sale — they do not.

▸ For Investors / Operators. On any FHA-insured (HUD) loan foreclosure, §§ 203.604–203.605 are a title-diligence item. In states that follow Mathews — treating the HUD regulations as conditions precedent incorporated into the deed of trust — a foreclosure completed without a documented face-to-face interview (or a qualifying exception under § 203.604(c)) and monthly loss-mitigation evaluation can be challenged or rescinded, clouding the purchaser’s title. Check whether the loan was FHA-insured (the deed of trust and note will say so), whether the servicer documented compliance, and whether an exception genuinely applies — note Stepp narrowed the § 203.604(c)(2) “200-mile / branch office” exception so a lender cannot rely on an office that does no mortgage-related business. The challenge window is generally pre-sale in Mathews-type states; a sale that has closed and seasoned is harder to unwind, but the defect can surface in a quiet-title or wrongful-foreclosure action.

Leading cases

Mathews v. PHH Mortgage Corp. — HUD regs as a condition precedent

Citation. 283 Va. 723, 724 S.E.2d 196 (Va. 2012) (Record No. 110967). Supreme Court of Virginia.

Facts. The Mathewses gave a deed of trust securing an FHA-insured note; PHH became holder and beneficiary. After they defaulted, PHH commenced foreclosure. They sued for a declaration that the sale would be void because PHH had not satisfied a condition precedent in the deed of trust — specifically, the face-to-face meeting required by 24 C.F.R. § 203.604 (and asserted to be incorporated into the deed of trust). The circuit court dismissed, reasoning that under Virginia’s first-material-breach rule a borrower who defaulted first could not sue to enforce the contract.

Holding. The Supreme Court of Virginia reversed and remanded. It held that the FHA-form deed of trust’s “Applicable Law” provisions were intended to incorporate the HUD regulations as conditions precedent to acceleration and sale, and that the borrowers’ prior nonpayment did not bar them from enforcing those conditions precedent — the lender’s compliance with the regulation was a condition the borrower could insist on notwithstanding the default. The Court also rejected a narrow reading of “branch office” that would have limited it to mortgage-servicing offices, holding the term covered “every type of business and service supplied by the mortgagee.” (The Fourth Circuit later quoted this language at 724 S.E.2d at 204.)

Good-law status. Good law; controlling in Virginia and widely cited. The Fourth Circuit relied on and distinguished it in Stepp (2020), and it continues to appear in current Virginia foreclosure materials.

(Source: Mathews v. PHH Mortgage Corp., 724 S.E.2d 196 (Va. 2012), holding and “branch office” language quoted verbatim in Stepp v. U.S. Bank Trust, N.A., 956 F.3d 266, 269–70 (4th Cir. 2020), slip op. retrieved 2026-06-02 from https://www.ca4.uscourts.gov/opinions/191067.P.pdf; citation and disposition corroborated via Justia https://law.justia.com/cases/virginia/supreme-court/2012/110967.html and FindLaw https://caselaw.findlaw.com/court/va-supreme-court/1599323.html, secondary sources used only for the reporter cite and disposition.)

Stepp v. U.S. Bank Trust, N.A. — narrowing the § 203.604(c)(2) “branch office” exception

Citation. 956 F.3d 266 (4th Cir. 2020), No. 19-1067, decided April 20, 2020 (Harris, J., joined by Keenan and Wynn, JJ.). Published opinion. Appeal from W.D. Va. (5:18-cv-00052), affirming Stepp v. U.S. Bank Nat’l Ass’n, 2018 WL 6625081 (W.D. Va. Dec. 18, 2018).

Facts. Stepp’s FHA-insured mortgage was assigned to U.S. Bank Trust. After she fell more than three months behind, U.S. Bank instructed its trustee to foreclose without offering a face-to-face meeting. Stepp sought damages and rescission, arguing the foreclosure violated § 203.604(b), which her deed of trust incorporated. U.S. Bank invoked the § 203.604(c)(2) exception (no branch office within 200 miles), asserting its only office within 200 miles — a Richmond office handling constructive trusts, not open to the public and doing no mortgage-related business — was not a “branch office.”

Holding. The Fourth Circuit affirmed dismissal, holding that a bank office “at which no mortgage-related business is conducted” is not a “branch office” of a “mortgagee” under § 203.604(c)(2). Reading “branch office” in context (and consistent with the regulation’s loss-mitigation purpose under 12 U.S.C. § 1715u(a)), the court held the exception requires “an office at which some business related to mortgages is done.” The court found no inconsistency with Mathews: Virginia’s broad “branch office” definition still requires the office to be part of the mortgage business. Because U.S. Bank’s qualifying office did no mortgage business, the 200-mile exception did not apply and (as the court framed it) the face-to-face requirement was not excused on that ground — though dismissal was affirmed for the specific issue presented.

Good-law status. Good law; published, binding Fourth Circuit precedent.

(Source: Stepp v. U.S. Bank Trust, N.A., 956 F.3d 266 (4th Cir. 2020), full slip opinion retrieved and parsed 2026-06-02 from https://www.ca4.uscourts.gov/opinions/191067.P.pdf; reporter cite corroborated via Leagle https://www.leagle.com/decision/infco20200420068 and Justia https://law.justia.com/cases/federal/appellate-courts/ca4/19-1067/19-1067-2020-04-20.html, secondary, cite-only.)

needs_verification — national uniformity of the condition-precedent rule. Whether §§ 203.604–203.605 are enforceable by a borrower as a contractual condition precedent (the Mathews approach) versus merely an unenforceable HUD-servicer obligation varies by state, and the precise remedy (dismissal, void, voidable, damages, rescission) is state-specific. Florida, Ohio, Illinois, and other states have generated divergent appellate treatments; those state holdings were not each retrieved to a primary opinion for this page and are flagged for verification on the respective jurisdiction pages.

State interaction notes

The HUD regulations are a federal overlay; their effect depends almost entirely on (1) the state’s foreclosure architecture and (2) whether the state’s courts treat the FHA-form deed-of-trust language as incorporating the regulations as enforceable conditions precedent.

  • Where the regulations are an enforceable condition precedent (the Mathews line). In virginia (per Mathews) and jurisdictions following it, a borrower may assert non-compliance as a contract defense to foreclosure. The Fourth Circuit’s Stepp applies this framework to FHA loans in virginia, west-virginia, maryland, north-carolina, and south-carolina (the Fourth Circuit). Several state appellate courts elsewhere (e.g., Florida and Ohio intermediate courts) have likewise treated § 203.604 as a condition precedent to foreclosure, but the specific holdings and remedies differ and are flagged below.

  • Judicial vs. non-judicial states. In judicial-foreclosure states (florida, illinois, ohio, new-jersey), the borrower raises HUD non-compliance as a defense in the foreclosure action or a basis for dismissal; the lender bears the burden of proving compliance with conditions precedent. In non-judicial / power-of-sale states (virginia, georgia, texas, california), there is no court to vet compliance before the sale, so the borrower must affirmatively sue to enjoin the sale or to set it aside / rescind afterward — the posture in both Mathews and Stepp.

  • Tax-sale layer is separate. Across all states, §§ 203.604–203.605 give a former owner no defense to a tax sale; that turns on the state’s surplus and redemption rules and the Tyler floor. FHA servicing rules instead obligate the servicer to protect lien priority by paying delinquent taxes.

needs_verification — per-state condition-precedent treatment & remedy. The exact enforceability and remedy for a § 203.604/§ 203.605 defect (dismissal without prejudice, void sale, voidable sale, damages, or rescission) was retrieved to a primary holding only for virginia (Mathews) and the Fourth Circuit (Stepp). Treatment in florida, ohio, illinois, california, and other states is asserted here from secondary descriptions only and must be confirmed against a retrieved primary opinion on each jurisdiction page before reliance.

▸ For Former Owners. If your foreclosed loan was an FHA-insured (HUD) mortgage, federal rules required your servicer, before foreclosing, to (a) attempt a face-to-face interview with you before you were three full monthly payments behind and at least 30 days before foreclosure (24 C.F.R. § 203.604), and (b) evaluate loss-mitigation options (loan modification, special forbearance, partial claim, preforeclosure sale, deed in lieu) on a monthly basis (24 C.F.R. §§ 203.605, 203.501). In states that follow Mathews, a foreclosure done without that face-to-face attempt (and without a real exception applying) can be challenged as a failed condition precedent — but the window is usually before the sale, so timing matters. These rules do not apply to a tax sale, and they create no automatic right to money; whether you are owed excess proceeds from any sale is a separate question of state law.

mathews-v-phh, stepp-v-us-bank, scra-foreclosure-protection, federal-tax-liens, federal-tax-lien-redemption, surplus-funds, tyler-v-hennepin-county, due-process-notice, right-of-redemption, sheriff-sale, treasurer-sale

Sources

Disclaimer. This page is legal information, not legal advice. It summarizes federal regulations and selected case law as of the last_verified date and does not account for every circuit or state interpretation, HUD Handbook update, local rule, or subsequent amendment. The enforceability of §§ 203.604–203.605 as conditions precedent, the available exceptions, and the remedy for non-compliance are state- and fact-specific. Nothing here creates an attorney-client relationship. Verify every provision against the current primary source (eCFR, U.S. Code, and the controlling court) and consult a licensed attorney in the relevant jurisdiction before acting.

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