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Question: Does a HUD-approved mortgagee need to report a loss in the Company’s net worth to FHA?

Answer:

Yes. As set forth below, in some circumstances operating losses must be promptly reported to HUD. In fact, HUD has recently taken several administrative actions against mortgagees for failing to complete the required notification in a timely fashion.

HUD’s Handbook 4000.1(A)(7)(g) and (h) specify if at any time a Mortgagee’s adjusted net worth or liquidity falls below the required minimum, the Mortgagee must submit a Notice of Material Event to FHA within 30 business days of the deficiency. The Mortgagee must submit a Corrective Action Plan that outlines the steps taken to mitigate the deficiency and includes relevant information, such as contributions and efforts made to obtain additional capital.

A Notice of Material Event must be submitted to FHA within 30 business days of the end of each fiscal quarter in which a Mortgagee experiences an operating loss of 20 percent or greater of its net worth. Following the initial notification, the Mortgagee must submit financial statements every quarter until it shows an operating profit for two consecutive quarters, or until it submits its financial reports as part of its recertification, whichever period is longer.