FHA Short Sale with BofA denied due to the severity of the Chinese Drywall in the home.

Just wanted to give my current story on what's going on and if anyone had any suggestions.  Currently trying to short sale our house which contains Chinese Drywall and this is the response from BofA:

The BPO came back with extensive damage regarding the Chinese drywall and deemed the property uninhabitable.  Because it is deemed uninhabitable FHA will not proceed with a short sale until all drywall is removed from the home as the liability is too high. Once the drywall situation has been taken care of BOA will reopen the file and order an updated value and proceed with the short sale.  Not the answer we were looking for I know but he reiterated that FHA will not proceed any further due to the liability and severity of the drywall situation.

I guess I am kind of confused here because how is the liability too high for FHA if the buyer has signed all kinds of disclosures indicating he understands the property has Chinese Drywall? Also, the buyer is paying for the hose in cash and intends to completely gut and renovate the house.

Suggestions/advise on how to proceed from here?

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A BPO is not done for an FHA PFS, It's a full FHA Appraisal.

In accordance with 24 CFR Part § 203.379 mortgagees are responsible for the cost of
surchargeable property damage. If the property is being sold “As Is” subject to the damage, the
mortgagee will be required to deduct the government’s estimate of the cost of the damage from its
PFS claim (See Appendix A - Claim Filing Instructions for Item 109).
If the property is being sold “As Repaired” and funds for surchargeable repairs will be
escrowed or provided as a credit to the borrower at closing, the amount of the repair escrow or
repair credit is not an allowable settlement cost as defined in Section J of this ML and may not
be included in the net sales proceeds calculation.
If the damage is not surchargeable it is not necessary to obtain approval from NSC prior to
approving the PFS Agreement. Regardless of the cause of the damage, the mortgagee must work
with the mortgagor to file a hazard insurance claim and either use the proceeds to repair the property
or adjust the claim by the amount of the insurance settlement (non-surchargeable damage) or the
government’s repair cost estimate.
Mortgagors are required to disclose any property damage to the mortgagee during the
application or after the PFS approval. In the event a property sustains significant damage after a
mortgagor has received approval to participate in the PFS program, the mortgagee must re-evaluate
the property to determine if it continues to qualify for the PFS Program and terminate participation
if the extent of the damage changes the property’s FMV. .

Filing a hazard insurance claim will not do anything since they do not cover Chinese Drywall damage. Not sure what an FHA PFS is but why would it matter if they did a full appraisal or not? Fact is they felt the damage was severe enough to warrant denying the short sale due to liability to FHA. My confusion is why would FHA be liable in any way? What are my options from this point on?

The FHA PFS (Pre-Foreclosure Sale Program) is the only type of Short Sale option available for FHA Insured Loans. A Full Appraisal is required for participation into the Program.

Oh ok thanks, I did request more information from BofA and they did end up doing a Full appraisal on the property. All the appraisal states is that the proprty is uninhabitable which all the properties with Chinese Drywall are uninhabitable, the appraisal does not state the severity of the damage so I am not sure how they came to the conclusion that the property had severe damage compared to other properties with Chinese Drywall.

Interesting problem, Nelly.

Isn't the issue here:  Who is liable for the loss of home value because of the drywall? Basically, someone is on the hook to go sue the manufacturer.  Who?  The Note Holder?  The Originator? Or the Insurer of the Note (FHA)? The liability insurer of the Originator?

I would think that the FHA as the Insurer of the Note is probably not on the hook.  After all, they just insured the Note, based on a representation of value.  Subsequently, information in revealed demonstrating that the value is not what was represented.  So, I would think the FHA's agreement would state that they are not liable for the resulting loss.  Seems reasonable, right?  They issued insurance based on the representation of value of the collateral.

I would think that the originator of the loan is liable here, or their liability insurer, but not the FHA or note holder.

Hence, it would seem that perhaps BofA/FHA are being reasonable here.  Until the responsible party indemnifies them for the loss by agreeing to pony up money, they cannot approve the short sale.

Sounds like that issue must be resolved before the property can sell.  I would say you probably need legal assistance here to protect your interests.  And, I think this is probably not a basic real estate attorney matter.

Yes, we have an attorney handling our case and they have already identified who is liable regarding the Chinese Drywall. But as with most cases involving this type of matter it has been taking a long time and no one wants to claim responsibility. Most likely we will end up losing the home in foreclosure.

I would not be surprised if this house did not foreclose, for lack of desire to acquire and because of potential liability upon ownership.  Also, the FHA does not move quickly, even under normal circumstances.

Upon agreement by parties unrelated to you, you might be back in the game.

Regarding "FHA liability", their liability is for a loss sustained by the holder of the note, not from the house itself, so I think the FHA liability as insurer would occur upon accepting a short payoff of the note.  So, I think their liability is probably not mitigated by the buyer agreeing to accept the property "as in".


Hi Nelly,


I did get a short sale approval with Space Coast on a home that had chinese drywall as well. While the loan was not an FHA loan, they had no issue with the existence of the chinese drywall, as the liability does not go with the lender. It took some doing to get them to waive the option for a defiicency judgement, as they had the position that should the home owner get any compensation from being a party to a class action lawsuit, they felt that the funds should go to them to offset their loss. We approached the bank with proof of the condition of the home with a full inspection report, and reiterated the home owner's financial circumstances. We also provided two estimates of the cost to remedy the condition of the home and were able to show that the cost to remedy far exceeded the current value of the home.

Maybe the buyer can have an attorney draft a Hold Harmless Agreement releasing Bank of America, FHA and all other parties to this transaction. I would also suggest you have the file escalated to a higher level and have them reconsider your case.

That is a tough one

So now that we have had the Short Sale declined we requested to do a Deed in Lieu and BofA is also declining that.  Unreal!  Here is what BofA stated:

Per FHA/HUD you must attempt a short sale before you can do a DIL therefore if you cannot do a SS you cannot do DIL

Is my only option now a foreclosure?




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