With foreclosure activity continuing its upward climb—now rising year-over-year for eleven consecutive months—a major policy shift from HUD is about to change how servicers handle FHA foreclosure sales. Mortgagee Letter 2026-03, published January 29, updates the requirements for bidding at foreclosure sales and utilizing Claims Without Conveyance of Title (CWCOT). The mandatory compliance date is April 29, 2026, and every vendor and servicer in the property preservation pipeline needs to be ready.
What ML 2026-03 Changes
The core change is straightforward but consequential: HUD is reaffirming and tightening the requirement that mortgagees must bid the Commissioner’s Adjusted Fair Market Value (CAFMV) at a foreclosure sale in order to participate in the CWCOT program. A mortgagee that bids below the CAFMV will no longer be eligible for CWCOT—meaning they must either convey the property to HUD or forgo filing a claim entirely.
Here’s what happens when a servicer bids the CAFMV and wins at sale: they can retain the property and file a CWCOT claim with HUD, convey title to HUD and file a conveyance claim, or proceed with post-foreclosure sales efforts. HUD will reimburse the mortgagee for 100% of the amount paid over the credit bid when acquiring a property at the CAFMV—a meaningful incentive to comply.
Notably, the small servicer exemption has been eliminated. Previously, smaller servicers had more flexibility around CAFMV bidding. Under the new rule, every servicer plays by the same rules. Small servicers who cannot meet the requirement can still convey the property to HUD, but the separate carve-out is gone.
Why This Matters for Property Preservation
The CWCOT changes arrive at a time when the property preservation workload is already expanding. According to ATTOM’s most recent data, January 2026 saw 40,534 U.S. properties with foreclosure filings. Foreclosure starts were up 26% from a year ago, and completed foreclosures (REOs) surged nearly 59%. February’s numbers held firm with foreclosure starts up 14% year-over-year and REOs up 35%.
More REOs moving through the CWCOT pipeline means more properties that need rapid preservation work—securing, winterizing, debris removal, lawn maintenance, and ongoing inspections. Servicers who must now bid CAFMV to access CWCOT will be more focused than ever on protecting their investment in these properties, which translates directly into higher preservation standards and tighter timelines for vendors.
Additionally, properties that servicers choose to convey to HUD rather than retain will still require full P&P compliance before conveyance. Either path increases demand for quality preservation work.
Action Items for Vendors
Review your servicer relationships now. If you work with smaller servicers who previously relied on the small servicer exemption, expect changes in how they handle FHA foreclosures. Some may shift more properties to HUD conveyance, altering your work order mix.
Tighten your turnaround times. Servicers paying CAFMV to retain properties will have stronger financial incentives to move quickly through the post-foreclosure process. Late or incomplete preservation work creates real dollar risk for them. Be the vendor that delivers on time, every time.
Sharpen your photo documentation. With more money on the line per property, expect heightened QC scrutiny. Every initial secure, every grass cut, every winterization needs bulletproof before-and-after documentation. Chargebacks on CWCOT properties will be a point of focus.
Prepare for volume. Rising foreclosure numbers combined with stricter CWCOT compliance mean the preservation pipeline is growing. Vendors with capacity, reliable crews, and clean QC records will be positioned to pick up additional work as servicers look for partners they can trust with higher-value assets.
The Bottom Line
April 29 isn’t a soft deadline—it’s a hard compliance date. The vendors and servicers who adapt quickly will come out ahead. At Ridgestone Services, we stay on top of regulatory changes like ML 2026-03 so our clients and partners are never caught off guard. The foreclosure landscape is shifting, and we’re ready to meet it head-on.