April 16, 1996
MORTGAGEE LETTER 96-18
TO: ALL APPROVED MORTGAGEES
SUBJECT: Single Family Loan Production - Refinance Transactions, Property
Inspections and Other Credit Policy Issues
This Mortgagee Letter is to advise lenders regarding revised policy on
several important issues.
I. REFINANCE TRANSACTIONS. In the recently revised mortgage
credit analysis handbook (HUD 4155.1 REV-4 Change 1), we modified
instructions on refinance transactions with appraisals (paragraphs 1-11A
and 12B) to more adequately accommodate a greater range of situations.
Since that time, we have been advised that additional information was
needed to bring about more consistency in interpretation among lenders
especially with regard to calculating the maximum insurable mortgage.
Specifically, in our instructions "existing first lien" may include the
interest charged by the servicing lender when the payoff is not received
on the first day of the month, as is typically assessed on FHA
mortgages, as well as prepayment penalties such as those on certain
conventional mortgages and FHA Title I home improvement loans. It
may not, however, include delinquent interest, late charges or escrow
shortages and does not permit a borrower to obtain "cash back" through
not making the mortgage payment when due.
Further, "prepaid expenses" may include the per diem interest to the end
of the month on the new loan, hazard insurance premium deposits, and
any real estate tax deposits. This should more easily accommodate
those transactions where the new originator is not the current
servicer of the mortgage being refinanced.
Any upfront MIP refund must be subtracted from existing indebtedness
in calculating the new mortgage amount and the amounts used to
determine the new mortgage must be reasonable reflections of the actual
payoff and closing costs at loan settlement. The maximum mortgage
may not exceed the least of the following calculations: 1) appraised
value plus closing costs multiplied by the appropriate loan-to-value
ratio; 2) sum of existing first lien and other permitted costs as
described in the handbook; and 3) appraised value exclusive of closing
costs multiplied by 97.75 percent (or 98.75 percent if $50,000
or less).
If the new loan amount on a streamline refinance with an appraisal will
exceed the original principal of the loan being refinanced, the lender
must document that the mortgagor's record of payment on the existing
mortgage is satisfactory, and the borrower has not otherwise exhibited a
disregard for credit obligations. Lenders are not to permit refinance
transactions where additional mortgage debt is incurred if the
borrower's record of payment is unsatisfactory. (Refinancing delinquent
mortgages is separately addressed in paragraph 1-12D(7) of the
mortgage credit handbook as well as Mortgagee Letter 94-30.)
ARM to ARM. Paragraph 1-12D(16)(a) should have indicated that the
maximum interest rate of the new mortgage may not exceed the
maximum interest rate of the old mortgage being refinanced. Please
make a note of this.
Loan Applications on Streamline Refinances. On streamline refinances,
lenders may use an abbreviated version of the URLA that omits sections
IV, V, VI, and a-k of VIII provided all other required information is
captured. Further, while the lender must assure itself that it is in
compliance with ECOA and all other regulations, the loan application
need not be signed by the borrower(s) until loan closing.
Termite Inspections. We do not require termite inspections on
streamline refinances, with or without appraisals. The lending
institution may, of course, require a termite inspection on a streamline
refinance as part of its credit policy.
Transferring Cases Between Lenders on Streamline Refinances. As
originally expressed in Mortgagee Letter 94-7 (ML 94-7), lenders are
expected to cooperate in the assignment of streamline refinance cases
upon the request of the borrower. We are especially concerned with
lenders that obtain case number assignments without the homeowner's
knowledge. Failure to cooperate may jeopardize the lender's
participation in the DE program. Please also be advised that FHA's
local offices are authorized to cancel case number assignments and issue
new case numbers on behalf of the borrower when a lender refuses to
reassign the case number.
II. PROPERTY-RELATED ISSUES.
"Early Start" Letters for Newly Constructed Properties. ML 95-57,
which eliminated the builder approval process, also terminated the use
of the Early Start Letter. However, in order to accommodate those
builders that wish to begin construction before either the appraisal is
completed or the lender issues the Statement of Appraised Value, the
lender may continue to provide Early Start Letters as described in HUD
Handbook 4145.1. This permits the borrower to obtain greater than 90
percent financing. An Early Start Letter is not required if the
builder is providing a FHA-accepted ten-year warranty.
Lender Selected Inspectors. Effective immediately, FHA is
discontinuing the practice of assigning inspectors on both new
construction and existing houses. Lenders are to select inspectors from
a panel of inspectors approved by FHA.
Since most states do not license inspectors, and because we wish to
maintain management and training of inspector panel members, the local
FHA office will continue to maintain an appropriately sized inspector
panel in its jurisdiction. While the local office will continue to
establish criteria for being listed on this panel, in those states
where a license is required, new inspectors placed on the panel must be
licensed. Our local offices will advertise its need to fill vacancies
and/or expand the size of the inspector panel within its jurisdiction.
Lenders may select any inspector from the list via HUD Query from
CLAS (CHUMS Lender Access System). HUD Query allows the lender
to locate inspectors by field office number, inspector's name, city or
state.
Lenders are advised not to continually select the same individual to
inspect houses from the same builder. Lenders are to rotate inspectors,
particularly in large subdivisions. If the local FHA office finds
that an inspector tends to inspect for the same builder for more than a
four-month period, the lender may be required to select a different
inspector for future cases.
Local Inspections. In jurisdictions where the local FHA office has
determined that the local code is adequately enforced and appropriate
inspections are made by a local building department, FHA will accept
these inspections for the first and second inspection on a newly
constructed property. The final inspection must still be made by a FHA
panel inspector. A certificate of occupancy or similar approval by the
local building department is required at closing.
Lenders may contact the local FHA office for a list of jurisdictions
which have been determined acceptable to make the first and second
inspections in lieu of a FHA inspection. Lenders and builders are
encouraged to nominate to the local FHA office those jurisdictions
which provide adequate code enforcement and inspection services. In
these communities, the first and second inspections may be performed
by the local building officials rather than a FHA inspector; copies of
these need not be submitted in the case binder. In such circumstances,
the builder is only required to obtain a FHA-accepted 10-year warranty
for greater than 90 percent financing if the property was not approved
by the lender prior to the beginning of construction or an Early Start
Letter was not issued prior to the issuance of the statement of appraised
value.
Evidence of Completed Repairs. For non-structural repairs on existing
houses, including new roof coverings, we will accept receipts from
licensed contractors as evidence of completion. This will eliminate the
need for and cost of a separate inspection. The lender is responsible for
accepting the quality of all repairs. Also, for all repairs, we will
accept inspections from licensed architects and engineers even if the
individual is not on FHA's inspector panel.
Appraisals Completed before Case Number Assignment. CHUMS has
been modified to accommodate appraisals that are assigned or completed
before the FHA case number is assigned. This revision stems from
several realities of the marketplace. First, under extreme time
pressures, we do not believe that an appraisal assignment should be
delayed until such time as the case number is assigned, even if that is
only a few days such as what occurred during the recent government
shutdown. Second, financing does not always start FHA but rather may
move into that category for various reasons. We do not believe
borrowers should be forced to pay for another appraisal or even a "re-
type" fee.
From a risk management standpoint, we recognize the possibility of
"value shopping" and will take appropriate measures should a lender be
discovered engaging in such practices. Similarly, we will also take
action if it is determined that real estate brokers are mandating the use
of particular appraisers to the lender. The lender remains responsible
for assuring that the appraisal adequately supports the value reported.
The mortgage must also close within prescribed time limits determined
by the date of the appraisal.
Testing of Individual Wells. ML 95-34, paragraph 2 states "If State or
local standards are inadequate or non-existent, testing should be done in
accordance with HUD's requirements which are based on EPA's
recommendation for private wells." This statement simply means that
testing should be performed utilizing either State or HUD requirements,
whichever are more stringent. The minimum testing level for individual
wells are those described in ML 95-34.
Energy Efficient Mortgage Program. Several pages of attachments to
ML 95-46 were left out of the package mailed by the printer.
Specifically, a blank borrower qualifying worksheet and the present
value factor sheet were omitted; both are attached to this mortgagee
letter.
Additionally, the last column of the Energy Efficient Premium Table
(Page 3 of Attachment B1, ML 95-46) should read "EE Premium
(Yearly Savings x Present Value Factor)." An updated chart is attached.
Plans and Specifications for Master Appraisal Reports (MAR).
Instructions in ML 95-11 for the lender to maintain construction exhibits
for new and proposed construction cases also apply to master appraisal
reports where the builder is providing a master set of construction
exhibits for houses being built in one subdivision.
III. SECTION 203(k) ISSUES.
Authorized Agents may underwrite 203(k) loans. Approved supervised
and nonsupervised mortgagees, as well as government institutions, with
the prior approval of FHA, may designate another approved lender as its
authorized agent(s) to process and/or underwrite FHA insured
mortgages. ML 96-12 describes how to obtain FHA approval.
This permits a lender with or without Section 203(k) experience to use a
DE lender with Section 203(k) experience for processing and
underwriting loans it originates. However, loan correspondents may not
use authorized agents.
Chain of Title. The chain of title requirement described in ML 95-40 is
designed to help us manage the insurance risk by reducing the
likelihood that property values were influenced by speculation and/or by
"flipping" of properties. While multiple sales of the same property
within one year may be completely legitimate, our experience indicates
that in the vast majority of cases such value increases have been derived
artificially and are not recognized in the marketplace.
We are similarly concerned that the value not be derived more from the
type of financing available than from the property itself, especially
when values increase before the rehabilitation has even started.
In discussions with various mortgage lenders, there was also concern
expressed that individual values and sales prices were not being
adequately determined and that the profit margins being generated were
greatly in excess of that normally seen in the marketplace. This, of
course, could increase the FHA's insurance risk while at the same time
depriving the eventual homeowner of the full benefit of an "affordable"
housing program.
Escrow Commitments and Assumptions. Assumptions by owner-
occupants under the Section 203(k) program may not occur until all
work on the property has been satisfactorily completed. In addition, a
non-profit agency may not assume a Section 203(k) mortgage that was
closed using the escrow commitment procedure.
Using Section 203(k) for Disaster Relief. The requirement that a
dwelling be completed more than one year before it becomes eligible
for Section 203(k) rehabilitation mortgage insurance is hereby waived
for damaged properties in Presidentially-declared disaster areas also
eligible for Section 203(h) financing. In these areas, damaged
residences that have been completed will be eligible for Section 203(k)
mortgage insurance regardless of the age of the property. Please note
that the percentage of financing is determined by the type of mortgage
being made, i.e., normal loan-to-value ratios apply to Section 203(k)
mortgages made within these areas.
IV. ADDITIONAL INFORMATION
Multiple Employers. With the exception of receptionists, and technical
staff such as appraisers and inspectors, lender employees may not work
for more than one company engaged in the real estate finance business
at the same time. This also includes working as a real estate agent or
broker as well as originating or underwriting loans for more than one
lending institution. Further, although FHA no longer approves lender
underwriters, "contract" underwriting is not permitted.
CLAS Version 8.0. CLAS Version 8.0 may be used to update
underwriter information in the registry, access CAIVRS, and extend
refinance authorizations. Please note that it may also be used for
updating branch office information.
To assure security, only FHA-approved lending institutions may access
CHUMS via CLAS. This precludes credit bureaus from obtaining
CAIVRS information on behalf on the lender as well as other second
parties from obtaining case number assignments, etc. Lenders are to
protect their CHUMS numbers and passwords.
Downpayment Assistance Programs. We are increasingly concerned
with those situations where a builder or developer either establishes a
non-profit agency or provides direct or indirect contributions to a non-
profit or governmental agency for eventual use by a homebuyer. While
we recognize the important contributions that governmental agencies,
non-profit agencies and other charitable organizations can provide in
helping first-time homebuyers and encourage these partnerships with
FHA, we also do not believe it to be appropriate to approve quid pro
quo arrangements whereby assistance is only available if the buyer
obtains financing with a particular lender or buys a particular builder's
property. Similarly, a non-profit or other organization that provides
bona fide gifts to eligible participants should not compel the
beneficiary to purchase only properties owned by the donor of the
funds. Such scenarios cloud the motivations of the purchaser/borrower
as well as the donor.
Therefore, in evaluating downpayment and other assistance plans
administered by non-profit agencies and units of government, lenders
and the local FHA office will consider whether there is an identity-of-
interest between the donor (e.g., builder, developer, etc.) and
recipient of the funds (e.g., non-profit agency) as well as the amount of
discretion afforded the homebuyer in using the assistance provided. The
source of funds for a gift to the borrower must be totally unrelated to
the loan transaction. If the homebuyer may only use the builder,
developer, lender, real estate firm, etc., that contributed the funds,
the program will in all likelihood be unacceptable for FHA mortgage
insurance. On the other hand, acceptable programs would include one
which has several donors contributing separately to a fund with the
prospective homebuyer not compelled to use only the services of any
particular donor.
Discounted Sales Prices. In determining the maximum mortgage on a
property purchased at a discounted price, such as those sold to non-
profit agencies from FHA's REO inventory, the lender must take into
consideration such discounts or rebates provided by the seller. If the
property is ultimately to be financed with a FHA-insured mortgage
within one year of its acquisition, the original, discounted price
must be used in determining the maximum mortgage amount. As an
example, on a $50,000 sales price with a 30 percent discount, the
discounted actual price of $35,000 must be used in calculating the
maximum mortgage. Seller-paid closing costs, of course, need not be
considered provided the buyer does not pocket cash from the
transaction.
Further, the discounts or rebates may not be used for the required cash
investment on any FHA-insured mortgage, including Section 203(k)
loans. On Section 203(k) mortgages, any discounts or rebates given
after closing the loan must be maintained in an escrow account to pay
for standard reserve requirements (i.e., mortgage payments, inspection
fees, contingency reserve, etc). Any unused funds would pay down the
principal balance of the mortgage and cannot otherwise be credited to
the buyer. When completing the Section 203(k) maximum mortgage
worksheet, the contract sales price shown on line A1 must reflect the
discounting price (i.e., asking price less the discounted amount), which
must include any rebates given after closing on the property except
when maintained in an escrow account.
V. HUD HANDBOOK 4165.1 REV-1 CHG-3 (MORTGAGE AND
NOTE FORMS). ML 96-6 established a June 1, 1996 date for
implementation. The following are additional revisions to the handbook
change.
New York. An additional paragraph (I) should be added to the New
York discussion on Page 4-11, µ 4-12, as follows:
In New York, FHA permits a lender to modify and extend a
previously-recorded Security Instrument to secure new financing
for the same property, instead of discharging the Security
Instrument of record upon prepayment of existing financing.
The borrower and lender must execute a new Note and either a
HUD-approved Modification Agreement (for refinancing with no
increase in principal amount) or a Consolidation, Extension and
Modification Agreement (for other situations). Copies of these
agreements are available from FHA Offices in Albany, Buffalo,
and New York City. Fannie Mae/Freddie Mac Form 3172,
"Consolidation, Extension and Modification Agreement," should
not be used.
Appendix III (Model Mortgage Form).
Page 2, µ 2. Correct the heading, "Monthly Payment of Taxes,
Insurance, and Other Charges" by capitalizing "Payment".
Page 2, µ 2, part 2. ML 95-20 provided the replacement
language for paragraph 2 of the Model Mortgage Form. In the
handbook, one extremely important phrase was omitted from end
of the second part of paragraph 2. The second part of this
paragraph should be corrected to read, "... except that the
cushion or reserve permitted by RESPA for unanticipated
disbursements or disbursements before the Borrower's payments
are available in the account may not be based on amounts due
for the mortgage insurance premium."
Page 2, µ 2, part 3. The last sentence in part 3 of paragraph 2
should be corrected to read, "If the amounts of funds held by
Lender at any time are not sufficient to pay the Escrow Items
when due, Lender may notify the Borrower and require
Borrower to make up the shortage as permitted by RESPA." In
other words, "shortage" should replace "deficiency." Under the
RESPA regulation, 24 CFR º3500.17, a slight distinction is
made between "shortage" and "deficiency". "Shortage" is the
better term in this context.
Appendix XIV, page 2, µ B. The following language should be added
to the end of paragraph B: "... to a purchaser or grantee who does not
occupy the Property as his or her principal residence."
Missing Appendices. We have been informed that some of the earlier
printings of Handbook 4165.1 REV-1 CHG-1 mailed to lenders are
missing Appendices V-XVI. These appendices include the Model
Adjustable Rate Note Form and other important Note Allonges and
Mortgage Riders. If you are missing these Appendices you should
obtain copies through your local FHA office.
If you have any questions regarding these issues, please contact your
local FHA Office.
Sincerely yours,
Nicolas P. Retsinas
Assistant Secretary for Housing-
Federal Housing Commissioner
.