April 16, 1996

                                  MORTGAGEE LETTER 96-18

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.


     "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

     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
     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

     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. 


     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. 


     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

     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.

     NOTE FORMS). ML 96-6 established a June 1, 1996 date for
     implementation.  The following are additional revisions to the handbook

     New York.  An additional paragraph (I) should be added to the New
     York discussion on Page 4-11,  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,  2.  Correct the heading, "Monthly Payment of Taxes,
           Insurance, and Other Charges" by capitalizing "Payment".

           Page 2,  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,  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 3500.17, a slight distinction is
           made between "shortage" and "deficiency".  "Shortage" is the
           better term in this context.    

     Appendix XIV, page 2,  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