FHA Loan Expert Blog

THE SUBJECT MESSAGE IS APPLICABLE ON FORWARD MORTGAGES ONLY

POLICY ALERT – RESPA/FHA EXISTING POLICY REGARDING NON FHAAPPROVED MORTGAGE BROKER FEES IN FHA MORTGAGE TRANSACTIONS

The subject alert reconfirms existing FHA policy regarding the use of non FHA-approved mortgage brokers. FHA loan origination services must be performed by a FHA-approved lender or FHA approved mortgage broker (loan correspondent). A loan correspondent may be compensated for the actual loan origination services it performs either directly by the consumer or indirectly by the FHA approved lender without being in violation of either the RESPA statute and regulations or FHA regulations.

In transactions where the mortgage broker is not an FHA-approved broker, the loan origination services cannot be performed. Under these circumstances, RESPA would prohibit the payment to the non FHA-approved mortgage broker because those services, under FHA regulations, would have to be performed again by either an FHA-approved lender or loan correspondent. The payment to the unapproved broker for duplicated services amounts to an unearned fee in violation of section 8(b) of RESPA. Further, this payment also acts as a disguised referral fee for steering the borrower to the FHA-approved lender or loan correspondent which is in violation of section 8(a) of RESPA. While a broker who is not FHA-approved may assist a prospective FHA borrower in obtaining an FHA loan, the non-approved broker cannot perform required FHA loan origination services. In these instances, the fee charged must be paid from the mortgagor’s own available assets, must be disclosed on the HUD-1 at closing and a copy of the contract included in the loan file submitted for insurance endorsement.

Under no circumstances, may a borrower pay a fee that is not commensurate with the amount normally charged for the similar services, goods or facilities. If the payment or a portion thereof bears no reasonable relationship to the market value of the goods, facilities or services provided, the excess over the market rate may be used as evidence of a compensated referral or unearned fee in violation of section 8(a) or (b) of RESPA and 24 CFR 3500.14(g).

RESPA provided further guidance to industry regarding payments by lenders to mortgage brokers in Policy Statement 1999-1. While the policy statement specifically speaks of lender payments to mortgage brokers, those payments are indirectly paid by the consumer and the policy statement would apply equally to payments made directly by the consumer.

There are a number of mortgage loan programs that are available in Florida.  One of the most popular these days is the Florida FHA loan.  The advantages of an FHA loan in Florida are apparent.

FHA provide a 3% down payment option that can be gifted

Many Florida properties are within FHA loan limits

Florida FHA loans may be obtained with some bad credit

FHA loans in Florida have low fixed rates

OK, I’ve typed enough about the Florida FHA loan for today.  Please consider your FHA options in FLorida for a Florida fixed rate FHA loan carefully.

Let’s take a look at what the 4155.1 states regarding delinquent federal debt and obtainig an FHA mortgage loan. 

“If the borrower, as revealed by public records, credit information, or HUD’s Credit Alert Interactive Voice Response System (CAIVRS), is presently delinquent on any Federal debt (e.g., VA-guaranteed mortgage, Title I loan, Federal student loan, Small Business Administration loan, delinquent Federal taxes) or has a lien, including taxes, placed against his or her property for a debt owed to the U.S., the borrower is not eligible until the delinquent account is brought current, paid, otherwise satisfied, or a satisfactory repayment plan is made between the borrower and the Federal agency owed and is verified in writing.  Tax liens may remain unpaid provided the lien holder subordinates the tax lien to the FHA-insured mortgage. If any regular payments are to be made, they must be included in the qualifying ratios.
 
Since the IRS routinely takes a second lien position without the necessity of independent documentation, eligibility for FHA mortgage insurance will not be jeopardized by outstanding IRS tax liens remaining on the property unless the lender has information that the IRS has demanded a first-lien position.

Although eligibility for an FHA-insured mortgage may be established by performing the actions described above, the overall analysis of the creditworthiness must include consideration of a borrower’s previous failure to make payments to the Federal agency in the agreed-to manner and must document its analysis of how the previous failure does not represent a risk of mortgage default.”

What is the expected impact of FHASecure?

From 2007-2009, 2.3 million adjustable rate mortgages are expected to reset, nearly a quarter of which will be at risk of foreclosure. FHA believes that FHASecure will be able to assist approximately 80,000 borrowers who are delinquent due to their loan resetting, as well as 160,000 borrowers who are facing reset but are still current on their mortgage. By offering FHASecure and other refinancing programs, FHA could help 240,000 borrowers facing reset.

What is the value of the FHASecure program to lenders?

Only FHA-approved lenders can originate FHASecure loans. FHASecure could benefit lenders by helping them avoid foreclosure expenses. Even if a lender takes a short payoff in order to originate an FHASecure loan, it is still less expensive than foreclosure and disposition of the property.

What advice should loan servicers/lenders give borrowers who are facing difficulty prior to ARM reset? How can FHA help borrowers who are delinquent prior to reset?

Loan servicers and lenders can advise borrowers who are current on their non-FHA adjustable rate mortgage to consider refinancing to an FHA insured mortgage. For those borrowers who may owe more than their property is worth, lenders have the option of placing a second lien on the property that when combined with the first lien exceeds the property’s value as well as FHA’s geographical loan limits.

Although FHA cannot help borrowers who are delinquent prior to reset, there may be other options available. Many lenders have successfully provided loss mitigation assistance to borrowers, and a number of states are considering foreclosure avoidance programs. Lenders should provide information to borrowers on possible options, including contacting a HUD-approved housing counseling agency. To find a HUD-approved housing counseling agency, borrowers may call 1-800-569-4287 or visit hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm.

When can we start originating FHASecure loans?

Applications may be taken starting September 5, 2007 thru December 31, 2008.

Eligibility and Underwriting Issues
How does FHA define reset? Does the definition include ARMs that reset at different time intervals (six months, annually)?

FHA has purposely not defined reset because it understands that there are various reset periods associated with non-FHA adjustable rate mortgages.

Under the FHASecure, are there restrictions on secondary financing, seasoning requirements for existing liens and/or a limit on the combined loan to value (CLTV) ratio?

Except as noted in Mortgagee Letter 2007-11, FHASecure does not change FHA’s underwriting requirements. Therefore, existing FHA policies regarding secondary financing are applicable: repayment terms of the second must not have a prepayment penalty or provide for a balloon payment before 10 years; any periodic payments due on the second mortgage are due monthly and are essentially the same in dollar amount; and the first and second liens cannot exceed the borrower’s reasonable ability to pay (HUD Handbook 4155.1 REV-5, paragraph 1-13 C 2 and 3). However, second mortgages that are deferred for no less than 36 months need not be considered in the qualifying ratios. As a reminder, the FHA insured mortgage must be in the first lien position.

Under FHASecure, there is no CLTV limit or a seasoning requirement for purchase money seconds. However, lenders are again reminded of existing FHA policy: if any portion of the funds of an equity line of credit in excess of $1,000 was advanced within the past 12 months and was used for purposes other than repairs and rehabilitation of the property, the line of credit is not eligible for inclusion in the new FHA mortgage (HUD Handbook 4155.1 REV-5, paragraph 1-11 A 2).

Will FHA adjust its Credit Watch termination policies for lenders who participate in FHASecure lending?

FHASecure does not change FHA’s underwriting guidelines, and FHA does not expect to see higher default and claim rates with these loans. As with all its programs, FHA will pull files in declining markets at a greater frequency as part of its normal risk management strategy.

Is there any leeway in FHA’s definition of “current” in the six months prior to reset? Must borrowers be current on all obligations in the six months prior to reset?

Borrowers must have paid their mortgage payment within the month due for the six months prior to reset, and must meet FHA’s standard underwriting criteria as it relates to all other aspects of the loan.

Are there special underwriting requirements for the FHASecure program? Is there model language, i.e. for the underwriter’s “remarks” regarding a borrower’s inability to pay after reset?

There is no model language for underwriters or special instructions for completing the Mortgage Credit Analysis Worksheet (MCAW) outside of what is already available regarding refinance transactions, which is located on page two of the MCAW. Furthermore, all borrowers being considered for FHASecure must meet FHA’s standard underwriting criteria.

With FHASecure lenders can include delinquent payments in the mortgage amount but the Mortgagee Letter does not address servicing costs accrued by homeowners, for example the cost of inspections. Can lenders include these types of costs as well or does the homeowner have to pay them out of pocket?

The items listed in the Mortgagee Letter are examples of what may be included in the new mortgage. Lenders may also include other reasonable and customary costs that are standard servicing practices and are included in all payoff statements.

Are there a maximum number of months of delinquent payments that a lender can roll into the new mortgage?

No. Homeowners with sufficient equity in their property may include the entire delinquency into the first mortgage as long as doing so does not result in exceeding the maximum FHA loan-to-value ratios and the loan limits for the area.

Will there be marketing brochures on the FHASecure program to provide to the public?

Yes. FHA is currently developing Fact Sheets and promotional brochures for both lenders and consumers.

Where can I find the additional guidance on FHASecure?

Guidance was published in Mortgagee Letter 2007-11, which can be found on FHA’s website fha.gov or hud.gov/offices/hsg/mltrmenu.cfm. The Mortgagee Letter permits consideration of delinquent borrowers and secondary financing by the lender. FHA has not changed its other underwriting policies and borrowers must still meet standard FHA underwriting criteria.

Are interest-only non-FHA insured loans eligible for FHASecure?

If the loan is a non-FHA adjustable rate mortgage, it is eligible for FHASecure. At this time, interest-only fixed rate non-FHA mortgages or such mortgages with buy down features incorporated into the interest rate or payment options are not eligible. For now, FHA is keeping the focus for FHASecure on adjustable rate mortgages but may consider other types of non-FHA insured mortgages in the future.

Can FHA assist borrowers who are current on their mortgage but facing an ARM reset?

Yes. Although FHASecure is limited to borrowers who are delinquent because of a non-FHA ARM reset, FHA’s standard refinancing programs can assist borrowers who are current. Lenders are permitted to offer a second mortgage to those borrowers who are current but owe more than what their property is worth. As with FHASecure, this authority for secondary financing is only applicable for non-FHA ARMs that will or have reset and applications must be taken between September 5, 2007 and December 31, 2008.

Appraisal Issues
Will there be an increased emphasis on FHA review of appraisals?

As noted in Mortgagee Letter 2007-11, FHA will be focusing more attention on reviewing appraisals in declining markets.

Will there be any changes to appraisal protocols since appraised values are declining?

Mortgagee Letter 2007-11 reiterates FHA’s existing guidance to mortgage lenders to ensure that appraisers are providing accurate property valuations. A declining market could be as small as a neighborhood or as large as an entire state, and no standard definition exists other than home prices are falling.

Initiative meeting in Chicago:

October 10-11, 2007 - Chicago, IL. Free FHASecure Initiative meeting. Metcalfe Federal Building, 77 W. Jackson Boulevard, Room #2205, Chicago, IL 60604. There will be two (2) sessions held each day, morning and afternoon.  9:00 AM to 12:00 PM. and 1:00 PM to 4:00 PM. Registration not required, no fee. The FHASecure Initiative which enables homeowners to refinance various types of adjustable rate mortgages (ARMs) that have recently “reset” and become delinquent. The FHASecure Initiative, a temporary program designed to provide refinancing opportunities to homeowners, preserve communities, and to increase liquidity in the mortgage market, requires that the loan application be signed no later than December 31, 2008.  Seating is limited & on a first-come first-served basis. All are welcome to walk in and learn about FHASecure.

Effective October 15, 2007, borrower social security information will no longer be validated in real time when a new case number assignment is requested in FHA Connection (FHAC).  Edits in FHAC will continue to validate the prefix combination of the SSN as well as check against the Social Security Administration’s (SSA) Death Master File.  The FHAC will also continue to validate SSNs using the borrower’s name, SSN and birth date. 

However, this validation process will no longer provide an acceptable confidence rating at the time of case number assignment.  Instead, the case number will be issued to the lender while an overnight verification attempt with SSA takes place.  Lenders are expected to view the Holds Tracking screen in FHAC the next business day (or the following business day after that for case numbers requested after 5:00PM Eastern Time) to verify the borrower’s name and SSN passed validation with SSA.  Due to their business cycle, especially towards the end of the month, SSA has cautioned that it may not be able to provide an overnight validation when required but should do so within a few business days.

If the overnight matching with SSA fails, a Case Warning for SSN Validation will be placed on the case number.  Lenders will have the opportunity to make the necessary corrections and a second attempt to validate with SSA will occur.  If the revised data passed validation, the Case Warning for SSN Validation will be removed.  If a case continues to fail SSA validation and the lender submits a request for insurance endorsement because it believes the SSA database is in error, the lender must provide conclusive documentation in the case binder supporting the validity of the SSN to the applicable Homeownership Center (HOC).  For the Lender Insurance program, the Case Warning for SSN Validation will require the lender to submit the case binder for endorsement along with conclusive documentation supporting the validity of the SSN.  If upon review, the HOC staff believes the documentation to be valid and the loan meets all other FHA requirements, it will endorse the mortgage for insurance.  Any changes made to the borrower’s name, birth date and SSN at any time prior to insurance endorsement will trigger a validation request with SSA.  It is anticipated that an increase in the number of loans that fail this validation process will occur.

SSA has limited tolerance for minor mistakes in names, birthdates and social security numbers, so lenders are reminded of the importance for accuracy in these three data elements when requesting a case number. 

FHA provides SSN checks to help protect the insurance funds it manages, and that lenders are still responsible – not FHA – to verify each borrower’s SSN, as well as the borrower’s identity.  This verification service, provided by FHA at no cost to its approved lenders, may only be used for processing loans for FHA insurance.  Lenders are not to use this service to verify SSNs for other than FHA-insured mortgages.

A mortgagee letter on this subject will be issued shortly.  In the meantime, should you have any questions concerning this change, call 1-800-CALLFHA

BUSH ADMINISTRATION ANNOUNCES $44.1 MILLION IN HOUSING COUNSELING GRANTS TO NEARLY 400 NATIONAL, STATE AND LOCAL AGENCIES

Approximately 700,000 families will have a greater opportunity to find housing or keep the homes they have because of more than $44 million in housing counseling and counseling training grants announced 10/04/07 by Housing and Urban Development Secretary Alphonso Jackson. Housing counseling grants will assist families in becoming first-time homeowners and remaining homeowners after their purchase. Renters and homeless individuals and families will also benefit from the counseling offered by the grants. These grants, totaling over $41 million, were awarded to 19 national and regional organizations and nearly 370 state and local housing counseling agencies…

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 203 [Docket No. FR-5087-F-02] RIN 2502-AI52
TITLE: Standards for Mortgagor’s Investment in Mortgaged Property
AGENCY: Office of the Assistant Secretary for Housing–Federal Housing Commissioner, HUD.
ACTION: Final rule.

DATES: Effective Date: October 31, 2007.

SUMMARY: This final rule amends the Department’s regulations governing the specific standards for a mortgagor’s investment in property for which the mortgage is insured by the Federal Housing Administration (FHA). Specifically, this final rule codifies HUD’s longstanding practice, authorized by statute, of allowing a mortgagor’s investment to be derived from gifts by family members and certain organizations. The standards established by this final rule address a situation in which the mortgagor’s investment is derived from a gift, loan, or other payment that is provided by any donor, including an individual or an organization, and also specify prohibited sources for a mortgagor’s investment. The final rule establishes that a prohibited source of downpayment assistance is a payment that consists, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale: The seller, or any other person or entity that financially benefits from the transaction; or any third party or entity that is reimbursed directly or indirectly by the seller, or any other person or entity that financially benefits from the transaction.
 
This final rule follows publication of a May 11, 2007, proposed rule and takes into consideration the public comments received on the proposed rule. After considering all comments received, HUD is adopting the May 11, 2007, proposed rule with certain minor clarification changes.

According to Nehemiah’s webiste getdownpayment.com, Nehemiah Corporation of America is “a not-for-profit community development corporation specializing in homeownership, affordable housing and community development….The nation’s largest privately funded downpayment assistance program. Since 1997, we have assisted over 230,000 families working with Realtors, builders and lenders nationwide to provide more than $900 million in downpayment gift funds.”  Here’s what Nehemiah’s president had to say about the recent HUD rule. 

October 1, 2007

Dear Colleague,

Today HUD published its rule known as “Standards for Mortgagor’s Investment in Mortgaged Property.” This rule threatens the existence of privately funded downpayment assistance. Below is an excerpt of a press release issued today that describes my assessment of the situation.

“HUD’s action to move forward with banning privately funded downpayment assistance programs is outrageous and we have responded by filing a lawsuit in Federal Court yesterday to challenge the merits of HUD’s damaging rule and to seek an injunction blocking implementation of this rule. It is inconceivable that HUD has taken this action in complete disregard for the House’s passage of legislation that would block it, driven by strong bipartisan support from House Financial Services Sub-Committee on Housing Opportunity Chair Congresswoman Maxine Waters (D-California) and fellow committee member Congressman Gary Miller (R-California). To date, privately-funded downpayment assistance programs have helped over 600,000 families become homeowners, and have been credited not only for helping people buy homes, but also stabilizing neighborhoods and cities and creating stronger families. As evidenced by the over 15,000 letters sent in opposition to HUD by families across the country, programs like The Nehemiah Program continue to be a lifeline for families working to reach the dream of homeownership. Further, broad opposition to this proposal by groups including the National Association of Home Builders, the Mortgage Bankers Association, the US Council of Mayors, and National Association of Counties speak to the validity and importance of seller-funded downpayment assistance programs. We remain hopeful that the legislative process reaches a successful conclusion.”

The HUD Rule has 3 major components:

1. Under the new rule downpayments cannot be derived from sellers directly or indirectly or any other party that benefits financially.

2. The rule takes effect on October 31, 2007 for all DPA providers except The Nehemiah Program.

3. Due to a 1998 legal settlement between Nehemiah and HUD, the effective date for The Nehemiah Program is March 31, 2008. The excerpt from the final rule states:

“…pursuant to an April 1998 settlement agreement resolving litigation between the Nehemiah Progressive Housing Development Corporation (Nehemiah) and HUD, the effective date shall be March 31, 2008 for the Nehemiah downpayment assistance program described in the settlement agreement between Nehemiah and HUD.”

Since May, Nehemiah has led the fight against this controversial rule, and will continue to take every possible step to preserve the option of privately funded downpayment assistance for low- and moderate-income homebuyers. We expect Congress to continue their opposition to the HUD rule. So far, the House of Representatives has opposed the HUD rule by including language in the FHA Reform Bill and the HUD 2008 Appropriations Bill that protects DPA. The Senate is presently working on its version of the FHA Reform bill and Nehemiah is diligently working with its leadership to make sure our concerns are heard.

We intend to prevail and ask for your support in preserving downpayment assistance by contacting your Congressperson and Senators to voice your concern about the elimination of downpayment assistance programs. Locate your elected officials by visiting takeaction.ahaanow.org/ahaa/home.

You can count on Nehemiah to keep you informed on the latest information surrounding the downpayment assistance industry. Stay up-to-date by visiting getdownpayment.com or call us at 877-634-3642 from 9:00 a.m. - 8:00 p.m. EST for answers to your questions.

On behalf of the Nehemiah family, I thank you for your support. Stay tuned!

Sincerely, 

Scott Syphax
President & CEO
Nehemiah Corporation of America
424 North 7th Street, Suite 250
Sacramento, CA 95811

Was today’s HUD rule the seller-funded-down-payment-knockout-punch?  Maybe it was.  Maybe it was not.

Stay tuned!