FHA Loan Expert Blog

The Bush Administration renews its efforts to address risky government-backed seller-funded downpayment assistance loans that are significantly more likely to lead to foreclosure.  HUD’s Federal Housing Administration (FHA) will reopen the public comment period on a proposed rule that would ban seller-funded downpayment assistance on mortgage transactions insured by the FHA.  The proposed rule will be re-published in the Federal Register and comments will be accepted for 60 days following publication. The rule can also be viewed on FHA’s website. 

In a speech to the National Press Club, HUD’s Assistant Secretary for Housing-Federal Housing Commissioner Brian D. Montgomery warned FHA must take action because these loans, which now make up one third of FHA’s portfolio, are causing substantial losses.  This year, as a result of its annual re-estimate, FHA had to book an additional of $4.6 billion in unanticipated long-term losses, mostly due to the increased number of certain types of seller-funded loans in the FHA portfolio. 

“Given these concerns, we cannot just stand by.  No private mortgage insurance companies back these types of loans.  We are concerned about this business because the substantial losses affect FHA’s bottom line and FHA’s ability to serve American citizens who need access to prime-rate home loans,” Montgomery stressed.

Stressing that FHA is still solvent with reserves of about $21 billion, Montgomery also noted:  “However, no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, FHA will soon either have to shut down or rely on appropriations to operate.  That, I think, would have a far-reaching impact on the economy: it would severely reduce the number of new homeowners each year; and it would also sharply reduce the need for the services required to build and maintain homes.  In other words, the negative impact goes far beyond the individuals who would not be able to purchase homes, and would likely be felt across the entire economy.”

The primary focus of HUD’s rule is to establish appropriate standards for downpayment assistance that is categorized as a gift.   Specifically, it would prohibit downpayment assistance provided before, during, or after closing of the sale by the seller, any other person or entity that financially benefits from the transaction, or any third party or entity that is reimbursed directly or indirectly by any of the parties benefiting from the sale. 

The rule would clarify that downpayment funds for FHA-insured mortgages cannot be derived from sellers - directly or indirectly - or any other party that stands to benefit from the transaction financially.  “The IRS, GAO and our own Inspector General have previously expressed concerns with these circular financing schemes.  Data clearly demonstrates that FHA loans made to borrowers relying on seller-funded downpayment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own downpayments,” noted Montgomery.

“In its entire 74-year history, FHA has been self-sustaining.  That means that our income has exceeded our costs and we have not needed an appropriation of taxpayer dollars to cover FHA’s operations. That’s pretty unique for a federal program,” Montgomery said.

Permissible sources of gifts as a source of the homebuyer’s investment include a family member, a governmental or public agency, the borrower’s employer or labor union, and a charitable organization that qualifies as a tax-exempt charitable or educational organization.  

In these cases, there is a clear quid pro quo between the homebuyer’s purchase of the property and the seller’s “contribution” or payment to the charitable organization.  Often, these contributions function as an inducement to purchase the home.  One of FHA’s primary concerns with these transactions is that the sales price may be increased to ensure that the seller’s net proceeds are not diminished, and such increase in sales price is often to the detriment of the borrower and FHA.  

Discussing the Bush Administration’s effort to help families stay in their homes, Montgomery also called on Congress to pass legislation that modernizes FHA, which includes addressing the risks associated with seller-funded downpayment assistance.  “Frankly, we need reasonable solutions to the housing crisis.  And I think there is considerable common ground on confronting it.  There is surely a consensus on a number of actions.  But some in Congress are advancing legislation that, while well intentioned, could be problematic for the economy and the country.  Some of the proposed Congressional actions could actually weaken FHA and endanger the housing market by turning FHA into a less stable, less solvent, more bureaucratic entity,” stressed Montgomery.

Clearly, this matter remains an area of significant concern for FHA, and HUD looks forward to receiving and reviewing public comments on the proposed rule.  Commissioner Montgomery’s full remarks can be found on HUD’s website.

>> UPDATE: WAIVER OF 90 DAY REQUIREMENT SIGNED BY BRIAN D. MONTGOMERY  

The Bush administration is temporarily suspending a 5-year-old rule intended to deter property flippers, as part of an effort to help speed the sale of foreclosed properties.

For one year, the Federal Housing Administration will no longer impose a 90-day waiting period before foreclosed properties can be sold to receive government-backed loans.

The policy was put in place in 2003 to deter property “flipping” schemes, in which buyers are overcharged for foreclosures or other distressed properties. But the surge in vacant properties resulting from borrowers who were unable to afford their mortgages has become a far more pressing concern.

“A glut of foreclosed and abandoned homes harms neighborhoods, frustrates homebuyers and delays a community’s recovery,” FHA commissioner Brian Montgomery said in a prepared statement.

The new policy “will allow homebuyers to purchase these homes in much greater numbers and ease the excess supply of unsold homes,” Montgomery said.

Full Time, Part Time and Outside Employment. A mortgagee may employ staff full time or part time (less than the normal 40 hour work week).  They may have other employment including self?employment.  However, such outside employment may not be in mortgage lending, real estate, or a related field.  Direct endorsement underwriters are included in this provision.  An underwriter may not work on a part?time basis for any other mortgagee, even underwriting conventional mortgage loans.  An underwriter may not underwrite loans for a parent or subsidiary of the underwriter’s approved employer.  A direct endorsement underwriter’s authority is through the employer and does not extend under any corporate “umbrella.”

FHA Title II Mortgagee Approval Handbook, Directive Number: 4060.1, REV-2, August 14, 2006

June 8, 2006

MORTGAGEE LETTER 2006 -14
TO:  ALL APPROVED MORTGAGEES

SUBJECT: Property Flipping Prohibition Amendment

 On June 7, 2006, HUD published a final rule in the Federal Register amending regulations at 24 CFR 203.37a prohibiting property flipping in HUD’s single-family mortgage insurance programs by providing additional exceptions to the time restrictions on sales. The rule and this mortgagee letter become effective for mortgages endorsed for insurance on or after July 7, 2006.  This Mortgagee Letter also rescinds, in their entirety, Mortgagee Letters 2003-07 and 2005-05.

 The additional categories of properties exempted from the time restrictions include sales of properties by:

· State and Federally chartered financial Institutions and government-sponsored enterprises (GSEs) (e.g., Fannie Mae and Freddie Mac)
· Local and State government agencies 
· Nonprofits approved to purchase HUD REO properties at a discount
hud.gov/offices/hsg/sfh/np/np_hoc.cfm
· Sales of properties within Presidentially-Declared Disaster Areas (upon FHA’s announcement of eligibility in a mortgagee letter specific to said disaster)

Prohibition on Property Flipping Described

 Property flipping is a practice whereby a property is resold a short period of time after it is purchased by the seller for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser.  FHA’s policy prohibiting property flipping eliminates the most egregious examples of predatory flips of properties within the FHA mortgage insurance programs.

Overview of FHA’s Property Flipping Policy

 FHA requires that: a) only owners of record may sell properties that will be financed using FHA-insured mortgages; b) any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and c) that for resales that occur between 91 and 180 days where the new sales price exceeds the previous sales price by 100 percent or more, FHA will require additional documentation validating the property’s value.  FHA also has flexibility to examine and require additional evidence of appraised value when properties are re-sold within 12 months.
 
           
Sale by Owner of Record

 To be eligible for a mortgage insured by FHA, the property must be purchased from the owner of record and the transaction may not involve any sale or assignment of the sales contract. This requirement applies to all FHA purchase money mortgages regardless of the time between resales.

 The mortgage lender must obtain documentation verifying that the seller is the owner of record and submit this to HUD as part of the insurance endorsement binder; it is to be placed behind the appraisal on the left side of the case binder.  This documentation may include, but is not limited to, a property sales history report, a copy of the recorded deed from the seller, or other documentation such as a copy of a property tax bill, title commitment or binder, demonstrating the seller’s ownership of the property and the date it was acquired.  Mortgagees participating in the Lender Insurance program (see ML 2005-36) are to retain this documentation and provide it to FHA upon request. 

Resales Occurring 90 Days or Less Following Acquisition

 If the owner sells a property within 90 days after the date of acquisition, that property is not eligible security for a mortgage insured by FHA unless it falls within one of the exceptions to the time restrictions on resales set forth in §203.37a(c) of the regulations.  FHA defines the seller’s date of acquisition as the date of settlement on the seller’s purchase of that property.  The resale date is the date of execution of the sales contract by the buyer that will result in a mortgage to be insured by FHA.

 As an example, a property acquired by the seller is not eligible for a mortgage to be insured for the buyer unless the seller has owned that property for at least 90 days.  The seller must also be the owner of record.

Resales Occurring Between 91 and 180 Days Following Acquisition

 If the resale date is between 91 and 180 days following acquisition by the seller, the lender is required to obtain a second appraisal made by another appraiser if the resale price is 100 percent or more over the price paid by the seller when the property was acquired.

 As an example, if a property is resold for $80,000 within six months of the seller’s acquisition of that property for $40,000, the mortgage lender must obtain a second independent appraisal supporting the $80,000 sales price.  The mortgage lender may also provide documentation showing the costs and extent of rehabilitation that went into the property resulting in the increased value but must still obtain the second appraisal.  The cost of the second appraisal may not be charged to the homebuyer.

 FHA also reserves the right to revise the resale percentage level at which this second appraisal is required by publishing a notice in the Federal Register.

Resales Occurring Between 91 Days and 12 Months Following Acquisition

 If the resale date is more than 90 days after the date of acquisition by the seller but before the end of the twelfth month following the date of acquisition, FHA reserves the right to require additional documentation from the lender to support the resale value if the resale price is 5 percent or greater than the lowest sales price of the property during the preceding 12 months.  At FHA’s discretion, such documentation may include, but is not limited to, an appraisal from another appraiser.

 FHA will announce its determination to require the additional appraisal and other value documentation, such as an automated valuation method (AVM), through a Federal Register issuance.  This requirement may be established either nationwide or on a regional basis, at FHA’s discretion.

Exceptions to 90-day Restriction

 The following sales are exempt from the time restrictions provided by §203.37a:

· Sales by HUD of its Real Estate Owned
· Sales by other United States Government agencies of single family properties pursuant to programs operated by these agencies.
· Sales of properties by nonprofits approved to purchase HUD-owned single-family properties at a discount with resale restrictions.
· Sales of properties that are acquired by the sellers by inheritance.
· Sales of properties purchased by employers or relocation agencies in connection with relocations of employees.
· Sales of properties by state and federally charted financial institutions and Government Sponsored Enterprises.
· Sales of properties by local and state government agencies.
· Upon FHA’s announcement of eligibility in a notice (i.e., ML), sales of properties located in areas designated by the President as federal disaster areas, will be exempt from the restrictions of the property-flipping rule.  The notice will specify how long the exception will be in effect and the specific disaster area affected.

Inapplicability of §203.37a to New Construction

  The restrictions in 203.37a are not applicable to a builder selling a newly built home or building a home for a homebuyer wishing to use FHA-insured financing.

Date of Property Acquisition Determined by the Appraiser

Mortgage lenders may rely on information provided by the appraiser in compliance with the updated Standard Rule 1-5 of the Uniform Standards of Professional Appraisal Practice (USPAP).  This rule requires appraisers to analyze any prior sales of the subject property that occurred within
specific time periods, now set for the previous three years for one-to-four family residential properties.

As a result, the information contained on the Uniform Residential Appraisal Report or other applicable appraisal report form describing the Date, Price and Data for prior Sales is to include all transactions for the subject property within three years of the date of the appraisal and the comparable sales within 12 months of the date of the comparable sale.  Appraisers are responsible for considering and analyzing any prior sales of the property being appraised within three years of the date of the appraisal and the comparables that are utilized within 12 months of the date of the comparable sale.

Therefore, provided that the URAR completed by the appraiser shows the most recent sale of the property to have occurred at least one year previously, no additional documentation is required from the mortgage lender.  The mortgage lender remains accountable for verifying that the seller is the owner of record and may rely on information developed by the appraiser for this purpose if provided.  However, if the lender obtains conflicting information before loan settlement, it must resolve the discrepancy and document the file accordingly.

If you have any questions regarding this Mortgagee Letter, please call 1-800-CALL-FHA.
-      Sincerely,
      Brian D. Montgomery
      Assistant Secretary for Housing-
          Federal Housing Commissioner

Here are some compensating factors for FHA mortgage loans.

2-13 COMPENSATING FACTORS. Compensating factors that may be used to justify approval of mortgage loans with ratios exceeding our benchmark guidelines are those listed below. Underwriters must record on the “remarks” section of the HUD 92900-WS/HUD 92900-PUR the compensating factor(s) used to support loan approval. Any compensating factor used to justify mortgage approval must be supported by documentation.

A. The borrower has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expense for the new mortgage over the past 12-24 months.

B. The borrower makes a large downpayment (ten percent or more) toward the purchase of the property.

C. The borrower has demonstrated an ability to accumulate savings and a conservative attitude toward the use of credit.

D. Previous credit history shows that the borrower has the ability to devote a greater portion of income to housing expenses.

E. The borrower receives documented compensation or income not reflected in effective income, but directly affecting the ability to pay the mortgage, including food stamps and similar public benefits.

F. There is only a minimal increase in the borrower’s housing expense.

G. The borrower has substantial documented cash reserves (at least three months’ worth) after closing. In determining if an asset can be included as cash reserves or cash to close, the lender must judge whether or not the asset is liquid or readily convertible to cash and can be done so absent retirement or job termination. Also see paragraph 2-10K.

Funds borrowed against these accounts may be used for loan closing, but are not to be considered as cash reserves. “Assets” such as equity in other properties and the proceeds from a cash-out refinance are not to be considered as cash reserves. Similarly, funds from gifts from any source are not to be included as cash reserves.

H. The borrower has substantial non-taxable income (if no adjustment was made previously in the ratio computations).

FHA Government Grants are generally not considered a compensating factor for FHA financing. This should not be confused with FHA assumable mortgage loans or the FHA lease/purchase program.

FHA Pre-foreclosure Sale (short sale)

FHA Secure Questions and Answers

FHA & Social Security Numbers (SSN)

Buying a HUD home (HUD Repo)

FHA Non-Profit Approval

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 3280, 3282, and 3288

[Docket No. FR-4813-F-03]
RIN 2502-AH98

Manufactured Home Dispute Resolution Program

AGENCY: Office of the Assistant Secretary for Housing–Federal Housing
Commissioner, HUD.

ACTION: Final rule.

SUMMARY: This rule establishes a federal manufactured home dispute resolution program and guidelines for the creation of state-administered dispute resolution programs. Under the National Manufactured Housing Construction and Safety Standards Act of 1974, as amended by the Manufactured Housing Improvement Act of 2000, HUD is required to establish a program for the timely resolution of disputes among manufacturers, retailers, and installers of manufactured homes regarding responsibility, and the issuance of appropriate orders, for the correction or repair of defects in manufactured homes that are reported during the 1-year period beginning on the date of
installation.

DATES: Effective Date: February 8, 2008.

FOR FURTHER INFORMATION CONTACT: William W. Matchneer III, Associate Deputy Assistant Secretary for Regulatory Affairs and Manufactured Housing, Department of Housing and Urban Development, 451 Seventh Street, SW., Room 9164, Washington, DC 20410, telephone (202) 708-6401 (this is not a toll-free number). Persons with hearing or speech impairments may access this number via TTY by calling the toll-free Federal Information Relay Service at (800) 877-8389.

SUPPLEMENTARY INFORMATION:

I. Background

Requirement for a Dispute Resolution Program

    The National Manufactured Housing Construction and Safety Standards Act of 1974 (the Act) (42 U.S.C. 5401-5426) is intended, in part, to protect the quality, safety, durability, and affordability of manufactured homes. The Act was amended on December 27, 2000, by the Manufactured Housing Improvement Act of 2000, Public Law 106-569, to require HUD, among other things, to establish and implement a new manufactured home dispute resolution program for states that choose not to operate their own dispute resolution programs and to establish guidelines for the creation of state-administered dispute resolution programs.
    Specifically, section 623(c)(12) of the Act (42 U.S.C. 5422(c)(12)) calls for the implementation of “a dispute resolution program for the timely resolution of disputes between manufacturers, retailers, and installers of manufactured homes regarding responsibility, and for the issuance of appropriate orders, for the correction or repair of defects in manufactured homes that are reported during the 1-year period beginning on the date of installation.'’ A state is not required to be a State Administrative Agency under HUD’s manufactured home program to administer its own dispute resolution program. However, any state submitting a state plan to change its status from a nonparticipating state to a conditionally or fully approved State Administrative Agency after the effective date must provide for a dispute resolution program as part of its plan. Any state that was conditionally or fully approved before the effective date will not be required to include a dispute resolution program in its state plan, as long as the state maintains conditionally or fully approved status. Section 623(g)(2) of the Act requires HUD to implement a HUD Manufactured Home Dispute Resolution Program that will meet the above requirements in any state that has not established a program that complies with the Act. The state where the home is sited determines whether the HUD Manufactured Home Dispute Resolution Program or the state program applies.

Proposed Rule

    On October 20, 2005, HUD published the Manufactured Home Dispute Resolution Program Proposed Rule (70 FR 61178) with a comment due date of December 19, 2005. HUD received responses from 20 commenters during the comment period. The commenters included two state agencies, several statewide and national manufactured housing associations, individuals, the Manufactured Housing Consensus Committee (MHCC), and one low-income housing organization.

II. Particular Areas of Interest to Commenters

    This section of the preamble discusses particular areas of interest to commenters in addition to the discussions of public comments that appear throughout the preamble in conjunction with the description of the dispute resolution program adopted in this final rule.

General

    As previously discussed, HUD was charged with implementing a system to resolve disputes among manufacturers, retailers, and installers. As several commenters noted, the proposed rule did not include a definition of “installer.'’ In response to this comment, this rule defines the term “installer.'’ Additional information regarding installers may be found in the Manufactured Home Installation Program Proposed Rule published June 14, 2006 (71 FR 34476).
    Even though the Act does not require their participation in the HUD Dispute Resolution Program, HUD views the participation of homeowners as a crucial element to a viable program. Under Section 625 of the Act, HUD has the broad authority to involve homeowners in the dispute resolution program. Consistent with the proposed rule, this final rule gives homeowners the right to participate in the HUD Dispute Resolution Program by initiating the Mediation and Arbitration Process and by acting as observers of the process. This final rule does not recognize homeowners as parties.
    HUD and the MHCC, in its meetings, recognized that it may have been possible under the proposed rule for the parties to argue that there is no dispute between them when in fact there is a defect that needs correction. In this final rule, HUD has ensured that the HUD Manufactured Home Dispute Resolution Program results in a proper determination of defect and culpability.

Funding

    The MHCC and commenters have continued to recommend that parties that use and receive the benefits of the dispute resolution process pay at least a portion of the direct costs associated with the program. HUD agrees with this “fees for service'’ approach and is currently seeking statutory authority to assess users of the program a fee for costs associated with the program. Absent such authority, the Department will absorb the cost of running the program in HUD-administered states as general program expenses. It is anticipated that such fees for service would not be used to cover the purely administrative costs to HUD of implementing the program, but would include a filing fee to initiate a dispute resolution process, a fee to initiate arbitration, and the assessment of arbitration costs to a losing party. Other administrative costs of the program in HUD-administered states would be funded as general program expenses.

Many states across the country are affected by declining market indicators in automated underwriting findings.  Beginning January 15, 2008, applications taken after that date will be subject to a 5% LTV reduction for FNMA Conventional loans.  This will be a 5% larger down payment required by borrowers desiring to purchase in a declining market area. 

FHA and VA will not be subject to the 5% declining market LTV reduction.  You can count on FHA and VA mortgage loans in the state of Florida.

FHA Home Equity Conversion Mortgage (HECM) Counseling Services:  To clarify the previous message sent on 11/20/07 regarding HECM counseling, prospective HECM borrowers may not pay for HECM counseling services until FHA issues guidance.  Lenders may continue to pay for these services, either on a case-by-case basis or through a lump sum contribution to a HUD-approved housing counseling agency.

Find out more about FHA’s HECM program by visiting: fha.gov/reverse/index.cfm 

For more information on Housing Counseling please visit: hud.gov/offices/hsg/sfh/hcc/hcc_home.cfm

On September 28, 2007, a Final Rule was published in the Federal Register at 72 FR 55638 and codified at 24 CFR Part 214 establishing new regulations for the Department of Housing and Urban Development’s (HUD) Housing Counseling Program.  Included in the final rule is a provision authorizing housing counseling agencies to charge fees for counseling and education.

HUD is in the process of finalizing a mortgagee letter to clarify HUD policy regarding reverse mortgage counseling fees in light of these regulations.  Until the mortgagee letter is published, agencies must not charge fees for reverse mortgage counseling.

Agencies may charge fees for pre-purchase, non-delinquency post-purchase, and rental counseling and education, provided they conform to the criteria in the final rule. 

However, no fees may be charged for clients needing homeless counseling or default counseling.

If you have any questions please call your GTR or staff representative at the Homeownership Center in your jurisdiction. You can find a directory of states that are serviced by the four FHA Homeownership Centers (HOC) on the web at: hud.gov/offices/hsg/sfh/hoc/hsghocs.cfm