FHA Loan Expert Blog

PDF Version: Mortgagee Letter Hope For Homeowners

The amount of the H4H mortgage may not exceed a nationwide maximum mortgage limit of $550,440.  The LTV of the H4H mortgage is limited to 90 percent of current appraised value of the property, including the UFMIP.  The proceeds from the new H4H mortgage will be applied to the existing senior mortgage, and extinguish all mortgage-related debts under all existing mortgages including: 
 
• Advances by existing lenders/servicers for taxes, hazard insurance and/or mortgage insurance; and

• Out of pocket third party legal expenses of the existing lenders/servicers associated with foreclosures and preservation and protection (See Mortgagee Letters 2007-03 and 2005-30)

PDF Version: Hope For Homeowners Mortgagee Letter 

Appraisals

The appraisal for the H4H mortgage must be performed by an appraiser on the FHA Appraiser Roster and conducted using FHA guidelines, which can be found in the Resources box at hud.gov/groups/appraisers.cfm. 

However, the appraisal must have been specifically ordered for the H4H transaction and the appraisal should be no more than 3 months old at the time of loan closing.  If an appraisal is more than 3 months old because of transactional delays, the appraisal may be acceptable with an explanation that addresses how the appraisal meets existing FHA standards and the requirement for “current” appraised value. The lender may require a new appraisal, if the appraisal and written explanation are insufficient.

Prevailing Appraised Value

If an appraisal is ordered by the current lender or servicer and a new appraisal is ordered by a different lender that will originate the new loan under this Program, the value provided in the appraisal ordered by the new lender will prevail as the appraisal accepted for obtaining FHA insurance.

Appraisal Practices in Declining Markets
 
 It is expected that many of the properties financed under this Program will be located in declining market areas.  Therefore, the following guidance is provided to assist lenders in ensuring 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 a market in which home prices are falling. 

Appraiser Responsibilities

The purpose of the appraisal is to provide the lender/client with an accurate, and adequately supported, opinion of market value.  It is the appraiser’s responsibility in performing the appraisal to determine whether a property is located in a declining market.
The neighborhood section of each property specific appraisal form contains a subsection on housing trends where the appraiser must mark a box indicating whether property values are increasing, stable or declining.  Whichever box is selected, the appraiser is certifying that he or she has performed an objective analysis of quantifiable data supporting the observations made.

The appraiser must provide an explanation in the “Market Conditions” section of the appraisal report that includes relevant information in support of the conclusions about appraised value relating to trends in property values, demand/supply and marketing time.  The appraiser must also provide a description of the prevalence and impact of sales and financing concessions and/or down payment assistance in the subject’s market area.  Other areas of discussion may include days on market, list-to-sale price ratios, and/or financing availability.
 
Appraisers and lenders are reminded that a comparable sale should not be more than six months old and should represent a closed sale. The appraiser may utilize comparables that are more than six months old but only with a clear explanation and justification.  The lender may require a new appraisal, if the appraisal and written explanation are insufficient. The appraiser is not permitted to use a comparable greater than 12 months old (see Comparable Selection, page D-6 of Valuation Protocol).

Lender Responsibilities

The lender’s responsibility is to properly review the appraisal and determine that the appraised value used to support the loan amount of the new FHA-insured mortgage is accurate and adequately supported.  Lenders may determine, through services such as the S&P/Case-Schiller Index, Office of Federal Housing Enterprise Oversight (OFHEO) House Price Index or any index developed by its successor, the Federal Housing Finance Agency, or National Association of Realtors (NAR) statistics, that the appraised value is supportable.

Lenders are reminded that, if the appraiser they select provides a poor or fraudulent appraisal that leads FHA to insure a mortgage at an inflated amount, the lender is held equally responsible with the appraiser for the violation if the lender knew or should have known of the defects or the fraud in the appraisal.  FHA will pursue appropriate enforcement actions against both or either party.  Lenders accept responsibility, equally with appraisers for the integrity, accuracy and thoroughness of the appraisal submitted to FHA for mortgage insurance purposes.

Lenders should inform appraisers that the purpose of the appraisal is for the H4H Program, advising them that a copy will be shared with subordinate lien holders and must be provided to the borrower.

PDF Version: Hope For Homeowners Mortgagee Letter

Property Eligibilty

• The property must be the borrower’s primary and only residence in which they have an ownership interest (if there are non-occupant co-borrowers, they will need to quit claim their interest in the property prior to the occupying co-borrowers applying for the H4H Program);

• Only 1 unit properties are eligible, including condominium units, cooperative units and manufactured housing permanently affixed to realty.

PDF Version: Hope For Homeowners Mortgagee Letter

Mortgage Eligibility

• The mortgage being refinanced must have been originated on or before January 1, 2008;

• Each holder of an existing senior mortgage being refinanced must:

1. Waive all prepayment penalties and late payment fees (including insufficient funds fees) on the mortgage.  Prepayment penalties are defined in the Federal Reserve Board’s Regulation Z (Truth in Lending), 12 CFR 226.32(d)(6);

2. Agree to accept the proceeds of the new H4H mortgage as payment in full, and

3. Release their outstanding mortgage liens.

• Each holder of an existing subordinate mortgage must:

1. Waive all prepayment penalties and late payment fees (including insufficient funds fees) on the mortgage.  Prepayment penalties are defined in the Federal Reserve Board’s Regulation Z (Truth in Lending), 12 CFR 226.32(d)(6); and

2.  Release their outstanding mortgage liens.

• Any type of mortgage is eligible for refinancing under the H4H Program, including conventional (prime, Alt-A, subprime) or government-backed (FHA, VA, or Rural Development), fixed-rate or an adjustable rate mortgage; and

• The mortgage being refinanced may have a variety of payment characteristics, including interest only, payment option, negative amortization and/or any other exotic features.

PDF Version: Mortgagee Letter for Hope For Homeowners

 Borrower Eligibility

• Borrowers who are current or delinquent  on their mortgage at the time of the refinance are eligible for this Program, if they:   

o Have not intentionally defaulted on their mortgage or any other debt (Intentionally defaulted means the borrower had available funds that could pay the mortgage and other debts without hardship.  Debts subject to a documented bona fide dispute may be excluded.) AND

o Have made a minimum of six (6) full payments during the life of the existing senior mortgage (full payment is defined as what was acceptable to the lender for meeting the monthly payment obligation under the terms and conditions of the mortgage).

• Borrowers must reside in the property securing the loan being refinanced, and may not have an ownership interest in other residential real estate, including second homes and/or rental properties.

• Borrowers cannot have been convicted of fraud under state and Federal laws in the last 10 years. 
o Similar to its validation tool for social security numbers, FHA will use an automated tool at the time of case number assignment that will check the borrower’s name against several databases for convictions of fraud and an ownership interest in other residential properties.  In the event that the lender receives a warning at case number assignment and believes it is in error, it must provide evidence to the appropriate Homeownership Center documenting that the borrower has not been convicted of fraud or does not have an ownership interest in other residential properties.  Once the Homeownership Center evaluates the documentation, it will determine whether to lift the warning.

• Borrowers must certify that they did not knowingly or willfully provide material false information to obtain the existing mortgages being refinanced under the H4H Program.

• As of March 1, 2008, the borrower’s aggregate total monthly mortgage payment debt-to-income ratio (DTI) on all existing mortgages must be greater than 31 percent of the borrower’s gross monthly income. The total monthly mortgage payment is defined as the fully-indexed and fully-amortized Principal, Interest, Taxes and Insurance (PITI) payment (this includes principal and interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens).

FHA recognizes that reconstructing the borrower’s prior total monthly mortgage payment DTI as of March 1, 2008 may be difficult, especially as the H4H Program nears its sunset date.  To comply with this eligibility requirement, lenders must obtain:

1. From the borrower, evidence that the prior mortgage DTI was more than 31 percent on March 1, 2008, such as pay stubs for March 2008, or a signed and dated copy of the individual 2008 Federal tax return, when available, to determine gross monthly income for that month (earnings divided by 12), or W-2s, financial records, or verification of employment from the borrower’s employer. 

Lenders may also rely on the borrower’s signed and dated 2007 Federal tax return if the lender has no reason to believe that the borrower’s income in March 2008 was materially different than the income reported on the 2007 Federal tax return.

• To determine March 2008 income for self-employed borrowers, obtain a copy of the quarterly tax return that contains income stream information for March 2008 or a signed and dated Profit and Loss Statement and balance sheet that contains income stream information for March 2008 or a signed and dated copy of the individual 2008 Federal tax return, when available, (earnings divided by 12).

2. From the servicer of the mortgage, the borrower’s total monthly mortgage payment due for March 2008, including any amounts due on subordinate liens.
 
• For mortgages without escrow accounts, the lender should obtain tax and insurance information from the borrower.  If the borrower does not provide insurance information, then the servicer of the mortgage should estimate the monthly cost of hazard insurance (and flood insurance, if applicable) based on the property’s location and the rates in effect for 2008.  If the borrower does not provide real estate tax information, the lender should obtain it from public records.

Q:  How will the law help struggling homeowners keep their homes?

A:  Through the Federal Housing Administration (FHA), an estimated 400,000 borrowers in danger of losing their homes will be able to refinance into more affordable government-insured mortgages.  The program offers government insurance to lenders who voluntarily reduce mortgages for at-risk homeowners to at least 90% of the property’s current value. 

Q:  When will the program begin?

A:  The program will begin on October 1, 2008 and sunset on September 30, 2011.  Homeowners in danger of losing their homes before October 1, however, should not wait to contact their loan servicers and should begin applying for federally insured mortgages now.

Q:  Who is eligible?

A:  To be eligible to participate in this program, a borrower must:

• Have a loan on an owner-occupied principal residence.  Investors, speculators, or borrowers who own second homes cannot participate in this program.
• Have a monthly mortgage payment greater than at least 31 percent of the borrower’s total monthly income, as of March 1, 2008.
• Certify that he or she has not intentionally defaulted on an existing mortgage, and did not obtain the existing loan fraudulently.
• Not have been convicted of fraud.

Q:  How can a homeowner access this new program?

A:  Homeowners or a servicer of an existing eligible loan need to contact an FHA-approved lender.  The FHA-approved lender will determine the size of a loan that a borrower can reasonably repay and that meets the requirements of the program.  If the current lender or mortgage holder agrees to write-down the amount of the existing mortgage and make the new loan affordable, the FHA lender will pay off the discounted existing mortgage.  Loans provided under this program must be 30-year fixed rate loans.

Q:  Are lenders required to participate in this program?

A:  No.  The program is completely voluntary for lenders, investors, loan servicers, and borrowers.

Q:  How does this law help neighborhoods that have been hit by the foreclosure crisis?

A:  The impact of the current crisis has not been isolated to individual borrowers or investors, but has been felt broadly by neighbors, communities, and governments across the nation.  The law strengthens neighborhoods hit hardest by the foreclosure crisis by providing $3.9 billion in Community Development Block Grants to states and localities to buy foreclosed homes standing empty, rehabilitate foreclosed properties, and stabilize the housing market. 

Q:  Will this law be a bailout for speculators, homeowners, investors, and lenders?

A:  No. It is narrowly tailored to keep families in their homes.  For example:

Only primary residences are eligible: NO speculators, investment properties, second or third homes will be refinanced.

Investors and lenders must take big losses first in order even to participate.  The owner of the old mortgage can get a maximum of 90% of the current value of the home (which presumably will be considerably less than the value of the original loan).  In many cases the loss will be significantly greater, but 10% is the minimum. 

In addition, lenders must waive any penalties or fees, and help pay for the origination and closing costs of the new loans.

Most homeowners will have seen the equity in their homes disappear before being able to refinance under this program.  In addition, the FHA will get a portion of any future profits on the house, to make sure the government recoups its investment over the long run.

Q:  Will this law reward families who bought homes they could not afford?

A:  Many homeowners facing foreclosure were misled, were deceived, or were in other ways the victims of unfair lending practices. 

To prevent future abuses by lenders, this law will establish a nationwide loan originator licensing and registration system to set minimum standards for all residential mortgage brokers and lenders.  It also strengthens mortgage disclosure requirements to help ensure that borrowers understand their mortgage loan terms.

Q:  How will this law make it more affordable to own a home?

A:  There are a number of provisions that will make homeownership more affordable:

• Creates a refundable tax credit for first-time homebuyers that works like an interest-free loan of up to $7,500 (to be paid back over 15 years).
• Grants states $11 billion of additional tax-exempt bond authority in 2008 that they can use to refinance subprime loans, make loans to first-time homebuyers and to finance the building of affordable rental housing.
• Raises conforming loan limits for the FHA, Fannie Mae and Freddie Mac to $625,500.  Because of the high cost of housing in California, a majority of the state’s residents were previously shut out from these programs.  Raising these loan limits will lead to lower interest rates on some loans, greater refinancing opportunities, and enable more borrowers in high cost areas to avoid the type of nontraditional and frequently abusive loans that led to the current crisis.
• Provides couples using the standard deduction with up to an additional $1,000 deduction for property taxes ($500 for individuals).

Q:  Does the law provide help to those who still cannot afford to own a home?

A: Yes.  The bill includes a number of provisions to increase the supply of affordable housing, which has been a major problem in California pre-dating the current foreclosure crisis.  For example:

• The bill creates a new permanent affordable housing trust fund – financed by Fannie Mae and Freddie Mac and not by taxpayers – to fund the construction, maintenance and preservation of affordable rental housing for low and very low-income individuals and families nationwide in both rural and urban areas. 
• In addition, the legislation provides a temporary increase in the Low-Income Housing Tax Credit and simplification of the credit to help put builders to work to create new options for families seeking affordable housing alternatives.

(e) Requirements of Insured Mortgages- To be eligible for insurance under this section, a refinanced eligible mortgage shall comply with all of the following requirements:‘

 (1) LACK OF CAPACITY TO PAY EXISTING MORTGAGE-‘

  (A) BORROWER CERTIFICATION-‘

   (i) IN GENERAL- The mortgagor shall provide certification to the Secretary that the mortgagor has not intentionally defaulted on the mortgage or any other debt, and has not knowingly, or willfully and with actual knowledge, furnished material information known to be false for the purpose of obtaining any eligible mortgage.‘
   
   (ii) PENALTIES-‘
   
    (I) FALSE STATEMENT- Any certification filed pursuant to clause (i) shall contain an acknowledgment that any willful false statement made in such certification is punishable under section 1001, of title 18, United States Code, by fine or imprisonment of not more than 5 years, or both.‘
    
    (II) LIABILITY FOR REPAYMENT- The mortgagor shall agree in writing that the mortgagor shall be liable to repay to the Federal Housing Administration any direct financial benefit achieved from the reduction of indebtedness on the existing mortgage or mortgages on the residence refinanced under this section derived from misrepresentations made in the certifications and documentation required under this subparagraph, subject to the discretion of the Secretary.‘
    
  (B) CURRENT BORROWER DEBT-TO-INCOME RATIO- As of March 1, 2008, the mortgagor shall have had a ratio of mortgage debt to income, taking into consideration all existing mortgages of that mortgagor at such time, greater than 31 percent (or such higher amount as the Board determines appropriate).‘
  
 (2) DETERMINATION OF PRINCIPAL OBLIGATION AMOUNT- The principal obligation amount of the refinanced eligible mortgage to be insured shall–‘
 
  (A) be determined by the reasonable ability of the mortgagor to make his or her mortgage payments, as such ability is determined by the Secretary pursuant to section 203(b)(4) or by any other underwriting standards established by the Board; and‘
  
  (B) not exceed 90 percent of the appraised value of the property to which such mortgage relates.‘
  
 (3) REQUIRED WAIVER OF PREPAYMENT PENALTIES AND FEES- All penalties for prepayment or refinancing of the eligible mortgage, and all fees and penalties related to default or delinquency on the eligible mortgage, shall be waived or forgiven.‘
 
 (4) EXTINGUISHMENT OF SUBORDINATE LIENS-‘
 
  (A) REQUIRED AGREEMENT- All holders of outstanding mortgage liens on the property to which the eligible mortgage relates shall agree to accept the proceeds of the insured loan as payment in full of all indebtedness under the eligible mortgage, and all encumbrances related to such eligible mortgage shall be removed. The Secretary may take such actions, subject to standards established by the Board under subparagraph (B), as may be necessary and appropriate to facilitate coordination and agreement between the holders of the existing senior mortgage and any existing subordinate mortgages, taking into consideration the subordinate lien status of such subordinate mortgages.‘
  
  (B) SHARED APPRECIATION-‘
  
   (i) IN GENERAL- The Board shall establish standards and policies that will allow for the payment to the holder of any existing subordinate mortgage of a portion of any future appreciation in the property secured by such eligible mortgage that is owed to the Secretary pursuant to subsection (k).‘
   
   (ii) FACTORS- In establishing the standards and policies required under clause (i), the Board shall take into consideration–‘
   
    (I) the status of any subordinate mortgage;‘
    
    (II) the outstanding principal balance of and accrued interest on the existing senior mortgage and any outstanding subordinate mortgages;‘
    
    (III) the extent to which the current appraised value of the property securing a subordinate mortgage is less than the outstanding principal balance and accrued interest on any other liens that are senior to such subordinate mortgage; and‘
    
    (IV) such other factors as the Board determines to be appropriate.‘
    
  (C) VOLUNTARY PROGRAM- This paragraph may not be construed to require any holder of any existing mortgage to participate in the program under this section generally, or with respect to any particular loan.‘
  
 (5) TERM OF MORTGAGE- The refinanced eligible mortgage to be insured shall–‘
  
  (A) bear interest at a single rate that is fixed for the entire term of the mortgage; and‘
  
  (B) have a maturity of not less than 30 years from the date of the beginning of amortization of such refinanced eligible mortgage.‘
  
 (6) MAXIMUM LOAN AMOUNT- The principal obligation amount of the eligible mortgage to be insured shall not exceed 132 percent of the dollar amount limitation in effect for 2007 under section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454(a)(2)) for a property of the applicable size.‘
 
 (7) PROHIBITION ON SECOND LIENS- A mortgagor may not grant a new second lien on the mortgaged property during the first 5 years of the term of the mortgage insured under this section, except as the Board determines to be necessary to ensure the maintenance of property standards; and provided that such new outstanding liens (A) do not reduce the value of the Government’s equity in the borrower’s home; and (B) when combined with the mortgagor’s existing mortgage indebtedness, do not exceed 95 percent of the home’s appraised value at the time of the new second lien.‘
 
 (8) APPRAISALS- Any appraisal conducted in connection with a mortgage insured under this section shall–‘
 
  (A) be based on the current value of the property;‘
  
  (B) be conducted in accordance with title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 3331 et seq.);‘
  
  (C) be completed by an appraiser who meets the competency requirements of the Uniform Standards of Professional Appraisal Practice;‘
  
  (D) be wholly consistent with the appraisal standards, practices, and procedures under section 202(e) of this Act that apply to all loans insured under this Act; and‘
  
  (E) comply with the requirements of subsection (g) of this section (relating to appraisal independence).‘
  
 (9) DOCUMENTATION AND VERIFICATION OF INCOME- In complying with the FHA underwriting requirements under the HOPE for Homeowners Program under this section, the mortgagee shall document and verify the income of the mortgagor or non-filing status by procuring (A) an income tax return transcript of the income tax returns of the mortgagor, or(B) a copy of the income tax returns from the Internal Revenue Service, for the two most recent years for which the filing deadline for such years has passed and by any other method, in accordance with procedures and standards that the Board shall establish.‘
 
 (10) MORTGAGE FRAUD- The mortgagor shall not have been convicted under Federal or State law for fraud during the 10-year period ending upon the insurance of the mortgage under this section.‘
 
 (11) PRIMARY RESIDENCE- The mortgagor shall provide documentation satisfactory in the determination of the Secretary to prove that the residence covered by the mortgage to be insured under this section is occupied by the mortgagor as the primary residence of the mortgagor, and that such residence is the only residence in which the mortgagor has any present ownership interest.‘