The Federal Housing
Administration (FHA) today announced several significant policy changes that
are intended to improve their exposure to risk. The changes, effective
January 1, include:
- Modification of Procedures for Streamline Refinance
Transactions
- Adoption of Home Valuation Code of Conduct Guidelines (some not all)
- Updated Appraisal Validity Period
- New Appraisal Portability Regs
- New Requirement of Lenders to Submit of Audited Financial Statements
for Review
- Adjustments to the Approval Process for Participation in FHA
Loan Origination
- Increased Net-Worth Requirements for Lenders
Grabbing the attention of mortgage professionals was FHA's decision
to adopt language from HVCC appraisal guidelines. The HVCC, which has
been the subject of heated debate within the industry, was implemented
by Fannie Mae and Freddie Mac on May 1, 2009. At that time the FHA
decided not to adhere to the policy. This undoubtedly increased demand
for FHA loan products as originators quickly learned of the multitude
of problems associated with HVCC. The new requirements will prohibit
any commissioned based lender staff member from ordering an FHA
appraisal.
FHA will not require the use of AMCs or other third party
organizations for appraisal ordering, if lenders do use AMCs and/or
other third party organizations FHA-approved lenders must ensure that:
- FHA Appraisers are not prohibited by the lender, AMC or other third
party, from recording the fee the appraiser was paid for the
performance of the appraisal in the appraisal report.
- FHA Roster appraisers are compensated at a rate that is customary
and reasonable for appraisal services performed in the market area of
the property being appraised.
- The fee for the actual completion of an FHA appraisal may not
include a fee for management of the appraisal process or any activity
other than the performance of the appraisal.
- Any management fees charged by an AMC or other third party must be
for actual services related to ordering, processing or reviewing of
appraisals performed for FHA financing.
- AMC and other third party fees must not exceed what is customary
and reasonable for such services provided in the market area of the
property being appraised.
FHA issued five new mortgage letters explaining the policy changes. Here are links to each mortgagee letter:
Mortgagee Letter 09-28: Appraiser Independence
Mortgagee Letter 09-29: Appraisal Portability
Mortgagee Letter 09-30: Appraisal Validity Periods
Mortgagee Letter 09-31: Strengthening Counter Party Risk Periods
Mortgagee Letter 09-32: Revised Streamline Refinance Transactions
Here are a few other notable changes...
(Excerpts taken directly from Mortgagee Letters)
Appraisals
In cases where a borrower has switched lenders, FHA did not allow a new appraisal to be ordered. Instead the first lender was required, at the borrower’s request, to transfer the case to the second lender. This guideline generally slowed the loan process as the original lender often times was unwilling to transfer the case in a timely manner.
The new guideline, effective January 1, allows a second appraisal to be ordered by the second lender under the following limited circumstances:
1. The first appraisal contains material deficiencies as determined by the Direct Endorsement underwriter for the second lender.
2. The appraiser performing the first appraisal is on the second lender’s exclusionary list of appraisers.
3. Failure of the first lender to provide a copy of the appraisal to the second lender in a timely manner would cause a delay in closing, posing potential harm to the borrower.
Potential harm includes events outside the control of the borrower such as loss of interest rate lock, purchase contract deadline, foreclosure proceedings, and late fees.
FHA also reduced the length of time that an appraisal could be considered valid for collateral underwriting. Previously, FHA considered an appraisal written within the last six months to be an acceptable property valuation. Today's announcement reduces that period from six months to four.
Advertising
FHA-approved mortgagees must use their HUD registered business names in all advertisements and promotional materials related to FHA programs. HUD registered business names include any alias or “doing business as” (DBA) on file with FHA. FHA-approved mortgagees must keep copies of all advertisements and promotional materials for a period of two years from the date that the materials are circulated or used to advertise.
Who can work with FHA and FHA originated loans
A lender or mortgagee shall not have any officer, partner, director, principal, manager, supervisor, loan processor, loan underwriter, or loan originator of the applicant mortgagee who is:
(1) currently suspended, debarred, under a limited denial of participation (LDP), or otherwise restricted under part 25 of title 24 of the Code of Federal Regulations, 2 Code of Federal Regulations, part 180 as implemented by part 2424, or any successor regulations to such parts, or under similar provisions of any other Federal agency;
(2) under indictment for, or has been convicted of, an offense that reflects adversely upon the applicant’s integrity, competence or fitness to meet the responsibilities of an approved mortgagee;
(3) subject to unresolved findings contained in a Department of Housing and Urban Development or other governmental audit, investigation, or review;
(4) engaged in business practices that do not conform to generally accepted practices of prudent mortgagees or that demonstrate irresponsibility;
(5) convicted of, or who has pled guilty or nolo contendre to, a felony related to participation in the real estate or mortgage loan industry—
(i) during the 7-year period preceding the date of the application for licensing and registration; or
(ii) at any time preceding such date of application, if such felony involved an act of fraud, dishonesty, or a breach of trust, or money laundering;
(6) in violation of provisions of the S.A.F.E. Mortgage Licensing Act of 2008 (12 U.S.C. 5101 et seq.) or any applicable provision of State law; or
(7) in violation of any other requirement as established by the Secretary.
Streamline Refinance Transactions
At the time of loan application, the borrower must have made at least 6 payments on the FHA-insured mortgage being refinanced.
At the time of loan application, the borrower must exhibit an acceptable payment history as described below.
1) For mortgages with less than a 12 months payment history, the borrower must have made all mortgage payments within the month due.
2) For mortgages with a 12 months payment history or greater, the borrower must have:
a) Experienced no more than one 30 day late payment in the preceding 12 months,
AND
b) Made all mortgage payments within the month due for the three months prior to the date of loan application.
The lender must determine that there is a net tangible benefit as a result of the streamline refinance transaction, with or without an appraisal. Net tangible benefit is defined as:
- reduction in the total mortgage payment (principal, interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens),
- refinancing from an adjustable rate mortgage (ARM) to a fixed rate mortgage,
OR
- reducing the term of the mortgage
If a credit score is available, the lender must enter the credit score into FHA Connection. If more than one credit score is available, lenders must enter all available credit scores.
If subordinate financing is remaining in place, the maximum combined loan-to-value ratio is 125 percent.
- For streamline refinance transactions WITHOUT an appraisal, the CLTV is based on the original appraised value of the property.
- For streamline refinance transactions WITH an appraisal, the CLTV is based on the new appraised value.
Revised Streamline Refinance Transactions WITHOUT an Appraisal
The maximum insurable mortgage cannot exceed:
- The outstanding principal balance minus the applicable refund of the UFMIP,
PLUS
- The new UFMIP that will be charged on the refinance.
Revised Streamline Transaction WITH an Appraisal
The maximum insurable mortgage is the lower of:
1) Outstanding principal balance minus the applicable refund of UFMIP, plus closing costs, prepaid items to establish the escrow account and the new UFMIP that will be charge on the refinance;
OR
2) 97.75 percent of the appraised value of the property plus the new UFMIP that will be charged on the refinance.
Discount points may not be included in the new mortgage. If the borrower has agreed to pay discount points, the lender must verify the borrower has the assets to pay them along with any other financing costs that are not included in the new mortgage amount.
Further Changes Currently Being Considered:
Modify Mortgagee Approval and Participation in FHA Loan Origination
Lenders seeking approval to originate, underwrite, or service an FHA
loan must meet the eligibility criteria for a supervised or
non-supervised mortgagee. Mortgagees with this approval status must
assume liability for all the loans they originate and/or underwrite.
Loan Correspondents (mortgage brokers) will continue to be able to
originate FHA-insured loans through their relationships with approved
mortgagees; however they will no longer receive independent FHA
approval for origination eligibility.
These policy changes will
require the FHA approved mortgagee to assume responsibility and
liability for the FHA insured loan underwritten and closed by the
approved mortgagee. These changes align FHA with the GSEs and will
potentially increase the number of loan correspondents (mortgage
brokers) who are eligible to originate FHA-insured loans while
providing for more effective oversight of loan correspondents through
the FHA approved mortgagees.
Increase Net-Worth Requirements for Mortgagees
The FHA plans to propose to increase the net worth requirement for
approved mortgagees to meet
industry standards. The requirement is currently at $250,000 and has
not been increased since 1993. HUD is proposing an initial increase of
approximately $1,000,000 that would be in place within one year of the
enactment of this rule. To maintain consistency with industry
standards, HUD may propose that the net worth requirements be increased
further in future years to a level comparable to those required by GSEs
and other market institutions. These changes will help to ensure that
FHA lenders are sufficiently capitalized to meet potential needs,
thereby permitting HUD to mitigate losses and decrease risks to the FHA
insurance fund.