Upcoming FHA Mortgagee Letters
Some upcoming changes for FHA cash out refinance LTV limits and allowable fees.
· Upcoming Mortgagee Letters
1. FHA Cash Out Refinance Policy
As we have noted in recent updates, we expect FHA to lower the maximum loan-to-value ratio on cash out refinances from 95% to possibly 85% for all loan amounts. It could be implemented as early as this week and with an “immediate trigger” so case numbers should be assigned and borrowers approved as soon as possible for potentially affected loans in the pipeline. FHA Neighborhood Watch data indicates the quality of refinance transactions is deteriorating.
2. Definition of origination fee
As we have mentioned in previous updates, FHA is concerned about the fees being charged borrowers, particularly those which FHA believes are duplicative and should be included in the origination fee. These include application, processing and underwriting fees.
We believe HUD has given us a preview of this letter in ML 2008-29 implementing the Hope For Homeowners Program. In that letter, it is stated:
“Standard FHA policy regarding closing costs (outlined in Mortgagee Letter 2006-4) is applicable, including the 1 percent cap on origination fees. The origination fee compensates the lender for administrative costs in originating and closing the loan. The origination fee covers administrative costs for taking the loan application, evaluating, preparing and submitting a proposed mortgage loan. The origination fee cannot be supplemented by other fees to cover these administrative costs, such as “application or processing” fees or broker fees. The origination fee cannot exceed … one percent of the original principal amount of the mortgage.”
3. HUD Condominium Policy
The implementation date will likely be delayed until January 1st. We expect the program requirements to remain basically the same. The highlights are:
v Two processing options
o HUD processing
o Direct Endorsement Lender Review and Approval
v Site condominiums will not require project approval
v Minimum required units in a project has been reduced to two units
v Eliminate 1 year waiting period for conversions
v Project requirements
o 51% Pre-sale
o 51% owner occupancy
o Right of first refusal is permitted as long as fair housing requirements are not violated
o Builder permit and final certificate of occupancy
· Alternatives to seller funded downpayment programs
We have several inquiries about substitute programs that we understand permit borrowers to be reimbursed for downpayments after closing. While we cannot comment on specific programs, it is helpful to review the legislative provision on seller funded downpayment assistance programs.
The law states :
“In no case shall the funds required by subparagraph (A) (i.e. 3.5% downpayment) consist, in whole or in part, of funds provided by any of the following parties before, during, or after closing of the property sale (bold added):
(i) The seller or any other person or entity that financially benefits from the transaction.
(ii) Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in clause (i).'.
As we read the law, it is very restrictive. No homebuyer can use funds to make the downpayment that were provided by the seller or any other entity that financially benefits “before, during or after closing”. It appears that the phrase “after closing” may preclude at least some of these programs. This provision also applies to any third party that is reimbursed, directly or indirectly, by the seller or anyone else who benefits financially from the transaction.
· HUD Tolerance Policy
The cut-off for seller funded downpayment assistance programs has triggered significant discussion about when a loan must be rescored. In Mortgagee Letter 2005-15, FHA published tolerance levels before rescoring is required. The three principal tolerances included in that letter are:
1. Taxes and Insurance Escrows
There is no need to resubmit to TOTAL when taxes and insurance changes do not modify debt-to-income ratios by more than 2 percent.
2. Cash reserves
As long as cash reserves are not more than 10% less than the amount reported on the application, no rescoring is necessary.
3. Income
There is no need to rescore a loan in which the verified income is not more than 5% lower than the income reported on the borrower application.