On Dec. 16, 2009, the Federal Housing Administration (FHA) published Mortgagee Letter 09-52, which issued guides for mortgage originators in circumstances where borrowers receive a short payoff from their current lender on either a sale or a refinance. Here is a summary of the five things you need to know about these changes:
1. Changes are effective as of Dec. 16, 2009.
2. Borrowers are not eligible for new FHA financing if they pursued a short sale only in order to take advantage of the declining market and acquire a similar or superior property within reasonable commuting distance.
3. Borrowers whose mortgage was in pre-foreclosure status at the time of the short sale are not eligible for FHA financing for three years, unless they qualify for an exception (see 4155.1, 4.C.2.1).
4. Borrowers are eligible for new FHA financing if they had 0x30 on the mortgage in the last 12 months, and the proceeds from the short sale serve as payment in full.
5. On an FHA refinance, borrowers are eligible if the current lender chooses to write down the mortgage due to declining values or reduction in income.
As of the writing of this article, there is a lack of clarity on how to underwrite according to these guides. By the time it goes to print, FHA may have already published a clarification. If you read these guides carefully, it opens up a lot of questions.
Now, bear in mind that sometimes FHA purposely writes their policy in a vague manner in order to give latitude to Direct Endorsement (DE) Underwriters to make a decision on the loan. And sometimes … well, frankly … they confuse everyone, even people at the U.S. Department of Housing & Urban Development (HUD). In item two above, it states that “Borrowers are not eligible for new FHA financing if they pursued a short sale only in order to take advantage of the declining market and acquire a similar or superior property within reasonable commuting distance.” How exactly will an underwriter prove that a borrower “took advantage?” I can see it now: A new loan application form titled the “Take Advantage of the Declining Market to Get a Similar or Superior Home with a Lower Payment Affidavit.” And, in a case where the borrower has a perfect credit history and they buy a home within “reasonable commuting distance,” are they eligible or not? Given the FHA’s policy until now, it would seem that they would be eligible if it is the lender’s decision to write down the mortgage and offer a short payoff. And what about a case where a family was growing, really needed a bigger home, liked the neighborhood and the schools, and sold their home qualified for a short sale? Their initial intention is clearly not to “Take Advantage” of the market, but to buy a home that meets their family’s needs. And what about a person who had perfect credit, sold with a short sale, rented an apartment for six months, and then wanted to buy a buy home with FHA financing? Would they also be denied? When someone has good credit, how much time will need to pass after a short sale before they can get FHA financing?
I contacted HUD on this issue and their response was this:
“The criteria that must be met is separate in terms of eligibility for being current versus the reason(s) for pursuing a short sale.”
I clarified this with them and their statement means that if a person receives a short payoff on a sale (lenders’ decision remember) they cannot purchase a house in the same neighborhood or within reasonable commuting distance. Only if they maintained their credit and are buying outside the commuting area would they be eligible for FHA financing. I encourage you to call HUD yourself and see what answer you get at (800) CALL-FHA.
FHA’s underwriting criteria has always been focused on the borrower’s “ability and willingness” to pay back debt, and in my opinion, a borrower should not be barred from FHA financing because a lender makes a financial decision to accept less than they are owed on a loan. If FHA will allow a short refinance for certain reasons, then they should give eligibility to people with short sales in certain scenarios that “make sense.” If the bank is going to write down the loan anyway, what difference does it make if it's a refinance or a purchase? Meaning, if the borrowers don't sell it short, then they'll refinance it short. And in both cases, you are left with an occupied home and not another boarded up house.
On Dec. 22, 2009, the FHA, rather than issuing a Mortgagee Letter, deployed an e-mail which announced the delay of the new appraisal rules set forth in ML 09-28 and ML 09-51.
To refresh your memories, here is a brief summary of these changes:
►ML 09-28 prohibits mortgage brokers and commission-based lender staff from involvement in the appraisal process.
►ML 09-51 adopts the use of the Appraisal Update and/or Completion Form. This Form is used when appraisers are updating existing appraisals and/or certifying the completion of repairs on existing and new construction dwellings.
Although FHA was holding out to see how the whole Home Valuation Code of Conduct (HVCC) story would unfold, it was only a matter of time before they would have to conform to satisfy the lending community and its investors. As I listen to the problems created by the HVCC and how customers are losing out, all I can say is that as an industry, we brought this upon ourselves. It’s my perspective that for now this is what has to happen in order for us to heal and to strengthen the secondary market … without which we would be out of business. Speak with any appraiser who has been in business for the last 10 years and ask them if pressure from brokers has influenced the values they bring in. Most (if not all) will answer with a very resounding “YES!” We just need to own the fact that AMCs are here, focus on sales and marketing, and on getting so much volume that the few we loans may lose to bad AMC appraisals won’t matter.
Although FHA is delaying these changes, Lenders may still require them prior to Feb. 15, 2010. So be sure to double check with your DE Underwriter, or refer to your Lenders Guideline Requirements.
Wishing you success in 2010!
Jeff Mifsud founded Southfield, Mich.-based Mortgage Seminars LLC in 2004, has been an FHA originator for 12 years, is a contributor to LoanToolbox.com and is a former FHA underwriter.