Review of FHA s Policies

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1 Review of FHA s Policies January 16, 2014 Presented by Arlene Nunes 1

2 Agenda HUD s Qualified Mortgage Rule 2014 FHA Loan Limits (ML ) Manual Underwriting Final Notice Single Family Housing Policy Guide Condo Policy Update Overview Back to Work Extenuating Circumstances (ML ) Fiscal Year 2014 FHA Program Development Policy Focus Appendix Condominium Policy Update (Detail Information) Application of Unused Borrower Escrow Funds (ML ) Super Storm Sandy Eligible Properties for Section 203 (k) (ML ) 2

3 HUD Qualified Mortgage (QM) Final Rule Overview On December 11, 2013, the Department of Housing and Urban Development published its Final Rule in the Federal Register, Qualified Mortgage Definition for HUD Insured and Guaranteed Single Family Mortgages The effective date is January 10, All loans, with case numbers assigned on or after that date, and which HUD insures or guarantees, will be a Qualified Mortgage, with a few exceptions noted at the end of this presentation

4 HUD Qualified Mortgage (QM) Final Rule Overview Definition of HUD s QM Aloan that satisfies the Dodd Frank Wall Street Reform and Consumer Protection Act regulatory requirements regarding the ability to pay criteria set out in the Truth in Lending Act and complies with the Department s requirements.

5 HUD Qualified Mortgage cont. On or after the effective date of January 10, 2014, to be a Qualified Mortgage, all non manufactured housing Title II loans must: Have periodic payments Have terms not to exceed 30 years Not have points and fees greater than 3% of the original unpaid principal balance (UPB) for most loans Loans with UPBs under $100,000 are given more flexibility Be insured or guaranteed by HUD

6 HUD Qualified Mortgage cont. HUD Qualified Mortgages fall into two categories, Rebuttable Presumption and Safe Harbor, with these category definitions based on the relation of the loan s Annual Percentage Rate (APR) to the Average Prime Offer Rate (APOR) at the time interest rate is set Home Equity Conversion Mortgages are excluded (exempt from ability to repay requirements); the Final Rule provides other product/program exclusions and conditions

7 HUD Qualified Mortgage Two Categories Rebuttable Presumption: Mortgage does not exceed limits on upfront points and fees; has an annual percentage rate (APR) that exceeds the average prime offer rate (APOR) as of the date the interest rate is set plus 115 basis points plus the annual ongoing Mortgage Insurance Premium (MIP) for a firstlien mortgage. Legally, lenders that offer these loans are presumed to have determined that the borrower met the ability to repay standard Safe Harbor Qualified Mortgage: Mortgage does not exceed limits on upfront points and fees; has an APR for a first lien mortgage that is equal to or less than the APOR plus 115 basis points plus ongoing annual MIP. Offers lenders the greatest legal certainty that they are complying with the ability to repay standard

8 HUD Qualified Mortgage Rebuttable Presumption Presumed to comply with TILA ability to repay requirements Allows borrower to bring a claim that lender did not make reasonable/good faith ability to repay determination Rebuttal of presumption compliance must show that the mortgagee did not make a good faith determination of ability to repay when underwriting according to HUD requirements

9 HUD Qualified Mortgage Safe Harbor Conclusively presumed to comply with TILA ability to repay requirements Meeting Qualified Mortgage criteria and underwriting requirements are sufficient to ensure mortgagee made reasonable and good faith effort to determine ability to repay Borrower can still legally challenge mortgagee if they believe loan does not meet HUD definition of Safe Harbor Qualified Mortgage (e.g., points and fees exceeded 3%)

10 Exemptions The following programs are exempted from the up front point and fee limit and are deemed Safe Harbor Qualified Mortgages: Title I Loans Title II Manufactured Housing Loans Section 184 Indian Housing Loan Guarantee Program Section 184A Native Hawaiian Housing Loans They represent a special subset of HUD products and require additional study to determine future changes, if any No change now to avoid interference with current lending practice

11 Additional Exemptions The following additional products and programs are exempt from the HUD Qualified Mortgage rule because their requirements are deemed to satisfy the Ability to Repay standard: Construction to Permanent loans for 12 months or less for the construction phase Extension of credit by a Housing Finance Agency Extension of credit by Community Development Financial Institutions Extension of credit through a program authorized by sections 101 and 109 of the Emergency Economic Stabilization Act of 2008 Down payment assistance through a secondary financing provider, when made in accordance with HUD regulations Community Housing Development Organization, provided the creditor has entered into a commitment with a participating jurisdiction and is undertaking a project under the HOME program 501(c)(3) organization that secured no more than 200 dwellings in the prior calendar year and to consumers with income that did not exceed the low and moderate income household limit, and the creditor determines, in accordance with written procedures, that the consumer has a reasonable ability to repay the extension of credit

12 Mortgagee Considerations Safe Harbor provides greatest legal certainty for mortgagees because borrower in default can only challenge ability to repay standard was not met because points and fees requirement was violated Rebuttable Presumption means a borrower could claim the ability to repay standard was not met either because the points and fees limit was exceeded or because the creditor failed to follow HUD underwriting requirements For both categories, documentation of the borrower s ability to repay will be important in demonstrating compliance with ability to repay requirements

13 2014 FHA Mortgage Limits (ML ) Published December 6, 2013 at: dclips/letters/mortgagee Effective for case numbers assigned on or after January 1, 2014 Announces expiration of congressional authority for loan limits under the Economic Stimulus Act of 2008 for forward mortgages results in a decrease in the calculation of high cost area limits and the loan limit ceiling 13

14 2014 FHA Mortgage Limits (ML ) Forward Mortgages FHA Ceiling $625,500 1 unit (150% of Conforming Limit) reduced from $729,750 Loan Limit Exceptions for Hawaii, Guam, and Virgin Islands loan limits may be increased 150 percent of ceiling to account for higher costs of construction FHA Floor unchanged at $271,050 (65% of Conforming Limit) Streamline Refinances w/o Appraisal not subject to these loan limits HECMs Maximum claim amount remains $625,500 (150 percent of conforming limit) $625,000 is also applicable to Hawaii, Guam, and Virgin Islands 14

15 2014 FHA Mortgage Limits (ML ) Loan Limit Information List of counties with increases and decreases available at: Appeals of Loan Limits: FHA is extending the date for interested parties to request a change to high cost area loan limits from January 6, 2014 to January 31, A request to change loan limits must contain sufficient housing sale price data, with the request listing one family properties sold in a specified high cost area, and where the sale took place within the lookback period of January through August

16 Manual Underwriting Final Notice Final Notice published in the Federal Register on December 11, 2013 at /pdf/ pdf Effective date (based on case number assignment date) will be announced in a mortgagee letter expected to be issued in late January 2014 Effective date will not be earlier than March 11, 2014 Follows proposed policy published in Federal Register on July 15, 2010 at /pdf/ pdf 16

17 Manual Underwriting Final Notice (cont.) Goals of New Requirements Protect the financial soundness of the FHA Mutual Mortgage Insurance Fund by restricting loans with characteristics shown to have high rates of foreclosure and claim: high debt to income ratios, lack of reserves, insufficient or thin credit. Provide mortgagees with objective well defined requirements to encourage underwriting to FHA standards, rather than adding credit overlays to FHA standards 17

18 Manual Underwriting Final Notice (cont.) Policy applies to all manually underwritten loans except non credit qualifying streamline refinance (with and without appraisal) and HECMs Reserve requirement for manually underwritten 1 2 unit properties set at one month PITI (as stated in July 15, 2010 notice) Reserve requirement for all (automated and manually underwritten) 3 4 unit properties remains at 3 months PITI Changes from July 15, 2010 proposal were made based on public comment 18

19 Manual Underwriting Final Notice (cont.) Threshold credit score for exceeding standard 31/43 ratios reduced to 580 from 620 stated in July 15, 2010 notice Maximum ratios set at 31/43 for borrowers with no credit score or credit score below 580 (from 620 in July 15, 2010 notice); 33/45 for Energy Efficient Homes Maximum ratios with one compensating factor increased to 37/47 (from 35/45 in July 15, 2010 notice) Maximum ratios with two compensating factors increased to 40/50 (from 37/47 in July 15, 2010 notice) New provision for borrowers with no discretionary debt; Ratios may not exceed 40/40 19

20 Manual Underwriting Final Notice (cont.) List of compensating factors expanded to include residual income modeled on VA formula and a provision for borrowers with no discretionary debt Other compensating factors include reserves, minimal change in housing payment, and additional income not considered effective income. Federal Register requests public comment on the change in threshold credit score to exceed standard qualifying ratios from 620 to 580; Comments are due by February 10,

21 Single Family Housing Policy Handbook (SF Handbook) Handbook Project Objectives Provide a single, authoritative source for all Single Family policy Respond to lender requests to make our policy easier to understand and follow Rollout to the market through a staged approach that considers industry feedback Use simple, direct, more objective, language Align the flow of the Handbook with the flow of doing business with Single Family 21

22 Process SF Handbook (cont.) Began a multi phased effort to develop a single, authoritative source for SF policy combining handbooks, Mortgagee Letters, and other sources of policy Introduced new Post, Publish, Effective rollout process Posted draft of the first section on October 29, 2013 Application through Endorsement for Title II forward mortgages for industry feedback on new FHA Single Family Policy s Drafting Table webpage at: licy_drafts Held two industry webcasts to answer questions about the new Handbook Extended feedback deadline to December 15,

23 Next Steps for 2014 SF Handbook (cont.) Update and publish Phase I Application through Endorsement Section of Handbook after consideration of industry feedback. Continue development of future sections of the Handbook: Doing Business with FHA, Appraiser, 203 (k), Condominiums, Title 1, Home Equity Conversion Mortgage (HECM), Servicing, Quality Control and Compliance, Real Estate Owned (REO) and Claims. 23

24 Condominium Policy Update Overview Condo Policy Update in Appendix Covers: Short Term Leasing Waiver to ML , Condominium Project Approval and Processing Guide, Insurance Requirements Specific Instructions on Case Number Assignments For more information, contact Joanne Kuczma, Senior Policy Advisor, at (202)

25 Back to Work/Extenuating Circumstances (ML ) Published August 15, 2013 at: /hudclips/letters/mortgagee Temporary policy covers case numbers assigned on or after Aug. 15, 2013 through September 30, 2016 Underwriting for this policy found in Chapter 6 section G of HUD handbook

26 Back to Work/Extenuating Circumstances (ML ) Consideration Given to Borrowers who: Experience and can document an extenuating circumstance due to an Economic Event Resulting in a 20% reduction in income for 6 months due to Loss of Employment, Loss of Income, or combination of both Recover from the economic event by re establishing satisfactory credit for 12 months Complete and provide proof of Housing Counseling 30 days prior to application Resolve outstanding CAIVRS issues or request waiver from HQ 26

27 Fiscal Year 2014 FHA Program Development Policy Focus FY Q1 October December 2013 E Signature Mortgagee Letter (12/13) HECM Financial Assessment/Property Charge Set Aside Implementation Date Extension Mortgagee Letter (12/13) FY Q3 April June 2014 Interested Party Contributions Final Rule Interested Party Contributions Mortgagee Letter Affordable Lending Lease to Purchase Program Mortgagee Letter Condominium Policy Proposed Rule Handbook: Publish Application to Endorsement Handbook content for feedback (including Condominium content) FY Q2 January March 2014 Manual Underwriting Mortgagee Letter (01/14) HECM Financial Assessment/Property Charge Set Aside Policy Mortgagee Letter (01/14) Secondary Financing Nonprofits Working with Government Entities Mortgagee Letter 203(k) Consultant Roster Mortgagee Letter 203 K System Changes Calculations (Maximum Mortgage Amount and MIP) Handbook: Post Appraisal and 203(k) Handbook content for feedback Handbook: Post Doing Business with FHA and Quality Control and Compliance sections Handbook content for feedback FY Q4 July September 2014 Demonstration Program Affordable Lending Deed Restriction Waivers Non Profit/Government Agency Approvals and Underwriting Requirements HECM Proposed Rule Handbook: Publish Appraisal and 203(k) Handbook Content Handbook: Post HECM, Title I, Servicing and Loss Mitigation Handbook content for feedback Handbook: Publish Doing Business with FHA and Quality Control and Compliance Sections of the Handbook Handbook: Post REO and Claims Sections of the Handbook for feedback 27

28 Appendix 28

29 Condominium Policy Update Short Term Leasing Mortgagee clause or other clause in Covenants, Conditions and Restrictions (CC&Rs) or other legal governing documents FHA Info #13 42 (7/18/13): Defines requirements if legal documents will not be amended; discusses form HUD submission requirements; link to FHA Info Archive: h/fha_info_messages FHA Info #13 76: Announces extension of time for implementation of form HUD submission requirements; provides FHA Connection (FHAC) instructions for entry of language where project approval is based on alternative requirements 29

30 Condominium Policy Update (cont.) Waiver to ML , Condominium Project Approval and Processing Guide, Insurance Requirements Posted to the Condominium Mortgage Insurance web page at: Listserv message forthcoming Key components: Limited to Manufactured Housing, Detached and Common Interest Condominium Projects unable to satisfy the insurance requirements as defined in the referenced ML Allows the individual unit owner to obtain and maintain individual insurance coverage One year waiver, issued November 27, 2013, expires November 26,

31 Condominium Policy Update (cont.) Case Number Assignments Project approval, including specific phase, must be issued prior to obtaining the FHA case number assignment Site Condos Increase in number of case number assignment requests ordered incorrectly To facilitate case number assignments made prior to MIP changes, effective April and June 2013, the hard system edit has been removed temporarily Required loan level certification cannot be made if case number assignment was obtained incorrectly New case number assignments will be required and original case numbers will be cancelled 31

32 Application of Unused Borrower Escrow Funds (ML ) Published September 15, 2013 at: ion/hudclips/letters/mortgagee Purpose of Policy: Clarify FHA policy on the application of unused borrower funds in escrow when it is applied to the newly originated FHA loan Provide documentation and submission requirements when unused borrower funds in escrow are applied in the newly originated FHA transaction 32

33 Application of Unused Borrower Escrow Funds cont. (ML ) Policy clarifications: The lender must obtain the borrower s authorization before: application of unused borrower funds in escrow to the newly originated FHA transaction; or netting of funds from the existing mortgage to reduce the payoff amount. 33

34 Application of Unused Borrower Escrow Funds cont. (ML ) When lenders apply unused borrower funds in escrow to the newly originated FHA transaction: Document the HUD 1 or HUD 1A Settlement Statement evidencing the application of the funds When lenders net funds from the existing mortgage to reduce the payoff amount: Calculate the maximum mortgage amount starting with the outstanding principal balance, not the pay off amount, if the newly originated FHA loan is a streamline refinance 34

35 Application of Unused Borrower Escrow Funds cont. (ML ) Submission and Documentation Requirements in the Endorsement File: HUD 1 or HUD 1A Settlement Statement, and Borrower s authorization to apply the unused borrower funds in escrows to the newly originated FHA loan. 35

36 Section 203 (k) and Super Storm Sandy (ML ) Published September 27, 2013 at: udclips/letters/mortgagee Purpose of Policy: Permits foundation repairs under the 203 (k) standard program only if certain criteria are met Limited in geographical scope: Policy only pertains to Presidentially Declared Major Disaster Area Super Storm Sandy Window of Opportunity: Case numbers must be assigned within 18 months of September 27,

37 Super Storm Sandy cont. (ML ) The following criteria must be met before foundation repairs may be eligible under this policy: Existing foundation in need of repair does not currently meet the flood elevation +1 foot; 203 (k) consultant conducts preliminary feasibility analysis to determine that subject property is damaged but can be rebuilt to comply with building codes and FHA minimum property requirements; A report from a structural engineer must be obtained stating that the proposed foundation is capable of supporting the proposed construction of the dwelling. 37

38 Super Storm Sandy cont. (ML ) Other underwriting considerations that lenders must follow to ensure that foundation repairs are eligible under this policy: Loan amount does not exceed 100% of the after repaired value (prior to the addition of any financed UFMIP). Any additional repairs or modifications to the foundation must be required by applicable codes, community development plan, insurance plan, or other local, state, or federal laws and regulations. The lowest floor must be elevated at or above the on the Base Flood Elevation based of on the most recent FEMA data, plus one foot of freeboard. 38

39 Super Storm Sandy cont. (ML ) Existing Policy in Handbook Section 1 4 on foundation work applies if: Any one of the criteria and underwriting considerations on previous slides cannot be met; Property is not located within the geographical area stated in the ML; Case number is assigned 18 months beyond the September 27, 2013 date. 39

40 Questions? 40

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