Blog of the Mortgage

HUD Extends time for Spot Approvals - Other Condo Updates

September 16th, 2009 9:38 PM

I originate loans all over Northern California. From Eureka to Sacramento to Modesto.. ALL OVER. Condominiums have been popping up all over the place in the last 10 years.
They're like cheap boxes in towers, too many of them remind me of Hotels. I've got friends that have purchased or rented these units and I feel like I'm at a Marriott or something. The upside (as opposed to my house from 1916!) is that there is NO maintenance, other than cleaning inside your walls everything else is totally handled. PERFECT for single folks, older folks, people with no time (or money) to do lame things like mow the lawn or coat their basement with water proofing paintx2 or rebuild/replace their "good neighbor" fence by hand (like me).. :)

Well, needless to say, Condo's are cheaper by the dozen now. $55,000 in Richmond by the BART? YEP.. Formerly $1.3 mill 2/2 in South Beach (SF) now $729,750.. you better believe it..
We knew they were going to fall in price but no one knew the programs would go away or that FNMA would stop approving projects.
SO, now that FHA/HUD is the way to go and Florida has entire Cities of Towers that stand empty and every Lender with over-Exposure in the two "Sunshine" states has been forced out of business we have loads of cheap first time units with no way to close on them (well almost - unless you have significant Down).
**Franklin American STILL writes CONFORMING ($417K condos to 90% with 720 scores and 41% DTI).

Of course none of the builders/developers got their projects HUD approved because it simply didn't compute. The loan sizes were too small for their needs.

Since 2008 we've been gaining SPOT approvals in projects with more than 5 units and 51% owner occupancy.

SPOT approvals are a great tool to gain FHA financing in existing projects and get your new buyer in to a low maintenance first time home purchase.
Franklin American it turns out is one of the few key players that actually gets these loans done and done on time!
Please note: we require a minimum of 10 units with max 10% TO FAMC vs. HUD which says Min. 5 units with 20% HUD Financed
over 30 units we go down to 5% FAMC FHA units in a project.

In any case HUD changed all that with ML09-19. GENIUS they thought:
FNMA does away with Condo approvals and private investors leave the market? HUD will fly in with a cape and SAVE THE DAY IN CONDO LAND!

With ML09-19 they are doing away with SPOT approvals entirely and letting any lender approve any project. They are also lowering the threshold number of units from 5 to 2 which is technically HUGE!! There are soo many Condo units that could potentially start flying off the shelf if this played out the way HUD envisioned.

!!STOP...!!
Give HUD a call.. they sooo messed this one up. They'll tell you so.
NO ONE; Literally NOT ONE LENDER has ANY interest in standing up and doing what HUD is asking them to do:
Self approve a project on their own!
DOH!
So, HUD has delayed the findings for ML09-19 from October 2nd until November 2nd of this year (we'll see if they don't suspend again?).

That means you get an extra 45 days to get your CONDO's SPOT approved with GREAT LENDERS like the one I work for.

Other Important Condo Updates:
Don't you just love it when "Old" guidelines finally make their way to funding conditions? - I'm just saying..

FNMA Requires $2 Million in liability insurance for sub 100 unit projects AND $3 Million in liability Insurance for greater than 100 unit projects!

HO-6 insurance required on ALL condo units now (thanks to Mari P for digging this up):
Announcement 08-34 December 16, 2008
(yes its really THAT old!)

Hazard Insurance for Units in Attached Condominium Projects Including 2-4 Unit Projects

The Selling Guide, Part XII, Chapter 5, Insurance Requirements require that lenders verify that hazard insurance for all condominium projects with attached units, including two- to four- unit projects, covers fixtures, equipment, and other personal property inside
individual units if they will be financed by the mortgage.

The updated policy now requires that the borrower obtain a "walls-in" coverage policy (commonly known as HO-6 policy) unless the lender can document that the master policy provides the same interior unit coverage. The master policy must include replacement of Announcement 08-34 Page 7 improvements and betterment coverage to cover any improvements that the borrower may have made to the unit.

The HO-6 insurance policy must provide coverage in an amount that is no less than 20 percent of the condominium unit's appraised value. In the event such coverage can not be obtained, the lender should call the Fannie Mae Project Standards Department at the phone number listed at the end of this Announcement. The standard requirement for a 5 percent deductible applies.

Have a great week!

*********************

Have a great Summer Selling season.

You'll need the following links to download these forms:

Education Station
Government Loan Programs

Remember to Go out and have fun!

Posted by Raoul Badde on September 16th, 2009 9:38 PMPost a Comment (0)

HUD Changes and the Future of FHA Business

September 25th, 2009 1:17 PM

It's BFF Friday (Bank Failure Friday). Which bank are you betting on failing? Depository Institution of course.

My Company is doing resoundingly well after tripling its funding capacity by adding two new warehouse facilities in the past week.
Last week Friday HUD sent out a multitude of Mortgagee Letters. But only 3 were of significant importance to our business: you can download each one here:
1. ML 09-28 Appraiser Independence: HUD is moving toward an HVCC type system Beginning on January 1st of 2010. Guess they're concerned with undue influence as well??
2. ML 09-30 Appraisal Validity Periods - HUD is shortening the time that FHA appraisals are valid on an existing Case number. This means that if you take on a declined loan from another lender and you have a new borrower you will only have to wait 121 days (instead of 161 days) to reissue a new appraisal for the subject property. This is GOOD NEWS!
3. ML 09-32 Streamline Refinance Documentation standards changing: AS OF NOVEMBER 18th of this year.
HUD is going to require, income, assets, employment information on their 1003's going forward as well as limiting the amount of closing costs you can roll into the new loan going forward. This could present a problem.

I am forwarding you below a COMPLETE e-mail from our Potomac Partners Group in Washington and their synopsis of this information above as well as what they believe the future of the FHA's direction under David Steven's will be and look like.
Please take a moment to read ALL of this as it very much effects your business going forward.

We have received inquiries from clients concerning the current status of the FHA program, particularly in light of recent press articles raising questions about FHA's fiscal soundness. We are writing this update to provide you w/ our analysis of FHA's financial issues behind these articles and to discuss the general direction of the sweeping changes that we see on the horizon for the FHA program.
FHA's Financial Condition
o  FHA Commissioner has said FHA has sufficient reserves and will not require taxpayer assistance
FHA's Changing Philosophy
o  For the first-time ever, FHA has leadership with industry experience (See New Personnel below)
o  FHA is expected to revamp its risk management and business processes
o  FHA will move toward industry underwriting standards
FHA's New Credit Policies
o  FHA effectively adopted the Home Valuation Code of Conduct and tightened rules on streamline refinances transactions
o  Supervised mortgagees (financial institutions) will be required to submit audited financial statements starting in January 2010
o  Proposed mortgagee eligibility changes could have significant impact (See below)

Overview
Considering the economic problems and the sharp decline in house prices, it is not surprising that FHA's capital ratio will fall below the Congressional target of 2%. FHA has indicated that it is in reasonably good financial shape and will not require any government assistance. However, the decline in the capital ratio does give FHA's opponents on Capitol Hill ammunition to restrict some of FHA activities. The most immediate concern is the extension of the higher mortgage limits. While we are still optimistic that the higher mortgage limits will be extended, it is no longer a "sure thing".
We believe that FHA will be dramatically transformed over the next several years. Under Dave Stevens' (FHA Commissioner) leadership, FHA will be gradually adopting industry principles in many key areas, particularly underwriting policy, risk management and lender relationships (counter-party risk). Accordingly, mortgage lenders should not rely on their experiences with FHA in the past in evaluating how FHA will act in the future. We expect a "seismic" shift in FHA's policies and operations. Quite frankly, we doubt FHA staff realize the magnitude of the changes that are coming.

I. Highlights

Ø FHA's Financial Condition

In last Friday's Washington Post (see #1 at the bottom of this email), FHA "announced" that its capital ratio will fall below the Congressional target of 2%. The capital ratio is important because it is an indicator of FHA's long-term financial health.

In response, FHA also announced on Friday a series of credit policy changes. The Washington Post article follows a September 4th Wall Street Journal story that initially raised concern about FHA's financial condition.

Overview of FHA's Audit:

FHA is required by law to have an independent audit performed every year. An audit is important because it assesses the future financial condition of the FHA program at a particular point in time. Therefore, an audit projects the status of the fund after paying all anticipated claims and expenses associated with the run-off of the existing portfolio. The capital ratio reflects the reserves available to address unanticipated losses. Consequently, two key factors in the audit analysis are 1) economic projections (e.g. house price estimates) going forward and 2) program factors (i.e. loan characteristics of the existing portfolio).

In 1990, Congress established a 2% capital ratio target for the FHA fund. In other words, FHA should have 2% of its portfolio in reserves after paying all anticipated claims and expenses.

FHA has signaled in the Washington Post article that the audit will conclude that the capital ratio will fall below 2% for FY 2009. However, FHA also indicates that the fund will remain "positive" and, in fact, will return above the 2% capital ratio target in the next several years even if no changes are made. The primary cause for the improving credit ratio will be stabilizing house prices. Once the economy (and house prices) recover, the capital ratio will increase accordingly.

Key Points

While the FY 2009 audit should be published in mid-late October, FHA has made several encouraging statements about the financial status of the fund.

First, FHA Commissioner Stevens underscored that FHA reserves are adequate to cover future losses and no bailout is necessary. He said:
"To be clear, the fund's reserves are sufficient to cover our future losses, so the FHA will not require
taxpayer assistance or new Congressional action."

Mr. Stevens also said that:
"We are not going to need a special subsidy or special funding of any kind."

He also added that it will not be necessary to raise mortgage insurance premiums.

FHA's Current Cash Reserves Are Strong

FHA has $30 billion in current cash reserves to pay claims. At their present claim rate, we estimate FHA could pay claims for 50 months without considering any premium income from existing or new originations.

More detailed information about the audit and the implications of the FY 2009 capital ratio falling below the Congressionally mandated 2% target are provided in the Details Section below.

P2 (Potomac Partners) Assessment

FHA, like every other financial institution, will not be immune from the impact of further house price depreciation. To fulfill its public purpose, FHA cannot avoid this economic risk. FHA's challenge and responsibility is to balance this risk with prudent credit management.

By acting quickly last week (and with more changes likely), FHA is attempting to mitigate the most significant risk from the capital ratio falling below 2% (i.e. political). FHA's opponents on Capitol Hill will attempt to use the decline in the capital ratio as justification for opposing further expansion of the FHA program. The most immediate threat would be to the proposal to extend the higher mortgage limits for another year. While we still believe the higher limits will be extended, the odds of this happening have decreased but are still better than 50/50.

Ø FHA's Changing Philosophy and Direction

We expect there will be a sea change in FHA policy and operational requirements in the coming months. The announcements last Friday are just the beginning of a dramatic overhaul of the FHA program. While the industry will not agree with every change, there should be significant improvement over the way FHA has conducted business.

With a new FHA Commissioner (and an incoming Deputy Assistant Secretary and Chief Risk Officer) that have extensive industry experience, we expect FHA to completely revamp all aspects of its business. In light of the financial concerns, underwriting policy, risk management processes and counterparty responsibilities are at the top of the list for review.   The upshot is that FHA will be a dramatically different agency in the coming months and years.

While it will not happen overnight, here are the kind of changes we expect:

1) Underwriting Changes

On a longer term basis, we expect FHA will develop their own automated underwriting system. In the interim, we expect FHA will tighten underwriting standards in its TOTAL Scorecard.   In addition, based on in-depth analysis of FHA performance data, we expect FHA to target poor performing products and tighten policies accordingly bringing FHA guidelines more in line with industry standards.   For example, Dave Stevens has mentioned problems with "manual underwrites". Further changes on refinance transactions also seem inevitable in light of the continued poor performance of these loans in the Neighborhood Watch database. Refinances (5.27%) are now performing 100 basis points worse than existing home purchase loans (4.20%). As recently as June 2008, refinances were performing 100 bps better.

2) Risk Management

FHA always had the tools to better manage the risk in the FHA program.   They now will have the "will" (i.e. leadership). We expect FHA will target their post-endorsement reviews to early delinquencies (e.g. 60 day) in the first six months. The result of these better targeted reviews will be more timely information on product performance and possible problems requiring policy changes. These reviews will also inevitably increase the number of loan indemnifications that lenders may receive from HUD as reviews will be targeted to poor performing loans.

3) Counterparty Responsibilities

It seems very likely that FHA will be increasing lender accountability in the coming months. Some likely changes are:

Implementation of Credit Watch for wholesalers

We expect FHA to implement Credit Watch for wholesalers by the end of FY 2009. It will likely be effective for the first quarter of 2010. Based on the way that FHA implemented Credit Watch for retail, each wholesaler's early default rate will be compared to the field office average and those with compare ratios ( probably above 300% to start) will be precluded from doing any FHA wholesale business in the particular HUD field office jurisdiction.

Higher net worth requirements

FHA, in its upcoming proposed rule, is expected to increase net worth requirements to $1 million dollars in 2010. It is possible that FHA will pursue further increases (above the $1 million base amount) through a tiered approach (i.e. higher net worth for higher volume).

Increased Indemnification risk

We believe there will be increased indemnification risk in the FHA program.   FHA's improved risk management review process will likely better identify underwriting errors and other administrative errors that affect the loan risk. Hopefully, FHA will target indemnifications to cases in which substantive errors occurred rather than for "technical fouls" that had no impact on the loan performance. We do not believe that FHA will be changing its philosophy in any way to hold lenders accountable for default issues (i.e. job loss, family, health, etc.) over which the lender had no control.

Ø FHA's New Credit Policy Changes: Impact of FHA's Proposed Mortgagee Eligibility Change

We believe the FHA proposal to stop approving loan correspondents in the FHA program is arguably the most significant announced change.
In the press release, FHA said "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." In other words, FHA Direct Endorsement lenders will be able to underwrite and close loans that were obtained from non approved mortgage brokers, community banks, etc. Of course, the Direct Endorsement lender will be responsible for the origination process on these loans. In effect, these loans are likely to be treated like retail loans from a liability perspective.

As you know, FHA Commissioner Dave Stevens is a former Freddie Mac executive. It appears that FHA will be adopting some Freddie Mac business principles. One of the GSE guidelines, of course, is to hold the seller servicer responsible for the actions of the originator. The FHA proposal, in effect, would be substituting the Direct Endorsement lender for the GSE seller-servicer. We would expect the DE lender would have to underwrite and close the loan in its name.

FHA's primary reasons for taking this action are: 1) FHA does not have the resources to conduct a thorough review of all applicants and their current process for mortgage brokers is cursory at best and 2) the minimal net worth ($63,000) provided little protection for the Government's risk in the event of an indemnification request.

The implications of this change are far-reaching in the FHA program. Once you permit FHA approved lenders to take applications from any source that meets State and other Federal guidelines (e.g. RESPA), it could render FHA's other lender approval requirements outdated and unnecessary (i.e. branch lending areas, direct lending, principal-agent restrictions, etc.). We expect FHA will be reengineering its lender approval and monitoring process.

Timeline for Implementation

To implement this change, FHA must go through the rulemaking process. We expect the proposed rule to be published in the next several weeks and there will likely be a 30 day period comment period. While changes are possible as a result of comments, the apparent goal is to have a final rule published by the end of the year so current loan correspondents will not have to be recertified in 2010.

Potomac Partners
Washington D.C. 20008

Have a great week!

*********************

Have a great Summer Selling season.

You'll need the following links to download these forms:

Education Station
Government Loan Programs

Remember to Go out and have fun!

Posted by Raoul Badde on September 25th, 2009 1:17 PMPost a Comment (0)

Did HUD Fire your Appraiser? AR/AG designation required

September 14th, 2009 8:26 PM

Can you Believe 2009 is nearly 3/4 over?? My Sincere hope is that this year has been a significant improvement over last year. It's been tough enough keeping track of all of the changes coming down the pike (and we're no where near done...) that making this year a success has been a struggle at best and a constant Dogfight as the "Norm".

Many of you may have noticed a memo come out from a competitor or two (HT to Deborah M for reminding me) but late last year on 12.17.08 HUD released an ML requiring ALL appraisers that submit work to HUD for collateral review to carry either an AR OR AG designation. This will be a significant set back for many of us.
Here is a copy of the HUD ML
Most of our most experienced and favored appraisers DO NOT carry these designations. In fact interviewing you all in the field on this subject has brought to light that this is not an economically viable option for many AL appraisers. The Appraisers that are left today are not getting the work that they need as it is to stay in business (HVCC has been a REAL Killer in more ways than one) and this move by HUD is only going to put the crunch on these same folks even more.
Even with Turn times across the industry very fast your appraisal work is about to get very backed up.
And you thought MDIA was an annoying procedure....

My only hope is that enough AL appraisers local to your area will see this as an opportunity to improve their business and gain some market share in their segment/area.
In the meantime, add an extra 7 days+ to your appraisal turn times when working with your Realtor's and Buyers on FHA Purchases.

Have a great week!

*********************

Have a great Summer Selling season.

You'll need the following links to download these forms:

Education Station
Government Loan Programs

Remember to Go out and have fun!

Posted by Raoul Badde on September 14th, 2009 8:26 PMPost a Comment (0)

Got a Turn Down? Beware FHA: "Mortgage Credit Reject"

September 14th, 2009 7:57 PM

We are all doing whatever we can to impress our Realtor Partners and to make sure that we gain the lions share of business from them wherever and however possible.

Of course we can not gain every single transaction and many customers come to Realtors already pre-qualified from a Retail institution such as Wells Fargo, Bank of America etc. In some cases the borrower's MUST make an application to the retail division of the REO firm that is selling the home in order to even gain an offer acceptance.

I have seen that your work is paying off and your consistency with your Realtors is showing them that you have capabilities to get far more loans funded than many of the Retail outfits in town.
This is of course the benefit of being a Mortgage Broker (Lending Options).

What I am also seeing (and especially since you know you can count on us for our own accuracy and speed) are deals that are half-way through only to have been turned down by the current lender that is working on the loan for this issue or that over lay.

One of My Company's strengths even in this market place and even with our own overlays is our ability to approve more FHA loans than the average lender.
This comes from many many years of experience with our company working very closely with its investors and with HUD to have a better understanding of exactly what is an approvable loan and what is not.

Obviously we can not approve every deal that we are given either but together you and I have mitigated those issues by having a very frank discussion about what is my company's deal and what is not. I thank you for that.

With respect to these loans that have fallen out from other lenders it is VERY IMPORTANT to note that the existing Lender may have entered Notes into FHA Connection as to the reason they are turning the loan down.
HUD/FHA asks every Sponsoring Lender to input these notes so that there is not a loan that should never have been approved sent to another sponsor that subsequently gets approved and insured without HUD's knowing it.

These notes left in Connection can kill the deal with nearly EVERY other Sponsor out there.
The issue is that HUD sets the BAR extremely HIGH to over-come another sponsor's opinion of credit and underwriting.

So, when your Realtor calls in you in a Panic to help "SAVE" this one deal this one time be sure you take copious notes.
Once you have the Case Number Transferred to your name be absolutely certain you have checked on ANY of the notes left behind from the other Sponsor.
You may Access these notes by:
Logging into FHA Connection and
Clicking on:

Single Family -->

Case Processing -->

Mortgage Credit Reject --> enter the Case number and then view the notes.

Before you submit the loan to Franklin American or any other Sponsor you will want to address these notes in the system BEFORE in order to know whether you can even over come the issue OR if the new Sponsor
will be able to over ride the existing reject issues posted in connection.

Doing all of this before the new submission goes out will save you lots of heart ache and loads of wasted time and resources.
It will also help you to strengthen your position of knowledge and understanding with your Realtors so that they better understand the implications of working with certain entities and what their specific habits are (especially when it comes to FHA loans).

Have a great weekend!

*********************

Have a great Summer Selling season.

You'll need the following links to download these forms:

Education Station
Government Loan Programs

Remember to Go out and have fun!

Posted by Raoul Badde on September 14th, 2009 7:57 PMPost a Comment (0)