U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, DC 20410 … · 2009-03-13 · U.S....

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

WASHINGTON, DC 20410-8000

ASSISTANT SECRETARY FOR HOUSING- FEDERAL HOUSING COMMISSIONER

December 31, 2003 MORTGAGEE LETTER 2003-23

TO: ALL APPROVED MORTGAGEES SUBJECT: Single Family Loan Production - Increase in FHA Maximum Mortgage Limits

This Mortgagee Letter provides the 2004 comprehensive update to the Federal Housing Administration’s (FHA) single family mortgage limits and adjusts the FHA single family limits (floors and ceilings) as a result of increases in Freddie Mac’s conforming mortgage loan limits. The information contained in this Mortgagee Letter is effective on January 1, 2004, and applies to mortgages insured under the following Sections of the Act: Section 203(b), 203(h), 203(i), 203(k), 203(n), 223(e), and 234(c). Section 203(b) of the National Housing Act provides that no mortgage limit (including limits for 2, 3 and 4 unit properties) can be lower than the greater of (1) the limit in effect on the date of the enactment of the Departments of Veterans Affairs and Housing and Urban Development and Independent Agencies Appropriations Act for Fiscal Year 1999 (Public Law 105-276 dated October 21, 1998) or (2) 48 percent of the dollar limitation determined by Freddie Mac for a residence of applicable size. Consequently, the Department has reviewed all of the mortgage limits and these adjustments are also part of the 2004 comprehensive update.

FHA's single family mortgage limits are set by county and are tied to increases in the loan limits established by Freddie Mac in accordance with Section 203 (b)(2)(A) of the National Housing Act, as amended (12 U.S.C 1709). On November 25, 2003, Freddie Mac announced that it will increase its single family mortgage loan limits for year 2004, effective January 1, 2004. These Freddie Mac mortgage loan limits can be viewed on the Internet at:

http://www.freddiemac.com/sell/guide/bulletins/ Therefore, FHA’s new nationwide basic mortgage limits (“the floor”) will be as follows: One-Unit $160,176 Two-Unit $205,032 Three-Unit $247,824

Four-Unit $307,992

www.hud.gov espanol.hud.gov

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Section 203(b)(2)(A) of the National Housing Act also states that FHA’s mortgage limits in high cost areas ("the ceiling") may increase to 87 percent of Freddie Mac's conforming loan limits for a residence of applicable size. In areas where the mortgage limit is above the FHA floor, the single unit loan limit will be equal to the lesser of 95 percent of the area median house price or the statutory ceiling, i.e., the 87 percent of Freddie Mac's limit. It should be noted that the comparison calculation has been performed for all maximum mortgage limits, including the separate 2-4 family unit limits. As stated earlier, the Department also compared this calculation with the mortgage limits in effect prior to the enactment of the FY 1999 Appropriations Act.

FHA's new statutory ceilings for high cost areas are: One-Unit $290,319 Two-Unit $371,621 Three-Unit $449,181 Four-Unit $558,236

Attached to this Mortgagee Letter is a list of the high cost areas at the new statutory ceiling for a single unit mortgage limit (Attachment I) and their respective limits for 2-4 unit properties. Also attached is a list of mortgage limits for all areas that have a single unit mortgage limit above the new FHA floor of $160,176 and their respective limits for 2-4 unit properties (Attachment II). Any area not listed on Attachment II has a single unit mortgage limit of $160,176. All of the new mortgage limits are effective January 1, 2004.

Section 214 of the National Housing Act provides that mortgage limits for Alaska, Guam, Hawaii and the Virgin Islands may be adjusted up to 150 percent of the new ceilings. This results in possible new ceilings of $435,479, $557,431, $673,772 and $837,353 for one-, two-, three-, and four-family dwellings, respectively. The comparison calculations have also been performed for these areas. A complete schedule of FHA mortgage limits for all areas is available through the Internet at https://entp.hud.gov/idapp/html/hicostlook.cfm.

OMB recently established revised definitions for the National Metropolitan Statistical Areas and recognized 49 new Metropolitan Statistical Areas. If you are unsure if a county is within one of the metropolitan statistical areas or micropolitan statistical areas listed on the attachments you should check the Internet site before closing the mortgage at the revised limit. For a complete list of all metropolitan counties in the country by MSA, go to http://www.whitehouse.gov/omb/bulletins/b03-04.html.

Homeownership Centers, pursuant to the Commissioner's re-delegated authority set forth in Mortgagee Letter 95-27, may add to the list of FHA limits above the floor as appropriate. Any interested party may submit a request to the appropriate Homeownership Center for the mortgage limits to be increased in a particular area, according to the procedures outlined in Mortgagee

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Letter 95-27. The request must contain sufficient housing sales price data listing all or nearly all of the one-family properties sold in the area for a period of time. The time period will vary depending on the volume of sales.

Any questions regarding this Mortgagee Letter or the mortgage limits in a particular area should be addressed to the Homeownership Centers in Atlanta (1-888-696-4687), Denver (1-800-543-9378), Philadelphia (1-800-440-8647) and Santa Ana (1-888-827-5605).

Sincerely, John C. Weicher Assistant Secretary for Housing-

Federal Housing Commissioner Attachments

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D.C. 20410-8000

OFFICE OF THE ASSISTANT SECRETARY

FOR HOUSING-FEDERAL HOUSING COMMISSIONER

November 20, 2003

MORTGAGEE LETTER 2003-19

TO: ALL APPROVED MORTGAGEES ATTENTION: Single Family Servicing Managers SUBJECT: Partial Claims: Program Changes and Updates

The purpose of this Mortgagee Letter is to remind mortgagees of the proper use of the partial claim as a loss mitigation tool for defaulted FHA mortgagors, and to introduce several changes in the partial claim program which include:

• a reminder that mortgagees shall lose the incentive payment when loss mitigation

claims are not submitted within 60 days of the date the partial claim subordinate lien is executed, or where the partial claim security documents are not forwarded timely,

• a “One-Time Amnesty ” which is being provided to accept all outstanding partial claim related legal documents without penalty;

• additional guidance for calculating pre-foreclosure sale ratios where a partial claim had been provided to the mortgagor in a previous default.

This Mortgagee Letter supersedes the portion of Mortgagee Letter (ML) 2000-05 that

addresses partial claims, starting on page 24 through page 29. The other loss mitigation provisions within ML 2000-05 were left intact. Several additional sections have been provided to clarify time frame and address document delivery issues. Definition and Existing Guidance

Under the partial claim option, a mortgagee will advance funds on behalf of a mortgagor in an amount necessary to reinstate a delinquent loan (not to exceed the equivalent of 12 months worth of principal, interest, taxes, and insurance (PITI)). The mortgagor, upon acceptance of the advance, will execute a promissory note and subordinate mortgage payable to HUD. Currently, these promissory or “partial claim” notes carry no interest and are not due and payable until the mortgagor either pays off the first mortgage or no longer owns the property.

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Following reinstatement, the mortgagee will file a partial claim for the amount of the advance plus the mortgagee’s incentive fee, and forward a copy of the recorded documents to HUD. A contractor retained by HUD will service the partial claim notes.

HUD approval is not required in order for mortgagees to advance funds and file a partial claim, as long as the requirements detailed in this section are satisfied. This option provides mortgagees with a powerful tool to assist mortgagors threatened with foreclosure. However, this loss mitigation option should be used only if the mortgagee is confident that:

• The mortgagor has the long-term financial stability to support the mortgage debt; and, • The mortgagor does not have the ability to repay the arrearage through a special

forbearance or modification.

A. Loan Default

The loan must be at least four (4) payments due and unpaid, but may not be more than 12 months due and unpaid at the time the partial claim note is executed. The loan may not be in foreclosure when the partial claim note is executed. However, a mortgagee may remove a loan from foreclosure if the mortgagor’s financial situation has improved sufficiently to justify a partial claim.

B. Mortgagor Qualifications

Partial claims may be offered to mortgagors who satisfy all of the following

requirements:

• Have overcome the cause of the default; • Have sufficient income to resume monthly mortgage payments; • Do not have sufficient surplus income to repay the arrearage through a repayment

plan; • A mortgage modification is not appropriate; • The mortgagor is an owner-occupant(s) committed to continuing occupancy of the

property as a primary residence. A partial claim may not be used to reinstate a loan prior to a sale or assumption.

A mortgagee may consider a mortgagor who has filed a petition in Bankruptcy

Court under Chapter 13 for a partial claim, only after obtaining the approval of the Bankruptcy Court. If the mortgagor has filed a bankruptcy petition under Chapter 7, the mortgagee must obtain Bankruptcy Court approval. In addition, the mortgagor must reaffirm the debt.

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C. Property Condition

While the partial claim option does not include a loan-to-value restriction and no appraisal or broker’s price opinion is required, the mortgagee must conduct a review sufficient to verify for FHA that the property has no physical condition(s) which adversely impact the mortgagor’s continued use or ability to support the debt.

A mortgagor may not be able to support payments under a partial claim if the

property is in such a deteriorated condition that repairs drain the mortgagor’s monthly resources. An analysis of the mortgagor’s surplus income should consider anticipated property maintenance expenses. If the mortgagee’s inspection identifies a property in extremely poor physical condition, a partial claim may not offer a permanent resolution to the default.

D. Financial Analysis

The mortgagee is required to assess the mortgagor’s financial status as described

in Section H, page 10, of ML 00-05. HUD expects the mortgagee to project the mortgagor’s surplus monthly income for a minimum of three months, and calculate the surplus income percentage.

If the financial analysis determines that the mortgagor does not have the ability to

support the normal monthly payment, the partial claim option may not be used. In no case may a partial claim be used if the mortgagor’s surplus income percentage is 0% or less than 0%. If the mortgagor has low surplus income (< 5%), mortgagees are encouraged to combine a partial claim with a special forbearance plan allowing the mortgagor to demonstrate the ability to make regular payments for a period of three (3) or more months prior to origination of the partial claim note.

Mortgagees must use good business judgment to determine if the mortgagor has

the adequate surplus income to repay the arrearage through a special forbearance or mortgage modification before approving a partial claim. Mortgagees are encouraged to require mortgagors to contribute all available funds toward paying down the default, thereby reducing the amount of the partial claim debt. The lender must retain the financial analysis and supporting documentation in the claim review file that supports the decision that a partial claim was the appropriate loss mitigation option. E. Combining Options

A partial claim may be utilized as a stand-alone tool, or incorporated as part of a

special forbearance agreement. For example, if a mortgagor needs time to resolve the default, but will eventually be able to support the normal monthly payment but no more than that, a repayment plan or special forbearance may culminate in a partial claim. An existing repayment plan or special forbearance may also be converted to partial claim if the mortgagor’s circumstances change. A partial claim may not be used in conjunction with a mortgage modification.

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On August 29, 2002, the Department published Mortgagee Letter (ML) 2002-17, Special Forbearance: Program Changes and Updates which provided new guidance for a Type II Special Forbearance. The Type II Special Forbearance combines a short-term special forbearance plan and a modification or partial claim as a single loss mitigation plan. It is an appropriate loss mitigation tool to utilize when there is any concern about the mortgagor’s ability or commitment to keep the payments current following reinstatement. For more information on this related issue, please refer to ML 2002-17.

F. Allowable Provisions

The following provisions apply to all partial claim notes:

• The partial claim must fully reinstate the loan; • The partial claim advance may include only principal, interest and escrow

advances required to reinstate the loan; • In no event may the total arrearage exceed the equivalent of 12 months PITI.

The maximum partial claim advance for an Adjustable Rate Mortgage (ARM), Graduated Payment Mortgage (GPM), and Growing Equity Mortgage (GEM) loans is calculated by adding the specific PITI requirement for each of the monthly installments to be included in the partial claim.

The mortgagee may not include late fees, legal fees or other administrative

expenses in the partial claim note. However, mortgagees may only collect legal costs and fees resulting from a canceled foreclosure action directly from the mortgagor to the extent not reimbursed by HUD and in accordance with HUD limitations. These requirements are provided in Chapter 4 of Handbook 4330.1, REV-5, Administration of Insured Home Mortgages, Mortgagee Letter 2001-19, Single Family Foreclosure Policy and Procedural Changes, or subsequent guidance, if any. As a reminder, under no circumstances will the mortgagor be required to pay the mortgagee more than the Department identified as customary and reasonable for claim purposes.

Although HUD does not prescribe a lien priority requirement for partial

claims, the mortgagee must ensure timely recordation of the subordinate mortgage.

G. Repayment Terms

The partial claim advance will be secured by a note and subordinate mortgage with the following repayment terms:

• The note is interest free. (The Secretary reserves the right to assess interest on

partial claim notes originated in the future.); • No monthly or periodic payments are required, however, mortgagors may

voluntarily submit partial payments; • The note is due at the earlier of 1) the payoff of the first mortgage, or 2) when the

5mortgagor no longer owns the property;

• There is no prepayment penalty; • A mortgagor is only eligible to apply for a mortgage insurance premium (MIP)

refund when the partial claim note has been paid in full; • The Partial Claim Note and security documents must be payable to HUD; • Voluntary payments or prepayments should be delivered via a cashier’s check or

other certified funds to the Department’s servicing contractor at the following address.

U.S. Department of HUD c/o First Madison Services, Inc. 4111 South Darlington Suite 300 Tulsa, OK 74135

H. Required Documentation

A promissory note must be executed in the name of the Secretary and a subordinate mortgage must be obtained and recorded. The mortgagee must include the provisions of HUD’s model form of note and subordinate mortgage (as provided in ML 97-17) and make any amendments required by state laws. While HUD does not endorse the products or services of vendors, the Department is aware that state specific documents are commercially available. Mortgagees who take advantage of the convenience of purchasing these documents should review them prior to use.

I. Disclosures

FHA requires mortgagees to comply with any disclosure or notice requirements

applicable under State or Federal law. J. Use of Pre-Foreclosure Sale where a Partial Claim was provided on an

earlier default

Some mortgagees have erroneously failed to include the amount of the Partial Claim when calculating total indebtedness for the purpose of a pre-foreclosure sale. In order to be in compliance, mortgagees must include both the first mortgage and the partial claim amounts to correctly calculate the total outstanding mortgage indebtedness.

K. Loan Payoff or Refinance- Mortgagee Responsibilities

Mortgagees will be responsible for notifying HUD when the first mortgage is being

paid in full or refinanced in order for HUD to provide a payoff figure on the Partial Claim. HUD’s Servicing Contractor, identified in Section G of this mortgagee letter, should be contacted to request a payoff quote on the outstanding Partial Claim. The purpose of this requirement is to ensure that no partial claim is overlooked when preparations are made to pay the first mortgage in full.

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L. Mortgagee Incentives

FHA will pay mortgagees a $250 incentive fee for each partial claim. The mortgagor may not be charged any additional costs for receiving this loss mitigation workout option, however, it is acceptable that legal costs and fees related to a canceled foreclosure action may be collected directly from the mortgagor. Mortgagees are reminded that all such costs must be reflective of work actually completed to the date of the foreclosure cancellation and the attorney fees may not be in excess of the fees that HUD has identified as customary and reasonable for claim purposes. Please refer to Mortgagee Letter 2001-19, issued August 24,2001, or subsequent issuance, if any, for guidance. M. Failure by the mortgagor on a Partial Claim

In the event the mortgagor becomes delinquent following reinstatement via a

partial claim, it shall be treated as a new default and serviced accordingly.

N. Limitations on Use

If a loan has been modified or reinstated using a partial claim within the past three years, re-default risk is presumed to increase following a subsequent partial claim. Prior to allowing a partial claim in this circumstance, the mortgagee must prepare a written justification, and retain a copy along with supporting documents in the claim review file. It is anticipated that this will be a highly unusual occurrence, and that the cause of the second default will be unrelated to the original problem. There is a lifetime limitation of 12 monthly installments of PITI. Once 12 full monthly installments have been paid by HUD on a claim type 33 (partial claim) for a given case number, no further partial claims will be honored on a specific case.

O. Recordation Requirements

Upon execution of a partial claim by a mortgagor, the Department requires that the

partial claim security instruments be submitted for recordation to the appropriate jurisdiction within a maximum period of five (5) business days following the execution AND prior to filing a claim with HUD.

The responsibility for servicing of the Partial Claim remains with the mortgagee

until the security interests are legally recorded in the appropriate jurisdiction.

P. Claim Filing

In accordance with 24 CFR 203.371 (d) “along with the prescribed application for partial claim insurance benefits, the mortgagee shall forward to HUD the original credit and security instruments requirements by paragraph (c) of this section.” Provided that the mortgagee has complied with the regulations, the mortgagee must file the claim within 60 days of the date the subordinate lien to HUD is executed. The claim may include the

7amount of the partial claim note and the $250 incentive fee. HUD will pay no other costs or fees. Failure to file the claim within 60 days will result in loss of the $250 incentive fee.

Q. Document Delivery

It is the responsibility of the mortgagee to deliver the original promissory note and recorded mortgage to HUD’s servicing contractor’s business address listed in Section G of this Mortgagee Letter, as soon as possible, but in any case, no later than six (6) months from the execution date of the partial claim note and security instruments.

HUD expects the mortgagee or its agent to periodically check on the status of all

unreturned recorded documents and that mortgagees advise HUD of all such delayed deliveries. Where it appears that recorded documents cannot be forwarded due to delays in the land records office, mortgagees must request an extension of time. HUD’s National Servicing Center (NSC) shall grant time extensions in the event document delivery is delayed by events beyond the control of the mortgagee. Except in extreme circumstances, late requests will be denied.

HUD Form 50012 is to be used for extension requests. Box 7, titled “Other”

(specify) must be checked and the following wording is recommended for specification purposes: “Requesting an extension of time to return recorded Partial Claim documents to HUD” and must enter the number of days needed. Under the sections “Basis for Extension Request”, the mortgagee must indicate the reason for the delay.

R. One-Time Amnesty for accepting outstanding Partial Claim related legal documents

without penalty.

HUD shall provide a “One-Time Amnesty” to allow mortgagees to submit overdue Partial Claim documents without penalty. The Department is emphasizing HUD’s willingness to partner with the mortgage industry on overdue partial claim related legal documents that remain outstanding because of a delay in receipt of recorded documents.

HUD expects mortgagees to exercise prudent and consistent diligence to ensure

that all documents are promptly submitted for recordation and are then forwarded to HUD as required. HUD will accept without penalty, all overdue partial claim documents received within 45 days of the issuance date of this Mortgagee Letter. Once the 45-day grace period has expired, on the 46th day HUD will begin issuing demand letters for the submission of overdue partial claim security instruments and notes and reimbursement of related incentives paid.

8 Any questions regarding this Mortgagee Letter may be directed to HUD’s National Servicing Center (NSC) at (888) 297-8685 or [email protected]. These clarifications are effective immediately. ____________ John C. Weicher Assistant Secretary for Housing- Federal Housing Commissioner




November 20, 2003 MORTGAGEE LETTER 2003-20

TO: ALL APPROVED MORTGAGEES SUBJECT: Revised Uniform Residential Loan Application (URLA)

The Uniform Residential Loan Application (URLA), shared by Fannie Mae, Freddie Mac, the Department of Veterans Affairs, Rural Housing Services, and the Federal Housing Administration (FHA) has been revised. These revisions are in response to additional collection requirements mandated by the Federal Reserve System under Regulation C (Home Mortgage Disclosure Act (HMDA)) (12 CFR Part 203), as well as the USA Patriot Act (Pub. L. 107-56, 115 Stat. 272 (2001)). The revised form will be required for all mortgage loan applications taken on and after January 1, 2004. Lenders may begin using the revised URLA immediately, but are cautioned that changes to the FHA Connection to capture the revised data fields will not be available until January 2004.

The URLA was also updated to cover all means of transmission or delivery, including those that use electronic applications that may be governed under federal and state laws, such as the federal Electronic Signatures in Global and National Commerce Act (E-SIGN) and the Uniform Electronic Transactions Act (UETA). In addition to any other changes to the URLA that were previously authorized, lenders may also add spaces to collect borrowers e-mail addresses to the extent permitted by applicable law.

The sections of the URLA that were changed are described below:

• Section I. Type of Mortgage and Terms of Loan, for type of mortgage applied for, Farmers Home Administration (FmHA) was changed to U.S. Department of Agriculture (USDA)/Rural Development.

• Section III. Borrower Information, age was changed to actual date of birth.

• Section III. Address, one of the spaces available for previous address was changed to

provide for a mailing address when it is different from the present address.

www.hud.gov espanol.hud.gov

• Section IX. Acknowledgment and Agreement was modified for clarification and expanded to address electronic and facsimile transmission of the application. In addition, this clarification eliminates the need for a lender to modify the Acknowledgment and Agreement when the application relates to a second mortgage.

• Section X. Information for Government Monitoring Purposes was changed to include

borrower ethnicity, modify the race classifications and permit multiple entries for individual borrowers, and to include the Internet as an option by which the application is taken.

Lenders may obtain the revised form at Fannie Mae’s website, www.efanniemae.com.

To obtain the form from Fannie Mae’s homepage, under the "Single Family" drop down menu, select "Originating and Underwriting," then "Selling and Servicing Forms," and then the specific form to be viewed, downloaded, or printed. Lenders that do not have access to the Internet may obtain the revised URLA from their forms vendor. HUD will also provide the revised forms on January 1, 2004, through its forms database website: http://www.hudclips.org/cgi/index.cgi.

If you have any questions regarding this Mortgagee Letter, please contact your Homeownership Center (HOC), using the toll-free numbers, in Atlanta (888-696-4687), Denver (800-543-9387), Philadelphia (800-440-8647), or Santa Ana (888-827-5605).

Sincerely,

John C. Weicher Assistant Secretary for Housing-

Federal Housing Commissioner




December 3, 2003

MORTGAGEE LETTER 03-21 TO: All FHA APPROVED MULTIFAMILY MORTGAGEES SUBJECT: FHA Policies for Controlling Multifamily Firm Commitments and Credit Subsidy

The following policies are in effect until further notice:

1. FHA Multifamily Housing and Health Care Firm Commitments – Headquarters will authorize Multifamily Hubs to issue commitments for specific cases based upon the order (time and date) Hub directors submit requests to Headquarters. Hubs cannot submit requests to Headquarters until they have completed all firm commitment processing and are prepared to issue the firm commitment. If there is not enough commitment authority remaining to provide commitment authority for the entire next available project, Headquarters will skip to the next project that is able to use the remaining commitment authority. Once the commitment authority is exhausted, Headquarters will establish a queue based upon the date and time of the request, except that Headquarters may create a special priority for mortgage increases at final endorsement. Hub Directors must receive prior Headquarters approval for specified mortgage amounts before Hubs/Program Centers can:

a) issue, amend (increase mortgage amount), or reissue firm

commitments (including reopening of expired firm commitments), or approve mortgage increases for all of the multifamily and health care mortgage insurance programs: (Sections 207, 207/223(f), 213, 220, 221(d)(3), 221(d)(4)/ 223(a)(7), 223(d), 231, 232, 232/223(f), 234(d), 241(a));

b) issue, amend or reissue firm approval letters to Housing Finance

Agencies (HFAs) for Section 542(c) risk-sharing loans; or

c) execute addenda to risk-sharing agreements with Government Sponsored Enterprises (GSEs) for Section 542(b) risk-sharing.

2. Processing/Reprocessing with lower MIP - As of October 1, 2003, mortgagees and Hubs/Program Centers are now authorized to process/reprocess applications with the 50 basis point MIP in effect in FY 2004 for Sections 207, 220, 221(d)(4) and 231. If an outstanding commitment is reprocessed with the lower MIP and results in an increased mortgage amount, the Hub Director must submit a request to Headquarters for the new mortgage amount before the firm commitment can be reissued at the higher amount.

3. FHA Endorsements - FHA will continue to endorse mortgages with outstanding firm

commitments issued, reissued or amended that were specifically authorized by Headquarters. FHA will also endorse HFA project mortgages under Section 542(c) with outstanding firm approval letters and execute addenda to risk-sharing agreements with GSEs under Section 542(b).

4. Extensions of Outstanding Commitments - Hubs/Program Centers can extend outstanding

firm commitments, provided the Hub/Program Center determines that the underwriting conclusions are still valid. If a commitment has been extended 90 days from the original expiration date, the mortgagee must provide updated appraisal/market, cost and mortgage credit information for MAP cases to the Hub/Program Center for review before the Hub/Program Center can issue another extension. On TAP cases, the Hub/Program Center must update its own appraisal/market, cost and mortgage credit underwriting conclusions, before granting further extensions. A new market study is required if the existing market study is over one year old.

5. Reopening of Expired Commitments – Hubs/Program Centers can reopen and reprocess

expired firm commitments (applications submitted within the 90 day reopening period), provided the mortgagee provides updated appraisal/market, cost and mortgage credit information for MAP cases. For TAP cases, the Hub/Program Center must update its own appraisal/market, cost and mortgage credit underwriting conclusions. A new market study is required if the existing market study is over one year old. Upon completion of its review, the Hub/Program Center cannot reissue the firm commitment until the Hub Director obtains the prior Headquarters authorization described in #1 above.

6. Credit subsidy - the following programs require credit subsidy:

Section 221(d)(3); Section 241(a) for apartments; Section 223(d) operating loss/apartments; and Section 223(d) operating loss /232 health care.

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Once Headquarters has authorized issuance of a firm commitment for the above programs, the commitments will be issued subject to the availability of credit subsidy. When the FHA firm commitments for the above programs have been accepted by the mortgagee and mortgagor and returned to the Hub/Program Center, the Hub Director can request credit subsidy. Requests from Hubs will be funded in order based on the date and time the request is received in Headquarters. Hubs/Program Centers will advise you in writing when credit subsidy has been obligated for your project mortgage. The letter amendment will extend the expiration date of the firm commitment to the expiration date of the credit subsidy.

When Headquarters determines that a program set-aside has been so depleted that there is

not enough credit subsidy left in a program set-aside to fully fund the next available project, we will skip to the next project that is able to use the remaining credit subsidy.

7. Mortgage Increases at Final Endorsement – additional credit subsidy is still required for mortgage increases on project mortgages (e.g., 221(d)(4)) that required credit subsidy at initial endorsement. The credit subsidy rate for the increase is the rate at which credit subsidy was obligated for the initially endorsed mortgage amount. Headquarters review and prior approval will be required for mortgage increases for projects which required credit subsidy at initial endorsement. If Headquarters does not obligate credit subsidy for the mortgage increase, FHA Hubs/Program centers cannot insure the mortgage increase.

I appreciate your cooperation.

___________________________________ John C. Weicher Assistant Secretary for Housing – Federal Housing Commissioner

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Official Record Copy U.S. Department of Housing and Urban Development form HUD-713.1 (02/03)

Previous edition is obsolete.

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U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D.C. 20410-8000

OFFICE OF THE ASSISTANT SECRETARY

FOR HOUSING-FEDERAL HOUSING COMMISSIONER

December 4, 2003


TO: ALL APPROVED MORTGAGEES ATTENTION: SINGLE FAMILY SERVICING MANAGERS SUBJECT: Home Equity Conversion Mortgages (HECMs) –Procedural Guidance The purpose of this mortgagee letter is to provide guidance and procedural clarification regarding Home Equity Conversion Mortgages (HECMs). The issues covered in this mortgagee letter include appraisal policy on foreclosure or deed in lieu claims, the death notification requirement and procedural guidance for determining the amount of interest paid on claims. Appraisal Policy on Foreclosure or Deed in Lieu Claims

Several mortgagees have recently raised the issue concerning the need to obtain a new appraisal when a property is under an executed contract of sale, but the sale will not be completed until after the date that the mortgagee should request a new appraisal.

Of concern is HUD regulation §206.127(a)(2) which states that “[I]f the property will not be sold within six months from the date the mortgagee acquired title, the mortgagee shall, at least 15 days prior to the expiration of the six month period, request the Secretary to cause another appraisal to be made.”

Upon review of the matter, it was determined that under certain circumstances an extension of time to allow the sale to be completed would be appropriate. Effective immediately, if a closing will occur within 30 days from the date the mortgagee should have ordered a new appraisal (per §206.127(a)(2), fifteen days prior to the expiration of six months from the date the mortgagee acquired title), mortgagees may request an extension of time to sell the property. Extensions may be approved for up to 30 days to allow the sale to proceed.

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This extension of time shall be requested from HUD’s National Servicing Center. The address is:

U. S. Department of Housing and Urban Development National Servicing Center Attn: HECM Extensions 1516 South Boston Street, Suite 100 Tulsa, OK 74119

Fax number: 918-581-7497.

The ordering of a second appraisal is still applicable in the event the sales contract falls

through and six months have expired since the completion date of the first appraisal. Within 15 days of receipt of the second appraisal, the mortgagee must file a claim with HUD for the payment of insurance benefits as provided in §206.127(a), substituting the appraised value for the sale price. The mortgagee is entitled to receive a claim payment for the difference between the mortgage balance (plus additional items specified in §206.129) and the appraised value. A mortgagee’s claim for the payment of insurance benefits may include the cost of all required appraisals provided the appraisals were obtained after the mortgage became due and payable and the mortgagee is not otherwise reimbursed for the cost. Requirement for Notification of Death When a mortgagor dies and the property is not the principal residence of at least one surviving mortgagor, the HECM mortgage balance becomes due and payable in full. The mortgagee is required to notify the Department (see 24 CFR 206.27 (c)(1)). This Notice must occur as soon as possible following the death, but no later than 60 days from the date of the mortgagor’s death.

This notice must be in writing, must provide the FHA case number, the mortgagor’s name, the property address and the date of death, which may be delivered via facsimile or letter. The Notice must be delivered to the Department’s HECM servicing contractor:

U.S. Department of Housing and Urban Development National Servicing Center. c/o First Madison Services, Inc. 4111 S. Darlington, Suite 300, Tulsa, OK 74135 ATTN: Document Custodian

3 The Department expects mortgagees to exercise prudent servicing and reasonable diligence to ensure that occupancy is verified on an annual basis. HUD Handbook 4330.1, Rev-5, Section 13-22, pages 13-19 “Mortgagor’s Occupancy and Maintenance of the Property” states that the mortgagee must provide a written certification for the mortgagor’s signature, to the mortgagor annually. Although written certification may be useful in determining the mortgagor’s occupancy status, other supplemental measures may be needed to effectively determine date of death to meet the six (6) month requirement for first legal action. Mortgagees may consider subscribing to one of several commercial resources that offer a monthly match of loan files against a Social Security database of death records.

Effective immediately, if a property is under an executed contract of sale and the closing will

occur within 30 days from the date the mortgagee should have ordered a new appraisal (per §206.127(a)(2), fifteen days prior to the expiration of the six months from the date the mortgagee acquired title), mortgagees may request an extension of time to sell the property. Extension requests should be submitted to HUD’s HECM Servicing Contractor using form HUD-50012, “Mortgagee’s Request for Extension of Time.” This form must be supported by the most recent occupancy certification and a summary of the mortgagee’s efforts to verify occupancy. Timeframes to use when Calculating Interest on HECM Claims

When submitting a claim, interest at the note rate is paid to the due date. The due date, as provided for in §206.129(d) (1), means the date when the mortgagee notifies the Secretary under §206.27(c) (1) that the mortgage became due and payable, or the date the Secretary granted approval under §206.27(c) (2) for the mortgage to become due and payable.

With respect to a HECM mortgage that is foreclosed as a result of the death of the mortgagor, the “due date” is the date that HUD is notified of the mortgagor’s death (notification date). Mortgagees are entitled to receive interest at the debenture rate from the due date (notification date) to the date the claim is paid as provided by §206.125(d).

HUD is aware that prior to publication of this Mortgagee Letter, some HECM claims were

processed with note rate interest paid to the date of death rather than the date of notification. Claims submitted using this calculation that were paid prior to the effective date of this letter will be considered compliant with HUD’s requirements.

4

Termination of FHA Insurance

FHA mortgage insurance must be active in order for a claim to be paid. This is true no matter what type of single family mortgage claim is in question. Because the HECM mortgage data that the Department maintains is in a different system than that of all other Title II single family mortgages, the process is a little different. The current procedure for processing a HECM claim is similar in that the Claims Branch reviews and processes the HECM claim for payment. However, unlike all other single family Title II mortgages, the mortgage insurance is not automatically terminated as a result of the claim payment process.

After the Claims Branch completes its processing, an Advice of Payment (AOP) letter is prepared and forwarded to the mortgagee as well as the payment via wire transfer. Information concerning the claims paid is forwarded to HUD’s Insurance Operations Division where the insurance will be terminated by HUD staff. Mortgagees may review the loan status and will find that HUD has entered the termination code 09 for all accounts where HUD paid the HECM claim.

The mortgagee is responsible for the proper termination of insurance on a HECM loan only where there was a payment in full and no claim will be submitted. The termination code for those transactions is 08. To terminate the insurance in the Insurance Accounting Collection System (IACS), the mortgagee must use the MF59 “Loan Claim/Termination” screen. Although mortgagees may have previously terminated HECM loans for an assignment, only authorized HUD personnel shall now process those terminations.

Should there be any questions regarding the insurance status of a HECM loan, mortgagees may call (202) 708-2438 (this is not a toll free number) and advise that the call is regarding a HECM mortgage. Or questions may be forwarded via email to [email protected]. All email submissions should identify that the inquiry is related to a HECM mortgage.

Any questions regarding this mortgagee letter may be directed to HUD’s National Servicing Center at (888) 297-8685 or [email protected]. The clarifications in this mortgagee letter are effective immediately. ___________________________________________ John C. Weicher

Assistant Secretary for Housing- Federal Housing Commissioner

mailto:[email protected]

March 19, 2004


TO: ALL APPROVED MORTGAGEES SUBJECT: Adjustable Rate Mortgages

On March 10, 2004, the Department of Housing and Urban Development published a final rule in the Federal Register amending the mortgage insurance regulations to implement additional product offerings known as “hybrid” adjustable rate mortgages (ARMs). The Federal Housing Administration (FHA) has insured ARMs since 1984; however, these were limited to 1-year ARMs. Under the terms and conditions described below, FHA is now offering mortgage insurance on 3-year, 5-year, 7-year and 10-year ARMs. These hybrid ARMs expand home buying opportunities through the creation of additional product offerings tailored to the financial conditions and desires of the borrowers.

This Mortgagee Letter provides a synopsis of the final rule, as well as specific guidance to assist lenders with implementing these new products. It supercedes Mortgagee Letter 89-24, FHA’s prior instructions on 1-year ARMs, and incorporates the two paragraphs from Mortgagee Letter 98-1 which apply to ARMs. This Mortgagee Letter contains a definition section at the end. Highlights of the Final Rule

In addition to 1-year ARMs, under this rule change, FHA may insure ARMs on single-family properties that have interest rates that are fixed for the first three years, five years, seven years or ten years of the mortgage term and adjusted annually thereafter. The 1-, 3- and 5-year ARMs allow a one percentage point annual interest rate adjustment after the initial fixed interest rate period and a five percentage point interest rate cap over the life of the loan. The 7- and 10-year ARMs allow a two percentage point annual interest rate adjustment after the initial fixed interest rate period and a six percentage point interest rate cap over the life of the loan.

The final rule also requires a pre-loan disclosure. A mortgagee must provide the mortgagor, at the time of loan application, a written explanation of the features of the adjustable rate mortgage consistent with requirements applicable to variable rate mortgages secured by a principal dwelling under the Truth-In-Lending Act (TILA), “Regulation Z,” at 15 USC 1601, 12 CFR §226.18. FHA will not provide these disclosures. 2 Programs Eligible for Hybrid ARMs These products may be used on owner-occupied principal residences only for loans to be insured under sections 203(b)(single-family mortgage insurance), 203(h)(disaster victims), 203(k)(rehabilitation loans) and 234(c)(mortgage insurance on condominium units). Lenders are not permitted to make ARMs to nonprofits (including those normally eligible as mortgagors) and units of government. Frequency of Interest Rate Changes Interest rate adjustments must occur on an annual basis, except that the first adjustment may occur no sooner than:

1-year ARMs - no sooner than 12 months nor later than 18 months 3-year ARMs – no sooner than 36 months nor later than 42 months 5-year ARMs – no sooner than 60 months nor later than 66 months 7-year ARMs – no sooner than 84 months nor later than 90 months 10-year ARMs – no sooner than 120 months nor later than 126 months

Pre-loan Disclosure

Mortgagees must make available to the mortgagor, at the time of loan application, a written explanation of the features of an ARM consistent with the disclosure requirements applicable to variable rate mortgages secured by a principal dwelling under TILA. Since mortgage lenders already prepare their own disclosures for FHA 1-year ARMs as well as conventional ARMs, FHA will rely upon lenders to comply with TILA and will not provide disclosures for these products. On the date of the loan application, the lender must explain fully and in writing to the prospective mortgagor, the nature of the proposed obligation. A hypothetical monthly payment schedule that displays the maximum potential increases in monthly payments for the term of the ARM must be provided to the applicant. For example, a 7-year ARM payment schedule would show the maximum potential increases over the three years following the initial fixed interest rate period of 7 years.

Note: Examples will differ depending on the caps, i.e., 1/5 vs. 2/6. The hypothetical payment schedule will illustrate the maximum increases over the shortest possible time frame.

Underwriting The ARM loan will be processed and underwritten using the initial interest rate negotiated between the lender and borrower, as stated in the Form HUD-92900-A, Addendum to Uniform Residential Loan Application. Mortgage credit processing shall be in accordance with existing instructions except as modified below: 3

a. An adjustable rate mortgage disclosure statement, signed by all borrowers, must accompany the loan application and applicable FHA addenda. The disclosure statement must meet the criteria of the Federal Reserve Board's Truth-in-Lending regulations ("Regulation Z").

b. The periodic mortgage insurance premium (MIP) amount and any termination provisions

will be based on the initial interest rate throughout the term of the loan and regardless of the annual interest rate adjustments to the loan.

c. The initial interest rate, the margin, the date of the first adjustment to the interest rate and the

frequency of adjustments must be specified in the mortgage documents.

d. For all adjustable rate mortgages, regardless of LTV, any form of temporary interest rate buydown is prohibited. If there is a permanent buydown, the underwriting will be based on the rate in the application.

e. ARM loan maturities shall not exceed 30 years.

f. This Mortgagee Letter does not apply to Home Equity Conversion Mortgages.

g. Borrowers choosing the 1-year ARM must qualify for payments based on the contract or

initial rate plus one percentage point (1%). This only applies to the 1-year ARM where the loan to value (LTV) is 95.00 percent or greater. (For this purpose, the LTV is defined as the lesser of the base loan amount divided by the appraiser's estimate of value, or the percentage shown on line 16a of the HUD-92900-PUR or line 14a of the HUD-92900-WS.)

h. Borrowers choosing the 3-, 5-, 7- or 10-year ARMs are to be qualified at the entry level (note) rate (i.e., there is no requirement to underwrite at one percentage point above the note rate as there is for 1-year ARMs).

Adjustable Rate Mortgage and Note For the model adjustable rate mortgage and note, see Handbook 4165.1, Rev 1, Chg 3, Chapter IV and the applicable appendices.

Mortgage lenders are to modify the model adjustable rate note form contained in Handbook 4165.1, to accommodate the type of ARM being offered (i.e., the Change Date, the limits on the interest rate changes associated with the initial fixed rate period of the ARM and the lifetime caps). Amortization Provisions The ARM must be fully-amortizing and contain amortization provisions that allow for periodic adjustments in the rate of interest charged. 4 Maximum Number of ARM Units

The aggregate number of all ARMs insured by FHA in any fiscal year may not exceed 30 percent of the aggregate number of mortgages insured by the Commissioner under Title II of the National Housing Act during the preceding fiscal year. FHA will notify lenders accordingly should it be close to reaching that maximum percentage during any fiscal year. Interest Rate Index Changes in the interest rate charged on an ARM must correspond to changes in the weekly average yield on United States Treasury securities adjusted to a constant maturity of one year, or equivalent, as provided by the Department of the Treasury and found on the Federal Reserve Statistical Release H.15, Selected Interest Rates website at: www.federalreserve.gov/releases. Except as otherwise provided in this Mortgagee Letter, each change in the mortgage interest rate must correspond to the upward or downward change in this index.

To establish the adjusted interest rate, the lender must compare the initial contract interest rate to the sum of the current index figure and the mortgage margin (calculated interest rate). The adjusted interest rate will be the interest rate charged to the mortgagor, subject to the limitations of the annual and lifetime caps for the respective ARM type. The current index figure shall be the most recent index figure available 30 calendar days before the Change Date (effective date of an adjustment to the interest rate as shown in paragraph 5(A) of the model adjusted rate note form.)

Section 203.49 (c) of the regulations has long provided for a method for setting the new interest rate as an alternative to the use of the margin to set the new rate. Section 203.49 (c) states that “(T)o set the new interest rate, the mortgagee will determine the change between the initial (i.e., base) index figure and the current index figure, or will add a specified margin to the current index figure.” However, Ginnie Mae will only purchase ARMs that use the margin method for arriving at the new interest rate. If a lender wishes to use the other method in the regulations for computing the new interest rate, HUD requests that the lender contact the FHA Single Family Program Development Office at 202-708-2121 for further guidance. Method of Calculating Interest Rate Adjustments

The mortgagee and the borrower negotiate the initial interest rate and margin. The margin must be constant for the entire term of the mortgage. To calculate the annual adjustments to the initial interest rate:

A. Determine the current index. "Current Index" means the most recent Index figure available 30 days before the Change Date.

The index used, based on the weekly average yield on United States Treasury securities adjusted to a constant maturity of one year, must be the one effective on the date thirty (30) calendar days before the Change Date. The Federal Reserve Board Statistical Release H.15 5 is published weekly on Monday, or, on Tuesday, if Monday is a Federal holiday. The index figure shown on that release is effective the day it is issued until such time a new H.15 index is published.

The following are examples of the proper index figure to use when the 30th calendar day falls on:

1. A Monday that is a business day. Use the index figure contained in the H.15 release

issued that Monday, if the 30th calendar day prior to a Change Date and the issue date of an H.15 release both occur on the same day, i.e., they both occur on a Monday.

2. A Monday that is a Federal holiday. Use the index figure in the H.15 release issued the prior

week if the 30th calendar day before the Change Date falls on a Monday that is a Federal holiday.

3. A day of the week other than Monday. Use the index figure in the H.15 release issued on

the Monday of that week (or issued on Tuesday if that Monday is a Federal holiday).

For example, assume a December 1, 2003 Change Date. Thirty (30) calendar days before December 1 is Saturday, November 1. The correct index figure to use is the one contained in the H.15 release issued on Monday of that week, which is October 27.

B. Determine the calculated interest rate. This is the current index plus the margin (the number of basis points identified as "margin" in paragraph 5(C) of the model adjustable rate note) rounded to the nearest 1/8th of one percentage point (0.125 percent). This will comply with Ginnie Mae's requirement that the mortgages placed into Ginnie Mae pools must be rounded to the nearest 1/8th of one percentage point at each Change Date.

C. Compare the calculated interest rate (index plus margin, rounded to the nearest 1/8th of one percentage point) to the existing interest rate (rate in effect for the preceding 12 months) to determine the new adjusted interest rate. If the calculated interest rate is:

1. Equal to the existing interest rate, the adjusted interest rate will be the same as the existing interest rate.

2. Less than the existing interest rate:

6 a. For 1-, 3-, and 5-year ARMs, if the calculated interest rate is less than one percentage point (100 basis points) higher or lower than the existing interest rate, the calculated interest rate will become the new adjusted interest rate.

b. For 7- and 10-year ARMs, if the calculated interest rate is less than two percentage points (200 basis points) higher or lower than the existing interest rate, the calculated interest rate will become the new adjusted interest rate.

3. More than the existing interest rate:

a. For 1-, 3-, and 5-year ARMs, if the new calculated interest rate is more than one percentage point (100 basis points) higher or lower than the existing interest rate, the adjusted interest rate will be limited to one percentage point higher or lower than the existing interest rate. Index changes in excess of one percentage point (100 basis points) may not be carried over for inclusion in an adjustment in a subsequent year.

b. For 7- and 10-year ARMs, if the calculated interest rate is more than two percentage points (200 basis points) higher or lower than the existing interest rate, the calculated interest rate will become the adjusted interest rate. Index changes in excess of two percentage points (200 basis points) may not be carried over for inclusion in a subsequent year.

Adjustments in the interest rate over the entire term of the mortgage may not result in a change in either direction of more than five percentage points (500 basis points) from the initial contract interest rate for 1-, 3-, and 5-year ARMs or six percentage points (600 basis points) for 7- and 10-year ARMs.

D. An adjusted interest rate becomes effective on the Change and thereafter will be deemed to be the existing interest rate. The new interest rate will remain in effect until the next Change Date. During the term of the mortgage, each adjustment will be effective on the same date of each succeeding year.

Method of Rate Changes Interest rate changes may only be implemented through adjustments to the mortgagor’s monthly payments. Computation of the Monthly Installment

If there is a new interest rate on the mortgage as a result of the above calculations, a new monthly payment must be determined. The monthly payment attributable to principal and interest will be calculated by determining the amount that is necessary to fully amortize the unpaid principal balance during the remaining term of the mortgage. For this purpose, the unpaid principal balance 7 shall mean that which would be due on the Change Date if there had been no default in any payment, but reduced by the amount of any prepayments to principal. (Accordingly, the mortgagee must credit all eligible prepayments, but must not debit any delinquency.) Escrow requirements will then be added to principal and interest to arrive at the new monthly payment.

Since interest is payable on the first day of the month following the month in which it accrued, the borrower will begin to pay the new monthly payment 30 days after the Change Date, provided the borrower is given proper notice as required under the Annual Disclosure section of this Mortgagee Letter.

All ARM adjustments affect interest percentages only; negative amortization is not permitted. Annual Adjustment Notice

At least 25 days before any adjustment to a mortgagor’s monthly payment may occur, the mortgagee must advise the mortgagor of the new mortgage interest rate, the amount of the new monthly payment, the current index, and how the payment adjustment was calculated. There are two basic steps which the mortgagee must take each year with respect to the interest rate adjustment:

Step 1: Make the computation to adjust the interest rate and the monthly payments. The first adjustment to the interest rate will become effective on the day specified in paragraph 5A of the ARM Note (Change Date) and thereafter each adjustment will be effective on the same date of each succeeding year during the term of the mortgage. (As previously noted, the new monthly payment is effective 30 days after the Change Date.)

Step 2: At least 25 days before any adjustment to a mortgagor’s monthly payment may occur, the mortgagee must advise the mortgagor of the new mortgage interest rate, the amount of the new monthly payment, the current index, and how the payment adjustment was calculated.

The mortgagee's obligation to compute, adjust the interest rate, if necessary, and give notice to the

mortgagor on the prescribed dates, is not affected by delinquencies or foreclosures so long as the mortgage debt exists. It is the mortgagee's responsibility to see that its collection actions continually update the mortgage debt. Notice of any adjustment to the interest rate and monthly payment, increase or decrease, must be mailed to the mortgagor at least 25 days prior to the change in payment. (If an existing mortgage provides for 30 days notice, that provision must be followed.) Our rule concerning the timing of the annual notice of adjustment is consistent with Federal Home Loan Bank Board (FHLBB) regulations and policy. 8

The Adjustment Notice must contain (a) the date the Adjustment Notice is mailed, (b) the Change Date, (c) the existing interest rate, (d) the adjusted interest rate, (e) the current Index and publishing date, (f) the method of calculating the adjustment to the monthly payments, (g) the amount of the adjusted monthly payments, and (h) any other information which may be required by law from time to time. The Notice should contain other relevant information such as an explanation of why the adjusted interest rate is less than the calculated interest rate when the cap is reached.

The content of the Adjustment Notice must meet the criteria of 24 CFR 203.49(h).

It is recommended that the Notice be sent to the mortgagor by Certified Mail, Return Receipt Requested. However, a Notice addressed and mailed via first class mail to all property owners identified on the mortgagee's records shall be sufficient unless the mortgagors' whereabouts are known to be elsewhere. A Notice must be given each year, even if the existing interest rate does not change.

For HUD review purposes, lenders must keep evidence that timely notice has been given, and evidence of the annual adjustment computations retained for the mortgage term. A file copy of the suggested HUD annual adjustment notice will be sufficient to satisfy this requirement. However, should disputes arise as to timely notice or as to the annual adjustment computations, compliance with our suggested methods may not satisfy local legal interpretations of the mortgage provisions in determining whether the evidence was sufficient. Lenders should, therefore, be guided by the advice of counsel in matters concerning the type and duration of record retention.

The mortgagee's collection personnel should be alerted to the prospect of Notice not being received by the mortgagor, and should take appropriate remedial action when necessary. If the mortgagor's payments do not reflect the increase or decrease recited in the Notice, a follow-up call should be made to determine if the Notice was received. If it is determined that the Notice was not received, a duplicate should be mailed promptly.

Failure to Provide Timely Notice If the mortgagee fails to provide notice for more than one year, an Adjusted Interest Rate must be determined for each omitted year because the calculations for each year affect the rate for subsequent years. The one and two percentage point limitations, and five and six percentage point caps are applicable each year and must be taken into consideration in determining the new Interest Rate. The mortgagee's failure to provide Notice in advance of each Change Date results in penalties (to be found in the Note) to the mortgagee.

Although the new interest rate may increase, the mortgagee is prevented from collecting any increase in payments until such time the Notice has met the required 25 days advance notice requirement. If timely notice is not provided, the lender forfeits its right to collect the increased amount and the borrower is relieved from the obligation to pay the increased payment amount. 9

In the event that the new interest rate was to decline, the failure of the mortgagee to provide proper Notice would result in overpayments until the mortgage rate was properly adjusted. In such case, the mortgagee must refund the excess with interest, at a rate equal to the sum of the Margin and the Index in effect on the Change Date, from the date of the excess payment to the date of repayment. The borrower has the option of a cash refund or application of the excess to the unpaid principal balance of the mortgage, after application of the refund to any existing delinquency. Failure to Provide Accurate Notice

If the mortgagee miscalculates the interest rate and/or the monthly payment, and the error(s) are reflected in the Notice, HUD takes the position that the errors need to be corrected. However, HUD takes no position as to whether an erroneous Notice would constitute a failure to provide notice under the terms of the mortgage contract. This is a legal matter subject to local law and court interpretation. Sales, Assignments and Transfers of Servicing Among Mortgagees

It is the responsibility of the transferor (seller) to provide the transferee with complete servicing records reflecting total compliance with ARM disclosure and reporting requirements. Although HUD regulations require the transferee/assignee to assume all servicing obligations, we do not intend that a negligent ARM mortgagee-transferor be permitted to avoid its disclosure obligations. In the event that a failure of Notice or other error is discovered, it shall be the responsibility of the mortgagee-transferor who was holding the loan when the failure occurred, to reimburse the mortgagee currently holding the loan, where any burden of refund to the mortgagor is required. Assumptions Lenders should encourage sellers to disclose the terms of an existing ARM in any sales transaction; however, when an assumption takes place both the seller and the lender should assume responsibility for notifying the purchaser (assumptor) about the terms and conditions of the ARM. As soon as the lender becomes aware of an assumption and has the name of the purchaser, it should provide the purchaser with a copy of the original Disclosure Statement and an explanatory letter addressing the ARM obligations. Documented acknowledgement of the assumptor’s receipt of this information is advisable. For assumption transactions which require a creditworthiness review or in cases where a release from personal liability is requested and approved, the lender must prepare a new Disclosure Statement to ensure that the purchaser is aware of the ARM obligation. Processing of the HUD-92210, Request for Credit Approval of Substitute Mortgagor, and/or HUD-92210.1, Approval of Purchaser and

Release of Seller or other similar forms used by the lender, must be based on the interest rate in effect at the time the complete credit review package is submitted to the DE Underwriter. 10 Statistical Information

To track ARM activity, the following case number suffix codes (Section of the Act ADP Codes) will be indicated on all HUD application addendums (Form HUD-92900) and printed on computer generated mortgage insurance certificates (Form 59100). The suffix codes for DE cases are as follows:

Eligible Program Section of the Act Suffix Code – Direct

Endorsement 203(b) 729 223(e) 829

203(k) first lien 730 234(c) 731

247 - Hawaiian Homelands

780

248 - Indian Lands 788 203(k)- Condominium 815

Product Identifier

In addition to existing Automated Data Processing (ADP) codes assigned to ARMs, a hybrid ARM-type indicator has been added to FHA’s Computerized Home Underwriting Management System (CHUMS). When submitting loan data to FHA via the FHA Connection or its functional equivalent, if an ARM is indicated by an ADP code, the lender must also identify the type of ARM by selecting the 1-, 3-, 5-, 7- or 10-year ARM-type indicator. This process is less likely to result in errors than adding additional ADP codes for each individual hybrid ARM offering. Definitions INDEX The weekly average yield on United States Treasury securities adjusted to a

constant maturity of one year (published in the Federal Reserve Bulletin H.15). See ARM Note.

CURRENT INDEX The most recently available Index published 30 calendar days before the Change

Date. CHANGE DATE The effective date of an adjustment to the interest rate (called the Interest Rate

Adjustment Date by Ginnie Mae). The date is specified in paragraph 5(A) of the ARM Note. (This is not the date on which monthly payments change.)

11 MARGIN The agreed upon number of percentage points added to the Current Index to

determine the Calculated Interest Rate. The number is specified in paragraph 5(C) of the ARM Note, and remains constant for the life of the mortgage.

INITIAL INTEREST The interest rate stated in the note that will be in effect from the date of the RATE first monthly payment for the initial:

12 to 18 months on a 1- year ARM, 36 to 42 months on a 3- year ARM,

60 to 66 months on a 5- year ARM, 84 to 90 months on a 7- year ARM, and 120 to 126 months on a 10- year ARM (See Frequency of Interest Rate Changes above.) CALCULATED The Current Index plus the Margin, rounded to the nearest one-eighth INTEREST RATE of one percentage point (0.125%). The Calculated Interest Rate is used to determine

the Adjusted Interest Rate. ADJUSTED The new interest rate effective for the twelve month period following INTEREST RATE each Change Date. (The Adjusted Interest Rate will become the Existing

Interest Rate on the next Change Date.) EXISTING The interest rate in effect immediately prior to any adjustment on the INTEREST RATE pending Change Date.

If you have any questions about this Mortgagee Letter, please contact your local Homeownership Center in Atlanta (888-696-4687), Denver (800-543-9378), Philadelphia (800-440-8647), or Santa Ana (888-827-5605).

Sincerely, John C. Weicher Assistant Secretary for Housing- Federal Housing Commissioner

MORTGAGEE LETTER 2004-11 March 23, 2004

TO: ALL FHA-APPROVED MULTIFAMILY MORTGAGEES SUBJECT: Increase in High Cost Percentage for FHA-Insured Multifamily Housing in High-Cost Areas

Under the Federal Housing Administration (FHA) Multifamily Loan Limit Adjustment Act of 2003, the maximum mortgage amount that the FHA can insure has been increased for Sections 207(c)(3), 213(b)(2)(B)(i), 220(d)(3)(B)(iii)(III), 221(d)(3)(ii)(II), 221(d)(4)(ii)(II), 231(c)(2)(B), and 234(e)(3)(B) of the National Housing Act.

The amount that the Secretary may increase the dollar amount limitations (Basic Limits) contained in the above sections has been increased from 110 percent to 140 percent on a geographic basis.

In addition, the amount that the Secretary may increase the Basic Limits in the above sections on a

project-by-project basis has been increased on a two-tier system: 1. “High cost areas” may be increased by up to 170 percent above the Basic Limits; and, 2. All other areas (with the exception of Alaska, Guam, Hawaii, and the U. S. Virgin Islands) may

be increased by up to 140 percent above the Basic Limits.

The Department has prepared a list of High Cost Areas that are eligible for the maximum 170 percent increase. This list is attached, and will also be posted on the HUD website along with the list of Base City High Cost Percentages for FHA Statutory Mortgage Programs for calendar year 2004, and the new limits for Section 207 Manufactured Housing Parks and Section 213 Cooperative Housing.

Please note that the 2004 Base City High Cost Percentages, and the list of High Cost Areas,

will become effective on April 2, 2004. For projects that are scheduled to close before April 2, 2004, the 2003 Base City High Cost Percentages must be used.

Sincerely, John C. Weicher Assistant Secretary for Housing– Federal Housing Commissioner Attachment

April 2, 2004

MORTGAGEE LETTER 2004-12 TO: ALL APPROVED MORTGAGEES ALL HOME EQUITY CONVERSION MORTGAGE COUNSELORS SUBJECT: Revised “Residential Loan Application for Reverse Mortgages”

Required for Home Equity Conversion Mortgage (HECM)

This Mortgagee Letter informs Mortgagees and HECM Counselors that the form Fannie Mae 1009 “Residential Loan Application for Reverse Mortgages,” shared by the Federal National Mortgage Association (Fannie Mae) and the Federal Housing Administration (FHA) has been revised. The “Residential Loan Application for Reverse Mortgages” form is a requirement in conjunction with form HUD-92900-A, “HUD/VA Addendum to Uniform Residential Loan Application,” for all HECM loan applications.

Mortgagees and HECM counselors may use the new form immediately. Mortgagees will be

required to use the new form for all cases submitted for case number assignments 30 days after the date of this Mortgagee Letter.

Revisions to Fannie Mae 1009 - “Residential Loan Application for Reverse Mortgages”

Fannie Mae 1009, “Residential Loan Application for Reverse Mortgages,” form has been modified to reflect compliance with the Home Mortgage Disclosure Act (HMDA), the USA Patriot Act (Pub. L. 107-56, 115 Stat. 272, 2001) and current Office of Management and Budget (OMB) standards for reporting race and ethnicity.

The following changes are made to the Fannie Mae 1009:

1. Section III. Borrower Information is modified to reflect the actual date of birth.

2. Section III. Borrower Information is modified with additional line items to provide for a mailing address when it is different from the subject property address.

3. Section VII. Acknowledgement and Agreement is modified for clarification and to eliminate the need for a lender to modify the Acknowledgement and Agreement when the application relates to a second mortgage. The new language is consistent with the revised Uniform Residential Loan Application (URLA) Form and conforms with amendments to the HMDA.

4. Section VIII. Information for Government Monitoring Purposes is changed to reflect the modified race and ethnicity classifications.

Information Collection Requirements The information collection requirements referred to in this Mortgagee Letter have been approved by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). The OMB number issued for this requirement is OMB 2502-0524.

If you have any questions concerning this Mortgagee Letter, please contact your local Homeownership Center (HOC), in Atlanta (888) 696-4687, Denver (800) 543-9378, Philadelphia (800) 440-8647, or Santa Ana (888) 827-5605 (these are all toll free numbers).

Sincerely,

John C. Weicher

Assistant Secretary for Housing-


Attachments

April 9, 2004


TO: ALL APPROVED MORTGAGEES SUBJECT: Credit Bureau Score Requirements for FHA-Insured Mortgages

The Federal Housing Administration (FHA) requires that mortgagees obtain a credit report to underwrite FHA-insured mortgages. Typically, a credit bureau score is provided with this credit report. Effective for all loan applications signed by borrowers on or after May 1, 2004, in those instances where a credit score is obtained, lenders will be required to enter those scores into the FHA Connection (or functional equivalent). The three national consumer-reporting agencies (previously called “credit bureaus”) that provide credit bureau scores are Equifax, Experian, and TransUnion. Each independently collects data from creditors, public records agencies, and other sources of financial information, and from this information can generate and provide a credit score. The credit bureau score provided by TransUnion is called Empirica®; for Equifax, it is Beacon®; and for Experian it is the Experian/Fair Isaac Risk Model score. If lenders have obtained a credit report that includes credit scores in connection with their underwriting of an FHA-insured loan application, these credit scores are to be entered into the FHA Connection. Lenders are reminded that borrowers without credit bureau scores are not disqualified or in any way

considered ineligible for FHA mortgages. FHA’s policies regarding nontraditional credit, as described in Handbook HUD-4155.1 REV-5, remain intact. Additionally, certain borrowers, e.g., approved nonprofits, state and local government agencies, will also not have a credit bureau score and credit bureau scores are not required for streamline refinance transactions. If a borrower is not required to have a credit bureau score, as described above, or one is not generated due to insufficient trade lines on the credit report, the lender must indicate this by entering “n/a” in the credit bureau score field in the FHA Connection.

Mortgages that are risk scored by FHA’s TOTAL (Technology Open To Approved Lenders)

Mortgage Scorecard already have the credit bureau scores entered and no additional credit bureau score entries are necessary. TOTAL generates a risk rating by examining the credit bureau scores and other variables associated with the mortgage application.

2

The FHA Connection has been modified to capture lender input of borrower credit bureau scores. It will not, however, allow for a manual re-entry of a credit bureau score once the loan application is evaluated by TOTAL. If a mortgage is scored through an AUS employing TOTAL, the credit bureau scores remain permanent (unless re-scored through the AUS) and cannot be changed with manual input.

If you have any questions regarding this Mortgagee Letter, please contact your Homeownership Center (HOC) in Atlanta (888-696-4687), Denver (800-543-9378), Philadelphia (800-440-8647), or Santa Ana (888-827-5605).

Sincerely,

John C. Weicher Assistant Secretary for Housing-


The information collection requirements contained in this mortgagee letter have been approved by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB control number 2502-0059. In accordance with the Paperwork Reduction Ac, HUD may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a currently valid OMB control number.

April 12, 2004 MORTGAGEE LETTER 2004-14

TO: ALL APPROVED MORTGAGEES

SUBJECT: Late Request for Endorsement Procedures

This Mortgagee Letter clarifies procedures for mortgage lenders when submitting mortgage insurance case binders to the Federal Housing Administration (FHA) for endorsement beyond the 60-day limit following closing. It replaces the instructions found in the section “Late Request for Endorsement contained in Chapter 3 of HUD Handbook 4165.1 REV-3. This clarification will help assure that mortgage lenders are in compliance and reduce the number of Notices of Return (NORs) issued by the jurisdictional Homeownership Centers (HOCs). The Department of Housing and Urban Development is also eliminating the need for mortgage lenders to submit explanations for delays, but is requiring certifications of compliance to the late endorsements instructions described below.

A request for insurance endorsement is considered “late” and triggers additional documentation whenever the binder is received by the HOC more than 60 days after mortgage loan settlement or funds disbursement, whichever is later. FHA believes that this is sufficient time for the mortgage lender to assemble the binder, obtain any final documents or signatures, and ship the binder to the appropriate HOC for endorsement processing. Cases Submitted for Reconsideration after NOR

If the HOC returns a case binder to the lender by issuing a NOR (or a subsequent NOR), the HOC must receive the reconsideration request for insurance endorsement within the original 60-day window, or 30 days from the date of issuance of the original NOR, whichever is greater. Cases resubmitted after the expiration of the applicable date must follow the late request instructions below. Also, should the issuance of a subsequent NOR result in the mortgage lender’s resubmission being received after the original 60 day period or the 30 day period set forth for the original NOR, whichever is later, the late endorsement instructions set forth below must be complied with. Late Request for Endorsement Certification by the Mortgage Lender When submitting a late request for endorsement, in addition to including the payment history or ledger, the mortgage lender is required to include a certification, signed by a representative of that lender on company letterhead, which includes the lender’s complete address and telephone

2. number. This certification must be specific to the case being submitted, i.e., identify the FHA case number and the name(s) of the borrower(s) and state that:

1. All mortgage payments due have been made by the mortgagor prior to or within the month due 1,

1 If any payments have been made after the month due, the loan is not eligible for endorsement until

and;

2. All escrow accounts for taxes, hazard insurance and mortgage insurance premiums are current and intact, except for disbursements that may have been made to cover payments for which the accounts were specifically established, and;

3. The mortgage lender did not provide the funds to bring and/or keep the loan current or to bring

about the appearance of an acceptable payment history.

Please note that individuals found making false certifications may have administrative sanctions taken against them including, but not limited to, debarment from participation in HUD’s programs. False certifications may also result in requests for indemnification on the individual mortgages for which false certifications were made. The information collection requirements contained in this document have been approved by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB control number 2502-0557. In accordance with the Paperwork Reduction Act, HUD may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a currently valid OMB control number.

If you have any questions regarding this Mortgagee Letter, please contact your Homeownership Center in Atlanta (888-696-4687), Denver (800-543-9378), Philadelphia (800-440-8647) or Santa Ana (888-827-5605). Sincerely,

John C. Weicher

Assistant Secretary for Housing- Federal Housing Commissioner

six consecutive payments have been made prior to and/or within the calendar month due.

April 9, 2004

MORTGAGEE LETTER 2004-15 TO: ALL APPROVED MORTGAGEES ATTENTION: Single Family Servicing Managers SUBJECT: National Servicing Center Address Change The purpose of this Mortgagee Letter is to notify mortgagees that the Office of Single Family Asset Management’s National Servicing Center (NSC) has relocated to a new address.

Effective immediately, please use the following address for all correspondence for the National Servicing Center’s Oklahoma City office:

301 N.W. 6th Street, Suite 200 Oklahoma City, OK 73102 The telephone number will remain the same: Phone: (888) 297-8685

The NSC web page (http://www.hud.gov/offices/hsg/sfh/nsc/nschome.cfm) is updated with the new address but the NSC email address ([email protected]) stays the same. Direct dial-in access to individual NSC staff is changing from 405-553-7xxx to 405-609-8xxx. The last three digits of the previous number remain the same.

All questions related to this mortgagee letter may be directed to Michael B. O’Donnell, Director of the National Servicing Center, at (888) 297-8685.

___________________________________ John C. Weicher, Assistant Secretary for Housing - Federal Housing Commissioner

April 13, 2004

MORTGAGEE LETTER 2004-16 TO: ALL APPROVED MORTGAGEES

ATTENTION: SINGLE FAMILY SERVICING MANAGERS SUBJECT: A New Interactive Website for Preservation and Protection Cost Allowables

The purpose of this Mortgagee Letter is to announce a new interactive website for preservation and protection (P&P) cost allowables and variations to general requirements. The website provides scheduled cost allowables, variations from general service requirements and links to pertinent P&P Mortgagee Letters. The website will also provide for an interactive email link to HUD’s Homeownership Centers for questions related to the information on the website only, and not for case specific property issues. The URL for this site is:

http://www.hud.gov/offices/hsg/sfh/reo/pandpsched/index.cfm

Subsequent revisions and updates to preservation and protection guidance and cost allowables will first be published as mortgagee letters and posted to HUDCLIPS, then updated to the P&P website.

The Department believes providing access to P&P cost allowables on-line will increase availability

of vital information to the industry. As a result, time frames required to preserve and protect vacant FHA-insured properties will be reduced by providing real time cost allowables on-line.

If you have any questions, please contact Richard Dunne of the Asset Management and Disposition

Division at (202) 708-1672.

__________________________________________ John C. Weicher Assistant Secretary for Housing- Federal Housing Commissioner

April 21, 2004 MORTGAGEE LETTER 2004-17 TO: ALL APPROVED MORTGAGEES SUBJECT: Social Security Number Validation

To help reduce incidents of identity theft and fraud in its mortgage insurance programs, the Federal Housing Administration (FHA) recently began applying system edits to validate the issuance of individual Social Security Numbers (SSN) used by borrowers obtaining FHA-insured mortgages. These edits are applied as soon as the mortgage lender enters a borrower’s SSN into the FHA Connection (or functional equivalent). SSN Prefix Combination Check

FHA’s edits will validate the prefix combination of the SSN using information provided by the Social Security Administration (SSA). The SSA publishes a list of the highest prefix numbers assigned to date. FHA obtains this information and uses it to validate the SSN prefix combination provided by the mortgage lender.

Once entered in the FHA Connection, the SSN is validated against the SSA’s prefix combination list.

If the entry is found on the list, then that SSN is considered as issued and processing may continue. If the entry is not on the list of SSA issued numbers, all further processing will cease and this message will be displaced. "SSN NOT ISSUED BY SOC SEC ADMIN". This procedure applies to all mortgage insurance applications including streamline refinances. Lenders must then correct the SSN entries to allow for processing to continue, or cancel the loan application in CHUMS since the borrower is unable to provide a valid SSN.

The SSN validation is processed when the SSN is first entered into the FHA Connection on the Case Number Assignment, Borrower/Address Change, or Insurance Application screens. Similarly, if an SSN is later changed and not found on the SSA’s prefix list, an error message will be issued and no further processing can occur.

The same information used by FHA is available to lenders through the SSA website at:

http://www.ssa.gov/employer/highgroup.txt. The logic for determining how SSA assigns these numbers is described at: http://www.ssa.gov/history/ssn/geocard.html.

2 Death Master File Check

In addition to the prefix validation, on March 1, 20

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