How Will FHA Reforms Impact the Mortgage Industry? Richard Andreano, Jr. Heather C. Hutchings
Background In the middle of September 2009, HUD announced that when FHA's annual independent actuarial study is completed this November, it likely will show that the FHA capital reserve ratio dropping below the required 2% level. The fall in the reserve ratio is expected despite existing total reserves of more than $30 billion, which represents more than 4.4% of the FHA insurance in force. To address the capital reserve ratio, HUD announced various steps. One is the hiring of a Credit Risk Officer. This will be the first Credit Risk Officer in the history of FHA. Other steps involve changes to FHA policies. We will address the current and proposed changes. 2
Recent FHA Reform Items Mortgagee Letters 2009-28, 2009-29, 2009-30, 2009-36 Appraisal Issues Mortgagee Letter 2009-31 Helping Families Save Their Homes Act of 2009, FHA Changes Mortgagee Letter 2009-32 Revised Streamline Refinance Transactions Program Requirement Changes by Rulemaking Elimination of Loan Correspondent Approval Increased Net Worth 3
Appraisal Issues ML 2009-28, Appraiser Independence Requirements effective for case numbers assigned on or after January 1, 2010. Appraiser selection restriction. Appraiser communication restriction. Use of appraisal management companies neither required nor prohibited. Appraiser independence safeguards. Appraiser competency. 4
Appraisal Issues ML 2009-28, Appraiser Independence FHA Selection Restriction: Appraisers cannot be selected, retained or compensated by mortgage brokers or any member of a lender s staff who is compensated on a commission basis tied to the successful completion of the loan ( commissioned staff ). A lender s commissioned staff or staff who report ultimately to any officer not independent of the loan production staff and process may not order or manage an appraisal assignment. Ability to use appraisal obtained by another lender pursuant to ML 2009-29. 5
Appraisal Issues ML 2009-28, Appraiser Independence HVCC Selection Restriction: Appraisers cannot be selected, retained or compensated by a third party, including a mortgage broker. A lender s commissioned staff or staff who report ultimately to any officer not independent of the loan production staff and process may not order or manage an appraisal assignment. Ability to use appraisal obtained by another lender under specific conditions. 6
Appraisal Issues ML 2009-28, Appraiser Independence FHA Communication Restriction: A lender s commissioned staff or staff who report ultimately to any officer not independent of the loan production staff and process may not have substantive communications with an appraiser relating to or having an impact on valuation. The Direct Endorsement (DE) underwriter who has responsibility for the quality of the appraisal report is allowed to request clarifications and discuss with the appraiser components of the appraisal that influence its quality. 7
Appraisal Issues ML 2009-28, Appraiser Independence HVCC Communication Restriction: A lender s commissioned staff or staff who report ultimately to any officer not independent of the loan production staff and process may not have any substantive communications with an appraiser or appraisal management company relating to or having an impact upon valuation. 8
Appraisal Issues ML 2009-28, Appraiser Independence FHA and HVCC Exception: If absolute lines of independence cannot be achieved as a result of a lender s small size and limited staff, the lender must be able to clearly demonstrate that it has prudent safeguards to isolate its collateral evaluation process from influence or interference from its loan production process. 9
10 Appraisal Issues ML 2009-28, Appraiser Independence Use of appraisal management companies (AMCs) neither prohibited nor required. It is the lender s responsibility to ensure that: Appraisers are not prohibited from recording their fee in the appraisal report; Appraiser compensation is customary and reasonable for services performed in the market area where the property is located; Appraisal fee does not include a fee for management of appraisal process or any other activity other than performance of the appraisal; AMCs are paid only for actual services related to ordering, processing or reviewing appraisals, and such fees are customary and reasonable in the given market area. HUD does not address how fees to AMCs should be disclosed to the borrower.
11 Appraisal Issues ML 2009-28, Appraiser Independence Appraiser independence safeguards Safeguards are similar, but not identical, to HVCC requirements. FAQs have been issued on HVCC for clarification and will likely be needed from HUD on the safeguards related to FHA loans.
12 Appraisal Issues ML 2009-28, Appraiser Independence Appraiser competency Just because an appraiser is on the FHA Appraiser Roster does not mean that he or she is competent to perform an appraisal on the particular property type or in the particular geographic area. Mortgagees remain responsible for assuring the quality and accuracy of the appraisal.
13 Appraisal Issues ML 2009-29, Appraisal Portability Effective for all case numbers assigned on or after January 1, 2010. FHA has an existing, more formal process than the conventional market when a borrower switches lenders. The Mortgagee Letter addresses whether a second appraisal can be ordered when a borrower changes from one FHA-approved lender to another FHAapproved lender. When an appraisal has already been ordered by and completed for the first lender, the second lender may order a new appraisal only in limited circumstances: The first appraisal contains material deficiencies as determined by second lender s DE underwriter; The first appraisal is performed by an appraiser on the second lender s exclusionary list; The first lender s failure to provide the second lender with copy of appraisal in timely manner would cause a delay in closing.
14 Appraisal Issues ML 2009-30, Appraisal Validity Period Effective for all case numbers assigned on or after January 1, 2010. Appraisals will be valid for 120 days for existing, proposed and under construction properties. Current policy: 6 months for existing properties. 12 months for proposed and under construction properties.
15 Appraisal Issues ML 2009-36, Revised Eligibility Requirements for FHA Roster Appraisers On September 23, 2009, HUD issued this mortgagee letter to remind lenders and appraisers that beginning October 1, 2009, appraisers will be removed from the FHA Appraiser Roster if they are not state certified.
16 Helping Families Save Their Homes Act (P.L. 111-22, May 20, 2009) ML 2009-31, Strengthening Counterparty Risk Management Revised Ineligibility Requirements. Expanded Civil Money Penalties. Advertising Restrictions. Reporting Mortgagee Changes. Submission of Audited Financial Statements.
17 Helping Families Save Their Homes Act ML 2009-31, Strengthening Counterparty Risk Management Revised ineligibility requirements (effective May 20, 2009) To qualify for FHA approval, no officer, partner, director, principal, manager, supervisor, loan processor, loan underwriter or loan originator of mortgagee may be: Suspended, debarred, under a LDP or otherwise restricted; Under indictment for, or convicted of, an offense that reflects adversely on the applicant s integrity, competence or fitness to meet the responsibilities of an approved mortgagee; Subject to unresolved findings in a HUD or governmental audit, investigation or review; Engaged in business practices that don t conform with generally accepted practices of prudent mortgagees or that demonstrate irresponsibility;
18 Helping Families Save Their Homes Act ML 2009-31, Strengthening Counterparty Risk Management Revised ineligibility requirements Identified individuals may not be: Convicted of, or subject to plea of guilty or no contest to, a felony related to participation in the real estate or mortgage loan industry during the 7 years preceding application for licensure or at any time preceding application if the felony involved an act of fraud, dishonesty, breach of trust or money laundering; In violation of the SAFE Act or applicable state law; In violation of any other requirement established by the Secretary. Applications for FHA approval submitted prior to September 18, 2009 that have not yet been approved will be returned for resubmission in accordance with new criteria.
19 Helping Families Save Their Homes Act ML 2009-31, Strengthening Counterparty Risk Management Revised ineligibility requirements SAFE Act provides that applicants for a loan originator license: May not have had a mortgage loan originator license revoked in any governmental jurisdiction, unless revocation was formally vacated; May not have been convicted of, or pled guilty or no contest to, a felony in a domestic, foreign, or military court during the 7-year period preceding the date of the application for licensing and registration; or at any time preceding such date of application, if such felony involved an act of fraud, dishonesty, breach of trust or money laundering;» Exception for pardoned convictions. Must demonstrate financial responsibility, character and general fitness to command the confidence of the community and to warrant a determination that they will operate honestly, fairly and efficiently within the purposes of the SAFE Act. States vary on the elements of the SAFE Act enacted.
20 Helping Families Save Their Homes Act ML 2009-31, Strengthening Counterparty Risk Management Revised ineligibility requirements Recertification (effective September 18, 2009) Mortgagee Letter 2009-31 requires entities already approved by FHA to be in compliance with the new requirements at recertification in order to renew their approval. Approvals that are not approved under the new criteria will expire 30 days after the recertification date.
21 Helping Families Save Their Homes Act ML 2009-31, Strengthening Counterparty Risk Management Civil money penalties (effective May 20, 2009) Secretary may impose a civil money penalty for any knowing and material violation by an owner, officer or director of a mortgagee or lender. Knowingly is redefined to include when a person has actual knowledge or should have known of the acts. Knowingly was previously defined as having actual knowledge of or acting with deliberate ignorance of or reckless disregard for the prohibitions under the Civil Money Penalties section of the National Housing Act. Secretary may impose a civil money penalty for a violation of Title I or II of the National Housing Act or any implementing regulation, handbook or mortgagee letter. Secretary may impose a civil money penalty for any participant in an FHA program causing or participating in any violation of the civil money penalty provisions.
22 Helping Families Save Their Homes Act ML 2009-31, Strengthening Counterparty Risk Management Civil Money Penalties New violations subject to civil money penalties: Origination of an FHA-insured loan by a person that does not hold FHA approval. Use of Federal Housing Administration, Department of Housing and Urban Development, Government National Mortgage Association, Ginnie Mae, HUD, FHA, GNMA or an official seal or logo of HUD without authorization by the Secretary.» Restriction applies to all entities, even those that are not FHA-approved mortgagees.
23 Helping Families Save Their Homes Act ML 2009-31, Strengthening Counterparty Risk Management Advertising Restrictions Effective May 20, 2009, any advertisements and promotional materials related to FHA programs must use entity s business name as registered with HUD (including any DBAs on file with FHA). Effective with assignment of OMB number, mortgagees must maintain a copy of advertisements and promotional materials for 2 years from the date of circulation or use. State laws may include similar limitations with respect to use of name and may impose longer record keeping requirements.
24 Helping Families Save Their Homes Act ML 2009-31, Strengthening Counterparty Risk Management Reporting Mortgagee Changes (effective with assignment of OMB number) New fiscal year end date Requests for change must be submitted 90 days prior to end of lender s current fiscal year. For non-supervised lenders, next audited financial statement submitted cannot have an ending date more than 18 months after submission of the preceding year s audited financials.
25 Helping Families Save Their Homes Act ML 2009-31, Strengthening Counterparty Risk Management Reporting Mortgagee Changes Notification of administrative/regulatory issues Mortgagees must submit immediate written notification to HUD of:» Debarment, suspension, LDP or other sanctions, exclusions, fines or penalties against the mortgagee or any of its officers, partners, directors, principals, managers, supervisors, loan processors, loan underwriters or loan originators pursuant to state or federal law.» Revocation of a state-issued mortgage loan originator license issued under SAFE Act or similar declaration of ineligibility pursuant to state law. Notification must be on company letterhead and signed by a senior officer.
26 Helping Families Save Their Homes Act ML 2009-31, Strengthening Counterparty Risk Management Submission of Audited Financial Statements Effective January 1, 2010, Supervised Mortgagees must submit an audited financial statement to HUD within 90 days of their fiscal year end.
27 Streamline Refinance ML 2009-32, Revised Streamline Refinance Transactions Effective for case numbers assigned on or after November 17, 2009. All Streamline Refinances Seasoning. Payment history. Net tangible benefit. Maximum CLTV. Verification/Certification. Other Points.
28 Streamline Refinance ML 2009-32, Revised Streamline Refinance Transactions Streamline Refinances without an appraisal Maximum insurable amount. Streamline Refinances with an appraisal Maximum insurable amount. Discount points.
29 Streamline Refinance ML 2009-32, Revised Streamline Refinance Transactions All Streamline Refinances Seasoning Borrower must have made at least 6 payments on loan being refinanced. Payment history If the loan being refinanced has less than 12 months payment history, the borrower must have made all payments within the month due. If the loan being refinanced has payment history of 12 months or more, the borrower must have experienced no more than one 30 day late payment in preceding 12 months AND must have made all payments within the month due for the 3 months prior to the date of loan application.
30 Streamline Refinance ML 2009-32, Revised Streamline Refinance Transactions All Streamline Refinances Mortgagee must demonstrate a net tangible benefit to the borrower through one of the following: Reduction in total mortgage payment (total mortgage payment includes PITI, HOA fees, ground rents, special assessments and all subordinate liens):» New total mortgage payment is 5 percent lower than total mortgage payment for loan being refinanced when refinancing from fixed rate to fixed rate, ARM to ARM, GPM to fixed rate, GPM to ARM, 203(k) to 203(b) or 235 to 203(b).
31 Streamline Refinance ML 2009-32, Revised Streamline Refinance Transactions All Streamline Refinances Net tangible benefit (cont d): Refinancing from ARM to fixed-rate mortgage:» The mortgagee letter affirms the previous requirement that the interest rate on the new mortgage must be no more than 2 percentage points above the current rate of the one-year ARM. For hybrid ARMs, total mortgage payment on the new fixed rate mortgage may not increase by more than 20 percent. Reducing term of mortgage:» Loan must be underwritten and closed as a rate and term (no cash-out) refinance transaction.
32 Streamline Refinance ML 2009-32, Revised Streamline Refinance Transactions All Streamline Refinances Maximum Combined Loan to Value Ratio: 125% If there is an appraisal, CLTV is based on the new appraised value. If there is no appraisal, CLTV is based on the original appraised value. Certifications and Verifications Lender must certify on letterhead that borrower is employed and has income at time of loan application. If assets are needed to close, lender must verify and document those assets. Lender must include pay-off statement in case binder. Other Points If available, lender must enter all available credit scores into FHA Connection. Lender may not use TOTAL Scorecard on streamline refinances. If TOTAL Scorecard is used, the loan must be underwritten and closed as a rate and term refinancing. Lender may not use an abbreviated version of the Uniform Residential Loan Application. The mortgagee letter affirms the previous requirement that when a fixed rate is refinanced into a one-year ARM, the interest rate on the new mortgage must be at least 2 percentage points below the interest rate of the current mortgage. Investment properties/secondary residences are not eligible for streamline refinancing to ARMs.
33 Streamline Refinance ML 2009-32, Revised Streamline Refinance Transactions Streamline Refinances without an appraisal. Maximum insurable amount cannot exceed: The outstanding principal balance minus the applicable refund of the UFMIP, PLUS The new UFMIP that will be charged on the refinance.» Outstanding principal balance may include interest charged by the servicing lender when the payoff is not received on the first day of the month but may not include delinquent interest, late charges or escrow shortages.
34 Streamline Refinances ML 2009-32, Revised Streamline Refinance Transactions Streamline Refinances with an appraisal. Maximum insurable amount is the lower of: Outstanding principal balance minus the applicable refund of UFMIP, plus closing costs, prepaid items to establish escrow account and the new UFMIP that will be charged on the refinance; or 97.75 percent of the appraised value of the property plus the new UFMIP that will be charged on the refinance. Discount points may not be included in the new mortgage. If the borrower will pay discount points, the lender must verify the borrower has assets to pay them and other financing costs not included in the new mortgage amount.
35 Streamline Refinances Higher-priced mortgage loan issue. Under Truth in Lending Act rules that were effective on October 1, 2009, there is a new category of loans called "higher- priced mortgage loans" or "HPMLs". An HPML is a loan secured by the consumer's principal dwelling with an annual percentage rate that meets or exceeds an applicable threshold established by the Federal Reserve Board. Lenders are prohibited from making HPMLs without regard to the repayment ability of the consumer, and must verify income and assets relied on, and obligations.
36 Streamline Refinances Higher-priced mortgage loan issue. A concern with FHA loans is the relatively low annual percentage rate trigger for a loan to be an HPML. For the week of October 12, the annual percentage rate trigger for: A 30-year fixed rate loan is 6.43%. A one-year ARM loan is 4.78%.
37 Forthcoming Rules Elimination of Loan Correspondent status. FHA loans can be brokered, but mortgagees will assume responsibility and liability for loans they underwrite and approve. Increase in net worth requirement. Proposal to increase current net worth of $250,000 to $1 million. MBA position on increase. Rules have not yet appeared in the Federal Register.
38 Thank you. Richard Andreano, Jr. Heather C. Hutchings Patton Boggs LLP Washington, DC randreano@pattonboggs.com hhutchings@pattonboggs.com