Important FHA notice for all mortgagees:

Delayed Implementation Date for New Requirements in ML 2009-28

Enactment of ML 2009-28, Appraiser Independence, will be delayed until February 15, 2010. ML09-28 (originally planned for a January 1, 2010 implementation) has two parts:  a) prohibition of mortgage brokers and commission-based lender staff from the appraisal process, and b) appraiser selection in FHA Connection.  The effective date for both sections of this guidance will now take effect for all case numbers assigned on or after February 15, 2010.  This extension will provide FHA and lenders additional time to adjust systems to accommodate the changes.

Detailed instructions on changes to FHA Connection will be issued in a new mortgagee letter. However, lenders should be aware that the requirement for inputting the appraiser ID and the appraisal assignment date in the FHA Connection case number assignment screen will be removed.  Instead, lenders will be required to enter all appraisal data, including the appraiser ID, in the Appraisal Update Screen once the completed appraisal is received by the lender and prior to closing the loan.

Delayed Implementation Date for ML 2009-51

ML 2009-51, Adoption of the Appraisal Update and/or Completion Report, states an effective date of January 1, 2010. The effective date is being extended and will now apply to all case numbers assigned on or after February 15, 2010. This extension will provide additional time needed by FHA and lenders to adjust their systems to accommodate use of the form.

Beginning April 1st, 2009, for all FHA appraisals your appraiser must:

• Complete the Market Conditions Addendum (Fannie Form 1004MC/Freddie Form 71)

• Provide at least 2 comparable sales within 90 days of appraisal date

• Provide a minimum of 2 active listings or pending sales in addition to the 3 closed comparables

• Insure that active listings and pending sales are market tested and have reasonable market exposure to avoid the use of over priced properties as comparables.

• Provide bracketed listings using both dwelling size and sales price when possible

• Adjust active listings to reflect the List To Sales Price Ratio

• Adjust pending sales to reflect contract sales price when possible

• Include the original list price and any revised list prices

• The appraiser must verify data via local parties to the transaction: agents, buyers, sellers, lenders, etc. (if the sale cannot be verified by a party then public records or other impartial data source that can be replicated may be used). A Multiple Listing Service (MLS) by itself is not considered a verification source.

• Provide a reconciliation of adjusted values of active or pending sales with adjusted values of closed comparable sales

• Provide Absorption Rate Analysis

• Indicate any known or reported sales concessions on active and pending sales

HUD also warns that “Direct Endorsement Lenders are reminded that if the appraiser they selected provides a poor or fraudulent appraisal that leads FHA to insure a mortgage at an inflated amount, the lender is held responsible equally with the appraiser for the integrity, accuracy and thoroughness of an appraisal submitted to FHA.”

You can find the full text of the update here.

You can find a link to Fannie Mae’s presentation on completion of the Market Conditions Addendum here.

Although this Mortgagee Letter is intended for appraisers, I encourage all loan officers and real estate agents to learn it as well. This helps to avoid confusion when underwriters ask for extra conditions, and helps avoid surprises because the experts weren’t up to speed on the guidelines.

The guidelines already included additional requirements that many loan officers have overlooked when taking applications for 95% loan to value cash out refinances:

• The subject property must have been owned by the borrower as his or her principal residence for at least 12 months preceding the date of the loan application.
• If said property is encumbered by a mortgage, the borrower must have made all of his/her mortgage payments within the month due for the previous 12 months, i.e., no payment may have been more than 30 days late and is current for the month due.
• The property that is security for the refinanced mortgage must be a 1- or 2-unit dwelling.
• Subordinate financing may remain in place, but subordinate to the FHA insured first mortgage, regardless of the total indebtedness or combined loan-to-value ratio, provided the homeowner qualifies for making scheduled payments on all liens.
• Any co-borrower or co-signer being added to the note must be an occupant of the property.  Non-occupant owners may not be added in order to meet FHA’s credit underwriting guidelines for the mortgage.

In Mortgagee Letter 2008-9, FHA already made it a requirement that two appraisals were required when the loan amount exceeds $417000. Those loans are also limited to 85% LTV (loan to value).

Now HUD has extended this requirement to any loans with an LTV above 85% beginning with any case number issued on or after January 1, 2009.

From Mortgagee Letter 2008-40:

In addition, FHA will now require a second appraisal for all cash-out refinances where the LTV, exclusive of the UFMIP, will exceed 85 percent of the appraiser’s estimate of value.  This second appraisal requirement applies regardless of the loan amount or the location of the property, i.e., whether the property is in a “declining area” or is not.  This second appraisal requirement for cash-out refinances is effective for all case number assignments on or after January 1, 2009 and is to adhere to the instructions set forth in ML 2008-09.  Please also note that cash-out refinances with LTVs exceeding 85 percent will be over-selected for post-endorsement technical reviews (PETR) to assure the quality of the underwriting.

Mortgagee Letter 2008-09 sets out the requirements for the 2nd appraisal. It must be done by an FHA approved appraiser engaged by the lender and the costs may be passed on to the borrower. If the second appraisal has an estimated value more than 5% below the first appraisal, the maximum mortgage must be determined based on the lower appraised value.

If you are a mortgage broker, please take note of that last sentence. This means that wholesale lenders are going to be picking these loans apart even more closely than they have been. And they haven’t exactly been easy with the underwriting lately to begin with. Also, remember that the borrower should be prepared to have as much as $900 of their cash out eaten up by appraisal fees!

If you would like to find an easy way to keep up with all these guidelines in an organized, easy to read handbook (HUD doesn’t understand what those terms mean), then check out http://fhatraininingsource.com.

No, it isn’t. And knock on wood, it never will be. FHA does provide an opportunity for borrowers who have had credit problems to get a loan. But the differences between FHA doing that and subprime loans doing that are that FHA requires common sense from the underwriter and FHA holds the lender accountable for their default rate. There isn’t an arbitrary rule that says “OK, you’ve been late 1×30 on your mortgage in the last twelve months, so you qualify. We don’t care why it happened, or whether the situation is likely to happen again in the next 3 months. You fit the matrix, you get the loan.”

One of the other issues I hear gripes about from loan officers is the FHA appraisal requirements. Given that my point of reference is from a time when those requirements were much more stringent than they are now, this is actually amusing to me.

This morning while catching up on the news, I came across this post by Tanta at Calculated Risk referencing the FHA appraisal process in a different light. Turns out the condition of some properties is resulting in lenders actually walking away from properties they could foreclose on because they don’t even want to be responsible for the property taxes! After reading that post, no one can say the mortgage landscape hasn’t changed. Good grief!