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From the HUD Mortgagee Letter (with some extra highlighting):

FHA encourages all approved lenders to use FHA’s TOTAL Mortgage Scorecard to obtain risk classifications on each mortgage originated under the FHASecure initiative. If TOTAL renders an “accept/approve,” the mortgagee’s underwriter need not perform a personal review of the borrower’s credit history and capacity to repay. However, in the more likely event that the risk class is a “refer,” the underwriter must:

Total Mortgage Scorecard is FHA’s automated underwriting system. It analyzes all the factors of the loan and either approves it or refers it to an underwriter for manual analysis. Borrowers with upcoming rate adjustments should move heaven and earth to keep their credit clean during the time before their ARM adjusts. Total Mortgage Scorecard has been known to approve mortgages with debt ratios that substantially exceed the standard guidelines when the credit is clean for the past 12 months.

1. Determine that the homeowner has the capacity to make future mortgage payments as well as pay all other obligations. The payment-to-income ratio and debt-to-income ratios remain 31 percent and 43 percent, respectively. Compensating factors are to be provided by the underwriter when the ratios are exceeded.

If borrowers do not take the time to clean up their credit ahead of time, the underwriter will be very reluctant to allow those debt ratios to be exceeded.

2. Analyze the homeowner’s overall credit history, especially payments on the existing mortgage. The underwriter must determine that the homeowner’s mortgage payment history during the 6 months prior to the reset showed no instances of making mortgage payments outside the month due and that other recurring obligations were paid on time. If the borrower was offered partial forbearance after interest rate reset, the underwriter must determine that he/she has made payments under the forbearance agreement in a timely manner.

Note the 6 month time period before the reset in which the mortgage or any forbearance agreement must be paid on time. Again, the key lesson here is to start early to make sure all the correct elements are in place for this program to work. Borrowers should not wait until the last possible minute to begin this process.

3. Provide comments in the “remarks” section of the mortgage credit analysis worksheet that he or she has determined that the cause of the borrower’s inability to make payments was directly related to the increased payment attributable to the reset and not due to a disregard for obligations.

The underwriter must be convinced that the only reason for any late payments was the mortgage payment going up.

• Tax consequences for a borrower when the note holder writes off a portion of the amount to pay off the first mortgage

FHA recognizes that there may be tax consequences resulting from debt relief. However, since FHA does not provide tax guidance, it recommends borrowers—and mortgage lenders—in such situations seek competent tax advice.

At present, if your lender has to write off part of your present mortgage balance in order to fit your loan into this program, the lender will send you a 1099 at the end of the year and you will owe taxes on the money as if it was income you received. Congress is working on changing this in the case of mortgages

• Other considerations of which the mortgagee must be aware when refinancing these mortgages.

The FHASecure initiative for refinancing borrowers harmed by non-FHA ARMs that have recently reset is not to be used to solicit homeowners to cease making timely mortgage payments; FHA reserves the right to reject for insurance those mortgage applications where it appears that a loan officer or other mortgagee employee suggested that the homeowners could stop making their payments, refinance into a FHA insured mortgage, and keep, as cash, the amount of payments not made on time.

As usual, HUD has to protect themselves from scammers working the system to put extra money in their pockets!


Filed under: FHASecure

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