FHA Makes “Economic Event” an “Extenuating Circumstance”
By: Tracey Rumsey, Staff Underwriter & Karen Deis, Publisher, www.MortgageCurrentcy.com
Well, it took 6 years – but FHA has decided that a job loss or decrease in income can now be considered an “extenuating circumstance,” which means additional business for you.
It’s great news for borrowers – but don’t jump the gun – at least not just yet!
This new FHA Mortgagee Letter (13-26) released on August 15, 2013 and effective immediately now makes “Economic Event” (i.e., job loss, reduction in income, etc.) an acceptable extenuating circumstance.
And no, it was not previously allowed.
The good news: This new guidance allows for a borrower to obtain a new FHA mortgage 12 months after a foreclosure, short sale or other derogatory event with re-established credit and housing counseling.
But, here are some of the issues you may run into:
1. You don’t know if investors will accept this new guidance.
2. The borrower must document the decrease in income.
a. Decrease in income is defined as at least 20% loss of income that lasted for a period of 6 months or more.
b. Loss of job is defined as the “month” the borrower lost their job.
c. Recovery is defined as re-establishing credit for at least a 12-month time period.
d. Decrease in “household” income means “all individuals” residing in the primary residence at the time of the job loss. (So, even if a spouse is not on the loan but lost their job, they still qualify for an extenuating circumstances waiver.)
e. If job loss, written VOE showing date of termination.
1. If company is no longer in business, will need a written termination notice or public document showing the business was closed or start date of unemployment income.
2. If loss of income, VOE showing decrease from year to year, or signed tax returns or W-2 forms showing prior income, and compare to decrease in income of at least 20%.
3. If “seasonal income,” must have had a two-year history of receiving seasonal income and verification of loss of income (20%) or loss of job.
3. The borrowers must have satisfactory credit.
a. No late payments over the last 12 months, including housing, revolving, installment debts.
b. If they still have an existing mortgage, it’s okay if the mortgage was brought current with a loan modification, but still must have been paid on time for 12 months.
c. Non-traditional credit is okay, as long as the borrower has an on-time pay history over the last 12 months.
d. No collection accounts other than medical or identity theft issue.
e. Borrowers must have had satisfactory credit PRIOR to job loss or income decrease.
d. If judgments appear on credit report (and have been paid), they must also be a direct result of the job loss or income decrease.
f. If foreclosure, short sale or deed-in-lieu, must show proof that it was a direct result of income decrease or job loss.
g. If bankruptcy, must be at least 12 months from the date of discharge. Must be related to the economic event.
3. The housing counseling MUST happen a minimum of 30 days PRIOR TO LOAN APPLICATION. Depending on your institution’s definition of ‘application’, this could be difficult.
- A list of non-profit housing counseling services can be found at www.hud.gov or call 800-569-4287.
- Can be conducted by telephone, internet or in person.
- Counseling service must provide “specific” documentation and completion certificate signed by both the counseling service and the borrower
- Housing counseling fees paid by borrower or other agency that subsidizes housing counseling fees
- 4. If the foreclosure or short sale was on an FHA loan and there is a CAIVRS claim, a “Back to Work” waiver is available, but can’t be requested until full underwriting is complete. (Interpretation: More delays.)
- . Reverse Mortgages are not covered by this rule.
- Check with your lenders and see how they are planning to handle this new “extenuating circumstance” and what documents they may require. HUD is very, very specific as to the documents that are required to meet the economic event underwriting rules.
- Get the word out to clients who are in the “derogatory waiting period” zone.
- Let your real estate agents know about the new change.
By the way, there are two other new Mortgagee Letters released regarding final guidance on collections and judgments. But complete details can be found in in the September 10th issue of www.MortgageCurrentcy.com
I have been a renovation loan specialist for years and have begged every employer that I’ve had for one thing, a jumbo renovation loan. I have finally gotten my wish and the high-end, luxury market has a new financing toy.
There’s always been a huge gaping hole in the renovation loan market. Falling into that abyss were high-end consumers looking to buy or refinance homes that need mortgages outside of FHA or conforming loan limits. In many higher cost states, like California, mid-range buyers were sucked into the renovation black hole as well.
When the private mortgage market disappeared in 2006 Fannie Mae and FHA stepped up to the plate and provided an outlet for higher cost areas by raising their loan limits from $417,000 an $271,000 respectively. In many areas those are still the loan limits and, per recent developments, they are going to return to pre-2007 levels.
As it stands right now ‘high balance” loan limits in places like California, DC, New York and Hawaii at currently $625,500. If you’ve ever checked out homes in those markets then you know that severely limits your choices unless you have significant assets to invest in the down payment. [rant] A reduction in those loan limits would be high on the the list of moronic housing decisions that FHFA have laid out in the past couple years.[/rant]
In order to protect ourselves and customers against the foolishness of policy makers in Washington, we decided that a new loan product was in order and the JUMBO RENOVATION MORTGAGE was born. Less than a month old demand is high as buyers earnest seek the home of their dreams in housing market that is utterly devoid of inventory. It’s tough on buyer and tough on agents who are seemingly a day late on the most desirable homes.
With renovation financing you don’t need the perfect home, just a good home in a good location. You do the rest with your own personal touch and you end up with the perfect home, your dream home.
Jumbo Renovation Guidelines
Since this is a one of kind proprietary product we decided that we’d roll the product out conservatively. As we start to see more statistics on default rates and customer trends I expect guidelines to expand. As it stands, here are the current underwriting parameters (some exceptions may apply).
Maximum Loan Size – $1,500,000
Max Renovation Amount – $150,000
Occupancy – Primary Residence ONLY
Max LTV (Loan to Value) – 80% Purchase, 75% Refinance
Reserves – 6 Month PITI (PITI = 1 Mortgage Payment + Escrows)
Major Derogatory Credit (Foreclosure, Bankruptcy, Deed in Lieu) = 7 Year Waiting Period
Clearly we are looking for a well qualified buyer. If you are buying a million dollar house and hoping to use a mortgage then that is probably not a surprise.
If you’ve had some major derogatory credit or just don’t have the assets then we can always explore other renovation options that will get you into the home (like the 203k or HomeStyle) then use the power of time to build equity and assets to pursue a jumbo renovation refinance. We know the renovation market backwards and forwards, creativity is one of our strong points.
The $150,000 max renovation escrow will be limiting to some customers too, but once again creativity financing is possible. Say you plan to add a 2nd story, fully renovate the main floor and build a pool. The contractor bids you are getting average $300,000 for the full project – $150,000 for the addition, $100,000 to renovate the main floor and $50,000 for the pool.
We could help with either the main floor + pool or the addition. Both would add tons of value which would allow you to come back 12 months down the road and do a renovation refinance (using after repair value) to do phase two OR, in some cases, you just added enough value to get a home equity line (based on current value) to finish out the remainder of the renovation.
Guidelines are guidelines and borrowers fit into them and not vice versa. Square pegs don’t fit in round holes unless you take a buzz saw and some sandpaper to them. That’s actually the fun part for us, making things work through experience an creative knowledge.
Have questions? Ready to move to application? No problem, we are here to help. Simply click on the link below and fill out the contact form OR give us a call and we’ll guide you, answer questions and get the ball rolling.
Jonathan Blackwell – Renovation Loan Specialist
When you plan on selling a property, it’s important to remember that most buyers will have to take out a mortgage to buy your property. When a mortgage company or bank looks to help finance a property for a buyer, an appraisal will be necessary to show condition of the property. If there are any condition problems that the lender doesn’t allow, this can delay the closing of your property or kill the deal.
Make sure you understand what major items a lender will look for in the condition of a property, when a buyer is taking out a mortgage. Here is a good list of items that you should review, if you plan on selling your property anytime soon.
Major Items to Check on Your Property
- Roof – Lenders are looking for leaks and major damage or major deterioration.
- Windows/Doors – Make sure they are not broken and are working properly.
- Basement – Make sure there are no signs of major cracks or movement in the walls. Foundation issues can really cause problems when it comes time to sell your property.
- Walls – Make sure the walls don’t have large holes, signs of water damage or unfinished.
- Repairs – Any repairs or improvement projects must be complete. You don’t necessarily have to have the trim installed, but all fixtures need to be installed.
- Heating – This must be in working condition. It doesn’t have to be new, but it must work.
- Water – This must be working and flow through the house, without any leaks.
- Hazardous Conditions – Make sure some items like, methane gas, lead paint, radon gas, radioactive material, landfill, toxic materials, etc. are not in or on the property. This can cause big concerns with the lender.
It’s always recommended that you have your home inspected by a licensed home inspector. This way, you will have peace of mind that there will be little to no problems with the condition of your property when the buyer uses a lender to buy it.
Title: Don’t End Up in Fair Housing Jail!
Here’s a story that is happening more and more as the CFPB hires more people to “police” FAIR HOUSING – Can you defend yourself in case of an audit?
Examiner: Mr. Mortgage Company: can you please tell me why this client did not receive the lowest rate offered to her on this day?
Mr. Mortgage: Uh, well let me call the loan originator. Oh, he is not here anymore, okay I’ll call the processor. Oh, she is on maternity leave. Can someone look in the LOS and tell me if you see any notes on that file? None about rate, huh! Well, we will pull that file, get the rate sheets from that day and review everything. I’m sure there was a good reason.
Examiner: Fantastic, and while you’re at it, can you also pull the data together for these 350 files? We have questions on those too.
Sound like a nightmare? For many lenders this is a reality. Yes, I know Fair Housing audits are not the most exciting topic; however it is the most important item you can focus on when it comes to making an exam easier.
We’ve created a Fair Housing Compliance Checklist and at the end of this article, you’ll find a “partial list. Email Karen@mortgagecurrentcy.com for the complete 3-page checklist.
Here is how it works. The loan originator answers the questions on the checklist. The answers can be “yes,” “no” and/or a comment. If they do not give you the answer that you have set up as a rule, then it needs to be noted in the file.
I have several pages of example questions; you will have to determine which ones you want to use. The goal is to get your team brainstorming regarding the questions that you want to memorialize.
Here are some ways other lenders are using the Compliance Checklist function:
- Requiring explanation when the loan originator gave the client a higher rate (assuming equal price) than one of the offered programs. This might be as simple as one lender taking the loan and another will not. The examiner is searching for the reason.
- Requiring written explanation when a loan is re-locked. What changed on the file that the program or rate needed to change? This prevents any notion of baiting and switching.
- Reining in your TPO’s to get written reasons for loan selections.
- Ensuring that internal workflow is followed. As an example, do you require a fully completed loan application prior to a lock in?
- Can the loan be locked only with this investor, or any investor? If limited, why?
These are just a few ways the Compliance Checklist functionality is being used. I cannot urge you strongly enough to get this started. Ask anyone who has been through an audit and they will tell you that notations about what happened and when are so very important – and save you an enormous amount of time.
Oh, one more thing, they are monitoring real estate agents too. A real estate agent recently got a letter that he was violating Fair Housing rules when he advertised a home as “adults only—no one under age 16” on the listing.
CFPB is out there and they have the people to monitor, audit and fine you!
Fair Housing Compliance Check List – Pricing Questions
Prices being equal, did you offer the client the lowest rate option available to them?
Is this a re-lock? If yes, what changed on the file that it needs a re-lock?
Is this file dependent on the underwriting guidelines of the
investor you selected? If yes, what specifically?
Is the length of the lock being requested compatible with the time to close?
If you are requesting a 15-day lock, is the loan clear to close?
If you are requesting less than 60 days for a refinance or short sale, is that time frame realistic? If yes, please indicate the loan status in the notations.
Is your final price par?
If your final price is above par, are you charging any discount points? If yes, are you giving a lender credit? If yes, then how much is the lender credit?
Is your rate lock within (x% – lender determines) of the initial disclosed rate?
What are the client credit scores? Please list (lender decides which scores they want listed in the notation).
Is this loan a pre-qualification? If yes, when is closing anticipated?
Is this loan under contract? If yes, what is the closing date?
What are the lender credits? Require notation.
If the price is below 100 or outside of your LO contract, did you receive prior exception? If yes, by whom? Did you document the reason for the exception in the loan file? (Lender sets what they mean by “document.”)
Does the requested pricing meet the parameters of your LO contract? If no, give reason and who authorized lock.
Has this loan been locked with us during the last 120 days?
If you are requesting a re-lock, is the rate going up? If so, is this based on a credit verification issue? Notation needed for explanation.
If you are requesting a re-lock, and the rate or price are increasing, do you have written documentation in the file as to what changed and how that resulted in a higher rate or price? Require notation.
Have the Regulators Seen their Shadow?
Karen Deis, Publisher, www.MortgageCurrentcy.com – View free video blog on home page.
Well, it seems like the agencies have “seen their shadow” and crawled back into a hole—because there were only a few updates within the last 30 days!
As part of the continuing mini-series of breaking apart the various rules from the Consumer Protection Finance Bureau, we are dissecting each topic that is important to loan originators, and writing about one every month—until they go into effect in 2014.
Part two of the mini-series talks about the Qualified Mortgage Rule and the five tiers of loan amount thresholds when it comes to the maximum amount of income that can be earned for each tier. There are five different loan amount tiers to be aware of:
Greater than $100,000
$60,000 to $100,000
$20,000 to $60,000
$12,500 to $20,000
And less than $12,500
The maximum income earned on each tier is inclusive of fees and points that are NOT included in your commission. It also states that those maximum commissions will be adjusted based on the CPI for inflation at the first of every year.
Loan Officer Compensation Rule defines the term “loan originator” in part two of the mini-series. While it’s not new, it basically says that anyone who quotes rates, assists the consumer in filling out a loan application, or negotiates loan terms and issues approval letters is a loan originator. SO, if processors, underwriters or assistants do any of these things, they must be licensed.
Something new that doesn’t affect you but we wanted you to know about is that if a seller finances residential property that they own, and provides financing for 4 or more properties within a 12-month time period, they are considered a “loan originator.”
So, if a builder is providing self-financing to home buyers AFTER the home has been completed, a builder would be considered a “loan originator.” However, if they are providing construction loan financing only, they would not have to be licensed.
Just a couple of update from FHA!
There will be a new 92900 form with the new MIP disclosures, but the form won’t go into effect until June 3. HUD said they are not going to provide a copy of the new form until the changes go into effect, but check with your LOS systems to make sure they are working on the updated version.
And, there was a strange email from HUD. On March 2, they sent an email with a link to a new TOTAL Scorecard update. The link took everyone to an OLD update. We searched the websites, contacted the HUD officials, and the mystery continues—no one knows where to find the March 2 update. So watch for it in the future.
And, there has been nothing from VA in quite a while—it’s probably one of the most stable loan programs available today.
Remember, getting a loan approved and closed these days IS rocket science.
Joint Venture between FHFA and CFPB to Monitor the Mortgage Market!
A new national mortgage database is being created to provide the ability to track and monitor various topics. Some of the ways this database would be used would be to:
- Monitor the relative health of the mortgage markets and consumers by tracking mortgage loan performance, such as payments being made on time and information on loan modifications, foreclosures and bankruptcies
- Provide new insight on consumer decision-making by using the database to conduct surveys
- Monitor new and emerging products in the mortgage market that would assist regulators in understanding potential problems or new risks via volume and performance data
- View both first- and second-lien mortgages for a given borrower which would allow policymakers the ability to see how many mortgages borrowers may have and how they are performing
- Understand the impact of consumers’ debt burdens with the ability to view or have information on a borrower’s other debt obligations, including auto loans or student debt.
This database will include information from the birth of a mortgage loan through the servicing and will include a variety of borrower characteristics. The database will include loan-level data about the mortgage such as the borrower’s financial profile, their credit profile, the mortgage product and associated terms and ongoing payment history.
The data would be updated on a monthly basis and would be able to track as far back as 1998.
What does it really mean to you?
Does this mean Big Brother is upon us? Yes it does. This is being presented as a solution that the FHFA was required to implement under the Housing and Recovery Act of 2008, which was to conduct a monthly mortgage market survey.
They go on to say that the database will not contain any personally identifiable information, but I find that hard to believe.
Can this be a good thing? It depends on the real purpose of this national database and how it will be used. It seems innocent enough on the surface, but if used inappropriately it could further restrict the independence and decision-making that is currently left to a borrower or lender based on their own personal risk appetite.
Much of this information is currently available from many private entities that collect various bits of our lives, but it is not all inclusive with any one entity and there is no one central place that holds all this information in one place, UNTIL NOW! The government will now have access to this information.
It will take a while to build this database, but the CFPB and FHFA are indicating that early versions of the database could be ready as early as sometime in 2013.
Karen Deis, Publisher of www.MortgageCurrentcy.com, an ezine that keeps you up to date on all the mortgage rule updates because getting a loan approved and closed these days IS rocket science!
Title: Just So There’s No Misunderstanding
By: Karen Deis, Publisher, MortgageCurrentcy.com
Before I get started with the updates for December, what I’ve noticed over the last few months is that Fannie, Freddie, FHA, VA and USDA have issued quite a few clarifications and updates in the form of FAQ’s and enhancements to cover the “grey areas,” so underwriters and LO’s have a clearer picture of exactly what a rule change means in plain language (just so there is no misunderstanding).
You’ll find three of them here this month from Fannie, including the new FAQ started on 11-19-12 where they answer DU 9.0 questions. Fannie has also created a comparison chart between DU 8.3 and DU 9.0 to illustrate the differences between the two. You’ll find it in this issue.
If there is one article I would recommend that you read this month, it’s the one where Fannie makes some big underwriting clarifications in Announcement SEL 2012-13.
Here are some of the highlights, because these affect your files in process right now.
- If you are refinancing a loan, the property taxes are 60 days past due and you are paying the back taxes by including them in the loan amount, it triggers a mandatory escrow account.
- Fannie went on to talk about “their indication of borrowed funds.” The trigger here is that if there is a large deposit that exceeds 25% of total monthly qualifying income, additional backup documentation is needed.
- Retirement funds used for cash reserves may be discounted by up to 40%, depending on the volatility of the type of retirement account.
- Additionally Fannie indicated that you no longer have to get a letter or back-up documents that say the collection poses no threat to their first lien position. This will make it easier on you and your borrowers.
- You’ll find five more updates in this announcement, including the treatment of capital gains or losses – you no longer have to count them, even if they are reoccurring. And Fannie says you no longer have to count the Treatment of Capital losses as a liability (or income), even if the losses are reoccurring.
Let’s talk about the Consumer Finance Protection Bureau. The latest warning is their findings when it comes to deceptive advertising practices. They are relying on Reg Z advertising rules, which cover mortgage companies, and the Mortgage Acts & Practices rules, which apply not only to mortgage companies, but to real estate agents and builders as well.
My personal observation is that CFPB is asking their examiners to review ALL types of advertising and then to create a section in their examination manual for everyone to follow. That’s why, for right now, they are sending out warning letters instead of fines.
MAP has been around since 2011, and you’ll find attached to this newsletter the article and Mortgage Talking Points™ article for your real estate agents and builders and what they need to do to follow the rules. In addition, you’ll find a REG Z video training course, with examples of mortgage ads that don’t meet federal rules.
Other updates this month
- A joint venture between FHFA and CFPB to monitor the mortgage market
- HARP program extension
- Updates to the Fannie Appraisal messaging system
- No increase in loan amounts for Fannie/Freddie
- HUD and NMLS team up to collect data when you order a case number
- VA updates to form 26-8937
- FHA Extends Anti-Flipping Rules
In recapping this year, we wrote 114 updates – or about 10 per month. In addition, we posted 136 most frequently asked questions that we hoped would help you get more of your loans approved. Oh, and I also wanted to mention the “marketing component” of your subscription to MC – the automatic Tweets, Facebook posts, Mortgage Talking Points™ and charts and checklists. www.MortgageCurrentcy.com
I hope that 2013 is your best year ever in the mortgage industry – and remember, getting a loan approved and closed these days… is rocket science.