Christopher Shearer

Christopher Shearer

Q&A for Small Business Owners

from: www.sba.gov

The Treasury Department will commit up to $15 billion to help unlock the secondary markets for small business loans. By purchasing these securities, the Treasury Department will facilitate the ability of lend ers to make new loans to small businesses by providing confidence that there will be a ready buyer for those loans in the secondary market.

In addition, the Small Business Administration is immediately implementing two key provisions of the

Recovery Act - temporarily eliminating certain loan fees and raising guarantee levels on some of its loans.

These steps will provide lenders with the security they need to start lending again to the millions of small

business owners desperately in need of capital.

Finally, the Treasury Department issued a call for new reporting requirements designed to better track

small business lending by banks and unveiled guidance from the IRS for an expanded "carryback" provision

that will offer many small businesses a tax refund.

Why will purchasing securities on the secondary market help small business owners?

Under normal circumstances, many banks sell a portion of their loans to companies that pool them

together and sell them as securities to investors. This provides banks with new capital that they can use to

make additional loans. The result is that the secondary markets significantly increase the amount of lending

banks can do to small businesses.

Over the past year, however, the secondary markets for 7(a) and first lien 504 securities have ground to a

virtual halt. The institutions that securitize these loans have been unable to find buyers for the securities they

have already packaged. This has in turn reduced their willingness to purchase new loans from banks. Since

banks depend on the secondary markets for liquidity, they have increasingly become reluctant to extend credit

to small businesses.

Today's announcement will help unlock secondary markets by providing assurances that the government

will stand ready to purchase 7(a) and 504 first-lien securities. If you apply for a 7(a) or 504 loan at your local

community bank, that bank will be more willing to lend because it will have confidence that the Treasury

Department will be a ready buyer of the loan in the secondary markets.

Which loans are affected by the fee elimination and higher guarantees?

Beginning this week, the SBA will temporarily raise guarantees and eliminate fees for borrowers on

certain of its 7(a) loans. 7(a) loans, which are partially guaranteed by the SBA, are issued by a bank to a small

business to support its operations.

Additionally, the SBA has temporarily eliminated fees for borrowers and third party lenders on its 504

Certified Development Company Loans. These loans offer growing small businesses long-term, fixed-rate

financing for major fixed assets, such as land, buildings and machinery and equipment. These loans are

aimed at fostering community development, creating jobs and encouraging modernization.

How do I apply for these loans?

Borrowers apply for loans directly with their lending institutions, including banks, credit unions, and

Small Business Lending Companies. The SBA works with thousands of small and large lenders nationwide.

Lenders evaluate loan applications under their lending standards and decide whether to:

a)

Make the loan through conventional financing -- without a SBA guarantee --because the borrower meets

their conventional credit standards;

b)

Make the loan with a SBA guarantee if the borrower does not meet conventional standards and is eligible

for SBA programs; or

c)

Decline to make the loan.

What kind of businesses typically get SBA-backed loans?

Typical 7(a) borrowers are entrepreneurs looking to start, expand or acquire a small business. In many

cases, the applicant may have a strong business idea, management ability, and sound financial projections,

but may have a shortfall in collateral to secure a loan or equity to put into the business.

In order to qualify for a SBA 7(a) loan, borrowers must be unable to secure conventional commercial

financing on reasonable terms and be a "small business" as defined by SBA size standards. In 2008, of the

$18 billion in SBA backed loans, 35% went to start-up businesses, nearly 32% ($5.7 billion) went to minority

owned businesses, and nearly 23% went to women owned businesses. The most frequently financed

industries in 2008 were services, retail trade, accommodation/food service, construction firms, and

manufacturing.

SBA-backed loans are three to five times more likely to be made to minority and women owned

businesses than conventional small business loans made by banks, according to a recent study by the Urban

Institute.

Is there a limit on how much I can apply for?

The maximum loan amount for a 7(a) loan is $2 million. For 504 loans, the loan structures and amounts

vary since lenders and borrowers each determine how much equity they are putting into the loan. However,

for the SBA portion of the loan, the maximum loan amount is either $2 million or $4 million, depending on

the purpose of the loan.

For most purposes, the SBA's maximum guarantee for any borrower remains at $1,500,000, or 75 percent

of a $2 million loan.

How soon can I get a loan to help me and take advantage of these new programs?

You can apply immediately to any SBA participating lender to take advantage of these programs.

•

Fees will be reduced for 7(a) loans starting this week.

•

Fees will be eliminated for 504 loans beginning this week.

•

Microloan intermediaries across the country are providing loans of up to $35,000 right now to start-up,

newly established and growing small businesses.

Lenders will work with the SBA to process and approve these loans. Once we receive a completed loan

package from a lender, the SBA can quickly process applications in just a few days.

U.S. Small Business Administration •

Recovery Act: Frequently Asked Questions

• 2

Is the elimination of borrower fees permanent and retroactive?

The temporary fee eliminations for 7(a) loans support an overall program level of $8.7 billion, while the

temporary fee eliminations for 504 loans support an overall program level of $3.6 billion. Depending on

loan volume in these programs, the SBA estimates that it will be able to eliminate these fees on loans

approved through approximately December 31, 2009. Fee eliminations will be retroactive for all eligible

loans approved on or after Feb. 17, 2009.

What if I had a 7(a) or 504 loan approved on or after Feb. 17 and already paid the fees? How do I get a

SBA is in the process of developing a refund mechanism and expects to be able to begin issuing refunds by

approximately May 1, 2009. If borrowers have already paid lenders for the fees on eligible loans, the lenders

must reimburse the borrowers from the SBA refund.

What kind of savings will I see from the temporary borrower fee elimination?

Fees for a 7(a) loan are based only on the guaranteed portion of the loan and depend on the size of the

loan. The fees range from 2% to 3.75%

For example, a $300,000 loan with a 75% guaranty would have a guarantee fee of 3%. With the

temporary elimination of fees, you would save $6,750.00 ($300,000 x 75% x 3%). Under the new 90%

guaranty your savings would be $8,100 ($300,000 x 90% x 3%).

For a Section 504 loan from a Certified Development Company, the 1.5% application fee that is

frequently charged to small businesses when they apply to the Certified Development Company for a loan

will not be charged. For a typical 504 loan of about $600,000, fee savings would equal about $9,000. In

addition, the SBA charges the first mortgage lender a fee equal to ½% of the first mortgage in a Section

504 loan transaction. The SBA will temporarily eliminate that fee as well, further encouraging the first

mortgage lender to get involved with the development project.

I am a small business owner - what does the 90% guarantee mean to me?

It means that the lender will have less risk and a greater sense of security due to the higher guarantee

percentage and will be more likely to extend credit to your small business.

Can I go to any lender in my area to take advantage of these new programs?

Only lenders who have been approved to participate in SBA lending programs can assist you with an

SBA-guaranteed loan. Contact your local SBA District Office to obtain a list of approved participants in your

area.

Follow this link to locate the District Office nearest you:

http://www.sba.gov/localresources/index.html

.

What if I was already turned down by a bank in the past six months? Can I qualify for any of these

You are eligible to apply, but you will need to provide updated financial information that is current within

90 days. Over the past year the financial position of many individuals and businesses has deteriorated along

with the economy, making some unfortunately no longer creditworthy.

U.S. Small Business Administration •

Recovery Act: Frequently Asked Questions

• 3

The banks aren't lending to me. So how do any of the programs the President announced help me?

Revisit your lender and specifically ask about the Recovery Act and SBA loans. Many of the provisions

in the Act provide incentives to lenders to encourage them to start lending again to get more dollars in the

hands of the small businesses that need it most. Banks will now have access to more funds and higher

guarantees making it less risky and more attractive to lend to small businesses. Also, you can contact your

local SBA District Office to obtain a list of SBA-participating lenders in your area.

I own a small business, and my revenue has gone down. The equity in my house has declined and I

SBA does not have a specific level of collateral that must be pledged. If your business is viable and you

have pledged all of your available business and personal assets, a lender may consider making a loan to you

with an SBA guarantee.

Additionally, as part of the Recovery Act, SBA is developing a new program to help viable businesses

with immediate financial hardships with a short term loan that will help them make payments on their

existing loans. We are working hard to get this program up and running as quickly as possible.

The Recovery Act includes other initiatives to help small business owners, including targeted tax relief

for small business owners, allowing "carryback" of losses from this year for up to the previous five years;

reducing the estimated tax payments a small business makes to the IRS from 110 percent to 90 percent; and

providing the ability to write off up to $250,000 of certain investments made in your small business.

I have only been in business for two years and don't have three years of financial statements or

Yes, you may qualify for a loan. SBA loan guarantee programs are available to start-up, newly

established and growing businesses. You will need to provide whatever financial information you have

available and will also be asked to furnish financial projections with assumptions to support your loan

request.

I got laid off from my job. Now, I want to start a new business, building on my prior skills. I have a

good business plan and am working with an accountant and an advisor. Can I get a loan from any of

SBA loan programs are available to start-up businesses as well as those that are already established.

All applicants must meet certain SBA eligibility and credit requirements. In general, you must be organized

for profit, meet SBA specific size standards, and be unable to obtain funding on reasonable terms through

traditional lending channels.

When applying for a loan, you must prepare a written loan proposal or business plan. The proposal should

outline your business strategy over the next several years and briefly explain who you are, your business

background, the nature of your business, the amount and purpose of your loan request, your requested terms

of repayment, how the funds will benefit your business, and how you will repay the loan.

SBA has a host of resource partners (

http://www.sba.gov/localresources/index.html

) that can assist you

in developing your plan, as well as online training resources through the Small Business Training Network

http://www.sba.gov/services/training/index.html

.

U.S. Small Business Administration •

Recovery Act: Frequently Asked Questions

• 4

I need working capital now to buy inventory and to make payroll. How long will it take to get a loan?

You can apply for a loan by talking to a local SBA participating lender today. Once SBA receives a com

-

plete application package from your lender, SBA typically responds to the lender within a few business days.

SBA loan programs are available for most sound business purposes including working capital, machinery and

equipment, furniture and fixtures, land and building (including purchase, renovation and new construction),

leasehold improvements, and debt refinancing (under special conditions). The maximum loan size under

SBA's 7(a) loan program is $2,000,000, although some programs have specific maximums that are lower.

I operate my business from home - does that matter? Can I qualify for a loan?

No, it does not matter. A home-based business must still meet our standard eligibility and credit criteria

for all businesses. If you meet all eligibility and credit criteria, you can apply for a loan.

The President mentioned that the $15 billion from the Treasury would primarily be focused on buying

Community banks, credit unions and other small lenders account for about 40 percent of all SBA-backed

loans. Unclogging the secondary market for these local, small lenders will help them provide greater access

to capital for the small businesses and entrepreneurs in their communities. While unclogging the secondary

market is aimed at providing a funding source for smaller lenders, large lenders may also use the secondary

market as a source of liquidity.

What other provisions are in the Recovery Act beyond fee elimination and higher guarantees, and

The additional provisions in the Recovery Act include:

•

Microloan Expansion:

Provides extra funding for loans and technical assistance to SBA backed micro-

lenders

•

ARC Stabilization Loans:

Offers 100% guaranteed deferred payment of loans up to $35,000 to help

viable small businesses facing immediate economic hardship make payments on existing qualifying loans

•

Expanded 504 Refinancing Project: Allows borrows to refinance an existing eligible loan as part of a new

504 small business expansion project.

•

Surety Bond Program Expansion:

Allows more small businesses to compete for contracts by raising the

maximum amount for contracts that qualify for SBA surety bonds to $5 million and up to $10 million for

certain contracts.

•

SBIC Program Expansion:

Increases the maximum levels of funding that SBA can provide to SBICs.

•

Secondary Market Guarantee for 504 First Mortgages: Provides liquidity to lenders by allowing SBA to

guarantee 504 first mortgage pools sold into the secondary market.

•

7(a) Secondary Market Lending Authority:

Increases liquidity in the secondary market for SBA loans by

directly lending money to brokers to purchase SBA 7(a) loans.

SBA is working hard to implement these provisions with the goal of having the broadest impact on

small businesses as rapidly and effectively as possible. Implementation will begin as soon as the rules and

regulations are published in the Federal Register.

Christopher Shearer

Building a Financial Foundation

On this page you will find links to many other websites. When you go to another site, you are subject to the privacy and security policies of that site. FHA cannot attest to the accuracy of information provided there. Linking to a web site does not constitute an endorsement by FHA, or any of its employees, of the sponsors of the site or the products presented on the site. FHA cannot authorize the use of copyrighted materials on linked websites. You will have to request authorization from the sponsor of the linked website. FHA cannot guarantee that outside websites comply with Section 508 (Accessibility Requirements) of the Rehabilitation Act.

Here are some tools to help you on your way towards building wealth and managing your money:

Building Wealth: A Beginners Guide to Securing Your Financial Future: The Federal Reserve Bank of Dallas's Building Wealth Program helps individuals and families develop a plan for building personal wealth. The program presents an overview of personal wealth-building strategies that includes setting financial goals, seeking guidance, budgeting, saving and investing, and managing debt.

Money Smart
The FDIC's Money Smart for Adults Training Program helps youth and adults outside the financial mainstream enhance their money skills and create positive banking relationships. The more people know about credit and banking services, the more likely they are to increase savings, buy homes, and improve their financial health and well being. The Money Smart curriculum helps individuals build financial knowledge, develop financial confidence, and use banking services effectively.
For computer based instruction (CBI) or to order a free cd-rom:
Youth (Age 12-20): http://www.fdic.gov/consumers/consumer/moneysmart/young.html
Adult: http://www.fdic.gov/consumers/consumer/moneysmart/overview.html

MyMoney.gov
MyMoney.gov is the U.S. government's website dedicated to teaching all Americans the basics about financial education. Whether you are planning to buy a home, balancing your checkbook, or investing in your 401k, the resources on MyMoney.gov can help you do it better.

Here are some tools to help you on your way towards managing your money:

Control Your Credit
The U.S. Department of Treasury along with the Ad Council, have developed a campaign to combat the issue of excessive debt and financial illiteracy. The PSAs urge young adults to take control of their financial decisions by directing them to a website which will provide information about credit and personal finance.

Hands on Banking®
Hands on Banking® is a free, fun financial education program that presents the basics of smart money management in an easy-to-use format. Topics include budgeting, the importance of saving, bank accounts and services, borrowing money and establishing credit, investing, and more. The curriculum is customized for four age groups from 4th grade through Adults.

MoneyWi$e
MoneyWi$e is a national financial literacy partnership between Capital One and Consumer Action. It is the first program of its kind to combine free, multilingual financial education materials with community training and seminars to give consumers at all income levels both the information and the practical assistance they need to make smart financial decisions.
For access to the 5 MoneyWi$e interactive computer courses:
http://www.money-wise.org/articles/moneywie_offers_online_financial_education_courses/

more info http://hud.gov

Christopher Shearer

Get Inside the Mind of the Consumer:

Websites Every REALTOR® Needs to Know

Studies indicate that over 80% of today's home buyers visit the Internet long before seeking the professional assistance of a REALTOR®. This means that, thanks to popular realty-themed websites that compete for your business, your clients are already armed with more information than ever before.

That's why today's savviest real estate agents must change their perspective and fight back. And the best way to do this is to visit and become familiar with these kinds of sites and the features they offer. This data will not only prepare you to answer any questions your clients might have, it will allow you to provide a more complete service that your clients will want to recommend to all of their friends and family members.

1) Redfin.com: In addition to listings, this site offers information such as how long a home has been for sale, its last sales price, and its current value. It also provides virtual tours to listed homes.

2) Trulia.com: Like Zillow.com, which offers satellite views and the estimated values of each home, Trulia's .heat maps. show how hot or cold an area is based on prices, sales, and popularity among its users. Trulia.com also has free tools real estate agents can easily add to their own websites to increase functionality and traffic.

3) Maps.Google.com and Maps.Live.com: For bird's-eye view, even 360 degrees in some cases, these amazing map sites offer a virtual perspective of available homes that's truly hard to beat.

4) Walkscore.com: interesting site that rates any address based on the walking distance of its nearby stores, restaurants, schools, parks, coffee shops etc.

5) SchoolMatters.com: A Standard & Poor's company, this site offers parents (and potential homebuyers) an objective rating of public schools and public school districts by region, including test scores and demographics. GreatSchools.net offers similar info and ratings on private schools based on region.

Government loan programs offer great opportunities for many consumers in many regions across the country, especially first-time buyers and veterans. The following websites are likely one of the first of many sites potential homebuyers visit during this process:

1) HUD.Gov is the official website for the U.S. Department of Housing and Urban Development (H.U.D.) This site lists HUD homes and provides information for home buyers, including financing options and home buying programs available through the Federal Housing Administration (FHA).

2) Homeloans.va.gov: This site houses information about government home loan programs specifically for veterans.

Christopher Shearer

HUD No. 09-033 Melanie Roussell (202) 708-0685 www.hud.gov/news/

For Release Monday April 6, 2009

FEDERAL, STATE PARTNERS ANNOUNCE MULTI-AGENCY CRACKDOWN TARGETING FORECLOSURE RESCUE SCAMS, LOAN MODIFICATION FRAUD
Civil Enforcement Cases, State Enforcement Actions, Alert to Financial Institutions Among New Efforts to Protect American Homeowners Seeking Relief

WASHINGTON - As homeowners and communities throughout the country continue to face devastating consequences from the deep contraction in the economy and the housing market, the Obama Administration today announced a new coordinated effort across federal and state government and the private sector to target mortgage loan modification fraud and foreclosure rescue scams that threaten to hurt American homeowners and prevent them from getting the help they need during these challenging times. The new effort announced today aligns responses from federal law enforcement agencies, state investigators and prosecutors, civil enforcement authorities, and the private sector to protect homeowners seeking assistance under the Administration's Making Home Affordable program from criminal actors looking to perpetrate predatory schemes.

The U.S. Department of the Treasury, the U.S. Department of Justice (DOJ), the Department of Housing and Urban Development (HUD), the Federal Trade Commission (FTC), and the Attorney General of Illinois today discussed new initiatives to coordinate information and resources across agencies to maximize targeting and efficiency in fraud investigations, alert financial institutions to emerging schemes, step up enforcement actions and educate consumers to help those in financial trouble avoid becoming the victims of a loan modification or foreclosure rescue scam.

Earlier this year, in an effort to stabilize the housing market and ensure responsible homeowners can afford to stay in their homes, the Administration announced Making Home Affordable, a program to help eligible homeowners refinance or modify their mortgages. The plan will help up to 7 to 9 million families restructure or refinance their mortgages to lower their monthly payments and make their mortgages affordable now and in the future - an opportunity for relief that unfortunately also brings greater opportunity for criminal actors to prey upon consumers seeking assistance.

The FTC recently surveyed online and print advertising for mortgage foreclosure rescue operations nationwide and identified approximately 71 distinct companies running suspicious ads. Treasury's Financial Crimes Enforcement Network (FinCEN) also conducted recent studies on mortgage fraud that found that between July 2002 and June 2008, depository institutions filed nearly 180,000 mortgage fraud suspicious activity reports (SARs), with those involved in mortgage fraud often involved in other types of crime as well.

"The Administration's Making Home Affordable program is a critical piece of our efforts to stabilize the financial system and ensure that it works with our efforts to grow the economy," said Treasury Secretary Tim Geithner. "American homeowners desperately need the relief this program offers, but the very last thing they need is to be taken advantage of as they try to hold on to their homes. This Administration is deeply committed not just to providing at-risk homeowners with assistance but also to cracking down on anyone who seeks to defraud them."

To this end, Treasury and FinCEN announced an advanced targeting effort already underway to combat fraudulent loan modification schemes and coordinate ongoing efforts across agencies to investigate fraud and assist with enforcement and prosecutions. In less than a week, FinCEN's new targeting effort has produced leads that have helped various agencies to halt the illegal practices of those offering loan modification or foreclosure scams. In undertaking this effort, FinCEN will marshal information about possible fraudulent actors, drawing upon a variety of data available to law enforcement, regulatory agencies, and the consumer protection community, for the purpose of identifying and proactively referring potential criminal targets to participating law enforcement authorities.

Through FinCEN, Treasury is also issuing an advisory alerting financial institutions to the risks of emerging schemes related to loan modifications. The advisory identifies certain "red flags" that may indicate a loan modification or foreclosure rescue scam and warrant the filing of a SAR by a financial institution. Examples of possible signs of fraudulent activity, such as requiring that fees be paid before services are provided, are listed in the advisory. In addition, the advisory requests that financial institutions include the term "foreclosure rescue scam" in the narrative sections of all relevant SARs.

As part of the multi-agency effort, Attorney General Eric Holder outlined ways in which DOJ has been cracking down on mortgage fraud schemes, including several successful convictions of scam artists in recent months. He also emphasized the Justice Department's commitment to working with federal and state law enforcement and regulatory partners to ensure a coordinated and comprehensive response to the problem, describing the department's work with the FTC and state attorneys general to reinvigorate the Executive Working Group, which allows partners to coordinate and exchange intelligence on competition and consumer fraud issues. The Attorney General also discussed DOJ's focus on investigating and prosecuting lenders who discriminate against borrowers based on race, national origin, or other prohibited factors.

"For millions of Americans, the dream of home ownership has become a nightmare because of the unscrupulous actions of individuals and companies who exploit the misfortune of others," Attorney General Eric Holder said. "The Department of Justice's message is simple: if you discriminate against borrowers or prey on vulnerable homeowners with fraudulent mortgage schemes, we will find you, and we will punish you."

On the civil enforcement side, the FTC has filed five new cases to halt the illegal practices of individuals and companies offering loan modification or foreclosure scams - including one company that spent 9 million dollars on TV and radio ads in less than one year. The FTC is also joining forces with a wide array of government, non-profit, and mortgage industry members to launch a new consumer education campaign to help those in financial trouble avoid becoming the victims of a loan modification or foreclosure rescue scam.

"Today the FTC announced five law enforcement actions and sent 71 warning letters to operations using deceptive tactics to market their mortgage loan modification and home foreclosure relief services," said Jon Leibowitz, Chairman of the FTC. "We're enforcing the law against these scam artists who are deceiving consumers while they're down; we're putting others on notice that unless they change their ways, they're next; and we're working with other government agencies, non-profits, and mortgage servicers to reach out to our neighbors in distress with the details of how and where to get help."

Under the new campaign, several private sector national loan servicers, including Chase Home Finance, Suntrust Mortgage, GMAC Mortgage, and American Home Mortgage Servicing, are distributing FTC consumer alerts that provide consumers with tips for avoiding mortgage relief scams and direct them to free, legitimate counseling services for at-risk homeowners. The servicers will distribute the materials in monthly statements, in correspondence to delinquent borrowers, in counseling sessions, and on their websites.

Bolstering new outreach efforts to protect homeowners against fraud, HUD Secretary Donovan announced that HUD would begin distributing literature today to all of its housing partners- HUD field offices and staff, housing authorities, state and local agencies, and non-profit organizations-warning consumers nationwide about loan modification fraud. This and other targeted outreach efforts will help alert communities hard-hit by foreclosure about the legitimate foreclosure assistance available to them.

"We have families on the edge of foreclosure that are being offered things that are too good to be true, and we will take every measure we can to educate and protect consumers and homeowners, bring these scams to light, and work to prevent con artists from exploiting the housing crisis," said HUD Secretary Donovan. "There are legitimate people, places, and agencies that American families can turn to when they are facing foreclosure, starting with www.MakingHomeAffordable.gov and the Homeowner's HOPE Hotline at 1-888-995-HOPE for free foreclosure counseling assistance."

Under the new multi-agency initiative, there will also be strong coordination between federal and state governments that are battling foreclosure scams. The FTC released today a list of more than 20 states that have already taken law enforcement action on loan modification or foreclosure rescue scams. For example, today in Illinois, Attorney General Madigan is filing lawsuits against two Chicago-area mortgage rescue fraud schemes seeking temporary restraining orders to immediately stop the defendants from providing mortgage rescue services.

The numerous rescue fraud lawsuits filed in Illinois -24 to date- illustrate how Attorney General Madigan and other state attorneys general are using their enforcement authority to prosecute mortgage foreclosure rescue fraud across the country. On the state level, more than 150 enforcement actions have been brought against mortgage rescue companies.

"We have repeatedly found that these foreclosure rescue operations are swindling desperate homeowners out of money they can't afford to lose," said Attorney General Madigan. "Struggling homeowners need to know that free help is available. The 24 lawsuits I have filed prove foreclosure rescue operators don't help. They don't call your lender, they don't modify your loan, and they don't represent you in court if you're in foreclosure. All they do is take your money. By combining our powers, state and federal authorities are sending a clear message to these mortgage rescue scammers: It is not a question of if we'll come after you; it is only a question of when."

###

PUBLIC AFFAIRS CONTACTS:

Treasury (202) 622-2960	DOJ (202) 514-2007
HUD (202) 708-0685	FTC (202) 326-2180
Illinois AG (312) 814-3118

Christopher Shearer

March 12, 2009 MORTGAGEE LETTER 2009-08

TO: ALL APPROVED MORTGAGEES

SUBJECT: Limits on Cash-Out Refinances

Effective for case number assignments on or after April 1, 2009, the loan-to-value (LTV) of any cash-out refinance to be insured by FHA may not exceed 85 percent of the appraiser's estimate of value.

Given the continued deterioration in the housing market, and FHA's need to limit its exposure to undue risk, this reduction to the maximum LTV for cash-out refinances is being instituted on a temporary basis while FHA further analyzes the housing and mortgage industry as well as its own portfolio to determine whether permanent measures should be taken.

Underwriting and eligibility requirements for cash-out refinances include:

•· Subordinate Liens and Combined Loan-to-Value (CLTV):

•o New Subordinate Financing: If new subordinate financing is being offered by the mortgagee or other permitted entity, the CLTV is limited to 85 percent (the FHA-insured first mortgage and any new junior liens when added together).

•o Re-Subordinate: Existing 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 borrower qualifies for making scheduled payments on all liens.

•o Modified Subordinate Lien: FHA understands that many subordinate lien holders have been requesting modifications to the terms of the lien (typically a reduction in the amount of the lien) in exchange for remaining in a subordinate position. Modifying the subordinate lien in this manner often results in re-executing it at closing, which is an acceptable practice to FHA and therefore, FHA does not consider it a new subordinate lien.

•· Length of Ownership:

•o 12 Months or More: 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 in order to obtain the maximum of 85 percent of the appraiser's estimate of value in the new mortgage. This applies whether there was a mortgage, and thus, mortgage payments, on the property, i.e., ownership of at least 12 months regardless of the number of mortgage payments, if any, that may have come due.

•o Less than 12 Months: If the subject property has been owned less than 12 months preceding the date of the loan application as the borrower's principal residence, the mortgage amount is limited to the lesser of either 85 percent of the appraiser's estimate of value or 85 percent of the sales price of the property when acquired. However, a sales price need not be considered if the property was acquired as the result of inheritance and is or will become the heir's principal residence.

•· Delinquent Borrowers Ineligible: Borrowers who are delinquent or in arrears under the terms and condition of their mortgage are not eligible for a cash-out refinance.

•· Three-and Four Unit Properties: The "self-sufficiency" test for three- and-four unit properties remains in effect. Handbook HUD-4155.1 REV-5, paragraph 1-8C explains the additional requirements for these properties.

•· Second Appraisal Requirements for High-Balance Cash-Out Refinances: A second appraisal is required on cash-out refinances that will exceed $417,000 and the property is in a declining area. See Mortgagee Letter 2008-09 for more information.

•· Non-Occupant Co-Borrowers/Co-Signers: Any co-borrower or co-signer being added to the note must be an occupant of the property securing the new FHA-insured mortgage. Non-occupant co-borrowers or co-signers may not be added in order to meet FHA's credit underwriting guidelines for the cash-out refinance.

•· Fees Charged by Non-Approved Broker: While FHA regulations (see 24 CFR 203.27(e)) permit a borrower to engage a broker who is not FHA-approved to assist in obtaining mortgage financing, the loan origination services may not be performed by that broker and the FHA approved mortgagee shall not compensate the broker for such services. FHA requires that these services be performed by either an FHA-approved lender or loan correspondent. Further, under no circumstances may a borrower be charged a fee that is not commensurate with the amount normally charged for similar services. If the payment bears no reasonable relationship to the market value of the services provided, the excess over the market rate may be used as evidence of a compensated referral or unearned fee in violation of section 8(a) or (b) of RESPA and 24 CFR 3500.14(g). See Mortgagee Letter 2008-17 for additional guidance.

•· Existing Mortgage Not Required: Properties owned free and clear may be financed as cash-out transactions.

If you have any questions regarding this mortgagee letter, please contact the FHA Resource Center at 1-800-CALL-FHA (1-800-225-5342). Persons with hearing or speech impairments may access this number via TDD/TTY by calling 1-877-TDD-2HUD (1-877-833-2483).

Sincerely,

Brian D. Montgomery

Assistant Secretary for Housing-

Federal Housing Commissioner

More info: http://www.hud.gov