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**Updated FHA Guidelines Regarding Loan Amounts for 2009**

12-26-08
Larry Bailey
December 15, 2008
MORTGAGEE LETTER 2008-40
TO: ALL APPROVED MORTGAGEES
SUBJECT: Refinance Transactions: New Maximum Mortgage Calculation
The Housing and Economic Recovery Act of 2008 revised the National Housing Act to:
  • Eliminate the variable loan-to-value (LTV) limits that were based on the combination of the property value and the average closing costs of the State where the property is located and
  • Limit the total FHA-insured first mortgage to 100 percent of the appraised value, and permit the inclusion of the upfront mortgage insurance premium (UFMIP) within that limit.
For simplicity purposes, and to eliminate any confusion in the marketplace, effective for case numbers assigned on or after January 1, 2009 the maximum LTV for most refinance transactions will be 97.75 percent. A summary of maximum LTVs is shown in the chart below.
The discussion of refinance transactions and mortgage calculation example shown in Mortgagee Letter 2008-23 are superseded by the instructions in this Mortgagee Letter. A matrix comparing rates and terms, streamlined with and without appraisals, is provided in the attachment to this Mortgagee Letter.
Underwriting requirements for rate-and-term and streamline refinances appear on the following pages; underwriting and eligibility requirements for cash-out refinances remain in ML 2005-43. Please note that in every example below, the loan amount before adding the UFMIP may not exceed the geographical limit where the property is located.
Type of Refinance
Maximum LTV
UFMIP[1]
Rate-and-Term
97.75%
1.75%
FHA-to-FHA Streamline w/Appraisal
97.75%
1.50%
FHA-to-FHA Streamline w/o Appraisal
n/a (see below)
1.50%
Cash-Out Refinances
95% and 85%
1.75%

Termination of FHASecure:
Per the original announcement, the FHASecure program will terminate December 31, 2008. To meet this deadline, the loan application must be executed by the borrower(s) and a case number assigned no later than December 31, 2008 to be eligible for this program. A separate mortgagee letter will be issued with additional information.
MORTGAGE AMOUNTS ON REFINANCE TRANSACTIONS
Rate and Term Refinances with Appraisals: The maximum mortgage is the lower of the LTV limitation or the existing debt calculation described below, and may never exceed the geographical statutory limit except by the amount of any new UFMIP:
o LTV Ratio Applied to Appraised Value: Multiply the appraised value of the property by 97.75 percent. Any appraisal requirements, including repairs, must be satisfied before the mortgage is eligible for insurance endorsement.
o Existing Debt: Add together the amount of the existing first lien, any purchase money second mortgage, any junior liens over 12 months old, closing costs, prepaid expenses, borrower paid repairs required by the appraisal, discount points, and then subtract any refund of UFMIP.
If any portion of the funds of an equity line of credit in excess of $1000 was advanced within the past 12 months and was for purposes other than repairs and rehabilitation of the property, the line of credit is not eligible for inclusion in the new mortgage.
The amount of the existing first mortgage may include the interest charged by the servicing lender when the payoff will not likely be received on the first day of the month (as is typically assessed on FHA-insured mortgages). The amount also may include any prepayment penalties assessed on a conventional mortgage.
In determining the existing debt as part of the mortgage amount calculation, the mortgagee may include accrued late charges and escrow shortages.
Prepaid expenses may include the per diem interest to the end of the month on the new loan, hazard insurance premium deposits, monthly mortgage insurance premiums, and any real estate tax deposits needed to establish the escrow account regardless whether the mortgagee refinancing the existing loan is also the servicing lender for that mortgage.
Additional underwriting and eligibility criteria:
· The mortgage being refinanced must be current for the month due, e.g., a refinance of a mortgage anytime in November must have had the October payment made.
· Subordinate liens, including credit lines, regardless of when taken, may remain outstanding (but subordinate to the FHA-insured mortgage).
· New subordinate liens may be placed behind the FHA-insured mortgage and are subject to no CLTV cap.
· At closing, the borrower may not receive cash back in excess of $500.
Streamline Refinance WITH an Appraisal. The maximum insurable mortgage is the lower of 97.75 percent of the appraiser's estimate of value or the sum of the existing indebtedness and related closing costs and prepaid expenses for the refinance; both are described below.
· LTV Ratio Applied to Appraised Value: Multiply the appraised value of the property by 97.75 percent.
· Existing Debt: Add together the amount of the existing FHA-insured first lien, closing costs, prepaid expenses, discount points, and then subtract any refund of UFMIP.
The amount of the existing first mortgage may include the interest charged by the servicing lender when the payoff will not likely be received on the first day of the month (as is typically assessed on FHA-insured mortgages). In determining the existing debt as part of the mortgage amount calculation, the mortgagee may include accrued late charges and escrow shortages.
Prepaid expenses may include the per diem interest to the end of the month on the new loan, hazard insurance premium deposits, monthly mortgage insurance premiums, and any real estate tax deposits needed to establish the escrow account regardless whether the mortgagee refinancing the existing loan is also the servicing lender for that mortgage.
Additional underwriting and eligibility criteria:
· The mortgage being refinanced must be current for the month due, e.g., a refinance of a mortgage anytime in November must have had the October payment made. [Borrowers no more than 2 months delinquent may also be refinanced in this manner per instructions contained in handbook HUD-4155.1 REV-5, paragraph 1-12D6.]
· Subordinate liens, including credit lines, regardless of when taken, may remain outstanding (but subordinate to the FHA-insured mortgage).
· At closing, the borrower may not receive cash back in excess of $500.
Streamline Refinances WITHOUT an Appraisal. The maximum insurable mortgage is the lower of the two calculations shown below:
· Original Loan Amount: The original principal balance on the mortgage (which will include any UFMIP) plus the new upfront premium that will be charged on the refinance, or
· Existing Debt: Add together the amount of the existing FHA-insured first lien, closing costs, prepaid expenses, discount points, and then subtract any refund of UFMIP.
The amount of the existing first mortgage may include the interest charged by the servicing lender when the payoff will not likely be received on the first day of the month (as is typically assessed on FHA-insured mortgages). In determining the existing debt as part of the mortgage amount calculation, the mortgagee may include accrued late charges and escrow shortages.
Prepaid expenses may include the per diem interest to the end of the month on the new loan, hazard insurance premium deposits, monthly mortgage insurance premiums, and any real estate tax deposits needed to establish the escrow account regardless whether the mortgagee refinancing the existing loan is also the servicing lender for that mortgage.
Additional underwriting and eligibility criteria
· The mortgage being refinanced must be current for the month due, e.g., a refinance of a mortgage anytime in November must have had the October payment made. [Borrowers no more than 2 months delinquent may also be refinanced in this manner per instruction contained in handbook HUD-4155.1 REV-5, paragraph 1-12D6.]
· Subordinate liens, including credit lines, regardless of when taken, may remain outstanding (but subordinate to the FHA-insured mortgage).
· At closing, the borrower may not receive cash back in excess of $500.
· Properties no longer occupied by the owners or otherwise owned by an investor can only be refinanced in this manner, i.e., without an appraisal, and only for the outstanding principal balance. See handbook HUD-4155.1 REV-5, Chapter 1, Section 12 for additional information when refinancing investor-owned properties.
Additional Information
· 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.
· Title Issues Regarding Non-Borrowing Spouses or Other Parties in Interest: This section addresses the situation where two or more parties have an ownership interest in the property, but only one of the parties is applying for the loan (and credit qualifies for the loan on his or her own). Currently, Handbook HUD-4155.1 REV-5, paragraphs 2-2 A and D do not permit the non-applicant individuals to have an ownership interest in the property at the time of settlement without executing the mortgage note and mortgage, deed of trust, or security deed. Except as provided in this section, the Mortgagee Letter eliminates that requirement, regardless of whether the transaction is a purchase or a refinance.
The lender is still required to ensure a valid and enforceable first lien on the property under state law, which may require the execution of the mortgage (but not typically the note) by all parties who have an ownership interest in the property. See Federal Reserve Regulation B for more information. If the party in question executes the mortgage, deed of trust, or security deed only for such reasons, he or she is not considered a borrower for FHA purposes, and therefore need not sign the loan application or be considered in credit underwriting.
· Second Appraisal Requirements/Loan-to-Value Limits for Cash-Out Refinances: The instructions in ML 2008-09 regarding when a second appraisal is needed, and the requirements for that second appraisal, as well as the 85 percent limitation on cash-out refinances when the loan balance will exceed $417,000, remain in effect.
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.
Additional underwriting and eligibility criteria
· 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.
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
Attachment

ATTACHMENT
The following matrix provides a comparison of rates and terms, streamlined with and without appraisals.

[1]
As of October 1, 2008
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Daily update Fri, Dec 19 - 10:35 AM ET

12-19-08
Larry Bailey

Larry Bailey TruClose Financial ServicesFri, Dec 19 - 10:35 AM ET
President Bush announces a $13.4B loan to GM and Chrysler. Stocks higher after the news. MBS taking a breather after a sharp eun higher in recent weeks.

8:35 AM ET - MBS slightly lower this morning with no economic data due for release. Quadruple witching occurs in the equity markets today so volatility should be rampant. Oil at $34.94.

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Market Update - Friday, December 19, 2008 10:32am ET

12-19-08
Larry Bailey

Current Trend Direction: Sideways

Risks favor: Carefully Floating

Current Price of FNMA 4.5% Bond: $101.44, -38bp

Surprise, surprise...volatility will once again be the key word on Wall Street today, as "quadruple witching" day occurs in the Stock markets. Quadruple witching, which happens four times a year, is the simultaneous expiration of market index futures, market index options, stock options, and stock futures. As Traders rush to unwind positions, Stock prices have the potential to bounce around rather sharply. This volatility has already extended to Mortgage Bonds, as Bond prices have also been jostled around quite a bit in the first hours of trading. It should be noted that on the Monday following a quadruple witching, securities prices often times move in the opposite direction from where they headed Friday.

There are no economic reports set for release today - but there was some big news from Japan. The Bank of Japan trimmed their benchmark interest rate from 0.3% to 0.1%, and unveiled a series of new steps to pump more money into the financial system to ease an emerging credit crunch among Japanese companies. Japan doesn't have much more room to cut rates at these levels, so it will be interesting to see how this stimulus impacts their financial markets.

The auto industry finally received some relief this morning, as President Bush just announced a deal that GM and Chrysler are going to receive $13.4B in government loans to keep operating in exchange for a restructuring. Ford has more cash on hand than the other two, and has said it should be able to avoid tapping into federal dollars unless weak auto sales continue longer than expected into 2009. Auto stocks are higher on the news, and this is providing a lift, as well as a sigh of relief to the entire Stock market.

Hopefully, you have taken advantage of the recent alerts and avoided the price erosion as Bonds seem to have tired out a bit since the move higher earlier this week. Don't you remember we built this rally on weak economic news, talks of the Fed purchasing Mortgage Bonds and rock and roll :)...and those factors have not changed, which bode well longer-term.

Again on new transactions, we recommend floating and here's why...prices do have support just beneath current levels and we feel there is a good chance prices could move higher on our aforementioned quadruple witching reversal theory.

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Market Update - Thursday, December 18, 2008 9:30am ET

12-18-08
Larry Bailey

Current Trend Direction: Higher

Risks favor: Floating

Current Price of FNMA 5% Bond: $101.62, -3bp

The Job Market continues to struggle. Initial Jobless Claims were reported at 554,000, near expectations, but still a bad number. The four-week average of Claims rose 2,750 to 543,750 - the highest level since December 1982. And the four-week average of continuing Claims rose 92,000 to 4.23 million -- the highest since January 1983. Mortgage Bonds have had little reaction to the release.

Leading Economic Indicators and the Philadelphia Fed Index are due out a little later, but unless these reports really miss the mark - there may not due much to influence the market.

Oil is now trading at $38.64 - wow. This should translate to some nice prices at the pump. It is really amazing how people were saying Oil was going to be $200 a barrel. Now we are hearing forecasts of possibly $25 a barrel. Still, the longer-term view for Oil will likely be much higher...it is just a matter of time.

Hopefully, you locked on yesterday's alert and missed the sudden price erosion, but on new transactions, let try and float and see if Bonds can regain their footing and move higher again.

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Wow..what a day on the markets yesterday...4.5% 30 year fixed a REALITY

12-18-08
Larry Bailey

Wed, Dec 17 - 5:00 PM ET
Market Wrap: Our benchmark FNMA 4.5% bond fell 28bp to close at $101.66 while trading within an expanded 137bp intra-day range. The bond showed early upward momentum following yesterday's huge rally but fell to profit taking later in the session as volatility picked up. Mortgage bonds have a history of spiking higher on significant Fed rate cuts only to temporarily sell off in the days that follow. The financial markets spent most of the day pondering future outcomes of the Fed's latest monetary policy. Commercial banks responded by immediately dropping their prime lending rate by 75bp to 3.25%, the lowest rate in over 50 years. This will help millions of business and consumer borrowers. The Fed has also offered to lend up to $200 billion to support securities backing car loans, credit card loans, and student loans. Another expected outcome is lower mortgage rates. Conventional 30-year mortgage rates may fall to around 4.50% from their current average level of 5.47% in the months ahead. The 3-month U.S. dollar LIBOR rate fell to 1.58% from 1.85% yesterday following the Fed's rate cut. Before the credit crisis hit, the 3-month U.S. dollar LIBOR usually traded within 50bp of the official Fed funds rate. We'll know the credit crisis has fully eased when this 50bp relationship has been restored. Stock prices swung back and forth between positive and negative territory before finishing lower. Morgan Stanley reported larger than expected losses of $2.30 billion in the fiscal 4th quarter vs. estimates for a loss of $298 million. Morgan Stanley's earnings troubles along with those of Goldman Sachs $2.12 billion loss posted yesterday weighed on the stock market as traders are quick to sell rallies to lock in profits during this bear market. The Dow fell 99 points to close at 8,824 while the broader S&P 500 Index retreated 8 points to end at 904. The NASDAQ Composite Index gave back 10 points to finish at 1,579.

3:15 PM ET - Crude futures settle at $40.06/barrel down $3.54.

2:22 PM ET - Investors and traders take some chips off the table and cash in. MBS at session lows. Stocks move into the black. Oil retreats to $40.72/barrel down $2.88.

11:34 AM ET - Things don't go straight up. MBS fall from earlier highs. Alert To Lock!

9:30 AM ET - OPEC to cut production by record levels but oil drops to $43.15/barrel down 54 cents.

8:30 AM ET - MBS near unchanged after yesterday's huge rally. Morgan Stanley's 3rd quarter earnings lower than estimates. Stock futures falling.

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