www.hudclips.org DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410 June 22, 1982 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING - FEDERAL HOUSING COMMISSIONER IN REPLY REFER TO: Mortgagee Letter 82-10 TO: ALL APPROVED MORTGAGEES SUBJECT: Initiatives Designed to Provide Economic Stimulus to the Housing Industry In a recent news release, Samuel R. Pierce, Jr., Secretary of the Department of Housing and Urban Development, outlined a number of modifications to current procedures that would provide economic impetus to the sluggish housing industry. Single Family Housing has implemented the following initiatives and is recommending statutory and regulatory changes that will permit the use of other innovative programs suggested by Secretary Pierce when processing applications for single family insured mortgages. In valuation, the release stressed the need to rely on the most recent market place appraisal information. HUD procedures for establishing property values rely heavily on the market approach, which establishes an upper limit of value. In applying this approach, members of fee panels and HUD staff will be required to use the best available and most recent comparable sales which can be identified. At least two of the three comparable sales used in establishing value for mortgage insurance should have been financed conventionally, with values assigned on the basis of the conventional mortgage closing amounts. You will note that 24 CFR 203.33 provides that: The mortgagor's income will be considered adequate if the total prospective housing expense does not exceed 35 percent of the mortgagor's net effective income, and if the total of the prospective housing expense and other recurring charges do not exceed 50 percent of the mortgagor's net effective income. In addition, this provision authorizes the consideration of favorable compensating factors to justify exceeding these limits in some cases. _____________________________________________________________________ 2 Because of current economic conditions, we believe many homeowners are compelled to pay a much larger portion of their incomes for housing expenses. Therefore, we have instructed our field offices to consider such favorable compensating factors as the reduction in IRS tax liability due to homeownership, past savings accumulated at a rate comparable to the increase in housing expense, and any other factors that indicate the borrower is, in fact, capable of substantially exceeding these net effective income ratios in paying for monthly shelter costs. In view of the President's directive to assure the maximum opportunity for families to purchase a home, we have instructed our field offices further that they may utilize modestly higher net effective income ratio guidelines for such borrowers, in the amounts of 38 and 53 percent respectively. This will accommodate the currently more severe economic conditions. Within this framework and where circumstances warrant, we have also authorized use of the Veterans Administration's "residual income" approach to determine the sufficiency of the borrower's income. Moreover, mortgagees may determine in some instances that even greater contributions by the borrower than would be justifiable under the 38/53 guidelines approach are allowable if the compensating factors of a given case support such a determination. Interest buy-down agreements, previously unacceptable with Graduated Payment Mortgages, may now be used and the buyer qualified on the basis of the reduced payment when Section 245(a), Plan IV, is selected by the applicant. The interest rate may be reduced by three percent for at least three years or three percent in the first year, two percent in the second year and one percent in the third year. The shared equity mortgage in which an investor and an owner-occupant purchase the property as co-mortgagors was previously limited to a maximum mortgage amount of 85 percent of that available to an owner-occupant. We have changed existing instructions to permit the maximum mortgage in such transactions to be processed on the basis of the maximum mortgage available to an owner-occupant. Certain provisions have been imposed on such agreements which have to be complied with to obtain the higher mortgage amount. The document providing for the sharing of equity must be submitted with the application for mortgage insurance in order for HUD to ascertain that the agreement does contain the necessary provisions. _____________________________________________________________________ 3 With respect to the 70 percent pre-sale requirement to close-out a condominium project mortgage, we have authorized our field offices when warranted to reduce the pre-sale requirement to 51 percent. This will facilitate the sale and close-out of individual units in the condominium project. Instructions are in process and will be incorporated in a Mortgagee Letter implementing the negotiated interest rate program. This program is intended to provide a favorable interest rate for the borrower without sacrificing the yield the lender must realize in order to fund a mortgage loan. Copies of appropriate memoranda are attached. For additional information and guidance, mortgagees are asked to contact the field office with whom they normally transact single family mortgage insurance business. I would be pleased to receive any comments or suggestions you have to further assist the housing industry. Sincerely, Philip Abrams General Deputy Assistant Secretary--Deputy Federal Housing Commissioner Attachments _____________________________________________________________________ DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D.C. 20410 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING - FEDERAL HOUSING COMMISSIONER MAY 26 1982 MEMORANDUM FOR: All Regional Administrators, Regional Directors of Housing, Area Office Managers, Area Office Directors of Housing, Service Office Supervisors, and Chiefs of Mortgage Credit FROM: Philip Abrams, General Deputy Assistant Secretary-Deputy Federal Housing Commissioner, HD SUBJECT: Single Family processing instructions and guidelines To further the President's program to assure the maximum opportunity for families to purchase a home, all field offices are directed to apply the following principles in processing: 1. Field offices will utilize 38/53 as guidelines in stead of 35/50. The purpose of this is to liberalize the income criteria in the acceptance of mortgagors. The new guidelines should be utilized in the same way as the previous ones. Compensating factors should be identified in accordance with outstanding instructions when these guidelines are exceeded. 2. Field offices will also emphasize the importance of residual income when applicant's income appears to be marginal. The use of this system has proven successful for the Veterans Administration over the years. You must determine whether the residual income is sufficient to support the family and to take care of their other obligations, exclusive of shelter expenses and long-term installment payments already deducted. Consideration must be given to the number and ages of dependents and the locality and economic level of the neighborhood in which they will be living. 3. The ratios and the residual income considerations are not the sole criteria for qualifying an applicant. Outstanding instructions require field offices to give full consideration to the presence of other compensating factors, such as the ability to accumulate savings, the tax benefit the borrower will realize as a result of the payment of interest on the mortgage, the limited and careful use of credit, as well as many other indications of financial responsibility of the borrower which may compensate for a large portion of the borrower's income being allocated to housing expense. _____________________________________________________________________ DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D.C. 20410 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING - FEDERAL HOUSING COMMISSIONER IN REPLY REFER TO: APR 1 - 1982 MEMORANDUM FOR: All Area Office Managers All Service Office Supervisors FROM: Philip Abrams, General Deputy Assistant Secretary-Deputy Federal Housing Commissioner, HD SUBJECT: Modification of current instructions on interest buy-down escrows The instructions for interest buy-down escrows, as set forth in HUD Handbook 4155.1 , are being expanded to permit such escrows in conjunction with Section 245(a), Plan IV. This plan provides for the monthly payments to increase at the rate of two percent over a ten-year period. The interest buy-down is limited to a three percent interest reduction for a period of at least three years in accordance with outstanding instructions. If this plan is used, we will qualify the buyer on the first year's payment by incorporating the three percent reduction with the lower payment determined by applying the applicable factor for Plan IV. _____________________________________________________________________ APR 13 1982 MEMORANDUM FOR: All Regional Administrators SUBJECT: Changes in underwriting single family loans On March 29, 1982, President Reagan accepted my recommendation and announced that "we are easing existing guidelines to expand the number of potential homebuyers qualifying for FHA mortgage loans." To implement this new policy, effective immediately, all field offices are directed to utilize, in determining the adequacy of a mortgagor's income, whichever of the following methods qualifies the family: 1. Guidelines of 38 percent of net income for housing expense and 53 percent of net income for all fixed expenses, or 2. Residual income method as used by the Veterans Administration (VA). Furthermore, effective immediately: 1. Pursuant to the authority provided in the regulations, the 70 percent pre-sale requirement for condominiums is reduced to 51 percent. The 51 percent pre-sale will prevail for the endorsement of HUD-insured mortgages notwithstanding a higher pre-sale requirement by the VA or the Federal National Mortgage Association (FNMA). 2. Appraisals based on conventional mortgage closing amounts are to be accepted as comparables. In addition, we expect to issue instructions in the near future which will allow acceptance of the following types of mortgages: 1. Accept shared equity mortgages. 2. Accept growing equity mortgages. 3. Accept a three percent buydown on GPM Plan IV mortgages. _____________________________________________________________________ 2 Field offices are to begin processing based on these changes immediately. They will remain in effect until September 30 1982. During this period, we will make a judgment regarding continued applicability. /s/ Samuel R. Pierce, Jr. Samuel R. Pierce, Jr. _____________________________________________________________________ Office of Public Affairs Washington, D.C. 20410 NEWS RELEASE Upcoming News Alert (202) 755-6424 Radio Spotmaster (800) 424-8530 (In Washington, D.C. call 755-7397) HUD-No. 82-71 FOR RELEASE: Andy Gasparich (202) 755-5284 Thursday Leonard Burchman (202) 755-6980 April 15, 1982 HUD SECRETARY OUTLINES STIMULUS FOR HOUSING Housing and Urban Development Secretary Samuel R. Pierce, Jr., today announced "a series of steps designed to provide a much needed short-term economic stimulus to the housing industry." At a news conference, Secretary Pierce outlined the recommendations of a Cabinet level Working Group on Housing Policy, established by the President in February to develop ways to assist the housing industry that are consistent with the President's Economic Recovery Program. Secretary Pierce, who chaired the Working Group, noted that the recommendations were presented to the President on March 31, and all have been accepted and will be implemented quickly. "Our final recommendations," said Secretary Pierce, "are focused on regulatory and administrative changes in order to have the greatest impact on the 1982 building season." One of the recommendations will clear the way for the construction of some 70,000 assisted housing units now stuck in the processing pipeline. The Financing Adjustment Factor (FAF) will be allowed to float to one-half percent below the tax exempt bond interest rate, not to exceed 14 percent. The Secretary explained that FAF allows HUD to adjust allowable rents on new and substantially rehabilitated assisted apartment projects to reflect the higher interest rate that developers must pay to finance the low-income housing. "This change", said Secretary Pierce, "means that much needed housing will be made available for low-income Americans, as well as employment for thousands of construction workers." To be eligible for the new FAF, developers must begin construction by August 1, 1982. more _____________________________________________________________________ HUD-No. 82-71 2 A number of other recommendations are designed to broaden the base of the housing finance system, expand the number of potential homebuyers qualifying for FHA-insured mortgages, and ease the regulatory burden on home builders. Secretary Pierce said mortgage fund availability will be increased by liberalizing regulations covering mortgage revenue bonds and private pension funds. Proposed changes will allow more distressed areas to qualify for mortgage revenue bonds and will liberalize accounting procedures to increase the volume of revenue bonds. In the area of pension funds, the Department of Labor has agreed to remove restrictions under the Employment Retirement Income Security Act (ERISA) making it easier for all pension funds to invest in mortgages. In an effort to increase the sale of both new and existing homes, the Secretary announced changes in FHA requirements to increase the number of families who qualify for FHA-insured mortgages, especially first-time homebuyers. "Effective immediately," said Secretary Pierce, "new guidelines will be used to determine whether a family's income is adequate for an FHA-insured mortgage." FHA will liberalize guidelines to qualify more mortgage borrowers, making them consistent with those of the Veterans Administration. In addition, FHA will emphasize conventional appraisal to make the qualification process more market sensitive. Furthermore, the Secretary said FHA regulations will be changed to allow builders to "buydown" the interest rate on Graduated Payment Mortgages (GPM) for a maximum of 3 percent the first year, 2 percent in the second year, and 1 percent in the third year. "The combination of the GPM and the buydown," said Secretary Pierce, "will allow many new potential homebuyers to qualify for mortgage financing." In addition, Secretary Pierce said FHA is meeting the need of today's market conditions by providing Federal insurance for three alternative mortgage instruments: * The Shared Appreciation Mortgage (SAM) allows lenders to offer a lower mortgage rate in return for a share of the equity appreciation as the value of the house rises. This substantially lowers the income requirement; * The Shared Equity Mortgage (SEM) allows outside parties to provide part of the housing expense in return for a future share of the equity; and more _____________________________________________________________________ HUD-No. 82-71 3 * The Growing Equity Mortgage (GEM) has the same downpayment requirement as a fixed rate mortgage but requires rising monthly payments during the early years, amortizing the loan more rapidly. Lenders will likely offer lower mortgage rates in return. In the area of regulatory relief, Secretary Pierce outlined a number of proposed changes to cut unnecessary Federal red tape that now confronts home builders, often causing increased cost to consumers. Among these are: * Revising HUD's Minimum Property Standards to remove liveability and marketability criteria; * Limiting HUD's environmental impact statement requirements to projects of 2,500 units or more and accepting Veterans Administration environmental assessments, thus eliminating duplication of effort; * Allowing lenders and builders to use the closest FHA office, rather than observing HUD's geographical zones; * Removing the mandatory requirement for review of rent changes in non-subsidized, FHA-insured apartment buildings; * Removing artificial restraints on condominium conversions, allowing the marketplace to determine the feasibility of conversion; * Making housing built under HUD's Manufactured Home Construction and Safety Standards eligible for the more favorable FHA 30-year insured mortgage when they are placed on permanent foundations; and * Revising the Real Estate Settlement Procedures Act (RESPA) to eliminate the portions that restrict innovative and logical development of the settlement service industry while retaining consumer disclosure aspects. "The steps that we are taking," said Secretary Pierce, "show this Administration's commitment to a healthy housing industry. However, these are just short term measures to help the industry through a difficult period. The long term measures that will help not only the housing industry but the American economy as a whole can be found in the President's program for economic recovery."