www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 August 31, 1987 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 87-24 TO: ALL APPROVED MORTGAGEES SUBJECT: Refinance Transactions -- Additional Instructions and Clarifications Mortgagee Letter 86-4 , dated January 28, 1986, outlined different types of refinancing transactions. The purpose of this letter is to clarify certain policies and procedures related to different types of refinance transactions. A. Streamline Refinances Two types of refinancing transactions to lower the interest rate and the monthly payments do not require regular mortgage credit underwriting and are frequently referred to as "streamlined refinancing," with no cash out. These two types of streamline refinance transactions involve the refinance of an existing FHA-insured mortgage either without an appraisal or with an appraisal. Neither transaction requires a face-to-face interview, nor is it necessary to obtain a picture identification of the applicant, a pay stub or bank statement, as set forth in Mortgagee Letter 87-12. However, you still must require evidence of the Social Security Number of the applicant for these streamline transactions. 1. Calculation of mortgage amount Unfortunately, some misunderstandings have developed when processing these cases as to what items may be included in the pay-off figure which forms the basis for the new mortgage amount. The procedure for determining the new mortgage amount for these two types of streamline refinance transactions is as follows: a. Without a new appraisal: 1. Unpaid PRINCIPAL balance 2. Subtract anticipated MIP refund if originally financed in the mortgage 3. Add new MIP if it is to be included in the mortgage. _____________________________________________________________________ 2 b. With a new appraisal: 1. Unpaid PRINCIPAL balance. 2. Subtract anticipated MIP refund if originally financed in the mortgage. 3. Where the new appraisal supports it, you can add the costs of refinancing (closing cost and appropriate discount points). In no event can the maximum mortgage amount, without the inclusion of the new MIP, exceed (i) in the case of an owner occupant, 97 percent of the first $25,000 of appraised value and 95 percent of appraised value in excess of $25,000, or (ii) in the case of investors, 85 percent of appraised value. 4. Add new MIP if it is to be included in the mortgage. We want to emphasize that an investor mortgagor may include refinancing costs in formula b only in those instances where it will not exceed 85 percent of the new appraised value. Interest, whether or not delinquent, may not be included as part of the existing indebtedness or the cost of refinancing in any refinancing transaction, whether it be streamline or a regular cash out transaction. 2. Delinquent monthly payments Our original requirement that the present mortgage must be current in order to be considered eligible for streamline refinancing is now modified to permit the loan to be refinanced if it is in arrears by no more than two payments; provided that the loan must be brought current by the refinancing lender or some other party before the refinancing transaction. No obligation may be placed upon the mortgagor for repayment of funds used by the lender to bring the loan current. Inasmuch as this is an administrative determination based on enhancing both the mortgagor's and the Secretary's position, no broader inference should be drawn from it when applying HUD credit standards to other transactions. 3. Holding period before eligible for streamline refinance We wish to remind you that investor mortgagors, as well as owner-occupant mortgagors, who assumed, or took title subject to, high ratio FHA-insured mortgages may refinance them without an appraisal and without reducing the mortgage amount. However, to avoid some new abuses which have begun to occur under the refinance program, for firm commitments issued by HUD and mortgage credit worksheets signed by Direct Endorsement (DE) underwriters, on or after November 1, 1987, HUD will require that the mortgagor, whether investor or owner occupant, who assumed, or took title subject to, FHA-insured mortgage without _____________________________________________________________________ 3 the benefit of a credit review by HUD or a DE lender, must have owned the property for at least six months before being eligible for the streamline refinance program. This will be an adequate period of ownership of the property, while subject to the existing insured mortgage, for the Commissioner to make the determination that the mortgagor's record of payment on the existing mortgage meets the standards as required by Section 203.43(c)(4) of the regulations and is consistent with the Department's efforts to restrict "quick flips" of ownership and other program abuses. Where an investor has a financial interest in more than seven rental units, as described in 24 CFR 203.42, it will still be necessary for the local HUD Field Office to obtain a regulatory waiver from HUD Headquarters before authorizing the refinancing of the mortgages. Waivers will only be granted when it is clearly in HUD's best interest to do so. Recommendations from the Field Office must address this point. 4. Term of mortgage Regulation changes effective March 23, 1987, (24 CFR 203.43 and 234.52) provide that the refinancing mortgage without an appraisal may have a term extended to the lesser of (i) 30 years or (ii) the unexpired term of the mortgage, plus 12 years, if the Commissioner determines that an extension of the term of the mortgage will inure to the benefit of the applicable insurance fund, taking into consideration the outstanding insurance liability under the existing insured mortgage. The Commissioner has determined that since the monthly mortgage payments under the refinancing mortgage will be reduced in all cases, the extension of the mortgage term will in every case inure to the benefit of the applicable insurance fund. Therefore, in all cases the term of the refinancing mortgage may be for the unexpired term of the existing mortgage plus twelve years, or 30 years, whichever is less. 5. Refinancing mortgages by lenders located outside the HUD Field Office jurisdiction Heretofore, we have permitted lenders located outside the HUD field office jurisdiction to use the streamline refinance program for mortgages currently in their servicing portfolios. Because no face-to-face interview is required under the streamline program, effective immediately, any lender, without regard to whether a mortgage is currently in their servicing portfolio, the lender's jurisdictional authority or its branch locations, may solicit and process a streamline refinance application from any area of the country, provided the lender: _____________________________________________________________________ 4 a. is approved for Direct Endorsement by a HUD Office b. notifies, in writing, the HUD field office that has jurisdiction over the area that the lender intends to offer a streamline refinance program and submits to that HUD office evidence of its Direct Endorsement approval from any other HUD office, along with a list of approved underwriter(s). Furthermore, when processing streamline refinance applications, a mortgagee may: a. Offer a "no-cost" program (no closing cost and no discount). b. Offer an interest rate higher than the market rate which will serve to defray some or all of the costs involved. c. Offer an interest free advance of the MIP refund amount. d. Offer an interest free advance of amounts equal to the present escrow balances on the existing loans. These actions should benefit large numbers of mortgagors who otherwise would not be able to afford to refinance their present mortgages. When the mortgagee calls for case number and appraiser assignment, it must advise the Field Office that the transaction is a streamline refinance involving an "out-of jurisdiction" mortgagee. 6. Evidence that current mortgage is FHA-insured It has come to our attention that some lenders have not exercised due diligence to establish that the existing mortgage being refinanced under our streamline procedures is indeed an FHA-insured mortgage. Therefore, for firm commitments issued by HUD and mortgage credit worksheets signed by DE underwriters, on or after November 1, 1987, in addition to the requirement that the mortgagee provide evidence that the mortgagor's payments under the existing mortgage are current (or no more than two months delinquent, as noted above) the mortgagee must also include as part of the application evidence that the existing mortgage is FHA-insured. Such evidence must be in the form of a copy of the Mortgage Insurance Certificate for the existing mortgage, a copy of the HUD-l Settlement Statement that indicates that the mortgage being prepaid was FHA-insured or a reference to the FHA case number of the existing mortgage. _____________________________________________________________________ 5 7. Refinancing condominium properties a. Section 420 of the Housing and Urban Rural Recovery Act of 1983 amended Section 234(c) of the National Housing Act to provide that at least 80 percent of the HUD-insured units in a condominium project must be owner occupied before HUD can make insured financing available to an investor. However, this test occurs as part of HUD's initial application process and, therefore, no further finding has to be made for streamline refinancing previously insured mortgages on condominium units. b. The regulation changes effective March 23, 1987, also permit the processing of current HUD-insured mortgages on condominium units under paragraph Ala, above; i.e., without an appraisal. Previously, condominium units could not be refinanced without an appraisal. 8. Subordinating existing mortgages When refinancing without an appraisal, other existing mortgages may be subordinated without regard to the total indebtedness against the property, except when HUD holds the second mortgage to secure payment of Section 235 subsidy funds (see paragraph D, below). It has been determined that it would not adversely affect the insurance funds if existing mortgages were subordinated to the refinancing mortgage and thus became junior liens against the property, since the liens were outstanding against the property before the refinancing. Sections 203.43(c) and 234.52 provide that a mortgage, refinancing an existing insured mortgage, may be insured without regard to any limitation on eligibility contained in the regulations. Therefore, Sections 203.32 and 234.52, prohibiting subordinate liens unless prior approval of the Secretary is obtained, are not applicable to refinancing mortgages without an appraisal 9. Refinancing 30-year mortgage to 15-year mortgage In those instances where the mortgagor wishes to refinance the mortgage under the streamlined procedure and wishes to reduce the mortgage term to 15 years, no mortgagor underwriting is required even if the new monthly payments are not reduced. Moreover, mortgagor underwriting is required if the increase in the monthly principal and interest payment is $50 or less. Under these circumstances, the provision of Sections 203.43(c)(3) and 234.52(c), requiring a reduction in monthly mortgage payments, are waived since the insurance liability of the Commissioner has been decreased because of the lesser term. _____________________________________________________________________ 6 10. Refinancing ARMs and GPMs Streamlined refinancing of a fixed rate mortgage to an ARM loan is permissible, provided the "worst case" or maximum interest rate under the terms of the ARM will not exceed the interest rate of the existing mortgage. Streamlined refinancing of an existing ARM to a new ARM also is acceptable if the maximum interest rate on the new ARM will not exceed the maximum interest rate on the existing ARM. Although GPMs may be refinanced without a new appraisal, the basic mortgage amount (principal balance minus MIP refund) may not exceed the original basic mortgage amount, thus requiring the amount of the negative amortization to be paid in cash. We recognize the hardship this creates in soft market areas and are seeking a legislative change to address the problem. In the meantime, Section 245 loans may be refinanced through the streamlined method without an appraisal with a level payment mortgage under Section 203 (234 for condominiums) in an amount not in excess of the original mortgage amount. The negative amortization may be paid by the mortgagor in cash or borrowed and secured by a second mortgage. However, the payments on the HUD first mortgage and the second mortgage may not exceed the next scheduled payment increase on the existing Section 245 mortgage. B. Refinancing Properties Valued at $50,000 or Less For properties with values of $50,000 or less, the maximum mortgage amount may not be based on 97 percent of $50,000 or less (the special program for modestly priced homes) since this program is available only to owner-occupant purchasers. C. Refinancing land contracts Land contracts, contracts for deed or other similar type financing arrangements can no longer be handled as refinance transactions since the mortgagor does not have title in fee simple or under a lease as approved by HUD. Effective immediately, such transactions are to be processed as purchase applications utilizing the contract to establish the purchase price. D. Refinancing Section 235 mortgages Cases insured under Section 235(i) may be refinanced under Section 203; however, an appraisal must be obtained to establish the current value so that a determination can be made regarding the amount of the second mortgage to be recaptured. The second mortgage, if any, may not be subordinated, but can be included in the new mortgage if the new value is sufficient to support the mortgage and a full credit analysis is performed on the mortgagor. _____________________________________________________________________ 7 On this or any other appraisal performed in conjunction with a refinancing transaction, the lender may advise the mortgagor that the current value is such that the mortgagor would be better advised to proceed as if no appraisal had been made. In that case, the lender will void the appraisal, make an appropriate notation in the remarks section on the mortgage credit worksheet and process under the streamline without appraisal procedure. E. Refinancing mortgages involving buydowns When refinancing mortgages with undistributed, temporary interest buydown funds where the unexpended funds are available to the mortgagor, they must be used to offset such items as negative amortization (Section 245), closing cost, etc., or to reduce the remaining principal balance which is to be refinanced. If the terms of the buydown agreement result in the reversion of the funds to the builder/seller they may likewise be used to offset some or all of the above costs with the permission of the seller. Unexpended funds may not be provided to the mortgagor as a cash refund. F. Over-estimated closing costs HUD must be assured that the mortgage amounts on all insured mortgages, including refinance transactions, are not inflated as a result of over-estimated closing costs. Therefore, when the mortgagor is obtaining the maximum loan amount, the lender must take the necessary steps to see that the closing costs used in arriving at the mortgage amount are a reasonable reflection of the actual closing costs. (Should not vary more than $100). If you have any questions concerning this Letter, please contact your local HUD Field Office or the Single Family Mortgage Credit Branch in HUD Headquarters, whose telephone number is (202) 755-6700. Sincerely yours, Thomas T. Demery Assistant Secretary