www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 February 5, 1988 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 88-2 TO: ALL APPROVED MORTGAGEES SUBJECT: Implementation of the Housing and Community Development Act of 1987 - Single Family Provisions The purpose of this letter is to advise you of the significant changes to the FHA Single Family insurance programs brought about by the Housing and Community Development Act of 1987 (1987 Act). These changes are discussed under their respective headings below and are effective as of the date of the signing of the 1987 Act, February 5, 1988, unless otherwise stated. Permanent Insurance Authority The 1987 Act provides the Department with permanent insurance authority for all of the single family programs except the Section 235 program which has not received new budget authority for several years. Consequently, so long as the FHA programs are operating within budgeted credit ceilings, we will no longer be hampered by the loss of insuring authority at the end of the fiscal year or at the expiration of short extensions of insuring authority pending the passage of a new budget. We can now look forward to greater continuity in our insuring operations. (The 1987 Act terminates our authority to insure new mortgages under the Selection 235 Program as of October 1, 1989.) Mortgage Limits While the 1987 Act did not change the basic mortgage limit for a one unit property ($67,500), it did increase the maximum ceiling to which this limit may be raised in high cost areas from $90,000 to $101,250. The new ceiling for a one unit property is now 150 percent of $67,500 or $101,250. Henceforth, for high cost areas which qualify for the new ceiling, the mortgage limits for one-, two-, three-, and four-unit properties insured under Sections 203(b) and 234(c) will be the lesser of the following: Percentage of Median Price Units Ceiling of one-unit Properties in Area 1 $101,250 95% 2 $114,000 107% 3 $138,000 130% 4 $160,500 150% For Alaska, Hawaii, and Guam the ceiling for one to four unit properties could be raised by an additional one-half of the amounts under "Ceiling" above. The 1987 Act also defines the term "area" as used in this connection to mean a county or a Metropolitan Statistical Area (MSA) as established by the Office of Management and Budget, whichever results in the higher dollar amount. HUD will amend its regulations to permit the increase to 150 percent of the basic mortgage limit in high cost areas. Until the regulations are amended, HUD intends to use its authority to waive the regulatory requirements not required by statute in individual cases. The current regulations which limit the increase to 133-1/3 percent will be waived in each case where an increase over 133-1/3 percent is justified. The decision to exceed the limit in the regulations will be made for each area using the methodology described in this letter. Although the ceiling has been increased from $90,000 to $101,250, you are cautioned that this does not mean that all areas at the current $90,000 ceiling will automatically be raised to $101,250. Likewise, the mortgage limits for Alaska, Hawaii, and Guam will not be automatically increased to the higher ceilings allowed these areas. As described below, we will be using our own data sources to increase the limits, where justified, to 95 percent of the median price or $101,250 ($151,875 for Alaska, Hawaii, and Guam), whichever is lower. It has been HUD's recent practice to increase mortgage limits only in response to appeals developed and supported by sales price data in accordance with Mortgagee Letter 86-16. In order to better respond to the expectations generated by the 1987 Act, we plan to develop and publish as soon as possible a revised listing of high cost areas using data currently available to us. This data is organized by MSA and, therefore, this initial round of mortgage limit increases will be for MSAs only, unless, by chance, we have sales price data for an individual county supporting an increase. No area will have its mortgage limits reduced. These new mortgage limits will not be effective until published in the Federal Register. Once they are published, we will notify all approved mortgagees of the new limits. We anticipate the process will be complete within the next 30 days. After HUD has published this revision, it will consider any appeal for further increases that may be submitted by those doing business in areas for which the mortgage limit is not yet at the $101,250 level (or the higher limit permitted for Alaska, Hawaii and Guam) for a one unit property and could justifiably be increased. These appeals can include individual counties within MSAs as set forth in the 1987 Act. Adjustable Rate Mortgagee (ARMs) Formerly the number of ARMs that FHA could insure was limited to 10 percent of the total number of endorsements for the previous fiscal year. The 1987 Act raises this limit to 30 percent. Since over 1.4 million single family mortgages were endorsed in FY 1987, we have statutory authority in FY 1988 to insure 420,000 ARMs. The old 10 percent limit will be deleted from the regulation. Refinancing Section 245 Graduated Payment Mortgages Section 245 mortgages are now eligible under the statute to be refinanced under the streamline refinance procedure without an appraisal. The procedure will be identical to Section 203(b); i.e., the starting point will be the current unpaid principal balance, which would include any negative amortization which has occurred. However, the 1987 Act does require that the amount of the monthly payment due under the refinancing mortgage be less than that due under the existing mortgage for the month in which the refinancing mortgage is executed. This should benefit numerous mortgagors in areas where property values may have declined or not increased in the last few years. Investor Mortgagors The loan-to value ratio for investor mortgagors has been reduced to 75 percent, except for Section 203(k), a few minor special cases and HUD's Property Disposition sales. (The loan-to-value ratio for Section 203(k) investor mortgagors shall continue to be 85 percent.) A mortgagor is considered an investor if the property in question is not a primary or secondary residence. Previous instructions limiting the loan-to-value ratio on secondary residences to 85 percent remain in effect. This new 75 percent loan-to-value ratio is effective for all transactions involving a HUD conditional commitment, HUD Master Conditional Commitment, VA Certificate of Reasonable Value or Master Certificate of Reasonable Value issued, or an appraisal or Master Appraisal signed by a Direct Endorsement Underwriter, on or after the date of enactment of the 1987 Act, February 5, 1988. An investor that assumes a high ratio mortgage originated by an owner occupant pursuant to a HUD conditional commitment issued, or an appraisal signed by a Direct Endorsement Underwriter, on or after the date of enactment of the 1987 Act must pay down the outstanding mortgage balance to a 75 percent loan-to-value ratio, if the selling mortgagor is being released by the mortgagee from personal liability on the mortgage note. This requirement continues throughout the term of the mortgage. The original appraised value of the property should be used in determining the loan-to-value ratio. See the following section. New Assumption Policy Our current assumption requirements have been changed by the 1987 Act. Therefore, the instructions contained in Mortgagee Letter 86-15 , dated August 8, 1986, page 7, item 7, paragraphs 1, 2, and 3 pertaining to assumptions are modified as follows: For all mortgages that were endorsed on or after December 1, 1986, HUD now requires a review of the creditworthiness of each person that seeks to assume an FHA-insured mortgage: (1) during the first 12 months after endorsement of the mortgage if the original mortgagor was an owner-occupant, or (2) during the first 24 months after endorsement of the mortgage if the original mortgagor was an investor. Note that these provisions apply only during the first 12 and 24 months, respectively, of the term of the mortgage and are not required during the remaining term of the mortgage. The processing procedures for requesting creditworthiness approval, as stated in Mortgagee Letter 86-15 , item 7, pages 8-11, remain the same. Failure to satisfy these conditions will be grounds for acceleration of the mortgage, subject in each case to HUD approval. These new assumption provisions must be made a part of the mortgage (or, where applicable, deed of trust or security deed), either by incorporation into the form itself (initialed by the mortgagor) or by rider, signed by the mortgagor. The new provisions must read as follows: The mortgagee shall, with the prior approval of the Federal Housing Commissioner, or his designee, declare all sums secured by this mortgage to be immediately due and payable if all or a part of the property is sold or otherwise transferred (other than by devise, descent or operation of law) by the mortgagor, pursuant to a contract of sale executed not later than 12 months after the date on which the mortgage is endorsed for insurance, to a purchaser whose credit has not been approved in accordance with the requirements of the Commissioner. (If the property is not the principal or secondary residence of the mortgagor, "24 months" must be substituted for "12 months. ) These new assumption provisions, like the current assumption provisions, apply to purchasers who take title to property subject to the mortgage without assuming personal liability for the debt as well as to those purchasers who assume and agree to pay the mortgage debt thereby becoming personally liable for it. Mortgages which contain the assumption provisions required by Mortgagee Letter 86-15 are adequate to enable the new assumption policy to be followed and do not need to be modified. The aforementioned assumption policy is not applicable to those mortgages closed prior to December 1, 1986, but endorsed on or after December 1, 1986, since they do not contain provisions on assumptions which require the creditworthiness review. Likewise, for mortgages endorsed prior to December 1, 1986, these new assumption requirements do not come into play. Such mortgages are freely assumable. Notice to Homeowners Considering Sale by Assumption Effective immediately, all mortgagors must be provided with a Notice (attached) on or before the date of settlement advising them of the procedures for requesting the lender to release them from liability (FHA Form 2210.1 Approval of Purchaser and Release of Seller). For the purposes of these procedures, the use of the word "assumptor(s)" below refers to purchasers who assume and agree to pay the mortgage debt and thereby become personally liable for it. If a homeowner does not choose to request a release of liability from the lender or the lender refuses to provide the release, the homeowner and the assumptor will remain liable, individually and jointly, for any default for a period of 5 years following the assumption. Upon expiration of the 5 year period, only the assumptor shall be liable for any default on the mortgage unless the mortgage is in default at the time of the expiration of the 5 years. In the case of a series of assumptors, various intervening mortgagors between the original and current owners may request and receive a release from liability from the lender (FHA Form 2210.1). However, the original and intervening mortgagors that are not released by the lender will be held liable until their 5 year liability period expires. Lenders must ensure that the original mortgagors receive the Notice on or before the date of settlement. A copy of the signed Notice should be placed in the original file. For mortgages endorsed on or after December 1, 1986, and prior to the effective date of the 1987 Act, a Notice must be sent to the original mortgagor by the servicing lender when the servicer learns that the mortgage will be assumed or has been assumed. A notation of the mailing must be retained in the servicing file. Prohibition of Requirement of Minimum Principal Loan Amounts Lenders may not require, as a condition of providing an FHA insured loan, that the principal amount of the loan exceed a minimum amount established by the lender. If it comes to HUD's attention that a lender has established a pattern of violating this prohibition, HUD will take appropriate administrative measures to sanction that lender, including, possibly withdrawing the lender's HUD approval. Equity Skimming The 1987 Act amends Section 912 of the Housing and Urban Development Act of 1970 by (1) including condominiums and cooperatives in the class of one-to four-family dwellings covered by the equity skimming statute; (2) indicating that a party guilty of equity skimming ("the purchaser") need not be formally obligated on the loan documents; and (3) expanding the maximum penalty from a $5,000 fine and three years imprisonment to a $250,000 fine and five years imprisonment. The 1987 Act also amends Title II of the National Housing Act to state that the applicability of the equity skimming penalty extends to Single and Multi-Family mortgage notes insured, acquired or held by the Secretary. The 1987 Act defines the persons subject to the law as well as the activity of diverting rent and other proceeds from application toward payment of the mortgage note. It, too, increases the maximum penalty from three to five years imprisonment, and from $5,000 to $250,000 in fines for this activity. Since Section 912 was approved in 1970, the Department has grown even more concerned over continued reports of equity skimming by unscrupulous "purchasers." The 1987 Act evidences this concern by significantly increasing the penalties a guilty party can be made to pay, as well as by enhancing the enforceability of the equity skimming statute by plugging loopholes with more precise definitions of the offenders and their prohibited activities. This Mortgagee Letter address only those portions of the 1987 Act that concern the FHA Single Family insurance program which could be implemented promptly or which were self-implementing. Steps will be taken to implement other sections of the 1987 Act at a later date. Sincerely yours, Thomas T. Demery Assistant Secretary Attachment Notice to Homeowner Assumption of HUD/FHA-Insured Mortgages You are legally obligated to make the monthly payments required by your mortgage (deed of trust) and promissory note. If you sell your home by letting a purchaser assume your mortgage, you are still liable for the mortgage debt unless you obtain a release of liability from your mortgage lender. You may obtain a release of liability by having the credit of your purchaser approved by HUD/FHA or your lender and having your lender complete FHA Form 2210.1 - "Approval of Purchaser and Release of Seller." If you sell your property but do not obtain a release of liability and if the purchaser assumes responsibility for the debt rather than merely taking title subject to the mortgage, then both you and the purchaser of your property will be liable, both individually and jointly, for any default for a period of 5 years following the date of assumption. After 5 years, only the purchaser will remain liable unless the mortgage is in default at the time the 5 year period expires. If the purchaser takes title subject to the mortgage without assuming personal liability for the debt, you will remain liable for the full term of the loan. If you wish to pursue being released from liability, you should get in touch with your mortgage lender. Questions concerning your release of liability should be directed to your mortgage lender or you should get in touch with the Housing Management Staff of your local HUD office. Your lender can provide you with the address of your local HUD office. You must sign and date this Notice as indicated, return one copy to your lender as proof of notification and keep one copy for your records. _________________________ _____________________________________ Date Mortgagor _____________________________________ Co-Mortgagor Instruction to Lender: A copy of this Notice must be given to the mortgagor(s) on or before the date of settlement. You should retain a signed copy in the origination file.