www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 December 26, 1989 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 89-31 TO: ALL APPROVED MORTGAGEES SUBJECT: Single Family Loan Production - Implementation of Certain Provisions of the "Department of Housing and Urban Development Reform Act of 1989" The purpose of this letter is to inform mortgagees about certain changes to the Single Family Mortgage Insurance programs that must be made as a result of passage of the Department of Housing and Urban Development Reform act of 1989 (1989 Act) that was recently passed by the Congress and signed by the President on December 15, 1989. According to the legislation, certain changes were effective the date the President signed it into law and these changes are as follows: I. Elimination of private investors. A. Private investors are no longer eligible for insured mortgages under any of HUD's Single Family Mortgage Insurance programs (except as set forth under paragraphs B, D and G below). The ban on private investors is effective for mortgages insured: 1. pursuant to a conditional commitment or master conditional commitment issued by HUD on or after December 15, 1989; or 2. pursuant to an appraisal report or master appraisal report signed by a Direct Endorsement underwriter on or after December 15, 1989; or 3. pursuant to a certificate of reasonable value or master certificate of reasonable value issued by the Department of Veterans Affairs on or after December 15, 1989. Investors that are State or local government agencies or instrumentalities thereof and nonprofit organizations that intend to sell or lease the mortgaged property to low or moderate income persons (income does not exceed 115 percent of the _____________________________________________________________________ 2 applicable median family income as provided in Section 143(f) and (i)(2) of the Internal Revenue Code) remain eligible for insured financing. The nonprofit organization must be of the type described in Section 5O1(c)(3) of the Internal Revenue Code of 1986 as an organization exempt under Section 501(a), have two years experience as a provider of housing for low and moderate income persons, have a voluntary board and no part of the net earnings of the organization may inure to the benefit of any member, founder, contributor or individual. The underwriting requirements set forth in HUD Handbook 4155.1 REV-2 remain applicable to these investor applications, except that a lease for the subject units(s) will no longer be required and the maximum loan-to-value ratio may be up to the amount available for an owner-occupied principal residence. Investor applications involving State and local government agencies may be processed by Direct Endorsement (DE) lenders. Applications involving non-profit organizations cannot be processed by DE lenders and must be processed by HUD. B. Exception for Section 203(k) and the sale of HUD- owned properties. The ban on private investors does not apply to mortgages insured under Section 203(k), HUD's Rehabilitation Mortgage Insurance program. Private investors are eligible for up to 85 percent loan- to-value insured financing under this program. State or local government agencies and nonprofit organizations that meet the criteria set forth in paragraph A, above, are eligible for maximum loan-to-value financing up to the amount available for an owner-occupied principal residence. The ban on private investors also does not apply to HUD-owned property being sold under our Single Family Property Disposition program. HUD will continue to insure mortgages for private investors that purchase HUD-owned property, but the maximum loan-to-value ratio will be 75 percent for one family dwellings. The loan-to-value ratio for two to four family dwellings will be 85 percent. (These loan-to-value ratios do not apply to sales contracts for HUD-owned property signed before December 15, 1989.) _____________________________________________________________________ 3 C. Assumptions of mortgages. The ban on private investors applies to persons that seek to assume insured mortgages that were subject to the restrictions of the 1989 Act (see paragraphs IAl, 2 and 3, above), including the purchase of property subject to such mortgages. The ban applies whether or not there is a release of liability by the lender of the selling mortgagor. Lenders will determine whether this ban on private investors applies before performing the required credit review set forth in paragraph II, below. Please note that the ban on assumptions by investors applies only to mortgages that are subject to the restrictions of the 1989 Act (see paragraph IA1, 2, and 3, above). Mortgages that are already insured may be assumed by investors under the provisions of Mortgagee Letters 86-15 , 88-2, 89-5, 89-6 and 89-27. D. Streamline refinances. An investor that has a current mortgage insured prior to the 1989 Act is eligible to refinance the mortgage under HUD's "streamline refinance without appraisal" procedure. Refinancing these mortgages reduces HUD's risk and is not affected by the ban on investors in the 1989 Act. E. Secondary residences. We expect that some unscrupulous persons may attempt to circumvent the ban on private investors by asserting that they are purchasing "secondary" residences. Lenders must closely review applications for insured mortgages on secondary residences to be sure that the applicant intends to be the occupant of the property and is not actually purchasing the property for investment purposes. Lenders are further reminded that a mortgagor can have only one secondary residence and that the maximum loan-to-value ratio is 85 percent. _____________________________________________________________________ 4 F. Condominium units. The requirement that no more than 20 percent of all HUD-insured mortgages in a condominium project be to investors is unchanged by the new legislation. Because investor mortgages can still be insured for public agencies and non-profits, Direct Endorsement lenders must continue to contact the HUD Field Office to register these transactions so that the Field Office can monitor the owner-occupancy requirements. G. Other exceptions. The ban on private investors does not apply to an Indian tribe, as provided in Section 248 or a service person who is unable to occupy the property because of his or her duty assignment, as provided in Section 216 or subsection (b)(4) or (f) of Section 222. II. Creditworthiness reviews of persons assuming insured mortgages. Any person that assumes an insured mortgage that is subject to the restrictions of the 1989 Act (see paragraphs IAl, 2 and 3, above), must be found creditworthy by HUD or a Direct Endorsement lender. This creditworthiness review must be performed in accordance with HUD mortgage credit policies (see Handbook 4155.1 REV-2 and Mortgagee Letters 86-15 and 87-5) including the screening of the applicant in HUD's Credit Alert Interactive Voice Response System and must include the following documentation: 1. HUD Application for Commitment for Insurance, Form HUD 92900. 2. Mortgage Credit Analysis Worksheet, Form HUD 929OOWS. 3. Picture identification and evidence of social security number. 4. Residential Mortgage Credit Report. _____________________________________________________________________ 5 5. Verification of Employment. 6. Recent pay stub. 7. Verification of Deposit. 8. Recent bank statement. 9. Copy of sales contract and any other agreements pertinent to the transaction, including agreements that involve subordinate financing. 10. Real estate certification signed by buyer, seller and selling real estate agent or broker. 11. Explanatory statements, as necessary, to clarify the above information. If the assumptor obtains a current, as is, appraisal performed by a HUD fee appraiser or DE staff appraiser showing that the present loan to value ratio for the property and the insured mortgage is 75 percent or less, the applicant(s) must be screened through HUD's Credit Alert Interactive Voice Response System, but HUD will allow the lender to use alternate and reduced documentation to speed processing. In these cases, the documentation requirements will be: 1. HUD Application for Commitment for Insurance, Form HUD 92900. 2. Mortgage Credit Analysis Worksheet, Form HUD 929O0WS. 3. Picture identification and evidence of social security number. 4. In-file credit report that accesses at least one national repository. 5. Recent pay stub that shows gross earnings for the pay period and year to date earnings. 6. Recent bank statement. 7. Copy of sales contract and any other agreements pertinent to the transaction, including agreements that involve subordinate financing. _____________________________________________________________________ 6 8. Real estate certification signed by buyer, seller, and selling real estate agent or broker. 9. Explanatory statements, as necessary, to clarify the above information. The lender must analyze the borrower's ability and willingness to pay the mortgage on the basis of the above documentation. The lender must analyze the borrower's credit characteristics, adequacy of income and adequacy of available assets to close the transaction. Stability of income need not be analyzed because there is no verification of employment. Therefore, Box 17 of Form HUD 929OOWS may be left blank. HUD will allow lenders to collect up to $500 for processing assumptions that are subject to the restrictions of the 1989 Act. The requirement for creditworthiness review extends for the life of the mortgage. III. New Mortgage Provision So that lenders can enforce the ban on investors and the creditworthiness review requirements, the appropriate following provision must be inserted in the security instrument (mortgage, deed of trust or security deed) for all insured mortgages that are subject to the restrictions of the 1989 Act (see paragraphs IA 1, 2 and 3, above): Use with HUD-approved mortgage forms. The mortgagee shall, if permitted by applicable law and with the prior approval of the Federal Housing Commissioner, or his or her designee, declare all sums secured by this mortgage to be immediately due and payable if all or part of the property is sold or otherwise transferred (other than by devise or descent) to a purchaser or grantee who does not occupy the property as his or her principal or secondary residence, or to a purchaser or grantee who does so occupy the property but whose credit has not been approved in accordance with the requirements of the Commissioner. _____________________________________________________________________ 7 Use with mortgage forms developed under new requirements. 9(b) Sale Without Credit Approval. Lender shall, if permitted by applicable law and with the prior approval of the Secretary, require immediate payment in full of all the sums secured by this Security Instrument if: (i ) All or part of the Property is otherwise transferred (other than by devise or descent) by the Borrower, and (ii) The Property is not occupied by the purchaser or grantee as his or her primary or secondary residence, or the purchaser or grantee does so occupy the Property but his or her credit has not been approved in accordance with the requirements of the Secretary. The appropriate provision should be used instead of the language required by Mortgagee Letter 89-6 (for HUD approved forms), or instead of Paragraph 9(b) of the Model Mortgage Form attached to Mortgagee Letter 89-23 (for forms developed under the new requirements). The provision must be made a part of the security instrument, either by incorporation into the form itself or by rider signed by the mortgagor. The new language is not required for Home Equity Conversion mortgages. The exception in the previous assumption provisions for transfer by "devise, descent or operation of law" is now limited to "devise or descent" to reflect the language in the new law. The new provisions expressly recognize that they may be exercised only "if permitted by applicable law." Currently, exercise of due on sale clauses is also limited in certain circumstances by Section 341(d) of the Garn-St Germain Depository Institutions Act of 1982 and the implementing regulations at 12 CFR Part 591. The new provisions are broad enough to prevent all assumptions by investors of mortgages subject to the restrictions of the 1989 Act, but HUD does not intend to approve exercise of the provisions in cases where investor financing is still allowed as described in paragraphs IA, lB, ID and IG, above, if the assumptor is found to be creditworthy. _____________________________________________________________________ 8 IV. Extension of reciprocity in the approval of subdivisions. The 1989 Act has extended the reciprocity of acceptance by HUD of a Certificate of Reasonable Value (CRV) or Master Certificate of Reasonable Value (MCRV) as evidence of subdivision approval. The provisions of Mortgagee Letters 89-1 and 89-9 remain in effect. V. Appraisal standards. The 1989 Act mandates that HUD appraisals be prepared by state licensed or certified appraisers. Accordingly, in states that have licensing or certification requirements, all fee appraisers and DE staff appraisers must meet such requirements within time frames to be prescribed by each local HUD office. The local HUD Office will be guided by the requirements of the licensing laws within each state. VI. Title X Land Development Mortgage Insurance Program. The Title X program has been repealed. No mortgage may be insured under this program except pursuant to a firm commitment issued prior to June 29, 1989. VII. Refinancing Section 235 mortgages. The 1989 Act authorizes HUD to insure refinance mortgages under the Section 235 interest subsidy program to reduce HUD's subsidy payments. Lenders will receive further information about this refinance program in the near future. If you have any questions concerning this letter please contact your local HUD Office or the Single Family Development Division in HUD Headquarters at (202) 755-6700. Very sincerely yours, C. Austin Fitts Assistant Secretary for Housing- Federal Housing Commissioner _____________________________________________________________________ _____________________________________________________________________