www.hudclips.org 


U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410-8000

June 26, 1990
OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING-FEDERAL HOUSING COMMISSIONER
Mortgagee Letter 90-20
     TO:  ALL APPROVED MORTGAGEES
     SUBJECT:  Single Family Loan Production - Refinance Transactions
                 Involving Temporary Buydowns - "Live Free" Mortgage
                 Programs - "Churning" Mortgages by Multiple
                 Refinances - New Telephone Number for Credit Alert
                 Interactive Voice Response System (CAIVRS)
 
          The purpose of this Mortgagee Letter is to remind mortgagees
     that all refinance transactions (including FHA Streamline
     Refinances) involving temporary buydowns are not eligible for
     insurance, as stated in paragraph 3 - 26 of HUD Handbook 4155.1,
     REV-3, Mortgage Credit Analysis.  This prohibition was effective
     for all refinance applications signed by applicants on or after
     May 1, 1990 and includes the "Live Free" mortgages described
     below.  Lenders that use the FHA Streamline Refinance program may
     still offer a "no cost" refinance program by originating mortgages
     at a premium interest rate.  However, lenders may use the proceeds
     from the sale of these premium interest rate loans to pay only
     closing costs and discounts for the borrower.  Temporary interest
     rate buydowns are not permitted.
 
          Recently, there have been newspaper articles and trade press
     articles describing "Live Free" mortgage programs being offered by
     lenders using FHA's Streamline Refinance procedures.  Under these
     programs, a mortgage that currently has a high interest rate is
     refinanced to a lower interest rate, but to an interest rate that
     is still above current market rates.  Because the new refinance
     mortgage is still above market rates, the lender can obtain a
     premium price for the mortgage in the secondary market.  The
     lender then establishes a temporary buydown and pays the
     borrower's mortgage payments for a short period of time (generally
     a few months).  After a few months and pursuant to a prearranged
     agreement with the mortgagor, the loan is streamline refinanced
     again, but again only to a slightly lower rate.  The lender again
     establishes a temporary buydown and pays the mortgagor's monthly
     payments for another few months.  This process is repeated through
     multiple refinancing until the market rate is reached and the
     mortgagor then actually begins paying the monthly payment.
 
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         These multiple refinancings using the FHA Streamline
    Refinance program with a temporary buydown have disrupted the
    secondary market and may adversely affect investors in Government
    National Mortgage Association (Ginnie Mae) securities.  As stated
    above, these "Live Free" mortgages are now prohibited as of May 1,
    1990.
 
         Further, it has been determined that the practice by
    mortgagees of "churning" mortgages by encouraging multiple
    refinancings using FHA mortgage insurance (including FHA
    Streamline Refinances) as described above is not a prudent lending
    practice and demonstrates irresponsibility.  This determination
    applies regardless of whether temporary buydowns are or are not
    utilized.  Accordingly, mortgagees are cautioned that any
    mortgagee engaged in these practices may be the subject of
    administrative action by the Mortgagee Review Board pursuant to 25
    CFR 25.9(j) and (p).
 
         We also wish to inform lenders that the telephone number is
    changing for HUD's Credit Alert Interactive Voice Response System
    (CAIVRS) effective July 14, 1990.  Beginning on July 14, 1990,
    lenders must call (703) 391-1400 to access CAIVRS.
 
         If you have any questions concerning this letter, please
    contact your local HUD Field Office.
 
                                  Very sincerely yours,
 
                                  C. Austin Fitts
                                  Assistant Secretary for Housing
                                    Federal Housing Commissioner