www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 June 28, 1994 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 94-30 TO: ALL APPROVED MORTGAGEES SPECIAL ATTENTION: Servicing Lenders SUBJECT: Refinances of Delinquent Mortgages---Special Instructions The Department has long relied on servicing lenders to actively intervene with borrowers to attempt to cure delinquent mortgages. We encourage servicers to work out mutually satisfactory arrangements that result in default resolution, thus saving the lender and HUD considerable expense in foreclosure and conveyance, and at the same time permitting the homeowner to retain his or her property. Although HUD permits streamline refinancing of mortgages that are no more than two months delinquent at the time of refinance, we also recognize there are situations where borrowers more than two months behind in their payments could cure their delinquency if they could refinance that mortgage and also retire any arrearage on the mortgage. Lenders often refuse to refinance such loans due to both their own lending policies and the refinancing rules set forth by HUD. However, to promote refinance transactions that will accomplish shared goals of avoiding lender foreclosure expenses and maintaining homeownership, the Department is establishing a new refinance program that will permit lenders to have greater flexibility in refinancing delinquent mortgages. To take advantage of the latitude HUD will permit under this program, the lender must provide an amount equal to one month's mortgage payment (PITI) of the mortgage being refinanced. Recognizing the financial savings to the lender if foreclosure can be avoided, the Department believes the one month's payment contribution represents the lender's commitment to the success of the refinancing effort and is not an unreasonable burden to the lender. _____________________________________________________________________ 2 The arrearage above the one month to be paid by the lender, as well as closing costs, may be included in the new mortgage amount, subject to the conditions described below. In addition, arrearage and closing costs may also be paid through the funds generated from a premium interest rate or paid through a secondary lien held by the lender, or through any combination of the three including equity in the property. There can be no cash back to the borrower in these transactions. Eligibility: To be eligible for a refinance of a defaulted mortgage under these guidelines, the owner-occupant borrower must be at least three months behind on his or her mortgage payments and the default must have been the result of a temporary hardship. While the borrower may choose the lender that will make the refinancing mortgage under these guidelines, we anticipate that the current mortgagee or its servicer will usually initiate the refinancing. As an example of how this program may work to the benefit of the borrower, the servicer, and HUD, a borrower six months in arrears on the mortgage may be brought current through the lender's contribution of one month's payment, with the remaining five months paid through the funds generated through a premium rate mortgage, secondary lien, or increase in the amount of the first mortgage or combination thereof. Underwriting: Traditional credit underwriting is not appropriate in these situations. The underwriter must assess the reasons for the default, which must have been temporary and extenuating circumstances that affected the borrowers' ability to pay, and how the borrowers have now reestablished their financial condition and will be able to make the mortgage payments on the refinanced mortgage. Borrowers who simply exhibit a disregard for their obligations are not entitled to the relief offered under these instructions. The approval of the mortgage shall be based on two primary elements: 1) Has the borrower overcome the temporary extenuating circumstances that brought about the default and can now resume meeting the financial obligations including the monthly payments of the refinanced mortgage? The decision to approve a new mortgage under these guidelines requires that the underwriter take into account both income adequacy and stability; this requires the normal verification of the borrower's income. Although the underwriter must establish that the borrower will have income adequate to meet the required monthly payments under the new mortgage and any other long-term obligations, the underwriter must also bear in mind that the purpose of this program is to avoid foreclosure and permit borrowers to retain ownership of their homes. This requires sensitive and careful weighing of all facts germane to the transaction. If the new mortgage results in a decrease in the borrower's monthly mortgage payment, then there should be little doubt that the refinance will result in an enhanced opportunity for the borrowers to make payments and avoid foreclosure. _____________________________________________________________________ 3 Conversely, if the new mortgage will result in an increase in the monthly mortgage payment, then the underwriter must explain his or her decision to approve the loan and how the refinance will benefit the borrower. 2) Does the file indicate that the borrower has made meaningful efforts to make regular payments and/or meet the terms of any forbearance agreement entered into with the servicing lender during the temporary hardship? In that we anticipate that servicers will initiate the majority of such refinances, the underwriter should have little trouble obtaining the documentation evidencing the borrowers' attempts to make regular payments or perform satisfactorily under the forbearance agreement. We also expect servicers to share with originators any information concerning the mortgagor's efforts to make payments or perform under the forbearance agreement if the borrower chooses another lender for the refinancing or if the servicer cannot or will not attempt the refinance. The underwriter must address the reasons for approving the loan. This must include documentation showing how the borrowers suffered a temporary, yet substantial, financial hardship beyond their control, and why they can now reasonably be expected to make payments on a regular, timely basis even if the mortgage payment increases due to the accrued arrearage and other costs. In all cases, the originator may use an in-file credit report in lieu of a Residential Mortgage Credit Report (RMCR) for verifying any additional debts of the borrowers. Maximum Mortgage Amounts: With an Appraisal: If the property appraisal supports the inclusion of additional property-related indebtedness, including closing costs, we will permit a mortgage up to the normal loan-to-value ratios. All accrued arrearage (above the one month's payment to be made by the lender) and closing costs may be added provided the amount of the mortgage is supportable by the appraised value and closing costs of the property. Further, if supported by the appraisal, the lender may instead fund those costs or portion thereof through a subordinate lien held on the property. The sum of the new first mortgage, excluding any upfront MIP, plus the second lien must not exceed normal loan-to-value and maximum mortgage limits and must otherwise meet the requirements set forth in HUD Handbook 4155.1 REV-4, paragraph 1-13C. _____________________________________________________________________ 4 Without an Appraisal: If no new appraisal is made on the property, the amount of the new mortgage may not exceed the lesser of either: a) the unpaid principal on the old mortgage plus reasonable closing costs and arrearage or, b) the original balance of the mortgage (both with appropriate adjustments for upfront MIP). That portion of closing costs and accumulated arrearage (above the one months' payment to be made by the lender) that may not be added to the loan amount must be paid by the lender and/or through the funds generated by a premium rate mortgage or secondary lien. The new mortgage must also result in a decrease in the monthly mortgage payment (except when an adjustable rate mortgage is refinanced to a fixed rate mortgage). Premium Interest Rates Mortgages: As described in Mortgagee Letter 94-7, premium rate mortgages may be used to pay the borrower's closing costs and prepaid items. In addition, under these instructions, the premium rate mortgage may also be used by the lender to pay in part or in full the accrued arrearage on the mortgage being refinanced. Mortgage Insurance Premiums: For purposes of determining the correct mortgage insurance premium charges, please note the following: o If the mortgage being refinanced was made before July 1, 1991, and is being made without an appraisal, the new mortgage is exempt from annual premium and will carry a 3.8 percent upfront premium (or 2.4 percent if the mortgage term is 15 years or less). o In all other cases, regardless of the date of the mortgage being refinanced or whether or not an appraisal is made, the Upfront MIP will be 2.25 percent (or 2.00 percent if the new loan will be for a term not exceeding 15 years) and the annual premium will be 0.50 percent (or 0.25 percent for 15 year or less mortgages). The number of years the annual premium will be collected is based on the loan-to-value (LTV) ratio; refinances without an appraisal are considered to have LTVs of 89.99 percent for determining the length of the annual premium. The mortgage insurance premium structure is described in Mortgagee Letter 94-14 (March 31, 1994). It is not our intent to permit such latitude to those transactions that will only result in a delay in foreclosure, nor will we permit this to be used as a mechanism to obtain "cash-back" through a refinance by borrowers not making the payments on the present mortgage. Rather, these instructions are designed to result in default resolution and permit deserving borrowers who have reestablished their financial condition to retain ownership of the home. _____________________________________________________________________ 5 It is our belief that these revised refinance instructions provisions will save servicers considerable expenses inherent in foreclosure and conveyance. Therefore, the Department expects servicers to be active participants in this program to help save deserving borrowers their homes. In addition to the mandatory payment of one month's principal and interest, we encourage servicers to contribute to the success of this program by such actions as waiving late charges, etc. If you have any questions regarding these procedures, please contact your local HUD Office. Sincerely yours, Nicolas P. Retsinas Assistant Secretary for Housing - Federal Housing Commissioner