www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 February 2, 1994 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER MORTGAGEE LETTER 94-7 TO: ALL APPROVED MORTGAGEES SUBJECT: Single Family Loan Production - Premium Rate Mortgages, Streamline Refinances, and Other Policy Issues This Mortgagee Letter informs lenders of Departmental policy regarding premium interest rate mortgages, provides additional guidance on streamline refinance transactions, discusses commitment and document preparation fees, and addresses other important issues. I. PREMIUM INTEREST RATE MORTGAGES Premium rate mortgages, also known as "rebate pricing" mortgages, permit the borrower to pay a slightly higher interest rate in exchange for the lender paying the borrower's closing costs. Generally, such programs have been very successful and are acceptable to HUD. However, based upon the number of questions received from lenders, additional guidance on premium rate mortgages is necessary. For mortgages to be insured by HUD, the funds derived from a premium interest rate: a) May be used to pay the borrower's closing costs and/or prepaid expenses (including accrued interest on refinances); b) May never be used to pay any portion of the borrower's downpayment or used to make mortgage principal payments; c) Must be disclosed on the Good-Faith Estimate (GFE) and the HUD-1 Settlement Statement. The GFE and HUD-1 must provide an itemized statement indicating which items are being paid on the borrower's behalf; disclosing only a lump sum is not acceptable. _____________________________________________________________________ 2 If a premium interest rate will be used to pay closing costs or any portion thereof, that amount to be paid through the premium rate may not be included in acquisition and, thus, the mortgage amount. For example, if total closing costs are $2000, $1500 of which will be paid through the premium interest rate, then only $500 may be used in calculating the maximum mortgage amount. Similarly, if a premium rate will result in excess funds (an amount exceeding closing costs and prepaids), the principal balance of the mortgage must be reduced by the overage. A seller may pay the borrower's closing costs (or a portion) with the lender using the funds from a premium to fund the borrower's prepaid expenses or other remaining closing costs. In addition, Mortgagee Letter 91-44 advised lenders of HUD's policy regarding premium interest rates when the seller was also charged discount points. At that time, it was HUD's opinion that such transactions were circumventing the 57 percent limitation on financeable closing costs. However, since the 57 percent has been eliminated and because only those closing costs to be paid by the buyer may be added to acquisition in calculating the mortgage amount, it is no longer necessary to deduct seller-paid discount points paid in conjunction with a premium interest rate from the acquisition cost. (Seller-paid discounts will continue to be shown on Attachment "A" to the HUD-92900-WS, mortgage credit analysis worksheet with adjustments made accordingly.) II. STREAMLINE REFINANCES Although the Department encourages refinances that result in reduced mortgage payments, it is concerned that some lenders may have inaccurately interpreted the rules about streamline refinances that will result in one or more borrowers being deleted from obligations under the mortgage note. Some lenders have incorrectly informed co-mortgagors that once six payments have been made on the mortgage on which they are co-obligated, they can be removed from the mortgage note through a streamline refinance. Often, this incorrect information is provided to parents who are considering co-borrowing in order for their children to qualify for a mortgage, yet wish to have themselves relieved from the mortgage liability as soon as possible. The Department permits streamline refinances that will result in the deletion of a borrower currently obligated on the note, provided the change in title occurred at least six months previously and the remaining borrowers can provide evidence they alone have made the mortgage payments during that period. However, this policy applies only to those loans that do not contain restrictions limiting assumptions only to creditworthy persons (typically, those mortgages made before December 15, 1989 are freely assumable) or where the transferability restriction (due-on-sale clause) was not triggered, such as in a divorce where a property transfer results from the divorce decree. _____________________________________________________________________ 3 To accommodate streamline refinances for those loans containing restrictive clauses where the deletion of a borrower may result in mortgage acceleration and for those situations where the six months waiting period has not occurred, the Department will permit lenders to make credit qualifying streamline refinances. These transactions contain all of the normal features of a streamline refinance (no appraisal requirement, possible exemption from annual premium) while at the same time providing HUD and the lender a level of assurance of continued performance on the mortgage. The lender must provide evidence that the remaining borrowers can reasonably be expected to continue paying on the mortgage without the income from the deleted borrower and that the remaining borrowers have an acceptable credit history. This requires income verification, an in-file credit report and computation of qualifying ratios. This policy permits streamline refinance opportunities in situations such as a divorce where the spouse that is required to relinquish ownership in the property refuses to do so until he or she is no longer obligated on the note (thus making the normal six-month wait an impossibility). Streamline Refinances of Other HUD Mortgage Products: In addition to the scenarios outlined in HUD Handbook 4155.1 REV-4, the following are permissible transactions under the streamline refinance program. Please note that if a 30-year mortgage is refinanced to a shorter term, it must meet the additional requirements described in paragraph 1-12C(6) of that handbook. ARM to ARM. An adjustable rate mortgage (ARM) may be refinanced to another ARM provided that an immediate payment reduction occurs and that the maximum interest rate of the new mortgage not exceed the maximum interest rate of the old mortgage being refinanced. These may be transacted with or without an appraisal. ARM to fixed rate. An ARM may be refinanced to a fixed-rate mortgage, with or without an appraisal, provided the interest rate on the new fixed-rate mortgage will be no greater than two percent above the current rate of the ARM. In addition, all mortgage payments must have been made within the month due for the past twelve months. Fixed-Rated to ARM. Fixed-Rate mortgages on owner-occupied principal residences may be refinanced to an adjustable rate mortgage, with or without an appraisal, provided the interest rate of the new mortgage is at least two percent below the interest rate of the mortgage being refinanced. An ARM may be used for refinancing only on an owner-occupied principal residence. _____________________________________________________________________ 4 GPM to ARM. A GPM may be refinanced to an ARM provided the note rate results in a reduction to the current P&I payments. (If the streamline refinance is completed without an appraisal, the new mortgage amount may exceed the statutory limit to include the accrued negative amortization and the new UFMIP.) III. TRANSFERRING CASES BETWEEN LENDERS ON STREAMLINE REFINANCES The Department has received numerous complaints from borrowers regarding lenders refusing to transfer streamline refinance cases or to cancel case numbers when borrowers elect to refinance through another lender. This is especially true with some lenders that secure case number assignments before the prospective borrower signs a loan application. Such behavior reflects negatively on the mortgage industry as a whole and is contrary to HUD policy. HUD expects all lenders to fully cooperate in the assignment of streamline refinance cases upon the request of the borrower. Failure to cooperate may jeopardize a lender's participation in the Direct Endorsement program. HUD Field Offices are also authorized to cancel case number assignments and issue new case numbers on behalf of the borrower when lenders fail to assign cases. Further, in that streamline refinances without appraisals represent a type of mortgage without significant underwriting, HUD will not permit any lender to charge a fee for transferring the case to another lender of the borrower's choice. (Non-refundable commitment fees, charged at loan application, are not included in this prohibition.) IV. FEES CHARGED BY LENDERS The Department will not permit lenders to charge mortgagors for tax service or flood certification fees, or require borrowers to purchase life, disability, or private unemployment insurance as a condition for making a HUD-insured mortgage. For those fees not specifically prohibited, the HUD office having jurisdiction where the property is located may determine if the amount of any fee is considered reasonable and customary. In addition, the following summarizes HUD's policy regarding commitment and document preparation fees. Commitment or "lock-in" fees The Department does not object to commitment or "lock-in" fees charged for guaranteeing the interest rate and/or discount points for a specific period of time. However, HUD is concerned that some lenders have abused this allowance by such practices as charging a fee for a commitment signed the day of closing; by not honoring commitments agreed to; and, in general, not providing something of _____________________________________________________________________ 5 value in exchange for the fee. Such actions clearly violate the intent of this provision. Therefore, any lock-in or commitment agreement for which a fee is charged must be in writing and must guarantee the rate and/or discount points for a period of not less than 15 days before the anticipated closing date. Lock-in fees may be paid by the borrower, but not financed in the mortgage. Document preparation fees Document preparation fees may only be charged to the borrower on a HUD-insured mortgage if the service was provided by some entity other than the lender. If, however, the business entity providing the document preparation service is controlled, owned, or otherwise has an identity-of-interest with the lending institution, then the fee may only be charged if the service provider/document preparation company is an entity actively engaged in soliciting and providing such services to other lenders. Obviously, a company created solely to provide this service for the lender would not be permitted to charge document preparation fees to borrowers on HUD-insured mortgages. As always, the fee collected by the lender may never be in excess of that actually charged by the service provider. V. CAIVRS ISSUES The Credit Alert Interactive Voice Response System (CAIVRS) telephone number was recently changed. The new number is (301) 344-4000. Please inform all appropriate staff. Additional information regarding CAIVRS is contained in Mortgagee Letter 93-17. Some lenders are requiring credit bureaus to access CAIVRS on their behalf rather than using their own personnel; this practice is unacceptable. First, no lender should divulge to third parties its 10-digit HUD approval number except in rare circumstances. Second, CAIVRS maintains a record of all calls, including the lender ID number of the caller, social security number checked, and access code reported. If a lender relies upon another entity to access and record CAIVRS numbers and if that approval number is recorded incorrectly or otherwise falsified, the originating lender will be held accountable. VI. RESPA REQUIREMENTS FOR HUD-INSURED MORTGAGES The mandatory requirements of the Real Estate Settlement Procedures Act (RESPA) that govern all Federally-related mortgage transactions also apply to HUD-insured mortgages. These include full disclosure requirements and prohibitions against certain payments by lenders and others. RESPA requires the disclosure of certain fees on "table funded" transactions. Therefore, fees _____________________________________________________________________ 6 between correspondents and sponsors must be disclosed if the transaction is table funded by the sponsor. These fees may be disclosed on any line in Section 800 of the HUD-1. Certain other practices are acceptable under RESPA but are not permitted for HUD-insured mortgages. For example, certain transactions involving computerized loan originations (CLOs) or mortgage brokers are acceptable under RESPA but may conflict with HUD mortgage insurance requirements because all aspects of the origination of HUD-insured mortgages must be performed by HUD-approved lenders. Some payments by lenders, that are not regarded as prohibited referral fees under RESPA, are prohibited by regulations applicable to HUD-insured mortgages. For complete information on the HUD mortgagee approval process, see HUD Handbook 4060.1 REV-1, Mortgagee Approval Handbook, issued September 30, 1993. VII. ASSUMPTION PROCESSING by NON-DE APPROVED SERVICERS The requirement that virtually all HUD-insured single family mortgages be processed under the Direct Endorsement (DE) program also applies to credit qualifying assumptions as well new originations. However, the Department recognizes that there are a number of servicing lenders that neither originate mortgages nor are approved under the Direct Endorsement program. In these situations, if the servicer is either a supervised or non-supervised financial institution, it may contract with a Direct Endorsement-approved lender to underwrite its credit qualifying assumptions. The DE underwriter must indicate his or her CHUMS identification number on the mortgage credit analysis worksheet. The fee is to be negotiated between servicer and DE lender. In addition, supervised lenders with a HUD-approved authorized agent relationship may have the agent underwrite its credit qualifying assumptions. VIII. PRELIMINARY TITLE BINDERS Effective with all closings on or after April 1, 1994, the lender must provide a copy of the preliminary title report or binder with the endorsement package, if such documents are obtained by the lender during loan processing. IX. FLOOD INSURANCE/MAXIMUM DEDUCTIBLE CLAUSE Unless a higher maximum amount is required by state law, the maximum deductible clause for a flood insurance policy must not exceed the greater of $1,000 or 1 percent of the face amount of the policy. _____________________________________________________________________ 7 X. NATION-WIDE RECOGNITION OF DE UNDERWRITER APPROVAL In Mortgagee Letter 92-15, the Department announced a policy that all Field Offices would recognize a DE underwriter's approval once it had been obtained from any HUD Field Office. At that time, HUD required, among other things, that the underwriter provide each HUD Office where he or she wished to be approved a nomination request and a copy of the approval letter issued by a HUD Field Office. However, to relieve the paperwork burden on both lenders and Field Offices, HUD's Computerized Homes Underwriting Management System (CHUMS) has been modified to recognize any underwriter's approval in all HUD offices. Once an underwriter has obtained approval and a CHUMS identification number, it will be automatically recognized in each Field Office where a lender has been approved to do business. Field Offices are authorized to check references and otherwise verify the experience and credentials of any underwriter requesting initial approval. Please note that this does not mean that the lender itself is approved to do business within a particular Field Office jurisdiction. Each lender, even though all HUD Offices will recognize its underwriter's DE approval, must still request approval to do business through each local HUD Office. XI. PAYING OFF LAND CONTRACTS---REVISED INSTRUCTIONS Currently, if a borrower will be using a HUD-insured mortgage to complete payment on a land contract, contract for deed, or other similar type financing arrangement where the borrower does not have title to the property, the mortgage loan was to be processed as a purchase transaction. Maximum loan-to-value ratios and other requirements are described in HUD Handbook 4155.1 Rev-4, paragraph 1-8E. However, the Department will now permit these transactions to be treated as refinances for HUD mortgage insurance purposes. This allows the borrower to obtain a HUD-insured mortgage sufficient to pay off the seller and pay closing costs, reasonable discount points, and required repairs. The mortgage amount is still controlled by loan-to-value limits applied to the appraised value of the property and restricted to 85 percent if the borrower receives cash in excess of $250 at settlement. (Replenishment of the borrower's own cash expended for repairs, improvements, renovation, etc., is not considered as "cash back" provided the borrower can substantiate with cancelled checks and paid receipts all out-of-pocket funds spent for these purposes.) _____________________________________________________________________ 8 This revised policy only applies if the contract for deed has been seasoned at least one full year. Terms shorter than that require consideration of the acquisition cost in calculating the mortgage amount. XII. REQUEST FOR INSURANCE ENDORSEMENT, FORM HUD-54111 Boxes 3 and 35 on form HUD-54111, Request for Insurance Endorsement, are to be completed by the lender requesting endorsement. Program identification codes, required for box 3, can be found of Form HUD-428, Home Mortgage ADP Code Chart, a copy of which may be found in both HUD Handbooks 4165.1 REV-1 and 4000.2 REV-2. XIII. FACE-TO-FACE INTERVIEW ON REFINANCE TRANSACTIONS In addition to the exemptions described in HUD Handbook 4155.1 REV-4, paragraph 3-6, it will no longer be necessary for a lender to conduct a face-to-face interview when the borrower is refinancing an existing HUD-insured mortgage, including cash-out refinances. If you have any questions regarding any issue covered in this Mortgagee Letter, please contact your local HUD Field Office. Sincerely yours. Nicolas P. Retsinas Assistant Secretary for Housing - Federal Housing Commissioner