**September 4, 2008**

**MORTGAGEE LETTER 2008-22**

**TO: ALL APPROVED MORTGAGEES**

**SUBJECT: Moratorium on Risk-Based Premiums for FHA Mortgage
Insurance**

The Housing and Economic Recovery Act of 2008 provides for a one-year
moratorium on the implementation of FHA's risk-based premiums beginning
October 1, 2008. Consequently, effective with new FHA case number
assignments on or after that date, FHA will no longer base its mortgage
insurance premiums on a combination of credit bureau score and
loan-to-value ratio. The new premiums (upfront and annual) to be
implemented for all loans for which a case number is assigned on or
after October 1, 2008, are described below. Mortgagee Letter 2008-16 is
rescinded in its entirety. Please note that certain parts of that
mortgagee letter are retained and reiterated in the guidance that
follows.

**[Upfront Premiums]{.underline}**: FHA will charge an upfront premium
in an amount equal to the following percentages of the mortgage:

-   **Purchase Money Mortgages and Full-Credit Qualifying Refinances =
    1.75 Percent**

-   **Streamline Refinances (all types) = 1.50 Percent**

-   **FHASecure (Delinquent Mortgagors) = 3.00 Percent.**

**[Annual Premiums]{.underline}**: An annual premium, shown in basis
points below, to be remitted on a monthly basis, will also be charged
based on the initial loan-to-value ratio and length of the mortgage
(except for FHASecure delinquent mortgages) according to the following
schedule:

-   **Purchase Money Mortgages, Full-Qualifying Refinances, and
    Streamline Refinances**:

  -------------------- ------------------------- -------------------- ------------------------
  **LTV**              **Annual for Loans \>15   **LTV**              **Annual for Loans
                       Years)**                                       [\<]{.underline} 15
                                                                      Years**

  **[\<]{.underline}   **50**                    **[\<]{.underline}   **-None-**
  95**                                           90**                 

  **\> 95**            **55**                    **\> 90**            **25**
  -------------------- ------------------------- -------------------- ------------------------

-   **FHASecure (delinquent mortgagors):**

  -------------------- -------------------------------------------------------
  **LTV**              **Annual (all loan terms)**

  **[\<]{.underline}   **50**
  95**                 

  **\> 95**            **55**
  -------------------- -------------------------------------------------------

**[Highlights Regarding FHA's Mortgage Insurance Premiums]{.underline}**

-   All loans to borrowers with a credit score must be risk-classified
    by FHA's TOTAL Mortgage Scorecard.

-   Borrowers with decision credit scores below 500 and with
    loan-to-value ratios at or above 90 percent are not eligible for
    FHA-insured mortgage financing.

-   Borrowers without credit bureau scores will need to be manually
    underwritten and deemed as eligible based on criteria described in
    Mortgagee Letter 2008-11.

-   Eligibility for delinquent mortgagors under the FHASecure initiative
    is described in full in ML 2008-13.

**[Loan-to-Value]{.underline}**

For insurance premium purposes and eligibility for FHA mortgage
insurance, the loan-to-value ratio, computed to two decimals (e.g.,
95.65), is calculated by dividing the mortgage amount prior to adding on
any upfront mortgage insurance premium by the sales price or appraised
value, whichever is less.

For refinance transactions, which often include closing costs in the
loan amount, the LTV is determined by dividing the loan amount prior to
adding on any upfront mortgage insurance premium by the appraiser's
estimate of value.

**["Decision Credit Score" Defined]{.underline}**

If a credit score is available, it must be used to determine the
decision credit score for the application and for eligibility for
FHA-insured mortgage financing. A "decision credit score" is determined
for each applicant according to the following rule: when three scores
are available (one from each repository), the median (middle) value is
used; when only two are available, the lesser of the two is chosen; when
only one is available that score is used.

[Multiple Borrowers]{.underline}. If more than one individual is
applying for the mortgage, the lender must determine the decision credit
score for each individual borrower and then select the lower (or lowest
if more than two borrowers). That \"decision\" credit score is then used
to determine whether the loan is eligible for FHA mortgage insurance.
Applications where the decision credit score is below 500 are not
eligible for FHA-insured financing *unless* the loan-to-value ratio is
less than 90 percent. A transaction where one borrower had only
"nontraditional credit" and the other had a decision credit bureau score
under 500 would not be eligible for FHA mortgage insurance unless they
had equity of 10 percent or more.

[Non-Traditional Credit.]{.underline} For underwriting purposes,
borrowers with non-traditional credit (or insufficient credit) must
qualify based on the underwriting guidance described in Mortgagee Letter
2008-11. Please note that if TOTAL renders an "accept/approve" risk-
classification, it can be relied on (subject to correct data) *except*
in those situations where none of the owner-occupants of the property
have credit bureau scores and the borrower(s) must be underwritten using
the insufficient credit instructions in that mortgagee letter.

The guidance in Mortgagee Letter 2008-11 regarding 'thin-file' credit
reports was intended to give lenders the option to also use
non-traditional credit sources should they have a minimum trade line
requirement to use a credit bureau score.

**[Refinancing Delinquent Loans into FHASecure]{.underline}**

For borrowers refinancing **delinquent** non-FHA ARMs the upfront
mortgage insurance premium (UFMIP) is set at **3.00** percent of the
base loan amount (loan amount excluding UFMIP) regardless of the
loan-to-value (LTV) ratio. The loan-to-value will determine the annual
premium.

Automated underwriting systems will provide lenders with a feedback
message that will inform them of the premium to be charged without
recognizing that the loan being refinanced is delinquent. Therefore, the
feedback message providing the premium message will caution lenders that
if the loan being refinanced is delinquent, then the premium is **3.00**
percent for the UFMIP and .**55** percent for annual premium when LTV
ratio greater than 95 percent; if the LTV ratio is equal to or less than
95 percent, the annual premium is 0.50 percent.

Borrowers who refinance their delinquent non-FHA ARM loan into
*FHASecure* and subsequently wish to refinance to another FHA-insured
mortgage must use a refinance product that requires full qualifying,
e.g., a rate and term refinance. Once the FHA-to-FHA full qualifying
refinance is insured, these borrowers will be able to take advantage of
FHA's Streamline Refinance program.

**[Underwriting Rules When Using FHA's TOTAL Mortgage
Scorecard]{.underline}**

If TOTAL renders a refer risk classification or triggers a review rule,
the mortgagee's Direct Endorsement underwriter must determine whether
the borrower qualifies for the mortgage using the basic underwriting and
eligibility requirements outlined in Mortgagee Letter 2004-47 (TOTAL
Mortgage Scorecard User Guide) and handbook HUD-4155.1 REV-5.

Review Rules for FHA's TOTAL Mortgage Scorecard include excessive
payment-to-income ratios and debt-to-income ratios; and from the credit
files, a previous mortgage foreclosure within 3 years, a bankruptcy
discharged within 2 years and late mortgage payments. TOTAL will refer
the application for underwriting analysis if any mortgage trade line,
including mortgage line-of-credit payments, during the most recent 12
months shows:

-   3 or more late payments of greater than 30 days; or

-   1 or more late payments of 60 days plus one or more 30-day late
    payments; or

-   1 payment greater than 90 days late

The Refer decision from TOTAL suggests that, absent additional factors
that can be documented by the underwriter, the credit risk of the loan
may be too great for FHA to insure. Such mortgages, which may exhibit
other risk-layering characteristics beyond credit bureau score and LTV,
are to be approved solely on the underwriter's judgment of the
likelihood of successful and sustained homeownership.  

If the underwriter approves a loan for which non-credit review rules are
triggered, i.e., excessive payment-to-income ratios and debt-to-income
ratios, the borrower will pay the mortgage insurance premium based on
the LTV ratio and term of mortgage in years.  

**[First-Time Homebuyer with HUD-Approved Pre-Purchase
Counseling]{.underline}**

The Housing and Economic Recovery Act also provides for a reduction of
the upfront premium from 3.00 to 2.75 percent for first-time homebuyers
(as defined below) who complete HUD-approved pre-purchase counseling.
However, since no premium for purchase money mortgages will exceed 1.75
percent through September 30, 2009, there will be no reduction in the
upfront premium for counseled first-time homebuyers. Nevertheless, we
are repeating the instructions of what constitutes acceptable
pre-purchase counseling below.

A first-time homebuyer is an individual who has had no ownership in a
principal residence during the 3-year period ending on the date of
purchase (closing date) of the property. A first-time homebuyer includes
any individual that has only owned with a former spouse while married
and also includes an individual who has only owned a principal residence
not permanently affixed to a permanent foundation, or a property that
was not in compliance with State, local, or model building codes and
cannot be brought into compliance for less than the cost of constructing
a permanent structure. If any of the occupant-owners on the mortgage
meet this definition, then the mortgage is considered as having been
made to a first-time homebuyer.

Pre-purchase counseling must be obtained from a HUD-approved housing
counseling agency, a participating agency of a HUD-approved housing
counseling intermediary or a state Housing Finance Agency receiving HUD
housing counseling grant funds, *and* the counseling [must]{.underline}
occur prior to execution of the sales agreement. With this requirement,
it is FHA's intent to encourage borrowers to participate in meaningful
counseling prior to the decision to purchase a home, not to create an
incentive or burden for lenders to have borrowers re-execute the sales
contract in order to receive a reduced premium.

The counseling may be completed up to one year before the homebuyer
signs a purchase agreement (executes a sales contract) for the subject
property. It must be one-on-one, face-to-face counseling unless a
hardship can be demonstrated, and then the counseling may be conducted
one-on-one over the telephone. The counseling must consist of, but is
not limited to:

-   Budgeting and credit, including an analysis of the household's
    unique financial/credit situation;

-   Assessing homeownership readiness, including an evaluation of home
    and monthly payment affordability;

-   Development of a written action plan outlining the steps the
    household and the counselor will take to help the household meet
    their goals;

-   Financing a home, including a discussion of alternative types of
    mortgage loans/features and special financing products, common
    lending documents, and steps in the loan application, approval, and
    closing processes;

-   Shopping for a home, including understanding the professionals
    involved in the process; and

-   Maintaining a home, including preventive maintenance, taxes, and
    insurance;    

Even if group sessions or homebuyer education classes cover the topics
above, they do not meet the level of one-on-one counseling needed to
receive the reduced mortgage insurance premium. To find a list of
housing counseling agencies, please visit the Department's website at
<http://www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm>.

**[Programs Covered by Insurance Premiums Shown Above]{.underline}**

The upfront and annual premiums and the requirements described in this
mortgagee letter apply to those forward mortgages insured under FHA's
Mutual Mortgage Insurance (MMI) fund; the Section 203(k) rehabilitation
mortgage insurance program; and individual condominium units insured
under Section 234(c). These premiums do not apply to mortgages insured
under Title I of the National Housing Act, nor to reverse mortgages
under FHA's Home Equity Conversion Mortgage (HECM). These premiums also
do not apply to Section 223(e)(declining neighborhoods), Section
238(c)(Military Impact areas in Georgia and New York), Section 247
(Hawaiian Homelands), and Section 248 (Indian Reservations).

**[Refinance Transactions]{.underline}**

The mortgage insurance premium for refinance transactions will depend on
the type of refinance (e.g., rate-and-term; streamlined FHA-to-FHA
refinance; or FHASecure delinquent), the loan-to-value ratio, and the
term of the mortgage.

[Full Qualifying Refinances]{.underline} (e.g., rate-and-term;
*FHASecure* refinance of a conventional mortgage not presently
delinquent; cash-out refinances; any that require complete underwriting
except delinquent loans being refinanced under *FHASecure*). These
refinances are subject to the same mortgage insurance premiums as
purchase money mortgages shown above.

[Streamline Refinances]{.underline}. The mortgage insurance premiums
charged are based on the loan-to-value ratio (either the calculated LTV
based on the existing mortgage, or a new LTV based on a new
FHA-appraisal) and the term of the mortgage.

Borrowers who refinanced their delinquent non-FHA ARM into an
*FHASecure* mortgage are [not eligible]{.underline} to streamline
refinance their *FHASecure* mortgage. The refinance transaction
subsequent to the *FHASecure* mortgage must be a full qualifying
refinance.

[Previous Case Number]{.underline}. To determine the case number of the
loan being refinanced, lenders may use the Case Query screen in FHA
Connection using the borrower's name, address and/or social security
number.

**[Future Changes to the Risk-based Premium Schedule]{.underline}**

It is FHA's intent to make any subsequent changes to the premium
schedule only on an annual basis and make them effective at the
beginning of the fiscal year. FHA's fiscal year begins October 1 and
ends September 30.

**[Systems]{.underline}**

Lenders are reminded of the importance of data integrity to ensure that
the appropriate premium is charged and that the data submitted to TOTAL
and FHA Connection is accurate. Also, system edits will prevent lenders
from streamline refinancing *FHASecure* loans that were previously
delinquent non-FHA ARM loans.

If you should have any questions concerning this Mortgagee Letter, call
1-800-CALLFHA.

Sincerely,

Brian D. Montgomery

Assistant Secretary for Housing-

Federal Housing Commissioner