> **MORTGAGEE LETTER 2005-08**

**February 16, 2005**

TO: ALL APPROVED MORTGAGEES

SUBJECT**:** Revised Post Endorsement Technical Review Process

The Department of Housing and Urban Development is pleased to announce a
significant change in the ratings and codes used in connection with our
Post Endorsement Technical Review (PETR) process for FHA single family
mortgages. The new ratings will be effective for mortgages reviewed and
rated after January 1, 2005, and will appear on Mortgagee Performance
Reports beginning in February 2005.

The focus of the revised PETR process is on effectively achieving an
evaluation of *risk* to the Department without compromising these
reviews as a means for providing useful feedback to lenders. Under the
revised process, FHA will no longer rate the underwriting of mortgages
Good, Fair, and Poor in the Closing, Mortgage Credit, Valuation, and
Architectural and Engineering categories. Mortgages will now be rated
either Acceptable or Unacceptable in two categories:

\(1\) Mortgage Credit Underwriting; and, (2) Valuation Underwriting. The
number of deficiency codes has been significantly reduced as well.

For mortgages rated Acceptable, the overall decision to approve the
mortgage is considered sound and the level of risk acceptable, but there
may be deficiencies noted that we expect the lender to address in future
submissions for insurance endorsement. These types of deficiencies would
largely entail documentation issues and less serious violations of FHA
requirements. As under the old rating system, lenders that consistently
exhibit deficiencies will be subject to actions taken by the
Homeownership Centers designed to improve the underwriting of mortgages
that FHA insures.

Conversely, a rating of Unacceptable means that the mortgage exhibits
such serious violations of FHA requirements and, therefore, poses such a
level of risk to the Department, that it should not have been approved.
A mortgage rated as Unacceptable will require the lender to explain the
decision to approve the mortgage, and may result in a request from the
Homeownership Center to indemnify the Department against loss.

2

Mortgagees are advised that the PETR process is substantially different
from the mortgagee monitoring performed by FHA's Homeownership Centers
and other Departmental reviews of insured mortgage operations. A status
of "acceptable" on a PETR in either mortgage credit underwriting or
valuation analysis does not necessarily indicate that the underwriting
of the mortgages is free from defects which may give rise to sanctions
against the individuals and entities involved with the mortgages. As
with current practice, those involved in performing PETRs will refer
violations of Departmental regulations and requirements to appropriate
offices for enforcement actions.

It is expected that this revised rating system will accurately reflect
the risk level associated with recently insured mortgages while at the
same time significantly reduce the number of unwarranted Poor ratings.
For your convenience, a list of the revised PETR codes is attached to
this Mortgagee Letter. You may also access these revised codes through
the online Reference Guide in Chapter 3 on page 3-8
\[http://www.hud.gov/offices/hsg/sfh/ref/sfhp3-08.cfm\].

If you have any questions concerning this Mortgagee Letter, please
contact your local Homeownership Centers in Atlanta (888-696-4687);
Philadelphia (800-440-8647); Denver (800-543-9378) or Santa Ana
(888-827-5605).

Sincerely,

John C. Weicher

Assistant Secretary for Housing-

Federal Housing Commissioner

Attachment

# Post Endorsement Technical Review Codes

## **M01 BORROWER ELIGIBILITY/QUALIFICATION**

M01A Invalid Social Security Number or Tax Identification Number
(4155.1, 3-1C)

> M01B Legal residency for non-US citizens not adequately documented
> (4155.1, 2-2B)
>
> M01C Borrower not owner-occupant, property not principal residence
> (4155.1, 1-2)

M01D Qualifying ratios exceeded without acceptable compensating factors
(4155.1, 2-12, 2-13)

> M01E Borrower deleted on streamline mortgage without credit qualifying
> (4155.1, 1-12c)
>
> M01F Other borrower eligibility/qualification deficiencies

### M02 BORROWER CREDIT

M02A Major derogatory credit, recent material inquiries not

satisfactorily explained (4155.1, 2-3)

M02B CAIVRS, LDP/GSA authorization not properly documented

(4155.1, 2-5)

M02C Extenuating circumstances for bankruptcy, foreclosure

not adequately documented (4155.1, 2-3d, 2-3E)

M02D Credit/alternative credit not obtained for all borrowers (4155.1,
2-4)

M02E Other credit deficiencies

### M03 BORROWER LIABILITIES

M03A Obligations of all borrowers, non-purchasing spouses Omitted,
inaccurate, not supported (4155.1, 2-2A, 2-2D, 2-11)

M03B Other liabilities deficiencies

### M04 BORROWER ASSETS

M04A insufficient total assets for closing (4155.1, 2-10)

M04B Unacceptable, unsupported source of funds for assets (4155.1, 2-10)

M04C Other asset deficiencies

### M05 BORROWER INCOME

M05A Stability of income for all borrowers insufficient or not supported
(4155.1, 2-6)

M05B Effective income for all borrowers insufficient or not supported
(4155.1, 2-7)

M05C Other income deficiencies

### M06 MAXIMUM MORTGAGE AND CASH INVESTMENT

M06A Borrower did not make required minimum cash investment (4155.1,
1-7)

M06B Mortgage amount incorrect, loan-to-value limit exceeded, statutory
limit exceeded (4155.1, 1-6, 1-7)

M06C Other mortgage amount deficiencies

### M07 PROGRAM/DOCUMENTATION REQUIREMENTS

M07A Form HUD-92564-CN not properly signed, dated (ML 04-04)

M07B Documentation deficiencies, processing errors related to Refinance
transactions (4155.1, 1-10)

M07C Documentation deficiencies, processing errors related to
Construction to Permanent transactions (4155.1, 2-17)

M07D Documentation deficiencies, processing errors related to ARMs
(4155.1, 2-15; ML 04-10)

M07E Documentation deficiencies, processing errors related to Section
203k transactions (4240.4)

M07F Documentation deficiencies, processing errors related to HECM
transactions (4235.1)

M07G Documentation deficiencies, processing errors related to Energy
Efficient Mortgage Refinance transactions(4155.1, 2-20)

M07H Documentation deficiencies, processing errors related to Hawaiian
Homelands transactions (69 FR 33524;24 CFR 203.43i; ML 04-43)

M07I Documentation deficiencies, processing errors related to
building-on-own-land transactions (4155.1, 1-8D; ML 04-28)

M07J Uniform Residential Loan Application not properly completed
(4155.1, 3-1; 4000.4, 3-15; ML 03-20; ML 92-7)

M07K Form HUD-92900-A not properly completed (4155.1, 3-1; 4000.4, 3-15;
ML 92-7)

M07L Other documentation deficiencies or processing errors for purchase

transactions

### M08 HUD-1/CLOSING

M08A Unallowable, excessive costs/credits to borrower (4155.1, 1-9;
4000.2, 5-1, 5-2; ML 02-10)

M08B Lender/seller credits not itemized (4155.1, 1-9; ML 97-26)

M08C Excessive cash back to borrower (4155.1, 1-12)

M08D Other deficiencies on HUD-1 or HUD-1 Addendum

### M09 AUTOMATED UNDERWRITING SYSTEMS/TOTAL

M09A Data Integrity deficiencies. File documentation does not support
Accept/Approve Decision (ML 04-01)

M09B Documentation does not support credit waivers (ML 04-01)

M09C Program requirements not addressed (ML 04-01)

M09D Other AUS/TOTAL deficiencies.

### V20 PROPERTY ELIGIBILITY/QUALIFICATION

V20A Allowable commercial space in mixed use property exceeded (4000.2,
2-6H; 4905.1, 2-6; 4150.2, Appendix B, B-1)

V20B Illegal Zoning (4150.2, 2-1)

V20C Existing construction in Special Flood Hazard Area (A or V Zone)
without evidence of flood insurance (4150.2, 2-2)

V20D New construction in Special Flood Hazard Area (A or V Zone) without
LOMA, LOMR, or an elevation certificate with evidence of flood (4150.2,
2-2)

V20E Sales contract with FHA borrower dated less than 91 days from
acquisition date by seller (4000.2, 1-7; ML 03-07)

V20F Property does not meet Minimum Property Requirements (4000.2, 2-6;
4905.1; 4910.1)

V20G Appraisal expired (4000.2, 2-17; 4000.4, 3-4)

V20H Major repair items not cited, addressed (4000.2, 2-6, 2-11; 4150.2,
Appendix D, D-2)

V20I Value Not Supported (4000.2, 2-3, 2-14)

V20J Other property eligibility/qualification deficiencies

**V21 UNIFORM RESIDENTIAL APPRAISAL REPORT**

V21A Deficiencies related to Neighborhood, Site, Description Of
Improvements (4150.2, 2-1, 2-2)

V21B Deficiencies related to Cost Approach (4150.2, 4-5)

V21C Deficiencies related to Sales Comparison Approach (4150.2, 4-6)

V21D Deficiencies related to Income Approach (4150.2, 4-7)

### V22 FLIPPING RULE

V22A Owner of record not documented (4000.2, 1-7; ML 03-07)

V22B Requirements for properties sold within 91-180 days not documented
4000.2, 1-7; ML 03-07)

V22C Other Flipping deficiencies

### V23 STATEMENT OF APPRAISED VALUE

V23A Form HUD-92800.5B substantially incomplete , incorrect (4000.2,
2-14; 4000.4, 3-3G)

### V24 REPAIRS/COMPLIANCE INSPECTIONS

V24A VC Conditions, repairs not acceptably addressed (4000.2, 2-11;
4000.4, 3-8; ML 03-18)

V24B Wood Destroying Insect Infestation Inspection Report missing,
incomplete; inadequate documentation that infestation, infection was
acceptably treated (ML 95-33)

V24C Compliance inspections, certifications, local government approvals
missing, incomplete (4000.2, 2-11; 4000.4, 3-8; ML 01-27)

V24D Form HUD-92051, Compliance inspection Report, substantially
incomplete, incorrect (4000.2, 2-19)

V24E Form HUD-92300, Mortgagee Assurance of Completion, missing,
incomplete, incorrect (4155.1, 5-2)

V24F Other repair/compliance inspection deficiencies.

### V25 MANUFACTURED HOMES

V25A Manufactured home does not meet eligibility guidelines(4000.2,
2-6B)

**V26 CONDOMINIUMS**

V26A Condo project not approved, spot condo documentation missing,
incomplete (4150.2, 9-1; ML 96-41)

V26B 51% owner occupancy requirement not met (4150.2, Appendix D, VC-13;
ML 96-41)

V26C Other condominium deficiencies

### V27 NEW CONSTRUCTION

V27A Newly constructed home does not meet requirements (4145.1, ML
01-27)