**October 1, 2008 MORTGAGEE LETTER 2008 - 29**

**TO: ALL APPROVED MORTGAGEES**

**ALL APPROVED APPRAISERS**

**SUBJECT: HOPE for Homeowners Origination Guidance**

The Housing and Economic Recovery Act of 2008 amends the National
Housing Act to authorize a new temporary FHA mortgage insurance program
called the HOPE for Homeowners (H4H) Program. Under this Program,
certain borrowers facing difficulty in paying their mortgages will be
eligible to refinance into affordable FHA-insured mortgages.  The H4H
Program is effective for endorsements on or after October 1, 2008
through September 30, 2011.

While underwriting mortgages for the H4H Program presents unique
challenges for the industry, FHA has confidence in its approved
mortgagees to exercise their ingenuity in meeting these challenges,
while adhering fully to this mortgagee letter, without compromising
their ability to make and support sound underwriting decisions. The
information, directions, and guidance provided in this mortgagee letter
reflect statutory requirements as well as the standards, policies and
regulations adopted by the Board of Directors (Board) for the H4H
Program.

I.  **[Determining Eligibility]{.underline}**

***Borrower Eligibility***

-   Borrowers who are current or delinquent[^1] on their mortgage at the
    time of the refinance are eligible for this Program, if they:

    -   Have not intentionally defaulted on their mortgage or any other
        debt (Intentionally defaulted means the borrower had available
        funds that could pay the mortgage and other debts without
        hardship. Debts subject to a documented bona fide dispute may be
        excluded.) **AND**

    -   Have made a minimum of six (6) full payments during the life of
        the existing senior mortgage (full payment is defined as what
        was acceptable to the lender for meeting the monthly payment
        obligation under the terms and conditions of the mortgage).

-   Borrowers must reside in the property securing the loan being
    refinanced, and may not have an ownership interest in other
    residential real estate, including second homes and/or rental
    properties.

-   Borrowers cannot have been convicted of fraud under state and
    Federal laws in the last 10 years.

    -   Similar to its validation tool for social security numbers, FHA
        will use an automated tool at the time of case number assignment
        that will check the borrower's name against several databases
        for convictions of fraud and an ownership interest in other
        residential properties. In the event that the lender receives a
        warning at case number assignment and believes it is in error,
        it must provide evidence to the appropriate Homeownership Center
        documenting that the borrower has not been convicted of fraud or
        does not have an ownership interest in other residential
        properties. Once the Homeownership Center evaluates the
        documentation, it will determine whether to lift the warning.

-   Borrowers must certify that they did not knowingly or willfully
    provide material false information to obtain the existing mortgages
    being refinanced under the H4H Program.

-   As of March 1, 2008, the borrower's aggregate total monthly mortgage
    payment debt-to-income ratio (DTI) on all existing mortgages must be
    greater than 31 percent of the borrower's gross monthly income. The
    total monthly mortgage payment is defined as the fully-indexed and
    fully-amortized Principal, Interest, Taxes and Insurance (PITI)
    payment (this includes principal and interest, taxes and insurances,
    homeowners' association fees, ground rents, special assessments and
    all subordinate liens).

> FHA recognizes that reconstructing the borrower's prior total monthly
> mortgage payment DTI as of March 1, 2008 may be difficult, especially
> as the H4H Program nears its sunset date. To comply with this
> eligibility requirement, lenders must obtain:

1.  From the borrower, evidence that the prior mortgage DTI was more
    than 31 percent on March 1, 2008, such as pay stubs for March 2008,
    *or* a signed and dated copy of the individual 2008 Federal tax
    return, when available, to determine gross monthly income for that
    month (earnings divided by 12), or W-2s, financial records, or
    verification of employment from the borrower's employer.

> Lenders may also rely on the borrower's signed and dated 2007 Federal
> tax return if the lender has no reason to believe that the borrower's
> income in March 2008 was materially different than the income reported
> on the 2007 Federal tax return.

-   To determine March 2008 income for self-employed borrowers, obtain a
    copy of the quarterly tax return that contains income stream
    information for March 2008 *or* a signed and dated Profit and Loss
    Statement and balance sheet that contains income stream information
    for March 2008 *or* a signed and dated copy of the individual 2008
    Federal tax return, when available, (earnings divided by 12).

2.  From the servicer of the mortgage, the borrower's total monthly
    mortgage payment due for March 2008, including any amounts due on
    subordinate liens.

-   For mortgages without escrow accounts, the lender should obtain tax
    and insurance information from the borrower. If the borrower does
    not provide insurance information, then the servicer of the mortgage
    should estimate the monthly cost of hazard insurance (and flood
    insurance, if applicable) based on the property's location and the
    rates in effect for 2008. If the borrower does not provide real
    estate tax information, the lender should obtain it from public
    records.

***Mortgage Eligibility***

-   The mortgage being refinanced must have been originated on or before
    January 1, 2008;

-   Each holder of an existing senior mortgage being refinanced must:

1.  Waive all prepayment penalties and late payment fees (including
    insufficient funds fees) on the mortgage. Prepayment penalties are
    defined in the Federal Reserve Board's Regulation Z (Truth in
    Lending), 12 CFR 226.32(d)(6);

2.  Agree to accept the proceeds of the new H4H mortgage as payment in
    full, *and*

3.  Release their outstanding mortgage liens.

-   Each holder of an existing subordinate mortgage must:

1.  Waive all prepayment penalties and late payment fees (including
    insufficient funds fees) on the mortgage. Prepayment penalties are
    defined in the Federal Reserve Board's Regulation Z (Truth in
    Lending), 12 CFR 226.32(d)(6); *and*

2.  Release their outstanding mortgage liens.

-   Any type of mortgage is eligible for refinancing under the H4H
    Program, including conventional (prime, Alt-A, subprime) or
    government-backed (FHA, VA, or Rural Development), fixed-rate or an
    adjustable rate mortgage; and

-   The mortgage being refinanced may have a variety of payment
    characteristics, including interest only, payment option, negative
    amortization and/or any other exotic features.

***Property Eligibility***

-   The property must be the borrower's primary and only residence in
    which they have an ownership interest (if there are non-occupant
    co-borrowers, they will need to quit claim their interest in the
    property prior to the occupying co-borrowers applying for the H4H
    Program);

-   Only 1 unit properties are eligible, including condominium units,
    cooperative units and manufactured housing permanently affixed to
    realty.

II. **[Consumer Protections and Disclosures]{.underline}**

Although counseling is not required as a condition of insurance
endorsement, borrowers should be strongly encouraged to contact and work
with a housing counseling agency. The lender must provide to the
borrower(s) the HOPE for Homeowners Consumer Disclosure and
Certification Form at the time of initial loan application for the
Program. This disclosure form must be signed and dated by the borrower
at least one day prior to execution of the initial Universal Residential
Loan Application (URLA) and HUD/VA Addendum to the URLA \[see Exhibit
A\].

Typically, borrowers execute a final URLA and a final Addendum to the
URLA at the time of closing. Borrowers will also need to sign and date
the HOPE for Homeowners Consumer Disclosure and Certification Form at
the time of closing.

III. **[Appraisals]{.underline}**

The appraisal for the H4H mortgage must be performed by an appraiser on
the FHA Appraiser Roster and conducted using FHA guidelines, which can
be found in the Resources box at
<http://www.hud.gov/groups/appraisers.cfm>.

However, the appraisal must have been specifically ordered for the H4H
transaction and *the appraisal should be no more than 3 months old* at
the time of loan closing. If an appraisal is more than 3 months old
because of transactional delays, the appraisal may be acceptable with an
explanation that addresses how the appraisal meets existing FHA
standards and the requirement for "current" appraised value. The lender
may require a new appraisal, if the appraisal and written explanation
are insufficient.

***Prevailing Appraised Value***

If an appraisal is ordered by the current lender or servicer and a new
appraisal is ordered by a different lender that will originate the new
loan under this Program, the value provided in the appraisal ordered by
the new lender will prevail as the appraisal accepted for obtaining FHA
insurance.

***Appraisal Practices in Declining Markets***

It is expected that many of the properties financed under this Program
will be located in declining market areas. Therefore, the following
guidance is provided to assist lenders in ensuring that appraisers are
providing accurate property valuations. A declining market could be as
small as a neighborhood or as large as an entire state, and no standard
definition exists, other than a market in which home prices are falling.

> [Appraiser Responsibilities]{.underline}
>
> The purpose of the appraisal is to provide the lender/client with an
> accurate, and adequately supported, opinion of market value. It is the
> appraiser's responsibility in performing the appraisal to determine
> whether a property is located in a declining market.
>
> The neighborhood section of each property specific appraisal form
> contains a subsection on housing trends where the appraiser must mark
> a box indicating whether property values are increasing, stable or
> declining.  Whichever box is selected, the appraiser is certifying
> that he or she has performed an objective analysis of quantifiable
> data supporting the observations made.
>
> The appraiser must provide an explanation in the "Market Conditions"
> section of the appraisal report that includes relevant information in
> support of the conclusions about appraised value relating to trends in
> property values, demand/supply and marketing time.  The appraiser must
> also provide a description of the prevalence and impact of sales and
> financing concessions and/or down payment assistance in the subject's
> market area.  Other areas of discussion may include days on market,
> list-to-sale price ratios, and/or financing availability.
>
> Appraisers and lenders are reminded that a comparable sale should not
> be more than six months old and should represent a closed sale. The
> appraiser may utilize comparables that are more than six months old
> but only with a clear explanation and justification. The lender may
> require a new appraisal, if the appraisal and written explanation are
> insufficient. The appraiser is not permitted to use a comparable
> greater than 12 months old (see Comparable Selection, page D-6 of
> [Valuation
> Protocol](http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4150.2/41502appdHSGH.doc)).
>
> [Lender Responsibilities]{.underline}
>
> The lender's responsibility is to properly review the appraisal and
> determine that the appraised value used to support the loan amount of
> the new FHA-insured mortgage is accurate and adequately supported.
> Lenders may determine, through services such as the S&P/Case-Schiller
> Index, Office of Federal Housing Enterprise Oversight (OFHEO) House
> Price Index or any index developed by its successor, the Federal
> Housing Finance Agency, or National Association of Realtors (NAR)
> statistics, that the appraised value is supportable.
>
> Lenders are reminded that, if the appraiser they select provides a
> poor or fraudulent appraisal that leads FHA to insure a mortgage at an
> inflated amount, the lender is held equally responsible with the
> appraiser for the violation if the lender knew or should have known of
> the defects or the fraud in the appraisal.  FHA will pursue
> appropriate enforcement actions against both or either party. Lenders
> accept responsibility, equally with appraisers for the integrity,
> accuracy and thoroughness of the appraisal submitted to FHA for
> mortgage insurance purposes.
>
> Lenders should inform appraisers that the purpose of the appraisal is
> for the H4H Program, advising them that a copy will be shared with
> subordinate lien holders and must be provided to the borrower.

***Pressure on Appraisers and Conflicts of Interest***

Lenders and appraisers must avoid conflicts of interest which affect,
either in reality or in appearance, the credibility of the appraisal.  A
lender may not choose an appraiser that has any interest, direct or
indirect, in the property being appraised.  Instances of undue pressure
or influence on an appraiser reported to FHA will result in appropriate
sanctions against the lender involved. See also [Mortgagee Letter
2005-06](http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/05-6ml.doc),
Lender Accountability for Appraisals.

IV. **[Term and Interest Rate on the H4H Mortgage]{.underline}**

Only 30-year term, fixed-rate mortgages may be offered under this
Program. While the interest rate on the new mortgage is to be negotiated
between the borrower and the lender, lenders should offer rates that are
commensurate with interest rates on similar types of loans, if any (not
considering the annual premium in that comparison).

V.  **[Mortgage Insurance Premiums]{.underline}**

The Upfront Mortgage Insurance Premium (UFMIP) is 3.00 percent of the
base loan amount (loan amount excluding UFMIP) regardless of the
loan-to-value (LTV) ratio. The Annual premium (collected monthly) is
1.50 percent of the base loan amount.

VI. **[Calculating the Maximum Mortgage Amount]{.underline}**

The amount of the H4H mortgage may not exceed a *nationwide* maximum
mortgage limit of \$550,440. The LTV of the H4H mortgage is limited to
90 percent of current appraised value of the property, including the
UFMIP. The proceeds from the new H4H mortgage will be applied to the
existing senior mortgage, and extinguish all mortgage-related debts
under all existing mortgages including:

-   Advances by existing lenders/servicers for taxes, hazard insurance
    and/or mortgage insurance; and

-   Out of pocket third party legal expenses of the existing
    lenders/servicers associated with foreclosures and preservation and
    protection (See Mortgagee Letters 2007-03 and 2005-30)

***Closing Costs and Prepaid Items***

Standard FHA policy regarding closing costs (outlined in Mortgagee
Letter 2006-4) is applicable, including the 1 percent cap on origination
fees. The origination fee compensates the lender for administrative
costs in originating and closing the loan.  The origination fee covers
administrative costs for taking the loan application, evaluating,
preparing and submitting a proposed mortgage loan. The origination fee
cannot be supplemented by other fees to cover these administrative
costs, such as "application or processing" fees or broker fees.  The
origination fee cannot exceed the greater of \$20 or one percent of the
original principal amount of the mortgage (excluding any one-time
mortgage insurance premium)

FHA does not require that closing costs and prepaid items come from the
borrower's own assets, giving lenders and borrowers the flexibility to
determine which of the following options (or combination of options)
should be used to pay these costs:

-   Borrowers pay closing costs and prepaid items from their own assets;

-   The closing costs and prepaid items may be financed into the
    mortgage provided the LTV does not exceed 90 percent, including
    UFMIP;

-   The servicing lender, originating lender and/or a third party (e.g.,
    a Federal, state or local Program) may pay the closing costs and
    prepaid items; and/or

-   The originating lender may pay the borrower's closing costs and
    prepaid items through premium pricing. (see handbook HUD 4155.1
    REV-5, paragraph 1-9 J)

VII. **[Underwriting the Mortgage and Qualifying the
     Borrower]{.underline}**

For analytical purposes, FHA requires all approved lenders to use FHA's
TOTAL Mortgage Scorecard (TOTAL). Regardless of the risk classification
obtained from TOTAL for each mortgage originated under the H4H Program,
the underwriter must:

1.  Determine that the borrower's total monthly mortgage payment on the
    new H4H loan *is less than* the borrower's aggregate total monthly
    mortgage payment on his or her existing (non-H4H) mortgage(s),
    including any subordinate mortgage liens, based on a fully-indexed,
    fully-amortizing PITI payment.

2.  Determine that the payment-to-income and debt-to-income ratios are
    at, or below, 31 percent and 43 percent, respectively, which may not
    exceed 38 percent and 50 percent, respectively, provided there is a
    minimum three consecutive month 'trial modification' period prior to
    loan application for the new H4H mortgage. Through the 'trial
    modification' period borrowers have the opportunity to demonstrate
    their capacity and willingness to make a mortgage payment at the
    estimated H4H monthly payment amount (including PITI) that does not
    exceed the 38/50 cap. Non-occupant *co-signers* (i.e., borrowers who
    do not hold ownership interest in the property) may be added in
    order to meet these underwriting guidelines for the new H4H
    mortgage.

> When using a trial modification, the lender must include documentation
> in the file that demonstrates the borrower, using his or her existing
> gross income, made full and timely mortgage payments on the existing
> senior mortgage pursuant to the terms of the trial modification for
> the three consecutive months preceding application for the H4H loan,
> *and* in an amount that is at least 90 percent of the estimated total
> monthly mortgage payment on the new H4H mortgage payment.

3.  In addition to standard FHA policies regarding documentation and
    verification of employment and income, the underwriter must also
    review income as reported on the transcript of the borrower's income
    tax returns or a copy of the borrower's income tax returns obtained
    directly from the IRS for the previous **two years**.

Consistent with the requirements above, for those borrowers current on
their mortgage, underwriters should not automatically reject them for
making their mortgage payment their first priority at the expense of
meeting other recurring obligations in a timely manner. If the borrower
was offered partial forbearance, the underwriter must determine that he
or she has made payments under the forbearance agreement in a timely
manner.

***Lender and Underwriter Certifications***

In addition to the certifications made by the lender and the underwriter
of the loan on the HUD/VA Addendum to the URLA, both the lender and
underwriter must also execute the HOPE For Homeowners Lender and
Underwriter General Certification \[see Exhibit B\].

VIII. **[Documentation Requirements]{.underline}**

In addition to the standard documentation requirements found in handbook
HUD 4155.1 REV-5, Chapter 3, the following additional documentation for
H4H loans must be included in the case binder on the right hand side.
This additional documentation will also become a part of the
pre-endorsement review conducted by FHA staff (Direct Endorsement
Program) or the lender (Lender Insurance Program). Exhibit C is a
suggested pre-endorsement review checklist for FHA staff and lenders to
use. For lenders that submit electronic case binders, this information
must be a new index labeled H4H.

-   **Prior Mortgage Origination Date:** Evidence the mortgage(s) being
    refinanced was originated on/before January 1, 2008, such as a HUD-1
    Settlement Statement or the mortgage payment history from the
    servicer.

-   **Payment History:** If delinquent at the time of the refinance,
    evidence that the borrower made 6 full payments during the life of
    the first mortgage loan being refinanced, such as the mortgage
    payment history from the servicer.

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-   **Prior Total Mortgage Payment:** Evidence that the prior aggregate
    mortgage DTI was more than 31 percent on March 1, 2008, such as pay
    stubs for March 2008, *or* a signed and dated copy of the individual
    2008 Federal tax return, when available, to determine gross monthly
    income for that month (earnings divided by 12), or W-2s, financial
    records, or verification of employment from the borrower's employer.

> Lenders may also rely on the borrower's signed and dated 2007 Federal
> tax return if the lender has no reason to believe that the borrower's
> income in March 2008 was materially different than the income reported
> on the 2007 Federal tax return.

-   To determine March 2008 income for self-employed borrowers, obtain a
    copy of the quarterly tax return that contains income stream
    information for March 2008 *or* a signed and dated Profit and Loss
    Statement and balance sheet that contains income stream information
    for March 2008 *or* a signed and dated copy of the individual 2008
    Federal tax return, when available, (earnings divided by 12).

> From the servicer, evidence of what the borrower's total mortgage
> payment was for March 2008, including any subordinate liens. For
> mortgages without escrow accounts, evidence regarding the amount of
> taxes and the cost of hazard insurance and flood insurance (if
> applicable). If the lender must estimate the cost of all insurance, it
> must document how it arrived at that estimate based on the property's
> location and the rates in effect for 2008. If the borrower does not
> provide information on real estate taxes, the lender must also include
> public record information.

-   **Primary Residence:** Evidence that the property is the borrower's
    primary residence, such as a Federal or state tax return, driver's
    license and/or voter registration card.

-   **HOPE for Homeowners Consumer Disclosure and Certifications:** The
    initial and final HOPE for Homeowners Consumer Disclosure and
    Certifications, signed and dated by the borrower(s), along with the
    initial and final URLA and Addendum to the URLA.

-   **Conviction of Fraud:** In instances where a warning is received
    that the borrower was convicted of fraud and the lender believes it
    is an error, the lender must document that the borrower has not been
    convicted of fraud under Federal or state law in last 10 years.

-   **Tax Returns:** Copies of the previous two years Federal tax
    returns or transcripts of the borrower's income tax returns obtained
    directly from IRS.

-   **Trial Modification:** If a 'trial modification' period was used to
    exceed the 31/43 DTI ratios, the lender must document that the
    borrower, using his or her existing gross income, made timely
    mortgage payments on the existing senior mortgage pursuant to the
    terms of the trial modification for the three consecutive months
    preceding application for the H4H loan, *and* in an amount that is
    at least 90 percent of the estimated total monthly mortgage payment
    on the new H4H mortgage payment.

-   **First Payment Made:** Evidence that the first payment on the new
    mortgage was made by the borrower and not by any interested party to
    the transaction, from the loan proceeds or escrowed at closing.

-   **Lender Certifications:** The HOPE for Homeowners Lender and
    Underwriter General Certifications, signed by an officer of the
    lending institution and the Direct Endorsement Underwriter.

IX. **[Prohibition Against Subordinate Financing]{.underline}**

Under the H4H Program, borrowers are prohibited from taking out new
subordinate liens for the first 5 years of the mortgage except when
necessary to ensure maintenance of property standards. Therefore, during
the first 5 years of the mortgage, FHA will permit a subordinate
mortgage lien only if the proceeds are essential to preserve and protect
the property, and:

-   The condition to be repaired represents a health and safety hazard
    and/or the failure to make the repair will cause the property
    condition to deteriorate;

-   The cost of the proposed repair is reasonable for the geographic
    market area as determined by HUD's residential property management
    contractor;

-   The repairs are not primarily cosmetic and do not represent routine
    maintenance;

-   The financing is a closed-end loan under Federal Reserve Board's
    Regulation Z;

-   The financing does not reduce the amount of the government's equity
    share in the property;[^2] [and]{.underline}

-   The new total debt does not exceed 95 percent of the property's new
    appraised value.

HUD will not subordinate equity or appreciation sharing notes to any
subordinate financing -- either within the first 5 years or thereafter
-- except liens as described above or for FHA loss mitigation actions
(mortgage modifications and partial claims).

X.  **[Equity and Appreciation Sharing]{.underline}**

***Shared Equity Mortgage***

As a condition of the H4H mortgage, the borrower must share with HUD a
portion of the initial equity, which is defined as the difference
between the appraised value at the time of H4H loan origination[^3] and
the original principal balance on the H4H mortgage. The originating
lender will prepare a Shared Equity note and mortgage (SEM) using the
format attached as Exhibit D. A dollar amount equaling the initial
equity will be inserted in the SEM. The SEM will be executed by the
borrower and recorded with all other loan documents in second lien
position.

> **Example:** Appraised value is \$200,000. Maximum loan to value on a
> H4H mortgage is 90%, or \$180,000. The equity amount that would be
> stated in the SEM is \$20,000.

***Shared Appreciation***

As a condition of the H4H mortgage, the borrower must share with HUD 50
percent of any future property appreciation upon sale or disposition of
the property. Future appreciation is the difference between the gross
proceeds from the sale or disposition of the property and the appraised
value of the property at origination of the H4H mortgage, less allowable
closing costs incurred in connection with the sale or disposition and a
percentage of the value of any capital improvements to the home that
increases the value of the property.

The originating lender will prepare a Shared Appreciation note and
mortgage (SAM) using the format attached as Exhibit E. The SAM will be
executed by the borrower and recorded in third lien position. The
originating lender is responsible for ensuring that a SAM (and a SEM)
complies with state law.

***Originating SEM and SAM liens***

In addition to other origination actions, the originating lender of a
H4H mortgage will complete actions necessary to determine and document a
borrower's commitment to share equity and future appreciation with HUD
as required under section 257 of the National Housing Act, as well as
the commitment of existing lien holders to waive all rights to collect
existing debt and to release the lien. The originating lender will:

-   Identify all existing lien holders through review of the borrower's
    loan application and by obtaining a preliminary title report,

-   Request that all existing lien holders provide a payoff statement
    itemizing unpaid principal, unpaid accrued interest, daily interest
    calculation, and allowable costs advanced on behalf of the borrower
    (e.g., taxes, insurance, legal fees, etc.),

-   Refer the borrower to the HOPE for Homeowners Consumer Disclosure
    and Certifications he or she signed at the time of initial loan
    application (Exhibit A), and

-   Provide the borrower copies of all payoff statements for review,
    requesting that the borrower notify the originating lender within 5
    business days of receipt of any discrepancies noted on the payoff
    statements.

Absent any challenge from the borrower regarding a payoff amount, the
originating lender will:

-   Determine the dollar amount of borrower's initial equity as
    described in the example above,

-   Using the Appreciation Worksheet provided in Exhibit F, calculate
    the maximum dollar amount that each subordinate mortgage lien holder
    could receive from HUD's share of future appreciation, if any, using
    the formula and charts contained herein,

-   Provide each subordinate lien holder with the Appreciation
    Worksheet, describing appreciation sharing and stating the maximum
    amount the lien holder may be entitled to receive,

-   Obtain the lien holder's signature on the Appreciation Worksheet,
    acknowledging it has read and accepts the terms of the Appreciation
    Worksheet and is prepared to execute a full release of its lien in
    exchange for a future appreciation share,

-   Prepare and cause the borrower to execute SEM and SAM for the H4H
    mortgage,

-   Record the SEM and SAM with other loan documents,

-   Register the H4H security instruments in the Mortgage Electronic
    Registration System (MERS) as MERS Original Mortgages, and

-   Deliver the original SEM and SAM notes and recorded mortgages to
    HUD's servicing contractor at the address below and retain copies in
    the servicing file.

***Document Delivery***

Following funding of the H4H mortgage, the originating lender will
record the SEM and SAM mortgage documents in the public records of the
county in which the property is located and will deliver the original
SEM and SAM notes and original recorded mortgage documents to HUD at the
address listed below no later than 15 business days from the date of
endorsement. Time extensions may be granted by the National Servicing
Center in the event document delivery is delayed by events beyond the
control of the lender.

> U.S. Department of HUD
>
> c/o C&L Service Corporation / Morris-Griffin Corporation
>
> 2488 East 81^st^ Street, Suite 700
>
> Tulsa, Oklahoma 74137

Other documentation requirements include a copy of the HUD-1 settlement
statement, and a copy of the appraisal that was completed in order to
establish the amount of the H4H mortgage. HUD accepts certified copies
of the recorded mortgage when the original recorded documents are not
available. The SEM and SAM notes and mortgages will be serviced by HUD
through its special servicing contractor.

XI. **[Extinguishment of Subordinate Liens]{.underline}**

All existing mortgage lien holders must waive all rights to collect
existing debt. To facilitate this agreement among lien holders, HUD may
offer subordinate lien holders a share in future appreciation.
Consistent with requirements and standards adopted by the Board, HUD may
also take such actions as may be necessary and appropriate to facilitate
coordination and agreement between the holders of the existing senior
mortgage and any existing subordinate mortgages, taking into
consideration the subordinate lien status of such subordinate mortgages.
Subordinate lien holders whose write off is less than \$2,500 will not
receive the opportunity to share in future appreciation.

Qualifying existing subordinate mortgage lien holders may receive a
share of HUD's interest in future appreciation in exchange for full
release of their lien(s). The originating lender will prepare a SAM
using the format attached as Exhibit E. In the event a subordinate lien
holder accepts the future appreciation, the subordinate lien holder
shall ensure it is a MERS member as MERS will be used to track lien
holders with an interest in future appreciation of the property. The SAM
will be executed by the borrower and recorded in third lien position.
The originating lender is responsible for ensuring that a SAM (and a
SEM) complies with state law. Instructions for calculating future
appreciation sharing payments are in Exhibit F.

XII. **[Monitoring and Program Compliance]{.underline}**

***Monitoring***

Current monitoring practices (such as the Post Endorsement Technical
Reviews, Appraiser Watch, and Lender Monitoring Reviews), will be used
to monitor lenders and appraisers participating in the H4H Program as
well as loan performance. If a serious violation of H4H or existing FHA
Program requirements is discovered, FHA's standard indemnification
procedures and claim payment procedures apply, i.e., holders of FHA
insurance benefits who were not a party to the violation will be paid a
claim and the deficiency or loss to FHA will be pursued under the
indemnification agreement with the lender responsible for the violation.

H4H mortgages will not be included in HUD's performance analysis of a
lender's compare ratio with respect to the CreditWatch Termination
Initiative. However, FHA will develop a separate module in Neighborhood
Watch to display a lender's performance compare ratio for H4H loans.

***Fraud Convictions***

As part of its Lender Monitoring Reviews, FHA will perform an
independent background check to determine whether the borrower has been
convicted of fraud in the last 10 years. Regarding this aspect of the
Program, the lender's liability is limited to what it knew or should
have known. That is, during loan processing information was available to
the lender indicating a fraud conviction or at the time of case number
assignment the lender received a warning for a fraud conviction.

***First Payment Default***

Under the statute for the H4H Program, HUD is prohibited from paying
insurance benefits to any lender in any case in which the borrower fails
to make the first payment on the new H4H mortgage. For purposes of this
Program, lenders will have a maximum of 120 days to submit a complete
case binder, including evidence that the mortgage is current. FHA will
not pay a claim on any mortgage under the H4H Program if the first
payment was not made within 120 days. Lenders are reminded that in order
to ensure compliance with this statutory requirement, FHA prohibits them
or any interested third party from making any payment on behalf of the
borrower, escrowing of any payment or applying any payment from closing
proceeds. Violation of this requirement will also result in a denial of
claim benefits.

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

Attachments

[^1]: Borrowers in bankruptcy are not precluded by FHA requirements from
    participating in the H4H Program.

[^2]: That is, the sum of the unpaid principal balance and accrued
    interest on the H4H mortgage and the original principal balance of
    the new mortgage debt is less than the sum of (i) the appraised
    value of the property after completion of the proposed repair and
    (ii) HUD's share of the new equity created upon origination of the
    H4H mortgage as if a sale of the property occurred on date of
    origination of the new mortgage debt.

[^3]: The Act provides that, in the event of refinance, sale or other
    disposition, HUD receive the following percentage of initial equity:

    During Year 1 100% of equity is paid to FHA

    > During Year 2 90% of equity is paid to FHA
    >
    > During Year 3 80% of equity is paid to FHA
    >
    > During Year 4 70% of equity is paid to FHA
    >
    > During Year 5 60% of equity is paid to FHA
    >
    > After Year 5 50% of equity is paid to FHA