**October 1, 2008 MORTGAGEE LETTER 2008 - 30**

**TO: ALL APPROVED MORTGAGEES**

**SUBJECT: HOPE for Homeowners Servicing Guidance**

The Housing and Economic Recovery Act of 2008 amends the National
Housing Act to authorize a new, temporary Federal Housing Administration
(FHA) mortgage insurance program called the HOPE for Homeowners Program
(also referred to as the H4H Program). Under the Program, a borrower
facing difficulty paying his or her mortgage will be eligible to
refinance into an affordable FHA-insured mortgage.  The H4H Program is
effective for endorsements on or after October 1, 2008, through
September 30, 2011.

This mortgagee letter provides HUD-approved servicing mortgagees with
servicing and loss mitigation guidance on the new H4H Program. The
information, directions and guidance provided in the mortgagee letter
reflect statutory requirements and the standards, policies and
regulations adopted for the H4H Program by the Board of Directors of the
H4H Program.

**I. [Background]{.underline}**

At origination of an H4H mortgage, the borrower will execute a Shared
Equity note and mortgage (SEM) in favor of HUD with a fixed dollar
amount inserted for initial equity. Likewise at origination, the
borrower will execute a Shared Appreciation note and mortgage (SAM) in
favor of HUD representing a fifty percent (50%) interest in future
appreciation of the mortgage property. The SEM and SAM mortgage
documents will be recorded as second and third priority liens,
respectively, against the property.

Initial equity is calculated as the difference between the H4H mortgage
original balance and the appraised value at the time of the H4H loan
origination. Based on the date of a sale, disposition or refinance, HUD
is entitled to a percentage of the initial equity pursuant to the
schedule as stated in the SEM.[^1] Upon sale or disposition of the
mortgaged property; HUD is also entitled to receive fifty percent (50%)
of any appreciation. Appreciation is defined as the growth, if any, in
the value of the property between the time the borrower takes out the
H4H mortgage and the time the borrower sells the property. HUD may share
its 50% interest in future appreciation with a subordinate lien
holder(s) who meet specific criteria for the H4H mortgage.

Following the funding of the H4H mortgage, the originating lender
(Originator) will record the H4H, 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. The recording of the mortgages should enable the
Originator to register the H4H, SEM and SAM notes and mortgages on the
Mortgage Electronic Registration System (MERS);. The SEM and SAM will be
serviced by HUD through its contractor, C&L Service
Corporation/Morris-Griffin Corporation (Contractor).[^2]

H4H mortgages will be serviced in accordance with the servicing policy
for other FHA-insured forward mortgages as described in HUD Handbook
4330.1 REV-5 and any mortgagee letters that update this handbook, except
as otherwise provided in this mortgagee letter.

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

Under the H4H Program, borrowers are prohibited from taking out new
subordinate liens for the first five years of the mortgage except when
necessary to ensure maintenance of property standards. Therefore, during
the first five years of the mortgage, FHA will permit a junior 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 or 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;[^3] [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 five years or
thereafter -- except liens as described above or for FHA loss mitigation
actions (mortgage modifications and partial claims).

Should a borrower need to obtain a loan for property repairs, the
borrower should contact HUD in care of its Contractor at the address at
the end of this mortgagee letter and provide information documenting the
need for the repairs, repair cost estimates and a current appraisal
prepared by a FHA roster appraiser.

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

In the event of any refinance of the H4H mortgage, the borrower must pay
to HUD its full equity interest as stated in the SEM. H4H mortgages may
not be refinanced using the FHA streamline process. Refinance into
another conventional loan product is permitted subject to the following
restrictions:

***Refinance*** ***to Access Equity***

No earlier than 12 months from the date of closing on the H4H mortgage,
HUD will subordinate its SAM to a refinance if:

-   The refinance results in a 30 year amortizing fixed-rate loan with a
    principal and interest payment that is lower than the P&I payment
    due on the existing H4H mortgage,

-   The proceeds from the refinance are sufficient to pay off the
    percent of initial equity due to HUD, and

-   The cash received by or on behalf of the borrower is limited to the
    borrower's initial equity as stated in the SEM and any earned equity
    the borrower has accrued by paying down the principal balance of the
    loan.

***Refinance*** ***to Access Appreciation***

No earlier than five years from the date of closing on the H4H mortgage,
HUD will allow a refinance if:

-   The cash received by or on behalf of the borrower from the refinance
    is limited to the initial and earned equity and no more than
    twenty-five percent (25%) of the appreciation accrued since
    origination of the H4H mortgage, and

-   The borrower consents to a modification of the SAM that specifies
    that HUD is entitled, upon the sale or other disposition of the
    property, to a fixed dollar amount equal to fifty percent (50%) of
    the appreciation (as adjusted for capital improvements as described
    below) that accrued between origination of the H4H mortgage and the
    date of the refinance, as well as fifty percent (50%) of any future
    appreciation that may accrue between the date of the refinance and
    sale of the property.

Additionally, if the H4H mortgage is being refinanced into a new FHA
loan, the borrower must; (i) meet all standard eligibility and
qualifying guidelines for FHA mortgage insurance, (ii) have made all of
his or her mortgage payments during the previous 12 months, within the
month due, and (iii) be current for the month due.

Upon receipt of any request to subordinate the SAM to a refinance, HUD
shall determine its equity interest based on the number of years since
origination of the H4H mortgage and shall provide the amount required to
pay off the shared equity mortgage to the refinance lender. If the
borrower is requesting an appreciation refinance, HUD will, based on a
new appraisal performed by a FHA roster appraiser and provided by the
refinance lender, calculate the total appreciation (as adjusted for
capital improvements) accrued since origination and multiply that amount
by twenty-five percent (25%) to determine the maximum amount of
appreciation the borrower may obtain from the refinance transaction.

**IV. [Capital Improvements]{.underline}**

Upon receipt of a written request from a borrower, the calculation of
accrued appreciation in the mortgage property may be reduced by an
amount equal to seventy-five percent (75%) of the actual expenditure for
capital improvements completed at the borrower's expense after
origination of the H4H mortgage, subject to the following conditions:

-   The combined total cost of the capital improvements claimed must be
    equal to or greater than \$2,500,

-   The borrower must submit original or legible copies of paid invoices
    itemizing the work completed,

-   The work must be of a nature that significantly changed and enhanced
    the value of the property including but not limited to room
    additions; full roof replacement; complete exterior painting, siding
    or stucco; full kitchen renovation; major landscape renovation;
    patio or deck additions; in-ground swimming pools,

-   Expenses, including but not limited to interior décor (paint,
    flooring, window and wall coverings); landscape maintenance (mowing,
    tree trimming or removal, reseeding, planting, fertilization) or
    normal maintenance or replacement of appliances, systems, and
    fixtures may not be included, and

-   There will be no allowance for "sweat equity".

**V. [Default and Loss Mitigation]{.underline}**

Mortgagees shall follow the same documentation and reporting guidelines
when providing loss mitigation to borrowers with H4H mortgages that
apply to FHA-insured mortgages. HUD's Loss Mitigation Program allows for
the following special considerations when evaluating an H4H borrower for
loss mitigation.

> ***Loss Mitigation Options***

-   [Special Forbearance]{.underline} -- follow existing Program
    guidance.

-   [Loan Modification]{.underline} -- HUD will subordinate the SEM and
    SAM to any modification of an H4H mortgage completed in accordance
    with HUD's Loss Mitigation Program.

-   [Partial Claim]{.underline} -- a partial claim note does not require
    subordination of the SEM and SAM.

-   [Pre-Foreclosure Sale]{.underline} -- the lender will include the
    total dollar amount of the SEM in the total debt calculation for the
    negative equity ratio calculations in addition to any existing
    Partial Claim. Net proceeds must fit into the eighty-two percent
    (82%) requirement and up to \$2,000 can be used to pay off any
    junior property preservation lien. If a junior property preservation
    lien does not exist, the borrower is not eligible for the \$2,000.

-   [Deed-In-Lieu (DIL)]{.underline} -- HUD will accept a DIL subject to
    the SEM and SAM liens and will allow up to \$2,000 to be used to
    satisfy a junior, property preservation lien.

**VI. [Impact of First Payment Defaults]{.underline}**

Section 257 of the National Housing Act prohibits HUD from paying an
insurance claim on any H4H loan where there was a first payment default
(the borrower did not make at least one full payment within 120 days
from the date of settlement). Though HUD is unable to pay claims for
insurance benefits on these loans, they remain insured and they must be
serviced in accordance with the HUD's servicing and loss mitigation
guidance. Lenders must remit the portion of the annual mortgage
insurance premium due each month.

Prior to filing any claim for insurance benefits, the lender must verify
that the loan did not experience a first payment default as defined
herein.

***Loss Mitigation***

Borrowers must be considered for and offered all appropriate loss
mitigation options. However, the lender may not file a claim for loss
mitigation incentives, reimbursement of loss mitigation expenses,
partial claim advances or forgiveness of principal and interest
associated with pre-foreclosure sales, DIL, claim without conveyance or
conveyance claims. These restrictions apply to loans with first payment
defaults:

-   [Partial Claim]{.underline} -- Lenders are encouraged but not
    required to offer a loss mitigation option similar to a partial
    claim. HUD may subordinate the SEM and SAM to a partial claim
    advance note in favor of a lender if the advance generally complies
    with FHA Loss Mitigation Program guidance. However, HUD is unable to
    reimburse the lender for the advance.

-   [Pre-Foreclosure Sale]{.underline} (PFS) -- the lender is required
    to offer eligible borrowers the opportunity to participate in a
    Preforeclosure Sale Program with terms similar to that proscribed by
    FHA, however, the lender is not required to pay the borrower a
    consideration or to advance funds for satisfaction of junior liens
    as provided in the FHA Loss Mitigation Program. When a PFS generally
    complies with HUD guidance, HUD may release its SEM and SAM liens to
    accommodate the loss mitigation action.

-   [DIL]{.underline} -- Lenders are required to utilize the DIL option
    when appropriate. When a DIL generally complies with HUD guidance,
    HUD may release its SEM and SAM liens to accommodate the loss
    mitigation action.

> ***Voluntary Termination of Insurance***

Section 229 of the National Housing Act, as implemented by the H4H
Regulations, provides that the Secretary shall terminate any insurance
contract upon request by the mortgagor and the mortgagee. In the event
the borrower and mortgagee mutually request termination of insurance and
the request is granted, annual mortgage insurance premiums will no
longer be due and payable to HUD. However, the borrower will not be
entitled to a refund of any upfront mortgage insurance premium received
by HUD and will remain obligated for the shared equity and appreciation
mortgages, that can be discharged only as provided in other sections of
this guidance.

**VII. [Sale and Payoff]{.underline}**

Upon sale or other disposition (transfer of title without sale) the
borrower must satisfy both the SEM (if not already satisfied through
refinance) and the SAM. Upon receipt of a payoff request, HUD will
calculate the respective payoff amounts in the manner described herein
and issue a payoff demand to the closing agent. Also, HUD will determine
if there are prior subordinate lien holders who are entitled to a
portion of any appreciation.

HUD shall receive out of net proceeds its initial equity amount as
stated in the SEM note. If net proceeds are less than HUD's share of the
initial equity due to a deduction for allowable closing costs, then net
proceeds will be shared as follows:

-   First, HUD shall receive from the net proceeds its proportionate
    share (as determined using the schedule stated in the SEM) of any
    closing costs deducted from initial equity.

-   Second, the remaining net proceeds (if any) will be distributed
    between HUD and the mortgagor according to the schedule stated in
    the SEM.

HUD shall accept net proceeds that are less than HUD's share of initial
equity as payment in full of the SEM note subject to the following
conditions:

-   The sale represents an arms-length transaction with no identity of
    interest between the parties,

-   The sale price was based on a current appraisal performed in
    accordance with the Uniform Standards of Professional Appraisal
    Practice and acceptable to HUD, and

-   The net proceeds from the sale are equal to or greater than
    eighty-eight percent (88%) of the appraised value or such other
    value as may be approved by HUD based on circumstances beyond the
    control of the borrower.

***Example***

> Assuming that the original appraisal for an H4H loan is \$100,000 and
> the original loan balance on the H4H loan is \$90,000; therefore the
> SEM is \$10,000. The property is sold six years later for \$103,000
> with \$7,000 in closing costs. The unpaid principal balance on the H4H
> loan is \$88,000. Net proceeds equal \$8,000
> (\$103,000-88,000-\$7,000). **HUD receives \$4,500 and the borrower
> receives \$3,500**; the deduction of closing costs resulted in the
> reduction in net proceeds being less than the initial equity amount by
> \$2,000; HUD first receives 50% of this \$2,000, or \$1,000 out of the
> net proceeds; The remaining net proceeds (\$7,000) are shared 50/50
> between HUD and the borrower with each receiving \$3,500.

To the extent that there is appreciation available from HUD's share for
distribution, HUD will provide instructions to the closing agent to
distribute the funds at closing to each prior subordinate lien holder in
order of their former priority. The lien holder that previously held the
highest priority will receive up to the full dollar amount of its
interest, not to exceed the amount of available appreciation. If
additional appreciation is available, the lien holder with the next
priority will be entitled to receive payment up to the full dollar
amount of its interest, not to exceed the amount of available
appreciation, and so on until all prior lien holders are satisfied or
the amount of available appreciation is exhausted. All remaining
appreciation will be remitted to HUD.

Upon receipt of all equity and appreciation proceeds due to HUD, the
Contractor will issue and record satisfaction and release of the SEM and
SAM notes.

**VIII. [Correspondence]{.underline}**

All correspondence and mortgagor inquiries as noted above related to
servicing H4H mortgage should be directed to:

> U.S. Department of HUD
>
> c/o C&L Service Corporation / Morris-Griffin Corporation

2488 East 81^st^ Street, Suite 700

Tulsa, Oklahoma 74137

Any questions regarding this mortgagee letter may be directed to HUD's
National Servicing Center at (888) 297-8685 or
[[hsg-lossmit@hud.gov]{.underline}](mailto:hsg-lossmit@hud.gov). This
guidance is effective immediately.

Sincerely,

Brian D. Montgomery

Assistant Secretary for Housing-

Federal Housing Commissioner

[^1]: 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

[^2]: Contractor is subject to change. Mortgagees will be notified of
    any changes via future mortgagee letters.

[^3]: 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.