**April 1, 2008**

> **MORTGAGEE LETTER 2008-09**

**TO: ALL APPROVED MORTGAGEES**

**ALL FHA ROSTER APPRAISERS**

**SUBJECT: Second Appraisal Requirements/Limits on Cash-Out Refinances**

Mortgagee Letter 2007-11, announcing the FHASecure initiative, also
included information regarding appropriate appraisal practices in
declining markets; those instructions remain in effect. Now, with FHA in
position to insure mortgage amounts greatly in excess of what has been
its experience as a mortgage insurer, we believe it prudent to set forth
additional underwriting and collateral assessment practices for
"high-balance" loans.

Specifically, for mortgage amounts that will exceed the January 1, 2008
conforming limit of \$417,000, FHA is establishing a second appraisal
requirement for loans on properties in declining areas, and limiting the
loan-to-value for cash-out refinances. These requirements are further
described below and are effective for all mortgages with FHA case number
assignments made on or after the date of this mortgagee letter.

**[Second Appraisal Requirements in Certain High-Cost
Areas]{.underline}**

Recognizing FHA's counter-cyclical role in the mortgage market, and its
ability to help stabilize declining housing markets, FHA is not at this
time establishing higher downpayment requirements or borrower credit
bureau score thresholds for properties located in declining areas.
However, to mitigate risk to the FHA insurance fund as well as FHA
borrowers, FHA will require a second appraisal for higher balance loans
secured by properties in declining markets as indicated on the appraisal
report or determined by the lender using other sources.

**[When is a Second Appraisal Required]{.underline}?** A second
appraisal will be required when:

-   The loan amount, excluding the upfront mortgage insurance premium,
    will exceed \$417,000, [and]{.underline}

-   The LTV[^1], excluding upfront MIP, equals or exceeds 95%,
    [and]{.underline}

-   The property is determined as being in a declining market.

**[How is a declining market determined]{.underline}**?

-   [By the appraiser]{.underline}: The appraisal report requires the
    appraiser to indicate if the property is located in a declining area
    in both the neighborhood section of the appropriate appraisal form
    as well as in the housing trend section, and/or determine if there
    is an "over-supply" of properties. The certifications contained in
    the appraisal reporting forms are supplemental standards to the
    Uniform Standards of Professional Appraisal Practice (USPAP) and
    Certification \# 14 specifically requires an appraiser to consider
    and report on all conditions that impact value.  Appraisers must
    provide specific support for any conclusions noted in the Housing
    Trend section of the appraisal report and research local price
    trends, relying upon such services as local Multiple Listing
    Services or others as described below.

-   [By the lender]{.underline}: The lender may determine through
    services such the S&P/Case-Schiller Index, Office of Federal Housing
    Enterprise Oversight (OFHEO) Index or National Association of
    Realtors (NAR) statistics, or through an automated underwriting
    system, e.g., Fannie Mae's Desktop Underwriter or Freddie Mac's Loan
    Prospector, that the property is located in a declining market area.

**[Who can perform the second appraisal]{.underline}?**

The second independent appraisal must be completed by a FHA roster
appraiser selected by the Direct Endorsement lender that is underwriting
the mortgage. The lender independently engages the appraiser and is not
to request a second case number through FHA Connection. The fee for the
appraisal may be passed onto the borrower as any other closing cost.

**[What form must be used for the second appraisal]{.underline}**?

If the property is a one-unit detached house, the second appraisal may
be an exterior-only appraisal using form Fannie Mae/Freddie Mac 2055;
any repair requirements noted in the original interior-exterior
appraisal report must be adhered to if the second appraisal is an
exterior-only appraisal. Condominium units including detached
site-condominiums; manufactured housing; and 2-4 unit properties are not
eligible for exterior-only second appraisals and must be completed on
the appropriate appraisal form.

**[When must the mortgage amount be reduced]{.underline}?**

If the second appraisal has an estimated value more than 5 percent lower
than the original appraisal, the [maximum mortgage]{.underline} must be
predicated upon the lower of the two appraised values.

**[What does the lender do with the second appraisal]{.underline}?**

The second appraisal, when required, is to be included in the FHA
insurance binder. If the second appraisal is used to recalculate the
maximum mortgage amount, the mortgagee must enter the appropriate
information in the appraisal logging screen in the FHA Connection or
functional equivalent.

**[Pressure on Appraiser and Conflicts of Interest]{.underline}**

The lender and appraiser must also 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.  In addition, a
lender may not choose an appraiser that is employed by an appraisal
company that owns, is owned by, is affiliated with or has any financial
interest in the builder or seller of the property. Instances of undue
pressure or influence on an appraiser reported to FHA will result in
appropriate disciplinary actions against the lender involved.

**[Loan-to-Value Limits for Cash-Out Refinances]{.underline}**

If a homeowner is pursuing a cash-out refinance and the loan balance
exclusive of FHA's upfront mortgage insurance premium will exceed
\$417,000, the loan-to-value may not exceed 85 percent of the
appraiser's estimate of value.

If you have any questions regarding this mortgagee letter, please
contact the FHA Resource Center at 1-800-CALL-FHA (1-800-225-5342).

> Sincerely,

Brian D. Montgomery

Assistant Secretary for Housing-

Federal Housing Commissioner

[^1]: Loan-to-Value is defined as the mortgage amount, excluding any
    financed upfront mortgage insurance premium, divided by the lower of
    the adjusted sales price or the appraiser's estimate of the
    property's value.