November 15, 2006

> MORTGAGEE LETTER 2006-27

# TO: ALL APPROVED MORTGAGEES

# SUBJECT: Enhancements to the Neighborhood Watch Early Warning System

This mortgagee letter announces enhancements made to the Neighborhood
Watch Early Warning System since the issuance of Mortgagee Letter
2005-26 -- Reporting Feature Added to the Neighborhood Watch Early
Warning System -- dated May 27, 2005.

### Background

Neighborhood Watch is a web-based software application that permits all
FHA-approved mortgagees to analyze their own and others' early default
and claim performance. The system is designed to highlight exceptions,
so that potential problems are readily identifiable. Neighborhood Watch
is primarily a tool that identifies lenders and loan characteristics
within various geographic areas that have a high incidence of defaulted
single family insured mortgages within the first two years of loan
origination.

### Access to Neighborhood Watch

In order to access Neighborhood Watch, users must have access to the FHA
Connection application. The lender's FHA Connection Coordinator must
update the user's FHA Connection profile within the ID Maintenance
section of the FHA Connection to one or both levels of Neighborhood
Watch access (Summary and/or Loan Detail). Once authorized to use
Neighborhood Watch, mortgagees can select the Neighborhood Watch link
located on the \"Single Family FHA\" screen of the FHA Connection to
begin using the application. The website address for the FHA Connection
is https://entp.hud.gov/clas/index.cfm.

### Enhancements

Improvements made to Neighborhood Watch are released periodically each
year. A message is displayed on the main Neighborhood Watch screen that
informs users to view the \"What\'s New\" option in the Help/About menu
for a description. Following are highlights of the enhancements to
Neighborhood Watch released since the issuance of Mortgagee Letter
2005-26.

**[March 17, 2006]{.underline}**

-   Modified the Early Warnings Loan Level Results display and Case
    Status Query to identify loans that are insured under the Lender
    Insurance Program, and provide the binder type for loans where HUD
    requested the lender's case binder.

-   Modified the Lender Details -- Lender Summary results screen to
    display the approval status total (active, terminated, merged) for a
    lender's business affiliate type (sponsor, loan correspondent,
    authorized agent, principal). The modification also allows a drill
    down of each status and type.

-   Added Direct Lending branch identifiers to the Lender Details --
    Lender Summary results screen, including a count and output report
    to view the Direct Lending branches by institution.

**[February 17, 2006]{.underline}**

-   Modified the Early Warnings Loan Level Results display and Case
    Status Query to include the most recent Post Endorsement Technical
    Rating (PETR) codes. The screen will display the new codes for loans
    recently rated, as well as previous codes that were used under the
    prior rating system.

-   Neighborhood Watch was modified to recognize the existence of the
    new Single Family Default Monitoring System reporting status code
    "34" -- Natural Disaster, and reason code "19" Casualty Loss. The
    codes were announced as part of Mortgagee Letter 2006-05 to help
    identify delinquencies caused by property damage and/or natural
    disasters.

**[December 16, 2005]{.underline}**

-   Modified the Late UFMIP Query to display the new remittance
    requirement of 10 days from closing for loans that closed on or
    after November 1, 2005 in accordance with Mortgagee Letter 2005-28.
    Loans that closed prior to November 1, 2005, continue to be measured
    against the 15-day timeframe from the date of closing.

-   Modified the Analysis icon on the Early Warnings All Lenders results
    screen to display drill down for the same performance period on the
    Analysis screen.

**[November 4, 2005]{.underline}**

-   Added a new Query -- Indemnification -- that allows a lender to view
    FHA-insured loans where HUD and the lender executed an
    indemnification agreement. The loan level results include all loans
    where the lender executed and indemnification agreement,
    irrespective of the status of the loan (e.g. terminated,
    paid-in-full, streamline refinance, etc.) or the status of the
    indemnification agreement (active or expired). Lenders can use the
    Indemnification Query to monitor the default status of the loan as
    reported to HUD's Single Family Default Monitoring System. In
    addition, for those properties conveyed to HUD, a lender can track
    the acquisition, sales contract and closing date of the property by
    HUD's Real Estate Owned Department.

-   Updated Frequently Asked Questions to provide lenders with
    instructions on how to view performance in Neighborhood Watch with
    respect to HUD's Lender Insurance participation qualifications.

**[August 22, 2005]{.underline}**

-   Enhanced Direct Endorsement Lender views in Early Warnings to
    display retail and sponsor compare ratios. This feature will be used
    in the future as part of HUD's performance analysis of a lender for
    HUD's Credit Watch Termination Initiative for Direct Endorsement
    Lenders.

**[June 24, 2005]{.underline}**

-   Added All Quarter and Quarter End Date to Performance Period in
    Early Warnings All Appraiser and Single Appraiser views for
    nationwide to HUD Office geographic areas for the following
    categories: all loans, living units (1 -- 4), 203K program, and
    non-profits.

### Future Enhancements

HUD's Office of Lender Activities is working on a number of
improvements/additions to Neighborhood Watch. These will include the
following.

-   Modification of Early Warnings, Servicing and Query sections in
    Neighborhood Watch to accommodate Single Family Default Monitoring
    System conversion as outlined in Mortgagee Letter 2006-15. This will
    include the addition of 30 and 60 day defaults to a servicers
    Current Defaults and provide the servicer with case level detail of
    this data. Revised default status and reason codes will also be
    added to case level data.

-   Addition of a new Query -- Default Cases -- that will provide a
    lender the ability to view its originations that have been reported
    as 30, 60, 90 days delinquent to HUD's Single Family Default
    Monitoring System.

-   Addition of lender level Home Equity Conversion Mortgage (HECM)
    production data, along with case level detail of this data.

If you have any questions about this system, please access the
"Feedback" option in the Help/About section of Neighborhood Watch and
send us your questions or comments. If you are unable to access this
feature, please contact the Office of Lender Activities and Program
Compliance, Quality Assurance Division at (202) 708-2830.

> Sincerely,
>
> Brian D. Montgomery
>
> Assistant Secretary for Housing-
>
> Federal Housing Commissioner