**January 6, 2009**

> **MORTGAGEE LETTER 2009-03**

**TO: ALL APPROVED MORTGAGEES**

**SUBJECT: HOPE for Homeowners Origination and Servicing Guidance
Supplement**

On behalf of the Board of Directors (Board) for the HOPE for Homeowners
Program, HUD published on October 1, 2008 Mortgagee Letter 2008-29,
*HOPE for Homeowners Origination Guidance,* describing procedures for
originating a new FHA-insured mortgage authorized under the Housing and
Economic Recovery Act of 2008 called the HOPE for Homeowners Program
(H4H Program). That same day, HUD also published on behalf of the Board
Mortgagee Letter 2008-30, *HOPE for Homeowners Servicing Guidance*,
which provided HUD-approved servicing mortgagees with servicing and loss
mitigation guidance on the Program. Under the H4H Program, certain
borrowers facing difficulty in paying their mortgages may be eligible to
refinance into affordable FHA-insured mortgages.  The H4H Program became
effective on October 1, 2008, and may continue to insure new mortgages
through September 30, 2011.

On October 3, 2008, the President signed into law the Emergency Economic
Stabilization Act of 2008 (EESA), which included a key change to the H4H
Program that allows HUD to offer subordinate mortgage lien holders, in
exchange for releasing their lien, an upfront payment in lieu of a share
of HUD's fifty percent (50%) interest in future appreciation of the
mortgaged property. EESA also amended how the borrower's pre-Program
total monthly mortgage payment debt-to-income ratio (DTI) may be
determined. This Mortgagee Letter, which incorporates the changes made
by EESA, supplements Mortgagee Letters 2008-29 and 2008-30 and is
effective immediately. Mortgagee Letters 2008-29 and 2008-30 continue to
apply, except as modified by this Mortgagee Letter.

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 for the H4H Program.

***Determining Pre-Program Mortgage Payment DTI***

In Mortgagee Letter 2008-29, guidance was provided on how to reconstruct
the borrower's aggregate total monthly mortgage payment DTI as of March
1, 2008. Under the Program as originally enacted and implemented, a
borrower must have had a mortgage DTI of at least 31 percent as of March
1, 2008, to qualify for the Program. In light of changes authorized by
EESA, lenders now have additional flexibility in qualifying borrowers
with adjustable-rate mortgages under this pre-Program mortgage payment
criteria.

[Fixed-rate Mortgages]{.underline}

Due to statutory limitations, in the case of borrowers that have
fixed-rate mortgages (or adjustable-rate mortgages (ARMs) for which
there are no resets after March 1, 2008), lenders must continue to use
the borrower's income and total monthly mortgage payments as of March 1,
2008, to determine whether the borrower meets this 31 percent
pre-Program mortgage DTI requirement. When calculating the aggregate
total monthly mortgage payment DTI as of March 1, 2008, for borrowers
with fixed-rate mortgages or ARMs that do not reset after such date, the
lender should continue to use the guidance provided in Mortgagee Letter
2008-29.

[Adjustable-rate mortgages]{.underline}

For borrowers that had an adjustable-rate senior or subordinate mortgage
on March 1, 2008, that has or may reset at some date after March 1,
2008, lenders now have the option of determining whether the borrower
meets the 31 percent pre-Program mortgage DTI criteria using either:

1\. The borrower's income and total monthly mortgage payment as of March
1, 2008; *or*

> 2\. The borrower's income and total monthly mortgage payment *as of
> the date the borrower applied for the H4H mortgage*.

In either case, lenders may only use debt resulting from mortgages in
existence as of

March 1, 2008.[^1] If a borrower has obtained an additional mortgage
after March 1, 2008, that debt may not be considered when making this
mortgage DTI calculation. These calculations should be made using the
fully indexed and fully amortizing payment for the mortgage. In
calculating the fully indexed total monthly mortgage payment as of a
certain date (i.e., as of March 1, 2008, or the date of application)
lenders should use the index rate prevailing on that date, plus the
margin applicable after the expiration of any introductory interest
rate, if any. The fully amortizing payment is based on the term of the
loan, e.g., for a 2/28 loan the amortization schedule would be based on
30 years.

When calculating the mortgage payment DTI at the time of loan
application for a borrower with an adjustable-rate mortgage that has or
may reset at some date after March 1, 2008, the lender should:

1.  Analyze the employment and income documentation it will use to
    qualify the borrower for the new H4H loan;

2.  Obtain from the servicer(s) the total monthly mortgage payment due
    at the time of loan application, including any amounts due on
    subordinate liens; and

> For mortgages without escrows, 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
> rate in effect at the time of loan application. If the borrower does
> not provide real estate tax information, the lender should obtain it
> from public records.

3.  Verify that only debt resulting from mortgages outstanding as of
    March 1, 2008 is being used to make the calculation.

***Increased Loan-to-Value Ratios and Modified Income Ratios***

In Mortgagee Letter 2008-29, guidance was provided that limited the
loan-to-value (LTV) ratio of the new H4H mortgage to 90 percent of
current appraised value of the property, including the Upfront Mortgage
Insurance Premium (UFMIP). In addition, the guidance provided that a
borrower generally was eligible for the Program only if under the H4H
mortgage the borrower would have a mortgage payment debt-to-income and a
total debt-to-income ratio of not more than 31 percent and 43 percent,
respectively. The guidance, however, also permitted a borrower to exceed
these ratios (up to a maximum mortgage payment debt-to-income ratio of
38 percent and a total debt-to-income ratio of 50 percent) if the lender
qualified the borrower through a 3-month trial modification process.

In light of changes made by EESA and the Board, lenders now have two
alternative LTV and DTI methodologies they may use to qualify borrowers
for the program:

1.  The Program mortgage may have an LTV of greater than 90 percent (up
    to a maximum of 96.5 percent) of current appraised value (including
    the UFMIP) provided the borrower's mortgage payment-to-income ratio
    and a total debt-to-income ratio under the new Program mortgage do
    not exceed 31 percent and 43 percent, respectively, *or*

2.  If the Program mortgage has an LTV of 90 percent or less of current
    appraised value (including the UFMIP), the borrower's mortgage
    payment debt-to-income ratio and a total debt-to-income ratio may be
    up to 38 percent and 50 percent, respectively. Borrowers may
    immediately qualify for the Program under the mortgage payment
    debt-to-income ratio and total debt-to-income ratio up to these
    maximums without any trial modification process.

.

***Extending Mortgage Term to 40 Years***

Under the H4H Program, lenders may now offer borrowers a mortgage with a
term of between 30 and 40 years. However, in order for a Program
mortgage to qualify for inclusion in a pool of Program mortgages to back
securities insured by the Government National Mortgage Association
(Ginnie Mae), the mortgage should be for a term of either 30 or 40 years
to maintain consistency in the mortgages within a securitization pool.
If the lender intends to hold the Program mortgage, then this
operational limitation would not apply, and the lender is free to set
the term of the mortgage at 30 years, 40 years, or some intermediate
number of years.

***Multiple Unit Properties***

In Mortgagee Letter 2008-29, eligible properties were limited to one
unit. Property eligibility has been expanded to include two-, three- and
four-unit properties. The borrower must occupy one of the units as the
borrower's primary residence, and the borrower may not have an ownership
interest in any residential property other than the two- to four-unit
property. The amount of the H4H mortgage may not exceed a nationwide
maximum mortgage limit as follows:

> One-unit \$550,440
>
> Two-units \$704,682
>
> Three-units \$851,796
>
> Four-units \$1,058,574

For a three- or four-unit property, lenders are reminded of FHA's
standard policy requiring those properties to be self-sufficient \[HUD
Handbook 4155.1 REV-5, paragraph 1-8 C\].

***Annual Premium***

Due to a statutory requirement, the 1.5 percent annual premium must be
collected for the life of the H4H mortgage.

***Shared Equity Mortgage -- Definition of Initial Equity***

As a condition of the Program mortgage, the borrower must share with HUD
a portion of the initial equity in the property.[^2] The definition of
initial equity to be shared with HUD has been modified. To determine the
initial equity amount, lenders should deduct the original principal
balance on the Program mortgage from the lesser of:

(1) the appraised value of the property at the time of origination; *or*

(2) the outstanding amount due under all existing senior mortgages,
    existing subordinate mortgages, and non-mortgage liens on the
    property.

***Appreciation Share Options***

In exchange for a full release of liens and the release of the borrower
from all indebtedness under the related subordinate mortgage, a
qualifying existing subordinate mortgage lien holder may now elect to
receive either an upfront payment or a share of HUD's 50% interest in
future property appreciation, but not both. Subordinate lien holders
whose write-off is less than \$2,500 are not eligible to receive an
upfront payment or a share in future appreciation.

[Upfront Payment Option]{.underline}

In exchange for a full release of liens and the release of the borrower
from all indebtedness under the related subordinate mortgage, a
subordinate mortgage lien holder may choose to receive a cash payment at
closing equal to a percentage of the total principal and note rate
interest they are writing off; see Exhibit A: Appreciation Worksheet,
for payment calculation methodology. In the event a subordinate lien
holder elects the upfront payment option:

-   The subordinate lien holder will indicate this election on the
    Appreciation Worksheet.

```{=html}
<!-- -->
```
-   Not less than ten (10) business days prior to the scheduled date of
    closing the H4H loan, the originating lender will send an
    Appreciation Worksheet for each eligible subordinate mortgage lien,
    executed by the subordinate lien holder and the originating lender,
    to HUD's National Servicing Center (NSC) at the address provided
    below.

```{=html}
<!-- -->
```
-   Not less than five (5) business days prior to closing, the NSC will
    notify the originating lender of discrepancies noted on the
    Appreciation Worksheet, if any, and request corrections prior to
    closing.

```{=html}
<!-- -->
```
-   The originating lender will provide instructions to the closing
    agent to pay the calculated upfront payment(s) reflected on the
    Appreciation Worksheet previously provided to HUD.

```{=html}
<!-- -->
```
-   The originating lender will advance funds in the amount of the new
    mortgage ***and*** the amount necessary to pay the upfront
    payment(s) to the subordinate lien holder(s) that have chosen this
    option.

-   Within fifteen (15) business days of the date of endorsement, HUD
    will automatically reimburse the originating lender the amount of
    the upfront payment.

[Future Appreciation Option]{.underline}

In the event an eligible subordinate mortgage lien holder elects the
future appreciation option, HUD will issue an Appreciation Share
Certificate (ASC) in favor of each subordinate mortgage lien holder,
providing it to the originating lender prior to closing.

-   The subordinate lien holder will indicate this election on the
    Appreciation Worksheet.

```{=html}
<!-- -->
```
-   Not less than ten (10) business days prior to the scheduled date of
    closing the H4H loan, the originating lender will send an
    Appreciation Worksheet for each eligible subordinate mortgage lien,
    executed by the subordinate lien holder and the originating lender,
    to HUD's National Servicing Center (NSC) at the address provided
    below.

```{=html}
<!-- -->
```
-   Not less than five (5) business days prior to closing, the NSC will
    notify the originating lender of discrepancies noted on the
    Appreciation Worksheet, if any, and request corrections prior to
    closing.

-   The originating lender will deliver the ASC to the closing agent
    along with closing instructions directing the closing agent to
    provide the ASC to the subordinate mortgage lien holder via any
    delivery method with receipt confirmation.

-   The closing agent will deliver the ASC to the subordinate mortgage
    lien holder either at the closing or via certified mail.

ASCs are numbered and registered by holder name and address in HUD's
system of records. In the event a holder elects to sell, trade or
otherwise transfer its ASC, it must notify NSC of the transfer in
writing at the address listed herein, by providing the ASC certificate
number and the name, address and telephone contact information for the
authorized representative of the transferee. Such notification must be
on the letterhead of the holder and signed by an authorized
representative of the holder. Only the registered holder may request
changes to the holder data. If an ASC is lost or damaged the holder
should contact NSC for replacement instructions.

[Calculation of Future Appreciation]{.underline}

In cases where a property refinanced with a Program mortgage is sold in
a transaction that does not involve a related party of the mortgagor,
the amount of appreciation that has occurred since the origination of
the Program mortgage will continue to be based on the gross proceeds
from the sale of the property. For non-sale dispositions or sales to a
related party of the mortgagor, the amount of appreciation will be
calculated based on the appraised value of the property at the time of
the disposition or sale. The related parties of a mortgagor include the
immediate family of the mortgagor, as well as entities owned or
controlled by the mortgagor or the mortgagor's immediate family. Further
information on the definition of a related party may be found in 24 CFR
§ 4001.17.

As provided in Mortgagee Letter 2008-30, allowable closing costs
incurred in connection with the sale or disposition of the property and
a percentage of the value of any capital improvements to the home that
increased the value of the property may be deducted from the gross
proceeds or appraised value, as relevant.

***First Payment Default and Submission of Case Binders for
Endorsement***

The endorsement process for the H4H Program will now conform to existing
FHA standards, eliminating the previous requirement that lenders must
submit the case binder within 120 days of closing in order for it to be
eligible for insurance. When submitting a case binder for insurance
endorsement under the H4H Program, lenders must:

-   Include evidence in the case binder that the borrower made the first
    payment from their own funds within 120 days of the of closing on
    the H4H loan[^3];

-   Certify that the loan is current at the time of submission; *and*

-   Certify that the lender did not bring the loan current to make it
    eligible for insurance.

***Unendorsed Loans***

In the event an H4H loan is not endorsed for FHA insurance, HUD will
execute and record a release of the Shared Equity Note and Mortgage
(SEM) and Shared Appreciation Note and Mortgage (SAM).  HUD will not
reimburse the originating lender for any upfront payment advanced to a
subordinate lien holder and will have no liability to provide any
payment to subordinate lien holders who elected the future appreciation
option.

The originating lender will receive a refund of the upfront mortgage
insurance premium and any periodic mortgage insurance premiums (MIP)
received by HUD.  If the originating lender funded an upfront payment in
lieu of future appreciation, the originating lender may apply the
refunded MIP first to reimburse itself for any amount advanced to a
prior subordinate lien holder(s) as an upfront payment and will apply
any remainder in accordance with normal servicing guidance.  If the
unendorsed H4H loan included a future appreciation option, HUD will
notify the prior subordinate lien holder(s) that its ASC is void and
request its return. 

***Sale and Payoff***

Upon sale or other disposition of the property securing the Program
mortgage, the borrower must satisfy both the SEM (if not already
satisfied through refinance) and the SAM. Upon receipt of a payoff
request, HUD will provide the closing agent with the payoff amounts for
the SEM and SAM. Within five (5) business days of the receipt of the SAM
proceeds, HUD will notify the ASC holder(s) of the disposition of the
property and provide instructions for redemption of the ASC, as
applicable.

At time of settlement of an H4H loan, HUD assumes the position of any
subordinate lien holder that chose the upfront payment option and will
retain any appreciation distributions that would have otherwise been
paid to that lien holder based on their priority position had that lien
holder chosen the appreciation sharing option.

***MERS Registration***

The originating lender must register the H4H first mortgage in the
Mortgage Electronic Registration System (MERS) as a MERS Original
Mortgage. It is no longer a requirement that the SEM and SAM be
registered in MERS. Originating lenders that choose to register the SEM
and SAM in MERS must pay the registration fee and may not pass the fee
on to the borrower. When registering a SEM or SAM in MERS, HUD should be
listed as both the investor and the servicer. HUD's MERS OrgID for the
H4H program is 1007870.

***Revised Versions of the SEM and SAM***

Revised versions of the SEM and SAM are attached as Exhibits B and C.
Lenders should use these revised versions as of the date of this
mortgagee letter.

***Document Delivery and Correspondence***

All documents or questions related to servicing or satisfaction of SEM
or SAM 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

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

[^1]: If the borrower had a line of credit outstanding on March 1, 2008,
    the lender may use the total debt outstanding on that line as of the
    date of application.

[^2]: 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

[^3]: Lenders are not eligible for claim payment if the first mortgage
    payment is not received within 120 days of loan closing.