**U. S. Department of Housing and Urban Development**

**Washington, D.C. 20410-8000**

**December 20, 2000**

**OFFICE OF THE ASSISTANT SECRETARY**

**FOR HOUSING-FEDERAL HOUSING COMMISSIONER**

> **MORTGAGEE LETTER 00-46**

**TO: ALL APPROVED MORTGAGEES**

**SUBJECT:** Additional Details about the Further Reduction in Upfront
Mortgage Insurance Premiums and Other Mortgage Insurance Premium Changes

Mortgagee Letter 00-38 advised lenders that FHA had reduced its Upfront
Mortgage Insurance Premium (UFMIP) and provided information regarding
when the annual mortgage insurance premium could be canceled. This
Mortgagee Letter provides additional information, including details on
the mortgage insurance premium charges for refinances, and issues the
new refund schedule. These instructions are being provided now to assist
lenders in explaining FHA\'s mortgage insurance payment policies to
borrowers as well as for other lender disclosure requirements.

**Refinance Transactions**

o *[Regular and Streamline Refinances]{.underline} (excepting those
streamline refinances of mortgages closed before July 1, 1991).* The
*UFMIP* for all refinance transactions, streamline as well as regular
refinances, is 1.50% regardless of the term of the mortgage.

The amount of the *annual MIP* is 0.50% for those mortgages with terms
greater than 15 years, and 0.25% for those with terms of 15 years or
less. Also, those mortgages with terms of 15 years or less where the
loan-to-value is determined to be less than 90 percent are not subject
to an annual premium.

> The amount of unearned premium refunded for the mortgage being
> refinanced will depend on when the mortgage closed. For those
> mortgages closed after July 1, 1991 but before January 1, 2001, the
> seven year unearned premium refund schedule shown in Mortgagee Letter
> 94-1 remains in effect. For mortgages closed on or after January 1,
> 2001 that are subsequently refinanced, the five year refund schedule,
> shown as an attachment to this letter, applies. If correct information
> is entered into CHUMS by the lender for UFMIP refinance authorization,
> FHA will automatically determine the amount of the refund based on the
> appropriate refund schedule. If the refund amount exceeds the new 1.5%
> upfront premium, the excess will be sent directly to the borrower from
> the U.S. Treasury using FHA\'s disbursement process.

2

> The loan-to-value ratio on streamline refinances performed without
> appraisals will be based on data regarding the mortgage being
> refinanced, including sales price and appraised value amounts residing
> in FHA\'s Single Family Insurance System (SFIS). FHA will compute a
> new loan-to-value ratio by dividing the new loan amount, exclusive of
> any upfront MIP, by the lower of the sales price or appraised value
> amount residing in SFIS. From this computed loan-to-value ratio, FHA
> will determine when the 78 percent threshold is reached based on the
> scheduled amortization.
>
> Regardless of the computed loan-to-value ratio, all but 15-year term
> mortgages will have annual premiums for the greater of five years or
> until the amortized loan-to-value reaches 78 percent; there is no
> annual premium on 15-year term mortgages with initial loan-to-value
> ratios less than 90 percent. All other mortgages with terms greater
> than 15 years, regardless of the initial loan-to-value ratio will have
> annual premiums for the greater of five years or until the amortized
> loan-to-value reaches 78 percent. If a computed loan-to-value ratio is
> not possible, due to missing data or previous refinancing without an
> appraisal, the new loan-to-value will default to 89.99 percent.

o *[Streamline Refinances of Mortgages Closed Before July
1,1991]{.underline}*: Streamline refinances of mortgages closed before
July 1, 1991 will remain exempt from the annual premium and will be
charged an upfront premium of only 1.50%. Lenders must accurately encode
the appropriate CHUMS screen to obtain the annual premium exemption.

**Shortened UFMIP Refund Schedule**

As stated in Mortgagee Letter 00-38, for loans closed on or after
January 1, 2001, the unearned premium refund schedule is shortened to a
five year period. This applies to refinances as well as loans paid in
full. The new refund schedule is attached to this Mortgagee Letter.

**Canceling FHA\'s Annual Mortgage Insurance Premiums**

o *[Cancellation based on Initial Amortization Schedule]{.underline}:*
Effective for all loans closed on or after January 1, 2001, FHA\'s
annual mortgage insurance premium will automatically be canceled-once
the unpaid principal balance, excluding the upfront MIP, reaches 78
percent of the lower of the initial sales price or appraised value based
on the initial amortization schedule and pursuant to instructions
contained in ML 00-38. Although the annual mortgage insurance premium
will be canceled as described, the contract of insurance will remain in
force for the loan\'s full term. This mortgage insurance premium
cancellation provision applies only to loans insured under the Mutual
Mortgage Insurance (MMI) fund. The MMI fund does not include mortgages
on condominiums or Section 203(k) rehabilitation loans, among others.

3

> Once the mortgage amortizes to a loan-to-value ratio of 78 percent,
> collection of the annual MIP will cease. FHA will determine when the
> mortgage reaches the amortized 78 percent loan-to-value threshold
> based on the contract interest rate (initial note rate on adjustable
> rate mortgages) and the loan-to-value information provided to CHUMS by
> the originating lender, and will cease billing the servicing lender
> accordingly. FHA\'s calculation of the 78 percent threshold will be
> predicated on the loan amount *excluding* the upfront MIP.
>
> Effective May 1, 2001, FHA will provide the *date* at which the annual
> MIP will end. The cancellation date will be available to lenders via
> the Case Query Screen located in the FHA Connection Single, Family
> Origination section and the Portfolio and Advance Notice reports
> located in the FHA connection SF Servicing section. Lenders utilizing
> HUD\'s Frame Relay will be able to obtain the same information through
> the Portfolio Report and Advance Notice applications.

o *[Borrower Initiated Cancellation]{.underline}:* In addition to
mortgages that reach the 78 percent loan-to-value ratio threshold
through initial scheduled amortization, borrowers can also request
through their lenders cancellation of the collection of the annual
mortgage insurance premium for those mortgages that reach the 78 percent
threshold in advance due to prepayments (principal curtailment). Those
loans reaching the 78 percent loan to value threshold sooner than
projected (but not sooner than five years from the date of origination
except for 15-year term mortgages) due to advanced payments of principal
will have the annual premium collections canceled upon the servicing
lender submitting supporting information to FHA following the
borrower\'s request *provided* that the borrower has not been more than
30 days delinquent on the mortgage during the previous twelve months. As
part of their annual disclosures to homeowners, servicers are to notify
borrowers of their option to cancel the annual MIP in advance of the
projected date by making additional payments of mortgage principal. As
stated in ML 00-38, the 78 percent threshold will be predicated only
upon the initial sales price or appraised value, whichever was less.

> Effective May 1, 2001, FHA will also provide the *amount* the loan
> balance must reach in order to cancel the annual MIP. FHA will
> determine the loan balance at which the 78 percent threshold is met by
> excluding the upfront MIP. The required loan balance data will be
> available to lenders via the Case Query Screen located in the FHA
> Connection Single Family Origination section and the Portfolio and
> Advance Notice reports located in the FHA connection SF Servicing
> section. Lenders utilizing HUD\'s Frame Relay will be able to obtain
> the same information through the Portfolio Report and Advance Notice
> applications. Servicing lenders should use the formula provided by
> SFPCS-Periodic described in Mortgagee Letter 98-22.

4

> If the borrower initiates cancellation of the MIP prior to FHA\'s
> original calculated cancellation date, lenders shall submit
> cancellation information using the FHA Connection or EDI processes. A
> separate Mortgagee Letter will be issued detailing the required
> information for the cancellation.

**Updated Consumer Disclosures**

Form HUD 92900-B, \"Important Notice to Homebuyers,\" has been revised
to include new information on mortgage insurance premiums. In addition,
the suggested format for the lender\'s \"Informed Consumer Choice
Disclosure\" originally described in ML 99-23 has been updated to
reflect the revisions to both the upfront MIP as well as the annual
premiums. The revised copies of these disclosures are attached to this
Mortgagee Letter. Form HUD 92900-B is also available for downloading
through HUDCLIPS at *www.hudclips.org.*

Since the annual premium termination per the amortization schedule is
based on the initial loan-to-value as well as the interest rate of the
mortgage, lenders are advised to determine the projected cutoff date for
Truth-In-Lending on these factors. As stated above, the 78 percent
loan-to-value threshold on adjustable rate mortgages will be predicated
on the initial rate.

If you have any questions about this Mortgagee Letter, please contact
your local Homeownership Center in Atlanta (888-696-4687), Denver
(800-543-9378), Philadelphia (800-440-8647), or Santa Ana
(888-827-5605).

Sincerely,

William C. Apgar

Assistant Secretary for Housing-

Federal Housing Commissioner

Attachments

**HUD MODEL NOTICE (Revised 1/01) [INFORMED CONSUMER CHOICE DISCLOSURE
NOTICE]{.underline}**

In addition to an FHA-insured mortgage, you may also qualify for other
mortgage products offered by your lender. To assure that you are aware
of possible choices in financing, your lender has prepared a comparison
of the typical costs of alternative conventional mortgage product(s)
below, using representative loan amounts and costs (the actual loan
amounts and associated costs shown below will vary from your own
mortgage loan transaction). You should study the comparison carefully,
ask questions, and determine which product is best for you. The
information provided below was prepared as of **\[month and year\].**

Neither your lender nor FHA warrants that you actually qualify for any
mortgage loan offered by your lender. This notice is provided to you to
identify the key differences between these mortgage products offered by
your lender. **This disclosure is not a contract and does not constitute
loan approval.** Actual mortgage approval can only be made following a
full underwriting analysis by your mortgage lender.

**FHA Financing Conventional Financing**

**203(b) Fixed Rate** **97% with Mortgage Insurance**

**(MI)**

**1 Sales Price** \$100,000 \$100,000

**2** **Mortgage Amount** \$97,750 (\$99,216 w/ Upfront \$97,000

Mortgage Insurance Premium)

**3** **Closing Costs** \$2000 \$2000

**4** **Downpayment Needed** \$4250 \$5000

**5** **Interest Rate and Term of Loan in** 7.00%/30 Year Loan 7.00%/30
Year Loan

**Years**

**6** **Monthly Payment (principal and** \$660 \$645

**interest only)**

**7** **Loan-to-Value** 97.75% 97%

**8 Monthly Mortgage Insurance Premium**

**(first year)** \$39.94 [1]{.underline}/ \$76.63

**9 Maximum Number of Years of**

M**onthly Insurance Premium Payments** Approx. 14 Years Approx. 13 Years

**10 Upfront Mortgage Insurance Premium** \$1,466 [2]{.underline}/
(Included in Mortgage N/A

**(if applicable)** Amount, line 2)

[1]{.underline}/ Monthly mortgage insurance premiums are calculated on
the average annual principal balance, i.e., as the amount you owe on the
loan decreases each year, so does the amount of the monthly premium.

[2]{.underline}/ Based on an upfront mortgage insurance premium rate of
1.50%.

**[FHA Mortgage Insurance Premium Information:]{.underline}**

If you paid an upfront mortgage insurance premium, you will also be
charged a monthly mortgage insurance premium until the loan to value
ratio of your mortgage reaches 78 percent of the *initial* sales price
or appraised value of your home, whichever was lower (provided that
premiums are paid for at least five years). You will reach the 78
percent loan-to-value threshold in one of two ways: Through normal
amortization as you make your monthly payments, or by paying additional
principal on the mortgage. Your lender can advise you on when the
mortgage will reach the 78 percent level through normal amortization.

If you have a 15-year mortgage and make a downpayment in excess of 10
percent, you will not have to make monthly mortgage insurance premiums.
You will also reach the 78 percent loan-to-value threshold earlier than
on longer term mortgages and may not have to pay monthly mortgage
insurance premiums for the full five years.

You are required to make these payments on your FHA-insured loan unless
you refinance or the mortgage is otherwise paid in full.

If you were *not* charged an upfront premium, as for example on
condominiums, you will pay the monthly premium for the life of the
mortgage.