**MORTGAGEE LETTER 2007-11**

**September 5, 2007**

**TO: ALL APPROVED MORTGAGEES**

**ALL FHA ROSTER APPRAISERS**

**SUBJECT: The *FHASecure* Initiative and Guidance on Appraisal
Practices in**

**Declining Markets**

The Federal Housing Administration is pleased to announce an initiative
that will enable homeowners to refinance various types of adjustable
rate mortgages (ARMs) that have recently "reset." This mortgagee letter
describes how lenders and homeowners may refinance mortgages that, due
to the increased mortgage payment following the reset, have become
delinquent. The mortgagee letter also reiterates guidance to lenders
about making objective decisions regarding the underlying collateral in
declining markets. The *FHASecure* initiative, which is a temporary
program designed to provide refinancing opportunities to homeowners and
to increase liquidity in the mortgage market, requires that the loan
application be signed no later than December 31, 2008.

**[Refinancing Non-FHA Adjustable Rate Mortgages Following
Resets]{.underline}**

FHA is currently doing a significant business in refinancing non-FHA
mortgages for borrowers who are current under their existing mortgage.
This mortgagee letter extends eligibility to borrowers who became
delinquent under their current mortgage following the reset of the
interest rate.

FHA recognizes that many lenders are engaged in a variety of loss
mitigation activities to keep borrowers in their homes, and applauds
these efforts. This mortgagee letter explains credit policies for
refinance transactions involving non-FHA adjustable rate mortgages where
the homeowner's mortgage payment history during the 6 months prior to
the reset showed no instances of making mortgage payments outside the
month due.

These instructions are designed to permit homeowners, who previous to
their reset, demonstrated an ability to meet their mortgage obligations,
an opportunity to refinance into a prime-rate FHA-insured mortgage. In
many cases homeowners may be permitted to include mortgage payment
arrearages into the new loan amount, subject to existing geographical
mortgage limits and the loan-to-value limit shown below.

**[Eligibility Highlights of the *FHASecure* Initiative]{.underline}**

-   The mortgage being refinanced must be a non-FHA ARM that has reset.

-   The mortgagor's payment history on the non-FHA ARM must show that,
    prior to the reset of the mortgage, the mortgagor was current in
    making the monthly mortgage payments, i.e., the homeowner's mortgage
    payment history during the 6 months prior to the reset showed no
    instances of making mortgage payments outside the month due.

-   If there is sufficient equity in the home, under additional
    eligibility instructions provided below, FHA will insure mortgages
    that include missed mortgage payments.

-   Under certain conditions explained below, FHA will insure first
    mortgages where (1) the existing note holder writes off the amount
    of indebtedness that cannot be refinanced into the FHA insured
    mortgage; or (2) either the FHA-approved lender making the new
    mortgage or the existing note holder may take back a second lien
    that includes closing costs, arrearages or previous secondary
    financing if the indebtedness exceeds FHA prescribed LTV and maximum
    mortgage amount limits.

-   Mortgagees must determine, as part of the underwriting process, that
    the reset of the non-FHA ARM monthly payments caused the mortgagor's
    inability to make the monthly payments and that the mortgagor has
    sufficient income and resources to make the monthly payments under
    the new FHA-insured refinancing mortgage.

    **[Additional Information About the *FHASecure*
    Initiative]{.underline}**

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-   ***Maximum FHA loan-to-value ratios***

The maximum loan-to-value limits are shown below and are applied to the
appraiser's estimate of value, exclusive of any upfront mortgage
insurance premium.

**[Maximum Loan-to-Value Ratios]{.underline}**

**[States with Average Closings Costs *At or Below* 2.1 Percent of Sales
Price]{.underline}**

-   **98.75 percent**: For properties with appraised values equal to or
    less than \$50,000.

-   **97.65 percent**: For properties with appraised values in excess of
    \$50,000 up to \$125,000

-   **97.15 percent**: For properties with appraised values in excess of
    \$125,000.

    **[States with Average Closings Costs *Above* 2.1 Percent of Sales
    Price]{.underline}**

-   **98.75 percent**: For properties with appraised values equal to or
    less than \$50,000

-   **97.75 percent**: For properties with appraised values in excess of
    \$50,000

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-   ***Calculating the Maximum FHA Mortgage Amount***

The amount of the *FHASecure* mortgage may not exceed either the
geographical maximum mortgage limits or the loan-to-value ratios shown
above. FHA will permit the inclusion of the existing first lien, any
purchase money second mortgage, closing costs, prepaid expenses,
discount points, prepayment penalties, and late charges. FHA will also
permit arrearages (principal, interest, taxes and insurance) to be added
into the new loan amount provided the arrearages arose after the reset.

-   ***Subordinate Financing Under the FHASecure Initiative***

If the new maximum FHA loan is not enough to pay off the existing first
lien, closing costs and arrearages, the lender may execute a second lien
at closing to pay the difference. The combined amount of the *FHASecure*
first mortgage and any subordinate non-FHA insured lien may exceed the
applicable FHA loan-to-value ratio and geographical maximum mortgage
amount. If payments on the second are required, they must be included in
qualifying the borrower. If payments are deferred, they must be so for
no less than 36 months to not be considered in the qualifying ratios.
Borrowers need not yet have missed any mortgage payments to be eligible
for this type of subordinate financing.

-   ***Underwriting the Mortgage/Qualifying the Borrower***

FHA encourages all approved lenders to use FHA's TOTAL Mortgage
Scorecard to obtain risk classifications on each mortgage originated
under the *FHASecure* initiative. If TOTAL renders an "accept/approve,"
the mortgagee's underwriter need not perform a personal review of the
borrower's credit history and capacity to repay. However, in the more
likely event that the risk class is a "refer," the underwriter must:

1.  Determine that the homeowner has the capacity to make future
    mortgage payments as well as pay all other obligations. The
    payment-to-income ratio and debt-to-income ratios remain 31 percent
    and 43 percent, respectively. Compensating factors are to be
    provided by the underwriter when the ratios are exceeded.

2.  Analyze the homeowner's overall credit history, especially payments
    on the existing mortgage. The underwriter must determine that the
    homeowner's mortgage payment history during the 6 months prior to
    the reset showed no instances of making mortgage payments outside
    the month due and that other recurring obligations were paid on
    time. If the borrower was offered partial forbearance after interest
    rate reset, the underwriter must determine that he/she has made
    payments under the forbearance agreement in a timely manner.

3.  Provide comments in the "remarks" section of the mortgage credit
    analysis worksheet that he or she has determined that the cause of
    the borrower's inability to make payments was directly related to
    the increased payment attributable to the reset and not due to a
    disregard for obligations.

-   ***Tax consequences for a borrower when the note holder writes off a
    portion of the amount to pay off the first mortgage***

FHA recognizes that there may be tax consequences resulting from debt
relief. However, since FHA does not provide tax guidance, it recommends
borrowers---and mortgage lenders---in such situations seek competent tax
advice.

-   ***Other considerations of which the mortgagee must be aware when
    refinancing these mortgages.***

The *FHASecure* initiative for refinancing borrowers harmed by non-FHA
ARMs that have recently reset is not to be used to solicit homeowners to
cease making timely mortgage payments; FHA reserves the right to reject
for insurance those mortgage applications where it appears that a loan
officer or other mortgagee employee suggested that the homeowners could
stop making their payments, refinance into a FHA insured mortgage, and
keep, as cash, the amount of payments not made on time.

**[Appraisal Practices in Declining Markets]{.underline}**

Historically, FHA has provided a counter-cyclical force in helping to
stabilize declining housing markets and will continue to do so. In fact,
much of FHA's business activity this year has been in those states
(e.g., Ohio, Michigan, Indiana) that have suffered sustained
depreciation of home prices due to job losses and increased
foreclosures. Nevertheless, recent property value declines in certain
markets suggest the need to reiterate our guidance to mortgage lenders
to ensure that appraisers are providing accurate property valuations. A
declining market could be as small as a neighborhood or as large as an
entire state, and no standard definition exists other than home prices
are falling.

**Appraiser Responsibilities**

> The purpose of the appraisal is to provide the lender/client with an
> accurate, and adequately supported, opinion of market value.  It is
> the appraiser's responsibility to determine whether a property being
> appraised is located in a declining market.
>
> The neighborhood section of each property specific appraisal form
> contains a housing trends section where the appraiser marks a box
> indicating property values are increasing, stable or declining. 
> Whichever box is selected, the appraiser is certifying that he/she has
> performed an objective analysis of quantifiable data supporting the
> observations made.
>
> If a property is located in a declining market, the appraiser must
> provide an explanation in the "Market Conditions" section of the
> appraisal report that includes relevant information in support of the
> conclusions relating to trends in property values, demand/supply and
> marketing time.  The appraiser must also provide a description of the
> prevalence and impact of sales and financing concessions and/or down
> payment assistance in the subject's market area.  Other areas of
> discussion may include days on market, list-to-sale price ratios,
> and/or financing availability.

**Lender Responsibilities**

> The mortgagee's responsibility is to properly review the appraisal and
> determine that the appraised value used to support the mortgage is
> accurate and adequately supported.
>
> Lenders are reminded that if the appraiser they selected provides a
> poor or even fraudulent appraisal that leads the Department to insure
> a mortgage at an inflated amount, the lender is held equally
> responsible with the appraiser for the violation if the lender knew or
> should have known.  FHA will pursue appropriate enforcement actions
> against both or either party if necessary. Lenders accept
> responsibility, equally with the appraisers for the integrity,
> accuracy and thoroughness of the appraisal submitted to FHA for
> mortgage insurance purposes.

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