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**U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT**

WASHINGTON, D. C. 20410-8000

August 31, 1987

OFFICE OF THE ASSISTANT SECRETARY FOR

HOUSING-FEDERAL HOUSING COMMISSIONER

**Mortgagee Letter 87-24**

TO: ALL APPROVED MORTGAGEES

**SUBJECT:** Refinance Transactions \-- Additional Instructions

and Clarifications

[[Mortgagee Letter
86-4]{.underline}](http://www.hudclips.org/sub_nonhud/cgi/nph-brs.cgi?d=MLET&s1=86-4%5Bno%5D&SECT1=TXTHLB&SECT5=MLET&u=./hudclips.cgi&p=1&r=1&f=G)
, dated January 28, 1986,

outlined different types of refinancing transactions. The

purpose of this letter is to clarify certain policies and

procedures related to different types of refinance

transactions.

A. Streamline Refinances

Two types of refinancing transactions to lower the

interest rate and the monthly payments do not require

regular mortgage credit underwriting and are frequently

referred to as \"streamlined refinancing,\" with no cash out.

These two types of streamline refinance transactions

involve the refinance of an existing FHA-insured mortgage

either without an appraisal or with an appraisal. Neither

transaction requires a face-to-face interview, nor is it

necessary to obtain a picture identification of the

applicant, a pay stub or bank statement, as set forth in

Mortgagee Letter 87-12. However, you still must require

evidence of the Social Security Number of the applicant for

these streamline transactions.

1\. Calculation of mortgage amount

Unfortunately, some misunderstandings have

developed when processing these cases as to what

items may be included in the pay-off figure which

forms the basis for the new mortgage amount. The

procedure for determining the new mortgage amount

for these two types of streamline refinance

transactions is as follows:

a\. Without a new appraisal:

1\. Unpaid PRINCIPAL balance

2\. Subtract anticipated MIP refund if

originally financed in the mortgage

3\. Add new MIP if it is to be included in

the mortgage.

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b\. With a new appraisal:

1\. Unpaid PRINCIPAL balance.

2\. Subtract anticipated MIP refund if originally

financed in the mortgage.

3\. Where the new appraisal supports it, you can add the

costs of refinancing (closing cost and appropriate

discount points). In no event can the maximum

mortgage amount, without the inclusion of the new MIP,

exceed (i) in the case of an owner occupant, 97

percent of the first \$25,000 of appraised value and 95

percent of appraised value in excess of \$25,000, or

\(ii\) in the case of investors, 85 percent of appraised

value.

4\. Add new MIP if it is to be included in the mortgage.

We want to emphasize that an investor mortgagor may include

refinancing costs in formula b only in those instances where it

will not exceed 85 percent of the new appraised value.

Interest, whether or not delinquent, may not be included as

part of the existing indebtedness or the cost of refinancing in

any refinancing transaction, whether it be streamline or a

regular cash out transaction.

2\. Delinquent monthly payments

Our original requirement that the present mortgage must be

current in order to be considered eligible for streamline

refinancing is now modified to permit the loan to be refinanced

if it is in arrears by no more than two payments; provided that

the loan must be brought current by the refinancing lender or

some other party before the refinancing transaction. No

obligation may be placed upon the mortgagor for repayment of

funds used by the lender to bring the loan current.

Inasmuch as this is an administrative determination based on

enhancing both the mortgagor\'s and the Secretary\'s position, no

broader inference should be drawn from it when applying HUD

credit standards to other transactions.

3\. Holding period before eligible for streamline refinance

We wish to remind you that investor mortgagors, as well as

owner-occupant mortgagors, who assumed, or took title subject

to, high ratio FHA-insured mortgages may refinance them without

an appraisal and without reducing the mortgage amount. However,

to avoid some new abuses which have begun to occur under the

refinance program, for firm commitments issued by HUD and

mortgage credit worksheets signed by Direct Endorsement (DE)

underwriters, on or after November 1, 1987, HUD will require

that the mortgagor, whether investor or owner occupant, who

assumed, or took title subject to, FHA-insured mortgage without

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the benefit of a credit review by HUD or a DE lender, must have

owned the property for at least six months before being

eligible for the streamline refinance program. This will be an

adequate period of ownership of the property, while subject to

the existing insured mortgage, for the Commissioner to make the

determination that the mortgagor\'s record of payment on the

existing mortgage meets the standards as required by Section

203.43(c)(4) of the regulations and is consistent with the

Department\'s efforts to restrict \"quick flips\" of ownership and

other program abuses.

Where an investor has a financial interest in more than seven

rental units, as described in 24 CFR 203.42, it will still be

necessary for the local HUD Field Office to obtain a regulatory

waiver from HUD Headquarters before authorizing the refinancing

of the mortgages. Waivers will only be granted when it is

clearly in HUD\'s best interest to do so. Recommendations from

the Field Office must address this point.

4\. Term of mortgage

Regulation changes effective March 23, 1987, (24 CFR 203.43 and

234.52) provide that the refinancing mortgage without an

appraisal may have a term extended to the lesser of (i) 30

years or (ii) the unexpired term of the mortgage, plus 12

years, if the Commissioner determines that an extension of the

term of the mortgage will inure to the benefit of the

applicable insurance fund, taking into consideration the

outstanding insurance liability under the existing insured

mortgage. The Commissioner has determined that since the

monthly mortgage payments under the refinancing mortgage will

be reduced in all cases, the extension of the mortgage term

will in every case inure to the benefit of the applicable

insurance fund. Therefore, in all cases the term of the

refinancing mortgage may be for the unexpired term of the

existing mortgage plus twelve years, or 30 years, whichever is

less.

5\. Refinancing mortgages by lenders located outside the HUD Field

Office jurisdiction

Heretofore, we have permitted lenders located outside the HUD

field office jurisdiction to use the streamline refinance

program for mortgages currently in their servicing portfolios.

Because no face-to-face interview is required under the

streamline program, effective immediately, any lender, without

regard to whether a mortgage is currently in their servicing

portfolio, the lender\'s jurisdictional authority or its branch

locations, may solicit and process a streamline refinance

application from any area of the country, provided the lender:

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a\. is approved for Direct Endorsement by a HUD Office

b\. notifies, in writing, the HUD field office that has

jurisdiction over the area that the lender intends to

offer a streamline refinance program and submits to that

HUD office evidence of its Direct Endorsement approval from

any other HUD office, along with a list of approved

underwriter(s).

Furthermore, when processing streamline refinance applications,

a mortgagee may:

a\. Offer a \"no-cost\" program (no closing cost and no

discount).

b\. Offer an interest rate higher than the market rate which

will serve to defray some or all of the costs involved.

c\. Offer an interest free advance of the MIP refund amount.

d\. Offer an interest free advance of amounts equal to the

present escrow balances on the existing loans.

These actions should benefit large numbers of mortgagors who

otherwise would not be able to afford to refinance their

present mortgages.

When the mortgagee calls for case number and appraiser

assignment, it must advise the Field Office that the

transaction is a streamline refinance involving an \"out-of

jurisdiction\" mortgagee.

6\. Evidence that current mortgage is FHA-insured

It has come to our attention that some lenders have not

exercised due diligence to establish that the existing mortgage

being refinanced under our streamline procedures is indeed an

FHA-insured mortgage. Therefore, for firm commitments issued by

HUD and mortgage credit worksheets signed by DE underwriters, on

or after November 1, 1987, in addition to the requirement that

the mortgagee provide evidence that the mortgagor\'s payments

under the existing mortgage are current (or no more than two

months delinquent, as noted above) the mortgagee must also

include as part of the application evidence that the existing

mortgage is FHA-insured. Such evidence must be in the form of a

copy of the Mortgage Insurance Certificate for the existing

mortgage, a copy of the HUD-l Settlement Statement that

indicates that the mortgage being prepaid was FHA-insured or a

reference to the FHA case number of the existing mortgage.

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7\. Refinancing condominium properties

a\. Section 420 of the Housing and Urban Rural Recovery Act of

1983 amended Section 234(c) of the National Housing Act to

provide that at least 80 percent of the HUD-insured units

in a condominium project must be owner occupied before HUD

can make insured financing available to an investor.

However, this test occurs as part of HUD\'s initial

application process and, therefore, no further finding has

to be made for streamline refinancing previously insured

mortgages on condominium units.

b\. The regulation changes effective March 23, 1987, also

permit the processing of current HUD-insured mortgages on

condominium units under paragraph Ala, above; i.e.,

without an appraisal. Previously, condominium units could

not be refinanced without an appraisal.

8\. Subordinating existing mortgages

When refinancing without an appraisal, other existing mortgages

may be subordinated without regard to the total indebtedness

against the property, except when HUD holds the second mortgage

to secure payment of Section 235 subsidy funds (see paragraph

D, below). It has been determined that it would not adversely

affect the insurance funds if existing mortgages were

subordinated to the refinancing mortgage and thus became junior

liens against the property, since the liens were outstanding

against the property before the refinancing. Sections 203.43(c)

and 234.52 provide that a mortgage, refinancing an existing

insured mortgage, may be insured without regard to any

limitation on eligibility contained in the regulations.

Therefore, Sections 203.32 and 234.52, prohibiting subordinate

liens unless prior approval of the Secretary is obtained, are

not applicable to refinancing mortgages without an appraisal

9\. Refinancing 30-year mortgage to 15-year mortgage

In those instances where the mortgagor wishes to refinance the

mortgage under the streamlined procedure and wishes to reduce

the mortgage term to 15 years, no mortgagor underwriting is

required even if the new monthly payments are not reduced.

Moreover, mortgagor underwriting is required if the increase in

the monthly principal and interest payment is \$50 or less.

Under these circumstances, the provision of Sections

203.43(c)(3) and 234.52(c), requiring a reduction in monthly

mortgage payments, are waived since the insurance liability of

the Commissioner has been decreased because of the lesser term.

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10\. Refinancing ARMs and GPMs

Streamlined refinancing of a fixed rate mortgage to an ARM

loan is permissible, provided the \"worst case\" or maximum

interest rate under the terms of the ARM will not exceed the

interest rate of the existing mortgage. Streamlined

refinancing of an existing ARM to a new ARM also is

acceptable if the maximum interest rate on the new ARM will

not exceed the maximum interest rate on the existing ARM.

Although GPMs may be refinanced without a new appraisal,

the basic mortgage amount (principal balance minus MIP

refund) may not exceed the original basic mortgage amount,

thus requiring the amount of the negative amortization to be

paid in cash. We recognize the hardship this creates in

soft market areas and are seeking a legislative change to

address the problem.

In the meantime, Section 245 loans may be refinanced

through the streamlined method without an appraisal with a

level payment mortgage under Section 203 (234 for

condominiums) in an amount not in excess of the original

mortgage amount. The negative amortization may be paid by

the mortgagor in cash or borrowed and secured by a second

mortgage. However, the payments on the HUD first mortgage

and the second mortgage may not exceed the next scheduled

payment increase on the existing Section 245 mortgage.

B. Refinancing Properties Valued at \$50,000 or Less

For properties with values of \$50,000 or less, the maximum

mortgage amount may not be based on 97 percent of \$50,000 or less

(the special program for modestly priced homes) since this program

is available only to owner-occupant purchasers.

C. Refinancing land contracts

Land contracts, contracts for deed or other similar type

financing arrangements can no longer be handled as refinance

transactions since the mortgagor does not have title in fee simple or

under a lease as approved by HUD. Effective immediately, such

transactions are to be processed as purchase applications utilizing

the contract to establish the purchase price.

D. Refinancing Section 235 mortgages

Cases insured under Section 235(i) may be refinanced under

Section 203; however, an appraisal must be obtained to establish the

current value so that a determination can be made regarding the

amount of the second mortgage to be recaptured. The second

mortgage, if any, may not be subordinated, but can be included in

the new mortgage if the new value is sufficient to support the

mortgage and a full credit analysis is performed on the mortgagor.

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On this or any other appraisal performed in conjunction with a

refinancing transaction, the lender may advise the mortgagor that

the current value is such that the mortgagor would be better advised

to proceed as if no appraisal had been made. In that case, the

lender will void the appraisal, make an appropriate notation in the

remarks section on the mortgage credit worksheet and process under

the streamline without appraisal procedure.

E. Refinancing mortgages involving buydowns

When refinancing mortgages with undistributed, temporary

interest buydown funds where the unexpended funds are available to

the mortgagor, they must be used to offset such items as negative

amortization (Section 245), closing cost, etc., or to reduce the

remaining principal balance which is to be refinanced. If the terms

of the buydown agreement result in the reversion of the funds to the

builder/seller they may likewise be used to offset some or all of the

above costs with the permission of the seller. Unexpended funds may

not be provided to the mortgagor as a cash refund.

F. Over-estimated closing costs

HUD must be assured that the mortgage amounts on all insured

mortgages, including refinance transactions, are not inflated as a

result of over-estimated closing costs. Therefore, when the

mortgagor is obtaining the maximum loan amount, the lender must take

the necessary steps to see that the closing costs used in arriving at

the mortgage amount are a reasonable reflection of the actual

closing costs. (Should not vary more than \$100).

If you have any questions concerning this Letter, please

contact your local HUD Field Office or the Single Family Mortgage

Credit Branch in HUD Headquarters, whose telephone number is (202)

755-6700.

Sincerely yours,

Thomas T. Demery

Assistant Secretary