www.hudclips.org 

U. S. Department of Housing and Urban Development
Washington, D.C. 20410-8000

February 2, 1994
OFFICE OF THE ASSISTANT SECRETARY
FOR HOUSING-FEDERAL HOUSING COMMISSIONER
MORTGAGEE LETTER 94-7
     TO:  ALL APPROVED MORTGAGEES
     SUBJECT:  Single Family Loan Production - Premium Rate Mortgages,
                 Streamline Refinances, and Other Policy Issues
 
          This Mortgagee Letter informs lenders of Departmental policy
     regarding premium interest rate mortgages, provides additional
     guidance on streamline refinance transactions, discusses commitment
     and document preparation fees, and addresses other important issues.
 
     I.   PREMIUM INTEREST RATE MORTGAGES
 
          Premium rate mortgages, also known as "rebate pricing" mortgages,
          permit the borrower to pay a slightly higher interest rate in
          exchange for the lender paying the borrower's closing costs.
          Generally, such programs have been very successful and are
          acceptable to HUD.  However, based upon the number of questions
          received from lenders, additional guidance on premium rate
          mortgages is necessary.
 
          For mortgages to be insured by HUD, the funds derived from a
          premium interest rate:
 
          a)   May be used to pay the borrower's closing costs and/or
               prepaid expenses (including accrued interest on refinances);
          b)   May never be used to pay any portion of the borrower's
               downpayment or used to make mortgage principal payments;
          c)   Must be disclosed on the Good-Faith Estimate (GFE) and the
               HUD-1 Settlement Statement.  The GFE and HUD-1 must provide
               an itemized statement indicating which items are being paid
               on the borrower's behalf; disclosing only a lump sum is not
               acceptable.
 
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     If a premium interest rate will be used to pay closing costs or any
     portion thereof, that amount to be paid through the premium rate may
     not be included in acquisition and, thus, the mortgage amount.  For
     example, if total closing costs are $2000, $1500 of which will be paid
     through the premium interest rate, then only $500 may be used in
     calculating the maximum mortgage amount.  Similarly, if a premium rate
     will result in excess funds (an amount exceeding closing costs and
     prepaids), the principal balance of the mortgage must be reduced by
     the overage.  A seller may pay the borrower's closing costs (or a
     portion) with the lender using the funds from a premium to fund the
     borrower's prepaid expenses or other remaining closing costs.
 
     In addition, Mortgagee Letter 91-44  advised lenders of HUD's policy
     regarding premium interest rates when the seller was also charged
     discount points.  At that time, it was HUD's opinion that such
     transactions were circumventing the 57 percent limitation on
     financeable closing costs.  However, since the 57 percent has been
     eliminated and because only those closing costs to be paid by the
     buyer may be added to acquisition in calculating the mortgage amount,
     it is no longer necessary to deduct seller-paid discount points paid
     in conjunction with a premium interest rate from the acquisition cost.
     (Seller-paid discounts will continue to be shown on Attachment "A" to
     the HUD-92900-WS, mortgage credit analysis worksheet with adjustments
     made accordingly.)
 
II.  STREAMLINE REFINANCES
 
     Although the Department encourages refinances that result in reduced
     mortgage payments, it is concerned that some lenders may have
     inaccurately interpreted the rules about streamline refinances that
     will result in one or more borrowers being deleted from obligations
     under the mortgage note.  Some lenders have incorrectly informed
     co-mortgagors that once six payments have been made on the mortgage
     on which they are co-obligated, they can be removed from the mortgage
     note through a streamline refinance.  Often, this incorrect
     information is provided to parents who are considering co-borrowing
     in order for their children to qualify for a mortgage, yet wish to
     have themselves relieved from the mortgage liability as soon as
     possible.
 
     The Department permits streamline refinances that will result in the
     deletion of a borrower currently obligated on the note, provided the
     change in title occurred at least six months previously and the
     remaining borrowers can provide evidence they alone have made the
     mortgage payments during that period.  However, this policy applies
     only to those loans that do not contain restrictions limiting
     assumptions only to creditworthy persons (typically, those mortgages
     made before December 15, 1989 are freely assumable) or where the
     transferability restriction (due-on-sale clause) was not triggered,
     such as in a divorce where a property transfer results from the
     divorce decree.
 
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     To accommodate streamline refinances for those loans containing
     restrictive clauses where the deletion of a borrower may result in
     mortgage acceleration and for those situations where the six months
     waiting period has not occurred, the Department will permit lenders to
     make credit qualifying streamline refinances.  These transactions
     contain all of the normal features of a streamline refinance (no
     appraisal requirement, possible exemption from annual premium) while
     at the same time providing HUD and the lender a level of assurance of
     continued performance on the mortgage.  The lender must provide
     evidence that the remaining borrowers can reasonably be expected to
     continue paying on the mortgage without the income from the deleted
     borrower and that the remaining borrowers have an acceptable credit
     history.  This requires income verification, an in-file credit report
     and computation of qualifying ratios.
 
     This policy permits streamline refinance opportunities in situations
     such as a divorce where the spouse that is required to relinquish
     ownership in the property refuses to do so until he or she is no
     longer obligated on the note (thus making the normal six-month wait
     an impossibility).
 
     Streamline Refinances of Other HUD Mortgage Products:
 
     In addition to the scenarios outlined in HUD Handbook 4155.1 REV-4,
     the following are permissible transactions under the streamline
     refinance program.  Please note that if a 30-year mortgage is
     refinanced to a shorter term, it must meet the additional
     requirements described in paragraph 1-12C(6) of that handbook.
 
     ARM to ARM.  An adjustable rate mortgage (ARM) may be refinanced to
     another ARM provided that an immediate payment reduction occurs and
     that the maximum interest rate of the new mortgage not exceed the
     maximum interest rate of the old mortgage being refinanced.  These
     may be transacted with or without an appraisal.
 
     ARM to fixed rate.  An ARM may be refinanced to a fixed-rate mortgage,
     with or without an appraisal, provided the interest rate on the new
     fixed-rate mortgage will be no greater than two percent above the
     current rate of the ARM.  In addition, all mortgage payments must
     have been made within the month due for the past twelve months.
 
     Fixed-Rated to ARM.  Fixed-Rate mortgages on owner-occupied principal
     residences may be refinanced to an adjustable rate mortgage, with or
     without an appraisal, provided the interest rate of the new mortgage
     is at least two percent below the interest rate of the mortgage being
     refinanced.  An ARM may be used for refinancing only on an
     owner-occupied principal residence.
 
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     GPM to ARM.  A GPM may be refinanced to an ARM provided the note rate
     results in a reduction to the current P&I payments.  (If the
     streamline refinance is completed without an appraisal, the new
     mortgage amount may exceed the statutory limit to include the accrued
     negative amortization and the new UFMIP.)
 
III. TRANSFERRING CASES BETWEEN LENDERS ON STREAMLINE
     REFINANCES
 
     The Department has received numerous complaints from borrowers
     regarding lenders refusing to transfer streamline refinance cases or
     to cancel case numbers when borrowers elect to refinance through
     another lender.  This is especially true with some lenders that secure
     case number assignments before the prospective borrower signs a loan
     application.  Such behavior reflects negatively on the mortgage
     industry as a whole and is contrary to HUD policy.
 
     HUD expects all lenders to fully cooperate in the assignment of
     streamline refinance cases upon the request of the borrower.  Failure
     to cooperate may jeopardize a lender's participation in the Direct
     Endorsement program.  HUD Field Offices are also authorized to cancel
     case number assignments and issue new case numbers on behalf of the
     borrower when lenders fail to assign cases.  Further, in that
     streamline refinances without appraisals represent a type of mortgage
     without significant underwriting, HUD will not permit any lender to
     charge a fee for transferring the case to another lender of the
     borrower's choice.  (Non-refundable commitment fees, charged at loan
     application, are not included in this prohibition.)
 
IV.  FEES CHARGED BY LENDERS
 
     The Department will not permit lenders to charge mortgagors for tax
     service or flood certification fees, or require borrowers to purchase
     life, disability, or private unemployment insurance as a condition for
     making a HUD-insured mortgage.  For those fees not specifically
     prohibited, the HUD office having jurisdiction where the property is
     located may determine if the amount of any fee is considered
     reasonable and customary.  In addition, the following summarizes
     HUD's policy regarding commitment and document preparation fees.
 
     Commitment or "lock-in" fees
 
     The Department does not object to commitment or "lock-in" fees charged
     for guaranteeing the interest rate and/or discount points for a
     specific period of time.  However, HUD is concerned that some lenders
     have abused this allowance by such practices as charging a fee for a
     commitment signed the day of closing; by not honoring commitments
     agreed to; and, in general, not providing something of
 
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     value in exchange for the fee.  Such actions clearly violate the
     intent of this provision.
 
     Therefore, any lock-in or commitment agreement for which a fee is
     charged must be in writing and must guarantee the rate and/or
     discount points for a period of not less than 15 days before the
     anticipated closing date.  Lock-in fees may be paid by the borrower,
     but not financed in the mortgage.
 
     Document preparation fees
 
     Document preparation fees may only be charged to the borrower on a
     HUD-insured mortgage if the service was provided by some entity other
     than the lender.  If, however, the business entity providing the
     document preparation service is controlled, owned, or otherwise has
     an identity-of-interest with the lending institution, then the fee
     may only be charged if the service provider/document preparation
     company is an entity actively engaged in soliciting and providing such
     services to other lenders.  Obviously, a company created solely to
     provide this service for the lender would not be permitted to charge
     document preparation fees to borrowers on HUD-insured mortgages.  As
     always, the fee collected by the lender may never be in excess of
     that actually charged by the service provider.
 
V.   CAIVRS ISSUES
 
     The Credit Alert Interactive Voice Response System (CAIVRS) telephone
     number was recently changed.  The new number is (301) 344-4000.
     Please inform all appropriate staff.  Additional information
     regarding CAIVRS is contained in Mortgagee Letter 93-17.
 
     Some lenders are requiring credit bureaus to access CAIVRS on their
     behalf rather than using their own personnel; this practice is
     unacceptable.  First, no lender should divulge to third parties its
     10-digit HUD approval number except in rare circumstances.  Second,
     CAIVRS maintains a record of all calls, including the lender ID
     number of the caller, social security number checked, and access code
     reported.  If a lender relies upon another entity to access and
     record CAIVRS numbers and if that approval number is recorded
     incorrectly or otherwise falsified, the originating lender will be
     held accountable.
 
VI.  RESPA REQUIREMENTS FOR HUD-INSURED MORTGAGES
 
     The mandatory requirements of the Real Estate Settlement Procedures
     Act (RESPA) that govern all Federally-related mortgage transactions
     also apply to HUD-insured mortgages.  These include full disclosure
     requirements and prohibitions against certain payments by lenders and
     others.  RESPA requires the disclosure of certain fees on
     "table funded" transactions.  Therefore, fees
 
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       between correspondents and sponsors must be disclosed if the
       transaction is table funded by the sponsor.  These fees may be
       disclosed on any line in Section 800 of the HUD-1.
 
       Certain other practices are acceptable under RESPA but are not
       permitted for HUD-insured mortgages.  For example, certain
       transactions involving computerized loan originations (CLOs) or
       mortgage brokers are acceptable under RESPA but may conflict with
       HUD mortgage insurance requirements because all aspects of the
       origination of HUD-insured mortgages must be performed by
       HUD-approved lenders.  Some payments by lenders, that are not
       regarded as prohibited referral fees under RESPA, are prohibited
       by regulations applicable to HUD-insured mortgages.  For complete
       information on the HUD mortgagee approval process, see HUD Handbook
       4060.1 REV-1, Mortgagee Approval Handbook, issued September 30,
       1993.
 
VII.   ASSUMPTION PROCESSING by NON-DE APPROVED SERVICERS
 
       The requirement that virtually all HUD-insured single family
       mortgages be processed under the Direct Endorsement (DE) program
       also applies to credit qualifying assumptions as well new
       originations.  However, the Department recognizes that there are
       a number of servicing lenders that neither originate mortgages nor
       are approved under the Direct Endorsement program.
 
       In these situations, if the servicer is either a supervised or
       non-supervised financial institution, it may contract with a Direct
       Endorsement-approved lender to underwrite its credit qualifying
       assumptions.  The DE underwriter must indicate his or her CHUMS
       identification number on the mortgage credit analysis worksheet.
       The fee is to be negotiated between servicer and DE lender.  In
       addition, supervised lenders with a HUD-approved authorized agent
       relationship may have the agent underwrite its credit qualifying
       assumptions.
 
VIII.  PRELIMINARY TITLE BINDERS
 
       Effective with all closings on or after April 1, 1994, the lender
       must provide a copy of the preliminary title report or binder with
       the endorsement package, if such documents are obtained by the
       lender during loan processing.
 
IX.    FLOOD INSURANCE/MAXIMUM DEDUCTIBLE CLAUSE
 
       Unless a higher maximum amount is required by state law, the maximum
       deductible clause for a flood insurance policy must not exceed the
       greater of $1,000 or 1 percent of the face amount of the policy.
 
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X.     NATION-WIDE RECOGNITION OF DE UNDERWRITER APPROVAL
 
       In Mortgagee Letter 92-15, the Department announced a policy that
       all Field Offices would recognize a DE underwriter's approval once
       it had been obtained from any HUD Field Office.  At that time, HUD
       required, among other things, that the underwriter provide each HUD
       Office where he or she wished to be approved a nomination request
       and a copy of the approval letter issued by a HUD Field Office.
 
       However, to relieve the paperwork burden on both lenders and Field
       Offices, HUD's Computerized Homes Underwriting Management System
       (CHUMS) has been modified to recognize any underwriter's approval
       in all HUD offices.  Once an underwriter has obtained approval and
       a CHUMS identification number, it will be automatically recognized
       in each Field Office where a lender has been approved to do
       business.  Field Offices are authorized to check references and
       otherwise verify the experience and credentials of any underwriter
       requesting initial approval.  Please note that this does not mean
       that the lender itself is approved to do business within a
       particular Field Office jurisdiction.  Each lender, even though all
       HUD Offices will recognize its underwriter's DE approval, must
       still request approval to do business through each local HUD Office.
 
XI.    PAYING OFF LAND CONTRACTS---REVISED INSTRUCTIONS
 
       Currently, if a borrower will be using a HUD-insured mortgage to
       complete payment on a land contract, contract for deed, or other
       similar type financing arrangement where the borrower does not have
       title to the property, the mortgage loan was to be processed as a
       purchase transaction.  Maximum loan-to-value ratios and other
       requirements are described in HUD Handbook 4155.1 Rev-4, paragraph
       1-8E.
 
       However, the Department will now permit these transactions to be
       treated as refinances for HUD mortgage insurance purposes.  This
       allows the borrower to obtain a HUD-insured mortgage sufficient to
       pay off the seller and pay closing costs, reasonable discount
       points, and required repairs.  The mortgage amount is still
       controlled by loan-to-value limits applied to the appraised value
       of the property and restricted to 85 percent if the borrower
       receives cash in excess of $250 at settlement.  (Replenishment of
       the borrower's own cash expended for repairs, improvements,
       renovation, etc., is not considered as "cash back" provided the
       borrower can substantiate with cancelled checks and paid receipts
       all out-of-pocket funds spent for these purposes.)
 
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       This revised policy only applies if the contract for deed has been
       seasoned at least one full year.  Terms shorter than that require
       consideration of the acquisition cost in calculating the mortgage
       amount.
 
XII.   REQUEST FOR INSURANCE ENDORSEMENT, FORM HUD-54111
 
       Boxes 3 and 35 on form HUD-54111, Request for Insurance Endorsement,
       are to be completed by the lender requesting endorsement.  Program
       identification codes, required for box 3, can be found of Form
       HUD-428, Home Mortgage ADP Code Chart, a copy of which may be found
       in both HUD Handbooks 4165.1 REV-1 and 4000.2 REV-2.
 
XIII.  FACE-TO-FACE INTERVIEW ON REFINANCE TRANSACTIONS
 
       In addition to the exemptions described in HUD Handbook 4155.1
       REV-4, paragraph 3-6, it will no longer be necessary for a lender
       to conduct a face-to-face interview when the borrower is refinancing
       an existing HUD-insured mortgage, including cash-out refinances.
 
       If you have any questions regarding any issue covered in this
Mortgagee Letter, please contact your local HUD Field Office.
 
Sincerely yours.
 

Nicolas P. Retsinas
Assistant Secretary for Housing
- Federal Housing Commissioner