What’s Your Mortgage IQ? June 2012 LO Issue

by 09 Jul 2012

(TheNicheReport) -- While the mortgage rule changes and updates have slowed down over the last few months, the changes being made by FHA, Fannie, Freddie & USDA are biggies.  That, in turn, triggers more questions on exactly how loan originators and underwriters should interpret them!  Don’t look at the answers yet—read the questions first and see if you know the answers! 

Oh, by the way, Mortgage Currentcy has just added Video Training Classes, and right now you’ll find a couple of new ones on HARP 2.0! 

USDA: Buying a Home While Still Owning Home:  Can a borrower own a home and still qualify for a Rural Development Loan on a new home?

 It is possible for a USDA borrower to own one other property besides the one being purchased under certain conditions.

The objective of the Single Family Housing Guaranteed Loan Program is to assist eligible households to obtain decent, safe, and sanitary dwellings and related facilities for their own use as their primary residence in rural areas. RD Instruction 1980-D restricts applicants from owning multiple dwellings in certain cases, specifically in§1980.346(a), under eligibility criteria as follows: The applicant must… “Be a person who does not own a dwelling in the local commuting area or owns a dwelling which is not structurally sound, functionally adequate.”


§1980.346(a), of RD Instruction 1980-D.

Loan applicants are limited to retaining ownership in one dwelling other than the one associated with the loan request. To retain ownership of the dwelling and meet this eligibility criterion, the retained dwelling must be outside of the applicant(s) local commuting area or not be structurally sound or functionally adequate.

Manufactured homes that are not anchored on a permanent foundation are not considered structurally sound and functionally adequate under §1980.346(a).

“If the applicant can provide sufficient information pertaining to the square footage, household make up, # of bedrooms, # of bathrooms, etc. of the current home, and if the underwriter and RD determine that the current home is insufficient for her current family needs, then the concern of community distance will not come into play.”

Facebook Post for Real Estate Agents:  Did you know that USDA allows ownership of another home under certain conditions?  Long commute for job, current home not structurally sound, or insufficient for current family needs.  Call me for the details. 


FHA: Shared Wells:  Are properties having a shared well acceptable for FHA financing?

FHA says shared wells may serve existing properties if they cannot feasibly be connected to an acceptable public/community water system. A shared well shall have a valve on each dwelling service line as it leaves the well. A shared well shall service no more than four living units or properties. A shared well must have a shared well agreement and shall be binding upon signatory parties and their successors in title. More information on this agreement can be referenced in HUD Handbook 4150.1 Rev-1, Section 12-17 and HOC Reference Guide, Section 1-21. Ref: REFERENCE: Handbook 4150.1 REV1, Section 12-17; HOC Reference Guide (1-21).

There’s a ” for your real estate agents. 

FHA Collections/Disputed Accounts:   With FHA’s new rule (ML 2012-3), do we only have to consider disputed accounts and collections that have had activity within last two years?

Because we have an upcoming rule change on this subject, I've given you both sets of guidance.

You will need to look at every disputed and collection account and apply the following rules to each depending on the date of case number assignment:

Effective on July 1, 2012:

A file must be downgraded and manually underwritten UNLESS:

  • The total outstanding balance of all disputed credit accounts or collections is less than $1,000, and 
  • Disputed credit accounts or collections are aged two years from date of last activity as indicated on the most recent credit report.

Effective now until June 30, 2012:

A file must be downgraded and manually underwritten UNLESS:

  • The total outstanding balance of ANY disputed credit account or collection is less than $500, and 
  • Disputed credit accounts or collections are aged two years from date of last activity as indicated on the most recent credit report.

NOTE:  Current guidance does not have a cumulative limit.  Each account is viewed separately for the $500 limit.

FHA: Timeshare Foreclosure:  Is a “timeshare” considered real estate for “foreclosure” purposes”?

No.  And the term 'foreclosure' should not be associated with a timeshare.  Timeshares are not real estate, and debts associated with them are not mortgages.  They are normal installment accounts.

Fannie Large Bank Deposit:  If we cannot document a large deposit on a bank statements, does Fannie allow us to "back out" the undocumented deposit and use the remaining balance?

FNMA does not address the ability to 'back out' undocumented assets that are not necessary to complete the mortgage transaction.  This type of approach is driven by a specific lender/investor and their interpretation of their obligations, to ensure that the funds in question were not an undisclosed loan or similar obligation that may impact the reps and warrants that lenders are obligated to perform upon sale and delivery to the aggregators and/or agencies. 


FNMA and every lender that I am aware of have documents that indicate 'best practices' and/or 'red flags' that they employ to try to draw awareness to undocumented assets.  You need to seek the advice of the lender that you are using for delivery/underwriting to see if they would allow you to 'back out' undocumented deposits. 


It is rare simply because it jeopardizes the lender’s reps and warrants, and could cause a re-purchase if it is determined that the funds were from an unacceptable source or were borrowed, since a payment requirement could change the qualifying ratios to a point where the borrower no longer would qualify.  It is best to document and satisfactorily paper trail all assets that are included in the loan file. 


Fannie/Freddie Flipping Policy:  What is the current flip guideline for Fannie/Freddie?

Fannie/Freddie do not prohibit property flips, but provide guidance on ways to recognize schemes and fraud that involve a flipped property.  Here is some info from FNMA and Freddie Mac that provides insight and/or best practices to follow when faced with a property flip. 


It is more likely that lenders and investors will apply their own overlays to property flips and associated delivery or eligibility restrictions, so I encourage you to check with your underwriter or lender to make sure you know your limitations and restrictions right up front.

Freddie Mac:  Transactions that Freddie Mac Considers to be Property Flips

Property flips are not inherently illegal and not all transactions involving a rapid purchase and resale are improper. Legitimate property flips are acceptable transactions in connection with loans purchased by Freddie Mac. Property flip transactions that may be legitimate include:

  • Sales of properties by a Government Sponsored Enterprise, state or federally chartered financial institution, mortgage insurer, or federal, state or local government agency
  • Property sales by employers or relocation agencies related to employee relocations
  • Sales of properties that are acquired by the property seller through inheritance, divorce, or as a result of a legal settlement or proceeding
  • Sales of properties that have been substantially improved by bona fide and verified renovations since the property was acquired by the property seller, in which any increase in sales price over the seller's acquisition costs is representative of the market given the improvements to the home
  • Sales of properties that the property seller acquired at below market value after purchasing as a result of a distress sale (i.e., REO sale, short sale, tax lien sale, bankruptcy, trustee's sale, etc.), where any increase in the sales price over the property seller's acquisition cost can be clearly shown to be a result of the difference (if any) in the market's reaction to distress sales and typical arm’s-length market sales.

Fannie Mae:  Property Flipping Part XI: Property and Appraisal Guidelines, Chapter 4, Section 406, Sales Comparison Approach to Value.

Property flipping is not illegal per se; however, when an immediate resale is attended by acts of fraud or misrepresentation, including but not limited to appraisals with inflated property values and other misleading or fraudulent documentation, it can result in a predatory transaction.

Fannie says the legitimate practice of buying real estate at a discounted price and re-selling it for the property's market value is OK. The revised underwriting policy should help homebuyers and lenders from becoming victims of predatory property-flipping schemes. This revised underwriting policy is for loan applications taken on or after May 1, 2005.


The likelihood of fraud or misrepresentation increases when the lender is not able to confirm that the property seller in a purchase money transaction (or the borrower in a refinance transaction) is the owner of the subject property based on publicly available information.


Examples of acceptable documentation include the appraiser's analysis and conclusions in the appraisal report, a copy of a recorded deed or mortgage, a recent property tax bill or tax assessment notice, a title report, a title commitment or binder, or a property sale history report. This documentation is especially important for transactions involving an assignment (or sale) of a contract for sale and/or "back-to-back," "simultaneous," or "double" transaction closings (or double escrows) to support the property acquisition, financing, and closing.

As stated above, when a new appraisal is required, we expect the lender to perform an underwriting analysis of the current contract for sale for the subject property (for purchase money transactions), the current offering or listing for sale for the subject property (for both purchase and refinance transactions, if applicable), the current ownership of the subject property (for both purchase and refinance transactions), and the sale (or transfer) history of the subject property, and comparable sales (for both purchase and refinance transactions). As part of the loan origination process, it is critical for the lender to analyze and review the sale(s) of the subject property and the sale price trend in relation to the appraiser's opinion of value to confirm that they are reasonable and representative of the market.

Confirming and documenting the current owner of the property based on publicly available information as part of the loan origination process will help to ensure a more meaningful analysis of the sale (or transfer) history of the subject property. Appraisers must certify the timeliness of their data sources, identify time gaps, and assess the accuracy of their data sources.


Facebook Post:  Do you work with investors who are in the business of flipping properties?  I have a Mortgage Talking Points™ article called “Best Practices for Mortgage Flips.” Please call me for your personal copy


Compliance Bank Disclosures:  Do you know if it would be okay to market under your broker number or NMLS #  without your company’s logo?

You can produce marketing materials – but the materials must include your NMLS information and comply with triggering terms rules for REG Z.


The problem really isn't with compliance rules. It is that if you wish to market the products of the bank/mortgage company, you must include the company name and comply with your company’s policy – that is, if you wish to stay employed.  The rules that your employer must comply with include little things like the FDIC logo, and BIG things like having a Compliance Officer who ensures that the lender adhere to all disclosure and advertising rules.


You should be able to establish a blog – but it would be a personal one, and you could present yourself as a "subject matter expert." But if you sell mortgage products on the blog, then you become subject to the company’s rules.  


Karen Deis

Karen Deis, President, ApartmentTookKit.com, providing apartment address mailing lists and marketing systems for attracting leads from apartment complexes. Why market to apartment complexes? Because the address never changes, but the people who live there do, so you are constantly marketing to new people.


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