Where is Blackacre anyway???

Treasury Department's "Making Home Affordable" Program Attempts to Tackle 2nd Lien Dilemna

The Government finally realized that 2nd mortgages and their debt servicers provide a major stumbling block to all loss mitigation efforts when present.  The 2nd lien holders are well aware of the powerful position that they hold (which was once thought as the weakest being in the junior position) and they use what leverage they have to jam up a possible successful modification or short sale. Most loss mitigators cringe at the sight of that 2nd lien on a title search, knowing they are going to face unreasonable monetary demands, threats of promissory notes etc. from the intractable 2nd lien holders.

Is the Treasury Department's incentives enough? Many of the large banks are signing on, but how many of them hold 2nd liens? Only time will tell....

Treasury Releases New Details of Making Home Affordable
Carrie Bay | 04.28.09

The U.S. Treasury announced details on Tuesday of new efforts to help bring relief to responsible homeowners under the Making Home Affordable Program. The new program components include an initiative that specifically addresses modifications on second lien mortgages and a set of measures intended to provide assistance to those borrowers who are underwater – meaning the value of their home is less than the outstanding balance owed on their mortgage.

Senior administration officials told reporters on a media conference call Tuesday afternoon that these new efforts are key pieces of President Obama's mortgage relief plan and are critical to achieving the administration's objective of bringing greater affordability and stability to American homeowners.

Second Lien Modifications

According to the Treasury, up to 50 percent of at-risk mortgages have second liens, and many properties in foreclosure have more than one lien. Second mortgages can create significant challenges for borrowers trying to bring their payments current, even when a first lien is modified. The new Second Lien Program announced Tuesday will work in tandem with first lien modifications offered under the Home Affordable Modification Program to deliver real affordability for struggling homeowners, the Treasury said.

Under the Second Lien Program, when a Home Affordable Modification is initiated on a first lien, the servicer will communicate the specifics of the modification to the second lien servicer, if applicable. Those servicers participating in the Second Lien Program will then “automatically” reduce payments on the associated second lien according to a pre-set protocol. For amortizing second liens, the servicer will reduce the rate to equal that of the modified first mortgage, and the government will then reduce the rate even further, down to 1 percent. On interest only second liens, the same equation will apply, but the government will reduce the rate down to 2 percent.

As with the Home Affordable Modification Program for first mortgages, the government will pay out an array of incentives. Servicers will receive incentive payments for each second lien modification made – $500 upfront and $250 a year for the first three years of the successful life of the modification. Investors will receive a subsidy payment from the government for the allowance of a modification, and borrowers will receive incentives paid toward the principal reduction of their first lien, as long as they stay current on the second lien payments -- $250 a year for up to five years. Government officials stressed that the amount of each incentive hinges on borrower performance.

Alternatively, servicers will have the option to extinguish the second lien in return for a lump sum payment under a pre-set formula determined by the Treasury, which will allow servicers to wipe out that added debt where it is deemed appropriate for the borrower situation.

A White House spokesperson said that tackling the issue of second liens has proven to be “a challenge operationally.” He said this new program addresses the problem faced by some homeowners who continue to struggle under the weight of a second mortgage, and he said the government expects the Second Lien Program to accelerate lender's participation in the Home Affordable Modification Program because it will support greater affordability and thus sustainable modifications.

Relief for Underwater Borrowers

The administration also announced steps to incorporate the Federal Housing Administration’s (FHA) Hope for Homeowners program into Making Home Affordable, to provide assistance to those homeowners who are deep underwater on their mortgages due to plummeting property values in virtually every housing market around the nation.

Hope for Homeowners was introduced to the industry last fall, but has not had much success so far, largely due to complicated borrower requirements and the typical second lien snag. The administration wants the FHA program to work in parallel with Making Home Affordable to yield principal write-downs for those homeowners who may not qualify for a government modification because they owe more on their home than it is worth.

Hope for Homeowners requires the holder of the mortgage to accept a payoff below the current market value of the home, allowing the borrower to refinance into a new FHA-guaranteed loan. This process takes a borrower from a position of being underwater to regaining equity in their home.

When evaluating borrowers for a Home Affordable Modification, servicers will be required to determine eligibility for a Hope for Homeowners refinancing. Where Hope for Homeowners proves to be viable, the servicer must offer this option to the borrower. The Treasury said servicers and lenders will receive pay-for-success payments for Hope for Homeowners refinancings similar to those offered for Home Affordable Modifications. But to lure wary lenders toward the FHA program, the administration is offering significantly higher payouts – a $2,500 upfront payment to servicers that refinance borrowers into the program, and $1,000 a year for the first three years that the loan stays current to lenders that originate the new FHA-backed mortgage.

This alternative avenue to provide mortgage relief to the nation's many underwater homeowners will take effect along with the expanded program guidelines currently pending in the Senate. The administration said such legislation is necessary “to strengthen Hope for Homeowners so that it can function effectively as an integral part of the Making Home Affordable Program.”

Making Home Affordable Coverage

According to the Treasury, more than 75 percent of all loans in the United States are covered under the administration's housing program. Treasury officials explained that between the servicers who have already signed contracts to begin federal loan modifications – including the nation's five largest lenders – and the share of loans owned or securitized by the GSEs Fannie Mae or Freddie Mac, more than three-quarters of the nation's mortgages are eligible for government relief.

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Seasoning and FHA's Time Restrictions on Resales - a Legal Analysis

In the post-subprime mortgage world, it has become increasingly difficult for prospective purchasers to obtain a mortgage. Not only is credit worthiness a mandatory prerequisite but there are certain underwriting requirements that can render a property ineligible for financing. Once such underwriting hurdle is known as Seasoning and I am not talking about what you might shake onto your dinner to make it palatable. Seasoning is a real estate industry term and it basically refers to the length of time title to a specific property is held by an entity.  However, these seasoning underwriting requirements are often misunderstood and inappropriately applied, thereby causing viable transactions to be turned down or to not even make it to Contract.  I am going to provide a correct analysis as to what the guidelines are and how they are to be applied in the FHA arena (note many Conventional lenders have also instituted seasoning requirements but often look to FHA and mirror their guidelines).

HISTORY
To understand seasoning, it is essential to examine the events that caused FHA to create this underwriting requirement.

Real estate speculators would often locate distressed real estate, purchase the property at a substantial discount, make repairs and improvements and quickly resell the improved property at a substantial profit. There is nothing inherently wrong or illegal about this model of flipping real estate and often, it led to revitalization of run-down neighborhoods and increased neighboring property values. Some speculators would execute a Contract to purchase a distressed property and turn around and assign the right to purchase the Contract to another buyer for a price and at closing, would receive their profit without any investment at all. Again, nothing inherently wrong with the Assignment or Contract Vendee flip model either.

The problem was in a number of these transactions, the speculator would collaborate with the appraiser, the loan officer and sometimes the end buyer to artificially inflate the value of the home or to falsify the borrower's documentation so that they would qualify for a mortgage.  These types of fraud transactions had a high rate of mortgage defaults because it was either never the intent of the buyer to pay the mortgage or the buyer was tricked into taking out a loan he could not afford. The Lender would foreclose and find that the value of the real property was woefully inadequate.

Therefore, to curb the fraudulent activity that often went hand in hand with flip transactions, FHA instituted a title seasoning underwriting requirement for those seeking FHA financing.

ANALYSIS
FHA's title seasoning underwriting guidelines are codified in 24 CFR 203.37a and further clarified in its Mortgagee Letter 2006-14.

FHA begins it's discussion of the Property Flipping Prohibition by defining property flipping as "

practice whereby property is resold a short period of time after it is purchased by the Seller for a considerable profit with an artificially inflated value, often abetted by a lender's collusion with an appraiser". This practice is addressed by FHA with a two-prong rule: (1) only Owners of Record may sell the property and (2) prohibits resales of property 90 days or less from the last sale. (Note, there is a rule for resales that occur between 91 and 180 days as well as up to 12 months but I am not going to discuss that here).

OWNERS OF RECORD  This requirement speaks directly to the assignment/contract vendee flip transaction and therefore, the Seller on the original Contract of Sale must hold title to the property.  There can be no intervening deed or assignment of Contract etc. Further, FHA sets forth certain types of documentation that would be acceptable proof of Ownership but also specifically indicates that it is not an exhaustive list: (1) property sales history report; (2) copy of recorded deed from Seller or other such documentation like a property tax bill and (3) title commitment or binder demonstrating seller's ownership and the date it was acquired.  Any of these items are sufficient to establish that the Seller is the Owner of Record for this test.

PROPERTY RESALES OCCURRING 90 DAYS OR LESS FOLLOWING ACQUISITION The rule is: "If the owner sells a property within 90 days of the date of acquisition, that property is not eligible security for a mortgage insured by FHA unless it falls within one of the exceptions to the time restrictions on resales set forth in Section 203.37a(c) of the Regulations". Those exceptions are as follows:

1) Sales by HUD of Real Estate-Owned (REO) properties under 24 CFR part 291 and of single family assets in revitalization areas pursuant to section 204 of the National Housing Act (12 U.S.C. 1710);
(2) Sales by another agency of the United States Government of REO single family properties pursuant to programs operated by these agencies;
(3) Sales of properties by nonprofit organizations approved to purchase HUD REO single family properties at a discount with resale restrictions;
(4) Sales of properties that were acquired by the sellers by inheritance;
(5) Sales of properties purchased by an employer or relocation agency in connection with the relocation of an employee;
(6) Sales of properties by state- and federally-chartered financial institutions and government-sponsored enterprises (GSEs);
(7) Sales of properties by local and state government agencies; and
(8) Only upon announcement by HUD through issuance of a notice, sales of properties located in areas designated by the President as federal disaster areas. The notice will specify how long the exception will be in effect.

One essential definition often glossed over is the Date of Acquisition.  Most realtors, loan officers and underwriters are under the mistaken impression that the seasoning clock is reset upon every title transfer.  However, FHA specifically defines the Date of Acquisition as "the date of settlement on the seller's purchase of that property" (emphasis added).  Therefore, not every title transfer is to be considered in determining the Date of Acquisition for the purpose of the seasoning test.

WHAT ABOUT A TRANSFER OF REAL PROPERTY FROM A HOME OWNER TO A TRUST?

Does a transfer of title from a Homeowner to a Trustee of an inter-vivos, revocable trust wherein the Homeowner retains 100% of the Beneficial Ownership of that Trust constitute a Resale of Property within the meaning of 24 CFR 203.37a and HUD Mortgagee Letter 2006-14?

 

The transfer of title from a homeowner to a Trustee of an inter-vivos, revocable trust wherein the Homeowner retains 100% of the beneficial ownership of said trust does not constitute a Resale of Property, within the meaning of 24 CFR 203.37a and HUD Mortgagee Letter 2006-14, and therefore, as long as homeowner's initial acquisition meets the test set forth in the Regulation and Mortgagee Letter, the subsequent sale of the real property is eligible for FHA financing, even if the transfer to the trust is 90 days or less from the sale contract date.

 

FHA will not provide financing when the Seller's Date of Acquisition is 90 days or less from the Purchaser's sale contract date.  FHA defines the Date of Acquisition as "the date of settlement on the seller's purchase of that property" (pg 2 Mortgagee Letter). The transfer of title from the Homeowner to a Trustee is not a purchase but a mere change of identity.  The trust and the homeowner share a commonality of ownership and control over the real property. Such transaction is without consideration and exempt from the payment of state and local transfer taxes based upon the "mere change of identity" exception.  Therefore, the Date of Acquisition is the date the Seller originally purchased the real property for consideration.

 

It is unnecessary and improper to look to the codified exceptions to the 90 days or less rule, outlined in 24 CFR 203.37a(c), if the date of the title transfer to the trustee is 90 days or less than the purchaser's sale contract date because such date is not the Date of Acquisition under the Rule and Mortgagee Letter.  If the contemplated transaction has a Date of Acquisition that is 90 days or less than the sale contract date, the Rule provides certain exceptions to the time restrictions on resales.  However, as the date of title transfer to the trust does not constitute the Date of Acquisition, it is unnecessary to look to the exceptions provided in 24 CFR 203.37a(c), except if the date  the Homeowner purchased the property, for consideration, is 90 days or less from the sale contract date.

CONCLUSION

The real estate flip is not illegal in and of itself.  The often accompanying loan and appraisal fraud is what makes this perfectly legitimate transaction fraudulent and the basis for FHA and other lenders to institute title seasoning underwriting requirements.  If done correctly, the flip often revitalizes neighborhoods and increases home values in the surrounding areas.

I hope that this clarifies exactly what is meant by Title Seasoning and how this underwriting requirement should be correctly applied to a contemplated real property transaction.  Remember, not every title transfer triggers that seasoning clock but be mindful of those that do!

 

           

FHA Limits on Cash Out Refinances drops to 85%

Just a heads up on some of the changes that came into effect this past Wesnesday, April 1, 2009, complements of the Mortgage Currency staff:

FHA just released ML 2009-08 - Limits on Cash Out Refinances - going to 85% with case numbers after April 1, 2009. The news is that the 95%’s cash out refi’s are going away - for now!

Plus the 85% will be figured on the Combined LTV!

* New Subordinate Financing: New subordinate financing + new FHA first mortgage + any new junior liens cannot exceed 85% CLTV.

* Existing Subordinate Financing: May remain in place, subordinate to new FHA first mortgage, with no regard for CLTV.

* Modified Subordinate Financing: Newly modified existing subordinate financing that has to be re-executed at closing with new FHA loan is not considered a new subordinate lien. It is treated as existing subordinate financing.Other Reminders

* Delinquent borrowers are not eligible * Must have owned the property at least 12 months

* If owned less than 12 months, value based on the sale price or appraisal–the lower of the two

* Two appraisals required when loan amount exceeds $417,000 (before UFMIP) and is in declining area

* No co-signers or non-owner occupants can be added to meet credit underwriting guidelines

Mortgage Talking Points

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Tags: FHA, guidelines, cash-out, refinance, mortgages