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FHA Tightens Streamline Refi Requirements

Mortgagee Letter 2009-32

Sept. 18, 2009

By staff

An expected shortfall in the Federal Housing Administration's capital reserve ratio has prompted changes to the agency's credit policy and the hiring of a chief risk officer. Among the changes are new requirements for FHA streamline refinances.

In an announcement today, the U.S. Department of Housing and Urban Development indicated that FHA's annual independent actuarial study is being prepared for delivery to Congress in November. The study determines excess reserves over and above projected losses during the next 30 years

FHA reserves currently stand at more than $30 billion, an amount exceeding 4.4 percent of its insurance in force. In addition, higher credit scores and tighter underwriting are expected are expected to generate revenue for the U.S. Treasury from the FHA fund.

But the upcoming study is expected to reveal that FHA's capital reserve ratio will fall below the 2 percent mandated by Congress.

"To be clear, the fund's reserves are sufficient to cover our future losses, so the FHA will not require taxpayer assistance or new congressional action," FHA Commissioner David H. Stevens said in the statement. "That said, given the size and scope of the FHA and its importance to today's market, these risk management and credit policy changes are important steps in strengthening the FHA fund, by ensuring that lenders have proper and sufficient protections."

On streamline refinance transactions, borrowers must have made at least six payments on the existing FHA loan, according to Mortgagee Letter 2009-32 today. No 30-day lates are allowed on loans less than 12 months old, and one 30-day is allowed on loans seasoned at least one year as long as the late payment wasn't within three months of the application.

Mortgagees must demonstrate a net tangible benefit to the borrower on streamline transactions. Among acceptable benefits are a reduction in total payment amount, a refinance out of an adjustable-rate mortgage or a reduction in the term of the loan.

Investment properties and second homes are ineligible for streamlined transactions, and TOTAL Scorecard should not be used.

Credit scores must be disclosed when available, and streamline loan-to-values are limited to 125 percent. Appraisals will be required if closing costs are rolled in.

Streamlined transactions without appraisals will be based on the original value and will be limited to the outstanding principal balance plus the net difference between the new premium and the refunded premium. With an appraisal, 97.75 percent of the appraised value -- plus the new mortgage insurance premium -- can be used as the new loan amount.

Discount points cannot be financed, and funds must be verified to pay them.

Abbreviated versions of the Uniform Residential Loan Application are no longer allowable, and mortgage insurance applications must be signed by the borrower before the loan is underwritten.

The changes are effective in 60 days.

"These revisions bring documentation standards for streamline refinance transactions in line with other FHA loan origination guidelines ... and prohibits the dangerous practice of loan churning," the statement said.

FHA also said it plans to add a chief risk officer who will oversee an effort to consolidate risk management from a number of offices to a single division responsible for all FHA programs.

"Adding a chief risk officer is a logical step to better manage and mitigate risk to the FHA insurance fund," Mortgage Bankers Association Chairman David G. Kittle said in a news release. "The steps that Commissioner Stevens announced today will help ensure that FHA remains viable for years to come."

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