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FHA Cuts Cashout LTV

FHA Cuts Cashout LTVHUD Mortgagee Letter 2009-8 issued

March 16, 2009

By staff

The maximum loan-to-value will be cut on cashout transactions insured by the Federal Housing Administration. In addition, excessive fees for services performed on FHA originations could wind up as evidence that the Real Estate Settlement Procedures Act was violated.The new limitations were outlined in Mortgagee Letter 2009-08 issued by the U.S. Department of Housing and Urban Development last week.

HUD said it needed to limit its risks amid continued deterioration in the housing market.

The LTV limitation is being temporarily implemented on loans with case numbers assigned on or after April 1 “while FHA further analyzes the housing and mortgage industry as well as its own portfolio to determine whether permanent measures should be taken.”

FHA loans on cashout refinances will be limited to 85 percent LTV based on the appraised value. On loans with new subordinate financing, the combined LTV will also be limited to 85 percent.

HUD said existing subordinate financing may remain in place as long as FHA’s lien has priority. The CLTV need not be considered, but borrowers must qualify for the scheduled payments on all liens. Junior liens modified at closing will be considered existing liens.

Only borrowers who have owned the property for at least 12 months may extract equity based on fair market value — though no existing lien is required. Borrowers who have owned the property less than a year are limited to 85 percent of the lower of the purchase price or FMV.

Delinquent borrowers are ineligible for cashout transactions, while loans on two- to four-unit properties must pass a “self-sufficiency” test.

On high-balance mortgages that exceed $417,000, a second appraisal is required.

HUD noted that mortgage brokers who are not FHA-approved may assist in obtaining mortgage financing, but no origination fees may be paid to those brokers and the origination must be handled by an FHA-approved company.

The housing agency emphasized that fees to non-FHA approved mortgagees and correspondents must be”commensurate with the amount normally charged for similar services.” Excessive fees “may be used as evidence of a compensated referral or unearned fee in violation of section 8(a) or (b) of RESPA and 24 CFR 3500.14(g).”

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