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Understanding fha and va distressed property options aug2011


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How exactly to do a FHA and VA short sale from the CE class written by Mark Taylor

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Understanding fha and va distressed property options aug2011

  1. 1. By Mark Taylor CDPE CMPS CSSPE C C REDS Understanding FHA & VA Distressed Property Options the Next Wave of Distressed Properties…. Arizona Academy of Real Estate #S05-0009 10207 N. Scottsdale Road Scottsdale, Arizona 85253 (623) 505-5380 1
  2. 2. The Plan of Attack for Today What our market is made up of loan wise Why this is necessary for you to learn these processes How the FHA PFS Program works Benefits of the FHA PFS Program What documents you need to use you’ve never used before How to price the home - yes that means no making up values :-) What to do if you meet a seller with a VA loan What VA paperwork you need and issues to be aware of And how FHA wants to help fix our upside down market 2
  3. 3. So How Are We Doing So Far?QUARTER 1 – 2011 vs. 2010 ALL MORTGAGES – 2010All Mortgages: 4.63% in Foreclosure 9.38% in Total Distressed Properties: 6,700,000*Default (30+ days late) 14.01% Total +1% Total Predicted Sales: 6,030,000**Prime Mortgages: 3.41% in Foreclosure 6.89% in *Distressed Property Institute estimateDefault (30+ days late) 10.3% Total +3% **NAR, Walt Molony ro_stateSubprime Mortgages: 15.39% in Foreclosure25.76% in Default (30+ days late) 41.15% Total -2% Unemployment Rate U.S. Bureau of Labor Statistics, the adjustedFHA Mortgages: 3.93% in Foreclosure 12.09% in unemployment rate for April 2010 was 9.9%. The highest rate ever recorded by the Bureau was 10.8%Default (30+ days late) 16.02% Total +10% in Nov/Dec 1982.VA Mortgages: 2.63% in Foreclosure 7.06% in Underemployment RateDefault (30+ days late) 9.69% Total 0% According to the U.S. Bureau of Labor Statistics, the seasonally adjusted underemployment rate for AprilMortgage Bankers Association 2010 was 16.7%.National Delinquency SurveyBased on 44,600,000 mortgages - Non Seasonally Adjusted 3
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  5. 5. The Next Wave of Mortgages FHA VA And what they become.... HUD HomesDid you know you can’t just slap these types ofsellers on the MLS and try and short sale thesehomes without going through a special process –which we will learn today 5
  6. 6. FHA YTDFHA has been 91% of ALL 91% SALESin the $358,000 or Under Price Point It allows for 3.5% down 0 months of reserves 1.15% MMI just went from .90% 9% 1% UFMIP now it was 2.25% 43% DTI exceptions to 50 available case by case 6
  7. 7. So How Does FHA PFS Work?If you have a Seller in an FHA loan theServicer must participate in the Pre-Foreclosure Program (PFS)This program has been around since1994 and received a revision in Dec 242008 per mortgagee letter 2008-43The intent of this program is tohelp homeowners avoidforeclosure 7
  8. 8. So How Does FHA PFS Work? KEY FEATURES OF THE PFS PROGRAMEstablishing Market ValueMortgagees are reminded to ensure thatproperties in the PFS program are sold atnear fair market value as established byan independent appraisal, prepared byan appraiser on the FHA Appraisalroster. 8
  9. 9. The FHA Appraisal• Servicer must obtain the appraisal at their cost and will be reimbursed through HUD’s claim filing process• Appraisals obtained by the Buyer, Seller, Real Estate Agent or other interested parties may not be used to establish FMV of the property• Servicer will provide a copy of the appraisal to the Homeowner, Agent or HUD, upon request• The appraised value becomes the listing price• To ensure the most current FMV is used, Mortgagee may obtain a new FHA appraisal, even if the property was appraised by and FHA Roster Appraiser within the preceding 6 months. 9
  10. 10. KEY FEATURES OF THE PFS PROGRAM Minimum List Price RequirementsProperties offered for sale underthe PFS program are to be listedfor sale no less than the as-isappraised price. 10
  11. 11. KEY FEATURES OF THE PFS PROGRAM Tiered Net Proceeds Requirement 12PFS has guidelines for a varyingminimum net sales proceeds 9 3based on length of time on themarket. More on this later… 6 11
  12. 12. KEY FEATURES OF THE PFS PROGRAM Non-Owner Occupant ExceptionMortgagees are allowed to proceedwith the PFS if the non occupantmortgagor proves house was notpurchased with the intent to rentand has been rented for at least 18months. 12
  13. 13. KEY FEATURES OF THE PFS PROGRAM Marketing DocumentationPrior to accepting a discountedoffer the selling agent mustprovide proof of why this offeris valid and the documentationneed be kept for the claim fileby HUD 13
  14. 14. KEY FEATURES OF THE PFS PROGRAM Removal of Repair LimitationsWith prior approval damage causedby flood, fire, earthquake, boilerexplosion or mortgagee neglect canbe repaired as long as the costs of therepairs is covered by a reduction inthe debt paid off by the claim 14
  15. 15. KEY FEATURES OF THE PFS PROGRAM Subordinate Liens$2500 will be paid to clearsubordinate liens in order todeliver clear and marketabletitle.Exception: If subordinate lienis an FHA Partial Claim, theamount must be included in thetotal delinquency 15
  16. 16. KEY FEATURES OF THE PFS PROGRAM Seller Paid Closing CostsHUD will allow under thePFS program to pay up to1% of the buyers mortgageamount in closing costs aslong as that Buyer is usingFHA financing to buy thehome. 16
  17. 17. FHA PFS Basics:Program is for people with a hardship that have to sell their home and can’tdue to loan being greater than the valueTo participate the seller must be willing to market the home with a Realtorfor at least 90 daysDuring the 90 days the Servicer will delay foreclosureIf the property is sold in the 90 day period the seller will receive a $1000incentive. $750 after that.If the property doesn’t sell then the Seller is encouraged to participate in theDIL process.No deficiency judgment will be sought if the Seller complies with theprogram in good faithHECM mortgages “reverse mortgages” are not eligible for the PFS programIn order to participate in the PFS the Seller must be delinquent at least 30days! (this excludes them from entering back into the market for 2 years on a conventional loanand 3 years using FHA again ((from time of claim paid)) 17
  18. 18. FHA PFS Basics:Qualifying: Are in default due to adverse and unforeseeable circumstances Have negative equity Are owner occupants ( non-owner exceptions are granted) Have only one FHA loan* Are not a corporation or partnership On the 32-60 day of default consumers will be sent HUD PA-426 “How to avoid foreclosure” in encourage initiation into the PFS program HUD-90035 Form “information disclosure” will be mailed to seller along with disclosures. Financial information will be furnished to the Servicer and upon approval of financial distress HUD-90045 Form “approval to participate” will be sent *Mortgagees are authorized to make reasonable exceptions for mortgagors who have acquired and FHA insured property through inheritance or co-signed to enhance the credit of another mortgagor. 18
  19. 19. FHA PFS Basics:Financial Analysis: All documentation and statements either supplied electronically or on the phone will be verified. Sellers with additional assets will be required to exhaust those assets wherever possible to make the mortgagee as whole as possible Calculations will be entered into to examine borrowers fixed monthly expenses including food, bills, utilities outstanding debts, etc) Calculations to verify monthly net income including anticipation of fluctuations in income Calculating the surplus income from net that remains to offset the mortgage During this process if the seller is deemed not eligible for the PFS or another mitigation solution then they must be given a detailed denial and 7 days to refute 19
  20. 20. Information/Disclosure HUD Form 90035 (Handout) 20
  21. 21. FHA PFS Basics:Property Value: Must be listed at the as-is appraised value completed by HUD per the HUD handbook 4150-2 (195 page manual) Must be valid for 6 months Distressed sales cannot be used unless that is all the comps availableProperty Condition: Any and all repairs must be approved prior to approval of FMV. Repairs require a HUD – 90041 Request for variance to be completed and approved 21
  22. 22. Request For Variance HUD Form 90041 (Handout) 22
  23. 23. FHA PFS Basics: RepairsSome Tricks to Know About Repairs If property is being sold as repaired and funds are to be held in an escrow holdback, the costs are not part of the settlement costs and are not calculated in the NSP calculations If the Seller can get the repairs completed under their insurance they must file a claim to that end and adjust claim to the PFS program 23
  24. 24. FHA PFS Basics::Title: A title search must be performed prior to issuance of the approval to participate. If the issues conveyed on the Prelim can be resolved they must be resolved If discharging of a junior lien is necessary then the max contribution will be $2500 . This is $1500 from the Mortgagor/Mortgagee and $1000 from the Mortgagee that they would have given to the Mortgagor as the incentive for helping sell the home. If a promissory note is requested the Seller must do all they can to comply with those terms. Mortgagors who have the ability to do so must satisfy or obtain release of liens. Upon completion of all of the aforementioned steps a form 90045 approval to participate will be issued. 24
  25. 25. Approval To Participate HUD Form 90045 (Handout) 25
  26. 26. FHA PFS Basics:Use of a Real Estate Broker(page 11 of 18 of ml 2008-43) Must be engaged with Broker within 7 days of the approval to participate HUD- 90045 No conflict of interest allowed for Listing Agent: No commission to be paid to Agent on their own property if doing a PFS If FSBO Seller had already entered into a contract there is no need for a Realtor Listing agreement must include the following language: "Seller may cancel this Agreement prior to the ending date of the listing period without advance notice to the Broker, and without payment of a commission or any other consideration if the property is conveyed to the mortgage insurer or the mortgage holder. The sale completion is subject to approval by the mortgagee.” 26
  27. 27. FHA PFS Basics :Use of a Real Estate Broker, cont.(page 11 of 18 of ml 2008-43) Seller must maintain the property Arms length transaction at all times Contract will be approved within 5 business days of receiving it and a HUD-90051 “Sales Contract review” form will be sent to the Seller after ensuring no hidden terms or “special” agreements have been entered into Sale must occur within 4 months of approval and an extension of 2 months may be given if loan is a tier 1 or there is a signed contract that cannot perform within the 4 months 27
  28. 28. Sales Contract Review HUD Form 90051 (Handout) 28
  29. 29. Net Sale Proceeds and Marketing :NET SALE PROCEEDS is defined as: First 30 days offers will be approved at Minimum Net Proceeds of 88% of FMV Net Sale Proceeds 30-60 days offers will be approved at MNP of 86% of FMV (FMV minus 61 days offers will be approved The Sales Price marketing time) at MNP of 84% of FMV– The Closing/Settlement Costs Max period is 6 months for marketing . The Goal is to sell homes in the first 90days ~ after Net Sale Proceeds that DIL is offered to seller. 29
  30. 30. More on Net Sale Proceeds:Costs Affecting NSP $ $ $ Commissions not to exceed 6% Taxes are prorated to date of closing $ $ $ Sellers costs for title transfer taxes $1000 incentive for selling home within 90 $ days Up to $2500 for releasing a junior lien after 90 days max is $2250 Up to 1% of buyers closing cost contributions 30
  31. 31. Net Sale Proceeds (Exclusions) : Items NOT Allowed*: _____________________________ Repair Reimbursements ____________________ Home Warranty __________________________________ Discount Points/Loan Fees __________________________ Lenders Title Costs * But the Seller may use his $1000 to offset these items. 31
  32. 32. Even More Basics:Early Termination Property Inspections MORTGAGOR may Terminate the PFS To prevent waste Mortgagee will AT ANY TIME conduct an inspection on the 45th day after default if there has been no contact with the Seller. MORTGAGEEcan Terminate the program for: Un-resolvable title problems Seller is not acting in good faith Significant change in the property Documentation shows the Seller doesn’t qualify for the PFS 32
  33. 33. Re-emphasizing Some Good News! Sellers will be eligible for a $750 incentive for complying with the PFS program however if they help the house to sell in LESS THAN 90 DAYS they will receive a total of $1000.Prior to closing a Closing Worksheet form 90052 will beprovided to the closing agent showing the aboveincentive and breaking down net proceeds, all allowablecosts come from net proceeds, buyer costs are coveredand that all the final numbers match the allowablethresholds. After the successful closing occurs the creditwill be reported as a short sale and mortgagees willreceive and be responsible for reporting a 1099A(Acquisition or Abandonment of a secured property). 33
  34. 34. What page of Google are YOU on?We all know what it means to be on the first page of Google. If yourinterested it learning how you can be on the first page without spendinga lot of your valuable time or money. We can have your name on thefirst page of Google within minutes....and we would love the opportunityto prove it to you!
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  39. 39. DON’T JUST SEND IT…. it!!!
  40. 40. VA Compromise Sales Program 70
  41. 41. VA Compromise Sales ProgramYTD VA Sales have been 6%$417000 Max Loan AmountVA Funding Fee of 2.15% if never used VAbenefits, 3.3% if used subsequently, noFunding Fee if disabled and 3.4% if currentlyin reserves.No Monthly MI100% Financing 71
  42. 42. Program Run Out of Roanoke Regional Center Consumers will be advised of the following options: Refunding Deed-in-Lieu Re-Amortization PrivatePay the Delinquency Sale PaymentOffered a Forbearance or Assistance Repayment Schedule 72
  43. 43. Pay the Delinquency Unlike MOST other Mortgage Holders.... VA Servicers must accept payment to bring the note current along with any legal costs. The borrower could be able to do so under the GI Bill. 73
  44. 44. Offered a Forbearance or Repayment Schedule Forbearance Agreementscan be issued using a VA-5655 Form A Workout Plan will be offered where each month the amount of arrears is added to the current payment until Paid In Full. Suspension of payments may be given under rare situations. VA Form 5655 VA Form 5655 Page 1 Page 2 74
  45. 45. Payment AssistanceMany State and LocalGovernments have aprogram that can pay all orsome of the mortgage for aspecific period of time.VA does not have aprogram but does havethe information that willhelp a Vet if needed. 75
  46. 46. Re-AmortizationRe-Amortize your Loan either by: Restarting the loan back to a 30 year Adding additional time to the loan and the delinquency is added to the balance This could increase the loan and the monthly payment. 76
  47. 47. Private SaleIf the Seller cannot reinstate the loan orwork anything out it, it can then be soldand any equity keptThe loan may also be assumed, howeverpermission must be granted by VA andobtain a Release of LiabilityShould the home be upside down VAmay pay a Compromise Claim to theMortgagee as long as the CompromiseSales program is approved and enteredinto with the Mortgagee. 77
  48. 48. Deed-In-LieuIf a private sale or a cure of the defaultcannot be achieved then a Deed-In-Lieumay be entered into.VA will have to pay the claim of thedifference owed to theServicer/Investor.The Seller will be released from futureliability but will be made responsible for all orpart of the loss incurred – the credit willreflect as a Voluntary Foreclosure 78
  49. 49. RefundingVA has the right to buy the loan from theLien Holder and take over the servicing! This is called “REFUNDING” This is an option looked at on every potential claim. Should you have the ability to make the payment in the future but cannot get caught up or maintain the current forbearance, the Seller may qualify for a refunding. 79
  50. 50. How to Qualify for a Compromise AgreementProperty must be sold at fair market valueClosing costs must be reasonable and customaryMust be less costly to Servicer/Investor than a foreclosureFinancial Hardship must be demonstrated by the SellerLoans funded prior to Dec 31st 1989, the seller must sign apromissory noteNo second liens! Where there are 2nd Liens, Seller must paythem or accept a promissory noteMust obtain a sales contract prior to being considered for theprogramRealtors must protect the Seller by ensuring the contract states:“Sales contract is contingent and/or subject to the approval of aVA Compromise Sale” 80
  51. 51. Ready For Some Rules?Seller should contact their Servicer or their local VA askingthem to participate in the VA Compromise Sale Program(VACSP)Seller to provide a written financial statement provided by theirServicerSeller must complete a letter of request to participate in VACSPCompromise Agreement Sale Application needs be completedby the Seller, obtained from the ServicerSeller needs be prepared to sign a promissory note to the VA forthe loss incurred if they had a home loan prior to 12/31/1989 81
  52. 52. More Rules for the Realtor and SellerSales contract submitted must include all signatures and state: “offercontingent upon approval of a VA compromise sale”GFE Needs be provided of all costs of the loanLetter to Servicer and VA asking to be considered for VACSPAll supporting documentation of the hardshipCompromise agreement sale Application submittedA current VA appraisal must be acquired by Seller’s Servicer and ordered bythem – exception is if buyer is a VA applicant that appraisal may be usedinstead ( note VA has a 10 day turn around window)A compromise assumption agreement from the Servicer to the VA agreeingto modify their claimReview of the buyer to ensure that they do indeed qualify before finalizingthe process 82
  53. 53. So Now You Have an Approval, Now What?Once the approval has been signed off on by the Legaldepartment of the VA the closing agent will verify theamounts.At the closing table, net proceeds are paid to theServicer who then files a claim to VA for the shortfallVA will not pay more than was approved and morethan the VA coverage amount.Seller also will be advised that their entitlement willnot be restored until the claim has been paid in full. 83
  54. 54. Are you ready for what’s Coming?? FHA Refinance of Borrowers in Negative Equity Positions 84
  55. 55. Who is the target market?FHA’s new refinance opportunity is targeted tohelp people who owe more on their mortgagethan their home is worth because their localmarkets have seen large declines in homevalues. 85
  56. 56. What are the borrower eligibility requirements?• Existing loan to be refinanced is not FHA insured;• Must owe more on their mortgage than the value of the property;• Must be current on the existing mortgage to be refinanced;• Must have a “FICO based” decision credit score greater than or equal to 500; 86
  57. 57. What are the borrower eligibility requirements?• Existing first lien holder must write off at least 10% of the unpaid principal balance (UPB);• Loan-to-value (LTV) ratio of no more than 97.75%;• Combined loan-to-value (CLTV) ratio must be 115% or less; and• For manually underwritten loans, the qualifying ratios can be no greater than 31/50. Standard FHA underwriting requirements apply 87
  58. 58. Does the borrower need to know any additional information? • Borrowers must be made aware that the short refinancing under this program may be reflected as a negative feature on their credit score. • Borrowers must be advised to consult with their tax advisors regarding the cancellation of debt and possible tax consequences. 88
  59. 59. Example Scenario 1Original Value 350,000UPB First Lien 280,000UPB Second Lien 70,000Current Value 210,000Max CLTV (115%) 241,500New First Lien (97.75%) 205,275New UPB Second Lien 36,225Reduction by First Lien 74,725Reduction by Second Lien 33,775Net Forgiveness 108,500 89
  60. 60. Example Scenario 2Original Value 100,000UPB First Lien 60,000UPB Second Lien 60,000Current Value 60,000Max CLTV (115%) 69,000New First Lien (97.75%) 58,650New UPB Second Lien 10,350Reduction by First Lien 1,350Reduction by Second Lien 49,650Net Forgiveness 51,000 90
  61. 61. What are benefits of these refinances?• Provides Servicers and borrowers with an affordable stable loan product;• Helps to stabilize communities that have seen a decline in housing prices; and• Costs will be shared between the private sector (1st and 2nd lien investors) and the federal government (HUD and Treasury). – Private sector will be extinguishing debt. – Treasury will be paying incentives to second lien servicers and investors. – HUD and Treasury would pay the claim. 91
  62. 62. When will this start?The program has been finished and replaces theH2H (H4H) program of last year that failed. Allprincipals and incentives and procedures havebeen approved in conceptThe mortgagee letter has to be signed and releasedand then implemented and promoted.Estimated launch date ... anytime soon ... Buehler? 92