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C                                               C
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
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
So How Are We Doing So Far?
QUARTER 2 – 2011 vs. 2010                                      ALL MORTGAGES – 2011
All 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 estimate
Default (30+ days late) 10.3% Total +3%                   **NAR, Walt Molony
                                                          http://www.realtor.org/press_room/news_releases/2010/02/metro_state
Subprime Mortgages: 15.39% in Foreclosure
25.76% in Default (30+ days late) 41.15% Total -2%        Unemployment Rate
                                                          U.S. Bureau of Labor Statistics, the adjusted
                                                          unemployment rate for April 2010 was 9.9%.
FHA Mortgages: 3.93% in Foreclosure 12.09% in             The highest rate ever recorded by the Bureau was 10.8%
                                                          in Nov/Dec 1982.
Default (30+ days late) 16.02% Total   +10%
                                                          Underemployment Rate
VA Mortgages: 2.63% in Foreclosure 7.06% in               According to the U.S. Bureau of Labor Statistics, the
Default (30+ days late) 9.69% Total 0%                    seasonally adjusted underemployment rate for April
                                                          2010 was 16.7%.
Mortgage Bankers Association
National Delinquency Survey
Based on 44,600,000 mortgages - Non Seasonally Adjusted



                                                                                                                        3
4
The Next Wave of Mortgages

   FHA                           VA
       FHA Loans that foreclose become....

  HUD Homes, but before that,
  In a short sale situation…
Did you know you can’t just slap these types of
sellers on the MLS and try and short sale these
homes without going through a special process –
which we will learn today



                                                  5
FHA
          YTD
FHA has been 91% of ALL                                   91%
             SALES
in 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
So How Does FHA PFS Work?


If you have a Seller in an FHA loan the
Servicer must participate in the Pre-
Foreclosure Program (PFS)


This program has been around since
1994 and received a revision in Dec 24
2008 per Mortgagee Letter 2008-43


The intent of this program is to
help homeowners avoid
foreclosure


                                          7
So How Does FHA PFS Work?

      KEY FEATURES OF THE PFS PROGRAM


Establishing Market Value

Mortgagees are reminded to ensure that
properties in the PFS program are sold at
near fair market value as established by
an independent appraisal, prepared by
an appraiser on the FHA Appraisal
roster.



                                            8
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 an FHA Roster Appraiser within the
  preceding 6 months.
                                                              9
KEY FEATURES OF THE PFS PROGRAM



    Minimum List
  Price Requirements


Properties offered for sale under
the PFS program are to be listed
for sale no less than the as-is
appraised price.




                                    10
KEY FEATURES OF THE PFS PROGRAM


   Tiered Net Proceeds
      Requirement                      12

PFS has guidelines for a varying
minimum net sales proceeds         9        3
based on length of time on the
market. More on this later…


                                       6
                                                11
KEY FEATURES OF THE PFS PROGRAM


      Non-Owner
   Occupant Exception


Mortgagees are allowed to proceed
with the PFS if the non occupant
mortgagor proves house was not
purchased with the intent to rent
and has been rented for at least 18
months.


                                      12
KEY FEATURES OF THE PFS PROGRAM


      Marketing
    Documentation


Prior to accepting a discounted
offer the selling agent must
provide proof of why this offer
is valid and the documentation
need be kept for the claim file
by HUD


                                  13
KEY FEATURES OF THE PFS PROGRAM


     Removal of
  Repair Limitations




With prior approval damage caused
by flood, fire, earthquake, boiler
explosion or mortgagee neglect can
be repaired as long as the costs of the
repairs is covered by a reduction in
the debt paid off by the claim
                                          14
KEY FEATURES OF THE PFS PROGRAM



  Subordinate Liens
$2500 will be paid to clear
subordinate liens in order to
deliver clear and marketable
title.

Exception: If subordinate lien
is an FHA Partial Claim, the
amount must be included in
the total delinquency


                                 15
KEY FEATURES OF THE PFS PROGRAM


    Seller Paid
   Closing Costs



HUD will allow under the
PFS program to pay up to
1% of the buyers mortgage
amount in closing costs as
long as that Buyer is using
FHA financing to buy the
home.

                              16
FHA PFS Basics:
Program is for people with a hardship that have to sell their home and can’t
due to loan being greater than the value
To participate the seller must be willing to market the home with a Realtor
for at least 90 days
During the 90 days the Servicer will delay foreclosure
If the property is sold in the 90 day period the seller will receive a $1000
incentive. $750 after that.
If the property doesn’t sell then the Seller is encouraged to participate in the
DIL process.
No deficiency judgment will be sought if the Seller complies with the
program in good faith
HECM mortgages “reverse mortgages” are not eligible for the PFS program
In order to participate in the PFS the Seller must be delinquent at least 30
days! (this excludes them from entering back into the market for 2 years on a conventional loan
and 3 years using FHA again ((from time of claim paid))

                                                                                                  17
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
   Between the 32nd and 60th day of default consumers will be sent HUD
   PA-426 “How to avoid foreclosure” to 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 an FHA insured property through inheritance or co-signed to enhance
                                                                                      18
   the credit of another mortgagor.
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
Information/Disclosure




                   HUD
                Form 90035

                (Handout)




                             20
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 available

Property 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
Request For Variance




                 HUD
              Form 90041
              (Handout)




                           22
FHA PFS Basics:

              Repairs
Some 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
FHA PFS Basics::
Title:
     A title search must be performed prior to issuance of the Approval to
     Participate (ATP).

     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 (ATP) will be issued.




                                                                              24
Approval To Participate




                   HUD
                Form 90045

                 (Handout)




                             25
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
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
      COMPLIANCE!!

      Sale must occur within 4 months of approval and an extension of 2 months
      may be given if loan is a tier 1 http://www.hud.gov/offices/hsg/sfh/nsc/trsovrvw.cfm) or
      there is a signed contract that cannot perform within the 4 months

                                                                                         27
Sales Contract Review




                  HUD
               Form 90051

                (Handout)




                            28
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
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
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
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.
       MORTGAGEE
can Terminate the program for:

 Un-resolvable title problems                 Remind Servic
                                                           er
 Seller is not acting in good faith                to Do
                                                Inspection
 Significant change in the property
                                                 Within
 Documentation shows the Seller
 doesn’t qualify for the PFS
                                               45 Days
                                                                            32
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 be
provided to the closing agent showing the above
incentive and breaking down net proceeds, all allowable
costs come from net proceeds, buyer costs are covered
and that all the final numbers match the allowable
thresholds. After the successful closing occurs the credit
will be reported as a short sale and mortgagees will
receive and be responsible for reporting a 1099A
(Acquisition or Abandonment of a secured property).

                                                             33
HAFA vs. FHA PFS
             HAFA                                  FHA PFS
    Servicer determines value          Value determined by FHA Appraisal

   Net proceeds still a mystery        Net Proceeds defined each 30 days

      Seller incentive $3,000                 Seller incentive $1,000
     No Deficiency Judgment                  No Deficiency Judgment
Servicer has 30 days to respond to
                                     Servicer has 5 days to respond to offers
              offers
  Most properties have 2 loans            Most properties have one loan
    Voluntary on part of Seller      Not voluntary, All Servicers must comply

     No Holdback for Repairs         Holdback for Approved Repairs Allowed

 Buyer Closing Costs Negotiable        1% Allowed on Buyer Closing Costs




                                                                                34
FHA Partial Claim

Provides a second lien for the purpose of reinstating the first lien


  • Servicer will advance funds in the amount necessary to
    reinstate the first (not to exceed 12 months PITI)
  • Borrower will execute a promissory note and subordinate
    mortgage payable to HUD
  • Note is interest free and not due and payable until
    liquidation-no payments required
  • Following reinstatement, Servicer files a claim with HUD for
    the amount of advance, plus an incentive fee ($250 for each
    claim)


                                                                       35
FHA Partial Claim (continued)



• Partial Claims may now be used after the 4th month of
  delinquency, so long as the total arrearage doesn’t exceed 12
  months PITI
• HUD approval is not required so long as the Borrower meets
  qualifications:
   – Borrower has the long term financial stability to support
     the current mortgage debt
   – Borrower does not have the ability to repay the arrearage
     through a special forbearance or modification




                                                                  36
FHA Partial Claim

Borrower Qualifications (must satisfy all)


 • Have overcome the cause of default
 • Have sufficient income to resume monthly payments
 • Do not have sufficient income to pay arrearage through a
   repayment plan
 • A mortgage modification is not appropriate
 • Borrower is owner occupant



    Borrowers in a Bankruptcy (7 or
     13) may participate with court                           37
VA Compromise Sales Program




                              38
VA Compromise Sales Program

   YTD VA Sales have been 6%
    $417000 Max Loan Amount
   VA Funding Fee of 2.15% if never used VA
   benefits, 3.30% if used subsequently, no
   Funding Fee if disabled and 2.40% if currently
   in reserves.*
   No Monthly MI
   100% Financing
*per Circular 26-11-19, as of November 22, 2011, with less than 5% down
                                payment
                                                                          39
Program Run Out of Roanoke
             Regional Center
 Consumers will be advised of the following options:


  Refunding       Deed-in-Lieu        Re-Amortization


                       Private
Pay the Delinquency     Sale


                                 Payment
Offered a Forbearance or
                                 Assistance
 Repayment Schedule



                                                        40
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.




                                              41
Offered a Forbearance or Repayment
                Schedule
     Forbearance Agreements
can 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                            42
Payment Assistance

Many State and Local
Governments have a
program that can pay all or
some of the mortgage for a
specific period of time.



VA does not have a
program but does have
the information that will
help a Vet if needed.

                                    43
Re-Amortization

Re-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.




                                             44
Private Sale

If the Seller cannot reinstate the loan or
work anything out it, it can then be sold
and any equity kept
The loan may also be assumed, however
permission must be granted by VA and
obtain a Release of Liability

Should the home be upside down VA
may pay a Compromise Claim to the
Mortgagee as long as the Compromise
Sales program is approved and entered
into with the Mortgagee.
                                             45
Deed-In-Lieu

If a private sale or a cure of the default
cannot be achieved then a Deed-In-Lieu
may be entered into.

VA will have to pay the claim of the
difference owed to the
Servicer/Investor.

The Seller will be released from future
liability but will be made responsible for all or
part of the loss incurred – the credit will
reflect as a Voluntary Foreclosure
                                                    46
Refunding

VA has the right to buy the loan from the
Lien 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.
                                                    47
How to Qualify for a Compromise
          Agreement
Property must be sold at fair market value
Closing costs must be reasonable and customary
Must be less costly to Servicer/Investor than a foreclosure
Financial Hardship must be demonstrated by the Seller
Loans funded prior to Dec 31st 1989, the seller must sign a
promissory note
No second liens! Where there are 2nd Liens, Seller must pay
them or accept a promissory note
Must obtain a sales contract prior to being considered for the
program
Realtors must protect the Seller by ensuring the contract states:
“Sales contract is contingent and/or subject to the approval of a
VA Compromise Sale”
                                                                    48
Ready For Some Rules?


Seller should contact their Servicer or their local VA asking
them to participate in the VA Compromise Sale Program
(VACSP)
Seller to provide a written financial statement provided by their
Servicer
Seller must complete a letter of request to participate in VACSP
Compromise Agreement Sale Application needs be completed
by the Seller, obtained from the Servicer
Seller needs be prepared to sign a promissory note to the VA for
the loss incurred if they had a home loan prior to 12/31/1989


                                                                    49
More Rules for the Realtor and Seller

Sales contract submitted must include all signatures and state: “offer
contingent upon approval of a VA compromise sale”
GFE Needs be provided of all costs of the loan
Letter to Servicer and VA asking to be considered for VACSP
All supporting documentation of the hardship
Compromise agreement sale Application submitted
A current VA appraisal must be acquired by Seller’s Servicer and ordered by
them – exception is if buyer is a VA applicant that appraisal may be used
instead ( note VA has a 10 day turn around window)
A compromise assumption agreement from the Servicer to the VA agreeing
to modify their claim
Review of the buyer to ensure that they do indeed qualify before finalizing
the process

                                                                              50
So Now You Have an Approval,
        Now What?

Once the approval has been signed off on by the Legal
department of the VA the closing agent will verify the
amounts.
At the closing table, net proceeds are paid to the
Servicer who then files a claim to VA for the shortfall
VA will not pay more than was approved and more
than the VA coverage amount.
Seller also will be advised that their entitlement will
not be restored until the claim has been paid in full.

                                                          51
Are you ready for what’s Coming??


        FHA Refinance of
        Borrowers in Negative
        Equity Positions



                                52
Who is the target market?


FHA’s new refinance opportunity is targeted to
help people who owe more on their mortgage
than their home is worth because their local
markets have seen large declines in home
values.




                                                 53
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;




                                                54
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



                                                       55
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.




                                                      56
Example
               Scenario 1
Original Value               350,000
UPB First Lien               280,000
UPB Second Lien               70,000
Current Value                210,000
Max CLTV (115%)              241,500
New First Lien (97.75%)      205,275
New UPB Second Lien           36,225
Reduction by First Lien       74,725
Reduction by Second Lien      33,775
Net Forgiveness             108,500




                                       57
Example
               Scenario 2
Original Value              100,000
UPB First Lien               60,000
UPB Second Lien              60,000
Current Value                60,000
Max CLTV (115%)              69,000
New First Lien (97.75%)      58,650
New UPB Second Lien          10,350
Reduction by First Lien       1,350
Reduction by Second Lien     49,650
Net Forgiveness             51,000




                                      58
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.

                                                    59
When will this start?

The program has been finished and replaces the
H2H (H4H) program of last year that failed. All
principals and incentives and procedures have
been approved in concept

The mortgagee letter has to be signed and released
and then implemented and promoted.

Estimated launch date ... anytime soon ... Buehler?


                                                      60

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Understanding FHA and VA Distressed Property Options

  • 1. C C 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. 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. So How Are We Doing So Far? QUARTER 2 – 2011 vs. 2010 ALL MORTGAGES – 2011 All 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 estimate Default (30+ days late) 10.3% Total +3% **NAR, Walt Molony http://www.realtor.org/press_room/news_releases/2010/02/metro_state Subprime Mortgages: 15.39% in Foreclosure 25.76% in Default (30+ days late) 41.15% Total -2% Unemployment Rate U.S. Bureau of Labor Statistics, the adjusted unemployment rate for April 2010 was 9.9%. FHA Mortgages: 3.93% in Foreclosure 12.09% in The highest rate ever recorded by the Bureau was 10.8% in Nov/Dec 1982. Default (30+ days late) 16.02% Total +10% Underemployment Rate VA Mortgages: 2.63% in Foreclosure 7.06% in According to the U.S. Bureau of Labor Statistics, the Default (30+ days late) 9.69% Total 0% seasonally adjusted underemployment rate for April 2010 was 16.7%. Mortgage Bankers Association National Delinquency Survey Based on 44,600,000 mortgages - Non Seasonally Adjusted 3
  • 4. 4
  • 5. The Next Wave of Mortgages FHA VA FHA Loans that foreclose become.... HUD Homes, but before that, In a short sale situation… Did you know you can’t just slap these types of sellers on the MLS and try and short sale these homes without going through a special process – which we will learn today 5
  • 6. FHA YTD FHA has been 91% of ALL 91% SALES in 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. So How Does FHA PFS Work? If you have a Seller in an FHA loan the Servicer must participate in the Pre- Foreclosure Program (PFS) This program has been around since 1994 and received a revision in Dec 24 2008 per Mortgagee Letter 2008-43 The intent of this program is to help homeowners avoid foreclosure 7
  • 8. So How Does FHA PFS Work? KEY FEATURES OF THE PFS PROGRAM Establishing Market Value Mortgagees are reminded to ensure that properties in the PFS program are sold at near fair market value as established by an independent appraisal, prepared by an appraiser on the FHA Appraisal roster. 8
  • 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 an FHA Roster Appraiser within the preceding 6 months. 9
  • 10. KEY FEATURES OF THE PFS PROGRAM Minimum List Price Requirements Properties offered for sale under the PFS program are to be listed for sale no less than the as-is appraised price. 10
  • 11. KEY FEATURES OF THE PFS PROGRAM Tiered Net Proceeds Requirement 12 PFS has guidelines for a varying minimum net sales proceeds 9 3 based on length of time on the market. More on this later… 6 11
  • 12. KEY FEATURES OF THE PFS PROGRAM Non-Owner Occupant Exception Mortgagees are allowed to proceed with the PFS if the non occupant mortgagor proves house was not purchased with the intent to rent and has been rented for at least 18 months. 12
  • 13. KEY FEATURES OF THE PFS PROGRAM Marketing Documentation Prior to accepting a discounted offer the selling agent must provide proof of why this offer is valid and the documentation need be kept for the claim file by HUD 13
  • 14. KEY FEATURES OF THE PFS PROGRAM Removal of Repair Limitations With prior approval damage caused by flood, fire, earthquake, boiler explosion or mortgagee neglect can be repaired as long as the costs of the repairs is covered by a reduction in the debt paid off by the claim 14
  • 15. KEY FEATURES OF THE PFS PROGRAM Subordinate Liens $2500 will be paid to clear subordinate liens in order to deliver clear and marketable title. Exception: If subordinate lien is an FHA Partial Claim, the amount must be included in the total delinquency 15
  • 16. KEY FEATURES OF THE PFS PROGRAM Seller Paid Closing Costs HUD will allow under the PFS program to pay up to 1% of the buyers mortgage amount in closing costs as long as that Buyer is using FHA financing to buy the home. 16
  • 17. FHA PFS Basics: Program is for people with a hardship that have to sell their home and can’t due to loan being greater than the value To participate the seller must be willing to market the home with a Realtor for at least 90 days During the 90 days the Servicer will delay foreclosure If the property is sold in the 90 day period the seller will receive a $1000 incentive. $750 after that. If the property doesn’t sell then the Seller is encouraged to participate in the DIL process. No deficiency judgment will be sought if the Seller complies with the program in good faith HECM mortgages “reverse mortgages” are not eligible for the PFS program In order to participate in the PFS the Seller must be delinquent at least 30 days! (this excludes them from entering back into the market for 2 years on a conventional loan and 3 years using FHA again ((from time of claim paid)) 17
  • 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 Between the 32nd and 60th day of default consumers will be sent HUD PA-426 “How to avoid foreclosure” to 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 an FHA insured property through inheritance or co-signed to enhance 18 the credit of another mortgagor.
  • 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. Information/Disclosure HUD Form 90035 (Handout) 20
  • 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 available Property 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. Request For Variance HUD Form 90041 (Handout) 22
  • 23. FHA PFS Basics: Repairs Some 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. FHA PFS Basics:: Title: A title search must be performed prior to issuance of the Approval to Participate (ATP). 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 (ATP) will be issued. 24
  • 25. Approval To Participate HUD Form 90045 (Handout) 25
  • 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. 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 COMPLIANCE!! Sale must occur within 4 months of approval and an extension of 2 months may be given if loan is a tier 1 http://www.hud.gov/offices/hsg/sfh/nsc/trsovrvw.cfm) or there is a signed contract that cannot perform within the 4 months 27
  • 28. Sales Contract Review HUD Form 90051 (Handout) 28
  • 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. 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. 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. 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. MORTGAGEE can Terminate the program for: Un-resolvable title problems Remind Servic er Seller is not acting in good faith to Do Inspection Significant change in the property Within Documentation shows the Seller doesn’t qualify for the PFS 45 Days 32
  • 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 be provided to the closing agent showing the above incentive and breaking down net proceeds, all allowable costs come from net proceeds, buyer costs are covered and that all the final numbers match the allowable thresholds. After the successful closing occurs the credit will be reported as a short sale and mortgagees will receive and be responsible for reporting a 1099A (Acquisition or Abandonment of a secured property). 33
  • 34. HAFA vs. FHA PFS HAFA FHA PFS Servicer determines value Value determined by FHA Appraisal Net proceeds still a mystery Net Proceeds defined each 30 days Seller incentive $3,000 Seller incentive $1,000 No Deficiency Judgment No Deficiency Judgment Servicer has 30 days to respond to Servicer has 5 days to respond to offers offers Most properties have 2 loans Most properties have one loan Voluntary on part of Seller Not voluntary, All Servicers must comply No Holdback for Repairs Holdback for Approved Repairs Allowed Buyer Closing Costs Negotiable 1% Allowed on Buyer Closing Costs 34
  • 35. FHA Partial Claim Provides a second lien for the purpose of reinstating the first lien • Servicer will advance funds in the amount necessary to reinstate the first (not to exceed 12 months PITI) • Borrower will execute a promissory note and subordinate mortgage payable to HUD • Note is interest free and not due and payable until liquidation-no payments required • Following reinstatement, Servicer files a claim with HUD for the amount of advance, plus an incentive fee ($250 for each claim) 35
  • 36. FHA Partial Claim (continued) • Partial Claims may now be used after the 4th month of delinquency, so long as the total arrearage doesn’t exceed 12 months PITI • HUD approval is not required so long as the Borrower meets qualifications: – Borrower has the long term financial stability to support the current mortgage debt – Borrower does not have the ability to repay the arrearage through a special forbearance or modification 36
  • 37. FHA Partial Claim Borrower Qualifications (must satisfy all) • Have overcome the cause of default • Have sufficient income to resume monthly payments • Do not have sufficient income to pay arrearage through a repayment plan • A mortgage modification is not appropriate • Borrower is owner occupant Borrowers in a Bankruptcy (7 or 13) may participate with court 37
  • 38. VA Compromise Sales Program 38
  • 39. VA Compromise Sales Program YTD VA Sales have been 6% $417000 Max Loan Amount VA Funding Fee of 2.15% if never used VA benefits, 3.30% if used subsequently, no Funding Fee if disabled and 2.40% if currently in reserves.* No Monthly MI 100% Financing *per Circular 26-11-19, as of November 22, 2011, with less than 5% down payment 39
  • 40. Program Run Out of Roanoke Regional Center Consumers will be advised of the following options: Refunding Deed-in-Lieu Re-Amortization Private Pay the Delinquency Sale Payment Offered a Forbearance or Assistance Repayment Schedule 40
  • 41. 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. 41
  • 42. Offered a Forbearance or Repayment Schedule Forbearance Agreements can 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 42
  • 43. Payment Assistance Many State and Local Governments have a program that can pay all or some of the mortgage for a specific period of time. VA does not have a program but does have the information that will help a Vet if needed. 43
  • 44. Re-Amortization Re-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. 44
  • 45. Private Sale If the Seller cannot reinstate the loan or work anything out it, it can then be sold and any equity kept The loan may also be assumed, however permission must be granted by VA and obtain a Release of Liability Should the home be upside down VA may pay a Compromise Claim to the Mortgagee as long as the Compromise Sales program is approved and entered into with the Mortgagee. 45
  • 46. Deed-In-Lieu If a private sale or a cure of the default cannot be achieved then a Deed-In-Lieu may be entered into. VA will have to pay the claim of the difference owed to the Servicer/Investor. The Seller will be released from future liability but will be made responsible for all or part of the loss incurred – the credit will reflect as a Voluntary Foreclosure 46
  • 47. Refunding VA has the right to buy the loan from the Lien 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. 47
  • 48. How to Qualify for a Compromise Agreement Property must be sold at fair market value Closing costs must be reasonable and customary Must be less costly to Servicer/Investor than a foreclosure Financial Hardship must be demonstrated by the Seller Loans funded prior to Dec 31st 1989, the seller must sign a promissory note No second liens! Where there are 2nd Liens, Seller must pay them or accept a promissory note Must obtain a sales contract prior to being considered for the program Realtors must protect the Seller by ensuring the contract states: “Sales contract is contingent and/or subject to the approval of a VA Compromise Sale” 48
  • 49. Ready For Some Rules? Seller should contact their Servicer or their local VA asking them to participate in the VA Compromise Sale Program (VACSP) Seller to provide a written financial statement provided by their Servicer Seller must complete a letter of request to participate in VACSP Compromise Agreement Sale Application needs be completed by the Seller, obtained from the Servicer Seller needs be prepared to sign a promissory note to the VA for the loss incurred if they had a home loan prior to 12/31/1989 49
  • 50. More Rules for the Realtor and Seller Sales contract submitted must include all signatures and state: “offer contingent upon approval of a VA compromise sale” GFE Needs be provided of all costs of the loan Letter to Servicer and VA asking to be considered for VACSP All supporting documentation of the hardship Compromise agreement sale Application submitted A current VA appraisal must be acquired by Seller’s Servicer and ordered by them – exception is if buyer is a VA applicant that appraisal may be used instead ( note VA has a 10 day turn around window) A compromise assumption agreement from the Servicer to the VA agreeing to modify their claim Review of the buyer to ensure that they do indeed qualify before finalizing the process 50
  • 51. So Now You Have an Approval, Now What? Once the approval has been signed off on by the Legal department of the VA the closing agent will verify the amounts. At the closing table, net proceeds are paid to the Servicer who then files a claim to VA for the shortfall VA will not pay more than was approved and more than the VA coverage amount. Seller also will be advised that their entitlement will not be restored until the claim has been paid in full. 51
  • 52. Are you ready for what’s Coming?? FHA Refinance of Borrowers in Negative Equity Positions 52
  • 53. Who is the target market? FHA’s new refinance opportunity is targeted to help people who owe more on their mortgage than their home is worth because their local markets have seen large declines in home values. 53
  • 54. 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; 54
  • 55. 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 55
  • 56. 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. 56
  • 57. Example Scenario 1 Original Value 350,000 UPB First Lien 280,000 UPB Second Lien 70,000 Current Value 210,000 Max CLTV (115%) 241,500 New First Lien (97.75%) 205,275 New UPB Second Lien 36,225 Reduction by First Lien 74,725 Reduction by Second Lien 33,775 Net Forgiveness 108,500 57
  • 58. Example Scenario 2 Original Value 100,000 UPB First Lien 60,000 UPB Second Lien 60,000 Current Value 60,000 Max CLTV (115%) 69,000 New First Lien (97.75%) 58,650 New UPB Second Lien 10,350 Reduction by First Lien 1,350 Reduction by Second Lien 49,650 Net Forgiveness 51,000 58
  • 59. 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. 59
  • 60. When will this start? The program has been finished and replaces the H2H (H4H) program of last year that failed. All principals and incentives and procedures have been approved in concept The mortgagee letter has to be signed and released and then implemented and promoted. Estimated launch date ... anytime soon ... Buehler? 60

Editor's Notes

  1. Test question: FHA loans have spiked
  2. Test Question: specific process for handling FHA & VA loans
  3. Test Question: Primary intent is to help people avoid foreclosure
  4. Mortgagee: Person who accepts a mortgage-Creditor
  5. ML 2008-43 is the HUD book on PFS
  6. The Link is to HUD’s website regarding the tier ranking system. HUD implemented the Tier Ranking System (TRS) in 2000 as a pilot to measure servicer's utilization of HUD's loss mitigation program.
  7. Mortgagor: Person who owes the Mortgage (Seller)
  8. UPB: Unpaid Principal Balance
  9. UPB: Unpaid Principal Balance