understanding fha and va distressed property options

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Understanding FHA & VA Understanding FHA & VA Distressed Property OptionsDistressed Property Options

Arizona Academy of Real Estate #S05-0009Arizona Academy of Real Estate #S05-000910207 N. Scottsdale Road10207 N. Scottsdale RoadScottsdale, Arizona 85253Scottsdale, Arizona 85253

(623) 505-5380(623) 505-5380

the Next Wave of the Next Wave of Distressed Properties….Distressed Properties….

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The Plan of Attack for TodayWhat our market is made up of loan wiseWhy this is necessary for you to learn these processesHow the FHA PFS Program worksBenefits of the FHA PFS ProgramWhat documents you need to use you’ve never used beforeHow to price the home - yes that means no making up values What to do if you meet a seller with a VA loanWhat VA paperwork you need and issues to be aware ofAnd how FHA wants to help fix our upside

down market

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So How Are We Doing So Far?

All Mortgages: 4.63% in Foreclosure 9.38% in Default (30+ days late) 14.01% Total +1%

Prime Mortgages: 3.41% in Foreclosure 6.89% in Default (30+ days late) 10.3% Total +3%

Subprime Mortgages: 15.39% in Foreclosure 25.76% in Default (30+ days late) 41.15% Total -2%

FHA Mortgages: 3.93% in Foreclosure 12.09% in Default (30+ days late) 16.02% Total

+10%VA Mortgages: 2.63% in Foreclosure 7.06% in Default (30+ days late) 9.69% Total 0%

Mortgage Bankers AssociationNational Delinquency SurveyBased on 44,600,000 mortgages - Non Seasonally Adjusted

*Distressed Property Institute estimate**NAR, Walt Molonyhttp://www.realtor.org/press_room/news_releases/2010/02/metro_state

Unemployment RateU.S. Bureau of Labor Statistics, the adjusted unemployment rate for April 2010 was 9.9%. The highest rate ever recorded by the Bureau was 10.8% in Nov/Dec 1982.

Underemployment RateAccording to the U.S. Bureau of Labor Statistics, the seasonally adjusted underemployment rate for April2010 was 16.7%.

QUARTER 2 – 2011 vs. 2010 ALL MORTGAGES – 2011Total Distressed Properties: 6,700,000*Total Predicted Sales: 6,030,000**

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The Next Wave of Mortgages

FHAFHA VAVAFHA Loans that foreclose become....

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

HUD Homes, HUD Homes, but before that, but before that, In a short sale situation…In a short sale situation…

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FHA

43% DTI exceptions to 50 available case by case

FHA has been 91% of ALL SALES

in the $358,000 or Under Price Point

It allows for 3.5% down

1% UFMIP now it was 2.25%1.15% MMI just went from .90%0 months of reserves

91%91%

9%9%

YTD

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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 2008-43The intent of this program is to help homeowners avoid foreclosure

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So How Does FHA PFS Work?

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.

KEY FEATURES OF THE PFS PROGRAMKEY FEATURES OF THE PFS PROGRAM

Establishing Market Value

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.

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Minimum ListPrice Requirements

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

KEY FEATURES OF THE PFS PROGRAMKEY FEATURES OF THE PFS PROGRAM

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

Tiered Net ProceedsRequirement 1212

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KEY FEATURES OF THE PFS PROGRAMKEY FEATURES OF THE PFS PROGRAM

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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.

Non-OwnerOccupant Exception

KEY FEATURES OF THE PFS PROGRAMKEY FEATURES OF THE PFS PROGRAM

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MarketingDocumentation

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

KEY FEATURES OF THE PFS PROGRAMKEY FEATURES OF THE PFS PROGRAM

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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

Removal of Repair Limitations

KEY FEATURES OF THE PFS PROGRAMKEY FEATURES OF THE PFS PROGRAM

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

Subordinate Liens

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

KEY FEATURES OF THE PFS PROGRAMKEY FEATURES OF THE PFS PROGRAM

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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.

Seller PaidClosing Costs

KEY FEATURES OF THE PFS PROGRAMKEY FEATURES OF THE PFS PROGRAM

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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 valueTo participate the seller must be willing to market the home with a Realtor for 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 $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 faithHECM mortgages “reverse mortgages” are not eligible for the PFS programIn 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))

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FHA PFS Basics:

Are in default due to adverse and unforeseeable circumstancesHave negative equityAre owner occupants ( non-owner exceptions are granted)

Have only one FHA loan*Are not a corporation or partnershipBetween the 32nd and 60th day of default consumers will be sent HUD PA-426 “How to avoid foreclosure” to encourage initiation into the PFS programHUD-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 haveacquired an FHA insured property through inheritance or co-signed to enhancethe credit of another mortgagor.

Qualifying:

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FHA PFS Basics:

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 possibleCalculations 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 incomeCalculating the surplus income from net that remains to offset the mortgageDuring 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

Financial Analysis:

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Information/Disclosure

(Handout)

HUDForm 90035

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FHA PFS Basics:

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 monthsDistressed sales cannot be used unless that is all the comps available

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

Property Value:

Property Condition:

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Request For Variance

HUDForm 90041(Handout)

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FHA PFS Basics:

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

RepairsSome Tricks to Know About Repairs

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FHA PFS Basics::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.

Title:

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Approval To Participate

HUDForm 90045

(Handout)

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FHA PFS Basics:

Must be engaged with Broker within 7 days of the approval to participate HUD-90045No conflict of interest allowed for Listing Agent: No commission to be paid to Agent on their own property if doing a PFSIf FSBO Seller had already entered into a contract there is no need for a RealtorListing 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.”

Use of a Real Estate Broker (page 11 of 18 of ML 2008-43)

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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 intoCOMPLIANCE!!

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

Use of a Real Estate Broker, cont. (page 11 of 18 of ML 2008-43)

FHA PFS Basics :

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Sales Contract Review

HUDForm 90051

(Handout)

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Net Sale Proceeds and Marketing :

First 30 days offers will be approved at Minimum Net Proceeds of 88% of FMV30-60 days offers will be approved at MNP of 86% of FMV61 days offers will be approved at MNP of 84% of FMVMax period is 6 months for marketing . The Goal is to sell homes in the first 90days ~ after that DIL is offered to seller.

NET SALE PROCEEDS is defined as:

Net Sale Proceeds

The Sales Price

– The Closing/Settlement Costs

(FMV minus marketing time)

Net Sale Proceeds

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More on Net Sale Proceeds:

Commissions not to exceed 6%Taxes are prorated to date of closingSellers costs for title transfer taxes$1000 incentive for selling home within 90 daysUp to $2500 for releasing a junior lien after 90 days max is $2250Up to 1% of buyers closing cost contributions

Costs Affecting NSP

$ $$

$ $

$$$

$

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Lenders Title Costs

Net Sale Proceeds (Exclusions) :

Items NOT Allowed*:

* But the Seller may use his $1000 to offset these items.

Repair Reimbursements

Home Warranty

Discount Points/Loan Fees

_____________________________

____________________

__________________________________

__________________________

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Even More Basics:

Documentation shows the Seller doesn’t qualify for the PFS

Property InspectionsEarly TerminationEarly Termination

MORTGAGORmay Terminate the

PFSAT ANY TIME MORTGAGEE

can Terminate the program for:

Un-resolvable title problemsSeller is not acting in good faithSignificant change in the property

To prevent waste Mortgagee will conduct an inspection on the 45th day after default if there has been no contact with the Seller.

Remind Servicer to Do

InspectionWithin

45 Days

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Re-emphasizing Some Good News!

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).

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.

HAFA vs. FHA PFSHAFA 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 offers Servicer has 5 days to respond to 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

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• 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)

FHA Partial ClaimFHA Partial Claim

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

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• 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

FHA Partial Claim (continued)FHA Partial Claim (continued)

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• 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

FHA Partial ClaimFHA Partial Claim

Borrower Qualifications (must satisfy all)

Borrowers in a Bankruptcy (7 or 13) may participate with court

approval. Mortgagor must reaffirm the debt on a Chapter 7

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VA Compromise Sales Program

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VA Compromise Sales Program

100% Financing

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

*per Circular 26-11-19, as of November 22, 2011, with less than 5% down payment

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Program Run Out of Roanoke Regional Center

Consumers will be advised of the following options:

Offered a Forbearance or

Repayment Schedule

PaymentAssistance

Pay the DelinquencyPrivate

Sale

Refunding Re-AmortizationDeed-in-Lieu

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Pay the Delinquency

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.

Unlike MOST other Mortgage Holders....

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Offered a Forbearance or Repayment Schedule

A Workout Plan will be offered where

each month the amount of arrears is added to the current payment until Paid

In Full.

Forbearance Agreementscan be issued using a VA-5655

Form

Suspension of payments may be given under rare

situations.

VA Form 5655Page 1

VA Form 5655Page 2

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Payment Assistance

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

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

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Re-Amortization

Adding additional time to the loan and the delinquency is added to the balanceThis could increase the loan and the monthly payment.

Re-Amortize your Loan either by: Restarting the loan back to a 30 year

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Private Sale

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.

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

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Deed-In-Lieu

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

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.

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Refunding

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.

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.

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How to Qualify for a Compromise Agreement

Property 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 a promissory noteNo second liens! Where there are 2nd Liens, Seller must pay them or accept a promissory noteMust obtain a sales contract prior to being considered for the programRealtors must protect the Seller by ensuring the contract states: “Sales contract is contingent and/or subject to the approval of a VA Compromise Sale”

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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 ServicerSeller must complete a letter of request to participate in VACSPCompromise Agreement Sale Application needs be completed by the Seller, obtained from the ServicerSeller 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

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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 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 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 claimReview of the buyer to ensure that they do indeed qualify before finalizing the process

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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 shortfallVA 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.

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Are you ready for what’s Coming??

FHA Refinance of Borrowers in Negative Equity Positions

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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.

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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;

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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

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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.

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Original 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

ExampleScenario 1

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Original 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

ExampleScenario 2

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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.

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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?