Covering Fannie, Freddie, FHA, and VA Ann. SEL-2010-05: Underwriting Borrowers with a Prior Pre-foreclosure Sale or Deed-in-Lieu of Foreclosure (04/14/10) To support overall market stability and reinforce the importance of borrowers working with their servicers when they have difficulty repaying their debt, Fannie Mae is updating several policies regarding the future eligibility of borrowers to obtain a new mortgage loan after experiencing a pre-foreclosure event (pre-foreclosure sale, short sale, or deed-in-lieu of foreclosure). The “waiting period” – the amount of time that must elapse after the pre-foreclosure event – is changing and may be dependent on the LTV ratio for the transaction and whether extenuating circumstances contributed to the borrower’s financial hardship (for example, loss of employment). In addition, Fannie Mae is updating the requirements for determining that borrowers have re-established their credit after a significant derogatory credit event. Note: The terms “short sale” and “pre-foreclosure sale” are both referenced in this Announcement and have the same meaning – the sale of a property in lieu of a foreclosure, resulting in a payoff of less than the total amount owed, which was pre-approved by the servicer. This Announcement describes the policy changes in detail and identifies the specific Selling Guide topics that will be updated on April 30, 2010, when a new version of the Selling Guide will be released. Waiting Period After a Pre-foreclosure Sale, Short Sale, or Deed-in-Lieu of Foreclosure Fannie Mae is changing the required waiting period for a borrower to be eligible for a mortgage loan after a pre-foreclosure event. The waiting period commences on the completion date of the pre-foreclosure event, and may vary based on the maximum allowable LTV, CLTV, and HCLTV ratios (referred to herein as LTV ratios) and occupancy of the property. These new policies will be updated in the Selling Guide, B3-5.3-07, Derogatory Credit Information, and in B3-5.3-10, DU Credit Report Analysis. The following table describes the waiting period policy changes: Pre-foreclosure Event Current Waiting Period Requirements New Waiting Period Requirements (1) Deed-in-Lieu of Foreclosure 4 years Additional requirements apply after 4 years up to 7 years • 2 years – 80% maximum LTV ratios • 4 years – 90% maximum LTV ratios • 7 years – LTV ratios per the Eligibility Matrix Pre-foreclosure Sale 2 years Short Sale No policy currently exists specific to short sales Exceptions to Waiting Period for Extenuating Circumstances Pre-foreclosure Event Current Waiting Period Requirements New Waiting Period Requirements (1) Deed-in-Lieu of Foreclosure 2 years Additional requirements apply after 2 years up to 7 years 2 years – 90% maximum LTV ratios Pre-foreclosure Sale No exceptions are permitted to the 2-year waiting period Short Sale No policy currently exists specific to short sales (1) The maximum LTV ratios permitted are the lesser of the LTV ratios in this table or the maximum LTV ratios for the transaction per the Eligibility Matrix. Fannie Mae’s policies for extenuating circumstances remain unchanged and are fully described in the Selling Guide, B3-5.3-08, Extenuating Circumstances for Derogatory Credit. VII, 504: Pre-foreclosure Sales (01/31/03) Occasionally, none of the servicer's efforts to prevent or cure the delinquency will be successful and the use of relief provisions may not have been feasible or productive. When all measures short of foreclosure have been exhausted for a conventional mortgage, the servicer should consider the use of a pre-foreclosure sale procedure. Under this procedure, when the borrower cannot sell his or her property for the full amount of our indebtedness, we will consider accepting a payoff of less than the total amount owed on the mortgage if that will enable us to reduce the loss we would incur if we foreclosed and acquired the property. (We also will agree to pre-foreclosure sales for FHA, VA, or RHS mortgages if they comply with all of the insurer's or guarantor's guidelines and do not result in a loss to us.) A servicer may pursue a pre-foreclosure sale at any time prior to the actual foreclosure sale if acquisition of the property is the only alternative to the pre-foreclosure sale and the proceeds from the sale, along with any MI settlement, would make us whole—or, at least, would result in a loss that would be less than any loss we would incur if we had to acquire and dispose of the property. As long as the proceeds from the transaction make us whole, a servicer may negotiate and complete the pre-foreclosure sale without our involvement. However, a servicer must obtain our prior approval of any pre-foreclosure sale that will result in a loss to Fannie Mae. FHA SHORT SALE GUIDES FOR BUYERS AND BORROWERS WHO HAVE EXPERIENCED A SHORT SALE MORTGAGEE LETTER REFERENCES INCLUDED Mortgagee Letter 2008-43 contains the new FHA short sale [a/k/a FHA Pre-Foreclosure Sale (PFS)] program guidelines. It’s definitely an improvement for anyone involved in shorting an FHA loan. Here’s some of what you need to know about the FHA PFS: • They removed the calculation that required the property to appraise for at least 63% of the indebtedness (this is helpful because many properties have dropped below 37% of the mortgage balance). • HUD used to accept 82% of the appraised value as their net – now it is 88% if it sells within 30-days marketing time, 86% if it sells in 60-days, and 84% after 60 days. • Prior to ML 2008-43, HUD would pay zero buyer closing costs on an FHA short sale, now they will pay 1% of buyer’s closing costs if the new buyer is obtaining FHA financing. • They’ve increased the amount allowable to discharge junior liens up to $2,500. • FHA allows the seller to walk away with up to a $1,000 check at closing FHA SHORT SALES – MORTGAGEE LETTER 2009-52 It depends on whether you are or aren’t current at the time your short sale occurs. 4155.1 4.C.2.l Short Sales A borrower is not eligible for a new FHA-insured mortgage if he/she pursued a short sale agreement on his/her principal residence simply to • take advantage of declining market conditions, and • purchase at a reduced price a similar or superior property within a reasonable commuting distance. Borrowers Current at the time of Short Sale A borrower is considered eligible for a new FHA-insured mortgage if, from the date of loan application for the new mortgage, all Although it is not clear in the letter, it is common that lenders will not allow you to get an FHA loan for 2 years from the time of short sale of your home. But : According to the Mortgagee Letter, it unclearly states that you are eligible for another FHA loan if you were current on your payments at the time of sale and “you didn’t short sale your house to take advantage of market conditions and purchase at a reduced price a similar or superior property within a reasonable commuting distance…” • mortgage payments due on the prior mortgage were made within the month due for the 12 month period preceding the short sale, and • installment debt payments for the same time period were also made within the month due. Borrowers in Default at the time of Short Sale A borrower in default on his/her mortgage at the time of the short sale (or pre-foreclosure sale) is not eligible for a new FHA-insured mortgage for three years from the date of the pre-foreclosure sale. Note: A borrower who sold his/her property under FHA's pre-foreclosure sale program is not eligible for a new FHA-insured mortgage from the date that FHA paid the claim associated with the pre-foreclosure sale. Exception: Lenders may make exceptions to this rule for borrowers in default on their mortgage at the time of the short sale if the: • Default was due to circumstances beyond the borrower’s control, such as death of primary wage earner or long term uninsured illness, and • Review of the credit report indicates satisfactory credit prior to the circumstances beyond the borrower’s control that caused the default. As always, if you have additional questions you can always call 1-800-CALL-FHA to speak with a representative at FHA directly. VA:- BANKRUPTCY AND FORECLOSURE INFORMATION Ch. 4, 7-f: Foreclosures (04/10/09) The fact that a home loan foreclosure (or deed-in-lieu of foreclosure) exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan. • Develop complete information on the facts and circumstances of the foreclosure. • Apply the guidelines provided for bankruptcies filed under the straight liquidation and discharge provisions of the bankruptcy law. See the preceding heading entitled “ Bankruptcy.” If the foreclosure was on a VA loan, the applicant may not have full entitlement available for the new loan. Ensure that the applicant’s Certificate of Eligibility reflects sufficient entitlement to meet any secondary marketing requirements of the lender. Ch. 4, 7-e: Bankruptcy (04/10/09) The fact that a bankruptcy exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan. Develop complete information on the facts and circumstances of the bankruptcy. Consider the reasons for the bankruptcy and the type of bankruptcy filing. Bankruptcy Filed Under the Straight Liquidation and Discharge Provisions of the Bankruptcy Law: You may disregard a bankruptcy discharged more than 2 years ago. If the bankruptcy was discharged within the last 1 to 2 years, it is probably not possible to determine that the applicant or spouse is a satisfactory credit risk unless both of the following requirements are met: • The applicant or spouse has obtained consumer items on credit subsequent to the bankruptcy and has satisfactorily made the payments over a continued period, and • The bankruptcy was caused by circumstances beyond the control of the applicant or spouse such as unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the circumstances are verified. Divorce is not generally viewed as beyond the control of the borrower and/or spouse. If the bankruptcy was caused by failure of the business of a self-employed applicant, it may be possible to determine that the applicant is a satisfactory credit risk if: • The applicant obtained a permanent position after the business failed, • There is no derogatory credit information prior to self-employment, • There is no derogatory credit information subsequent to the bankruptcy, and • Failure of the business was not due to the applicant’s misconduct. If a borrower or spouse has been discharged in bankruptcy within the past 12 months, it will not generally be possible to determine that the borrower or spouse is a satisfactory credit risk.
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