FHA PFS Program Changes
Recently we wrote about FHA's 'Post Housing Crisis' program. FHA recognized the hardships homeowners faced during the downturn of the economy and implemented a new program for borrowers who could show their hardship was caused by either a job loss or income loss; the impact to their credit was a direct result of their financial hardship, and they have re-established their credit since the hardship occurred. This program was implemented to get previous homeowners back into a home before the standard waiting period of three to seven years after selling their home as a short sale, suffering foreclosure, or offering a Deed in Lieu (DIL) of foreclosure.
In addition to this program announcement, FHA also issued new requirements for their pre-foreclosure sale program (PFS). These new changes take effect on October 1, 2013 and affect FHA's Standard and Streamlined PFS programs, Appraisal Validation requirements, Seller Incentives, postponement and cancellation of a scheduled Foreclosure Sale date and Arm's Length requirements*. The new guidelines and requirements are outlined in Mortgagee Letter, ML 2013-23[i]. We encourage you to read this Mortgagee Letter in its entirety.
*The new Arm's Length requirements came under quick scrutiny when contradictory views and opinions from the National Association of Realtors (NAR) and Consumer Advocates in American Real Estate (CAARE) were submitted to HUD. Information regarding the reactions and consequences of this debate are discussed further in our article titled, 'FHA's Arm's Length Controversy.'
FHA requires mortgagees (lenders and servicers) to complete a Home Retention process with each borrower who requests eligibility into the PFS program. New guidelines were implemented to help standardize the process. The Home Retention process allows lenders to determine and verify whether a borrower is in a position to sustain their mortgage payment and stay in the home. If the borrower's circumstances and financial hardships are such that home retention is not possible, the lender must then evaluate the borrower first for a PFS transaction before they can evaluate the borrower for a Deed in Lieu (DIL) of foreclosure transaction.
Standard PFS Guidelines:
Borrowers can be considered for a Standard PFS if they are current on their mortgage or less than 30 days past due and they can clearly demonstrate they are at risk of default due to one or more of the following hardships:
1. Loss or reduction of income that supports the mortgage loan or a change in the financial circumstances of the household
2. Death of a co-borrower
3. Long-term or permanent illness or disability of a borrower or dependent family member
4. Divorce or separation of a borrower
5. A job transfer that is more than 50 miles way (one-way) from the borrower's current primary residence and causes relocation so the borrower can be closer to the new employer
For a Standard pre-foreclosure sale alternative, a Deficit Income Test (DIT) is completed to determine the borrower's financial hardship. The DIT is calculated by subtracting the borrower's total monthly expenses from their total monthly net income. If the DIT shows expenses exceed income, home-retention is not viable and a pre-foreclosure sale option can be recommended as the more appropriate loss mitigation option.
The documentation required for verifying income and expenses for the DIT include:
1. Two of the borrower's most recent pay stubs. If the borrower is self-employed, the most recent quarterly profit and loss statement compiled by a CPA is required.
2. If the borrower receives retirement pay, Social Security income or disability benefits, a copy of the most current statements are required.
3. Income can also be verified using the borrower's most current Form W2, Form 1099 or Federal Tax Returns.
Monthly expenses must also be verified. To do this, the lender includes all expense verified by a current credit report as well as standard living expenses such as food, utilities, insurance and transportation expenses. All expenses must be factored into the DIT.
Lastly, the lender must calculate and disclose the amount of the mortgagor's cash reserves to determine if the borrower is able to contribute or apply any monies toward their loan.
Per FHA guidelines, cash reserves include all non-retirement liquid assets available for withdrawal or liquidation from the borrower's depository accounts. Such accounts include, but are not limited to, brokerage, stocks, mutual funds, checking, savings, money market and certificate of deposits. The assets must be verifiable using Schedules B (Interest & Dividends), D (Capital Gains & Losses) and E (Supplemental Income & Loss) from the mortgagor’s most recent Federal Tax Return.
If additional cash assets are available, the following documentation must be obtained and reviewed:
1. Three most current monthly bank statements for all accounts
2. Three most current brokerage statements for all accounts
3. The borrowers most recent Federal Tax Return
Cash reserves are calculated by using the highest ending balance of each cash reserve asset. If a borrower has cash reserves greater than $5K, the borrower will be required to contribute 20% of the total amount that exceeds $5K toward the unpaid principal balance (UPB) of their mortgage. The amount of the contribution is not to exceed the difference between the UPB and the appraised value of the property.
Streamlined PFS Guidelines:
The Streamlined PFS program allows borrowers who qualify to be approved into the program without having to verify their hardship if each of the following conditions exists:
For Non-Owner Occupants:
1. Borrower(s) is 90 days or more delinquent on their FHA-insured loan and
2. Borrower(s) has a credit score of 620 or below
1. Borrower(s) is 90 days or more delinquent on their FHA-insured loan and
2. Borrower(s) has a credit score of 620 below and
3. Borrower(s) have been reviewed for other home retention options (Servicemembers with PCS orders are excluded)
Lenders can only offer a Streamline PFS or DIL option to owner-occupant borrowers when one or more of the following conditions have been met:
1. The borrower(s) defaulted on a trial payment plan within the last 6 months.
2. The borrower(s) defaulted on an FHA-HAMP or other loan modification within the last two years
3. The borrower(s) was deemed ineligible for other home retention options.
4. The borrower(s) received a special forbearance, but did not qualify for a permanent home-retention option at the end of the forbearance period.
5. The borrower(s) is eligible for a home-retention option but has a credit score below 580 and submits written documentation stating they do not accept the home retention offer.
As long as all the requirements are met, primary residences, second homes, and investment properties are eligible for the Streamlined PFS and DIL process. Properties are no longer required to be occupied. They can be vacant, but they cannot be condemned.
Special consideration is given to service members. Lenders can approve military personnel for a Streamlined PFS or DIL without verifying the borrower's hardship and requiring a full workout packet if the following applies:
1. The service member has current PCS Orders to relocate to a duty station at least 50 miles away from the secured property and a copy of the order is provided to the lender and
2. The service member submits an affidavit certifying the property that secures the FHA-insured mortgage was their principal residence at the time the orders were issued and
3. New permanent housing has been, or will be, obtained because of the orders
Appraisal Validation Requirements:
The lender must review the FHA appraisal and submit a variance request if the appraised value of the property is $75,000 or more, less than the UPB or the appraised value is less than 50 percent of the UPB.
If neither of these conditions exist, a PFS appraisal prepared by an FHA approved appraiser will be considered acceptable if either a Broker Price Opinion (BPO) or Automated Valuation Model4 (AVM) can affirm the 'as is' value of the property is within 10 percent of the value assessed by the appraiser. If the appraised value is within the guidelines, the lender can authorize the marketing of the property. If the value does not fall within the guidelines, the lender must request a variance to obtain approval to authorize the marketing of the property.
Seller Incentives for Owner Occupants:
Borrowers who occupy their home and successfully sell their property under the FHA pre-foreclosure sale program are waived from any deficiency balance and will be considered for an incentive up to $3,000. The borrower can use any incentive money awarded to resolve junior liens, offset any closing costs that are not approved by HUD or pay expenses such as home warranties or optional repair costs. Any additional incentive money left over must be used for relocation assistance and only those borrowers who are not required to make a cash contribution at closing can receive any remaining funds.
The lender must instruct the closing agent to pay the relocation assistance from sales proceeds and if applicable, itemize it and any other assistance received, separately on the HUD-1 Settlement Statement.
Previously Initiated Foreclosures:
If a foreclosure sale date has already been scheduled on a property owned by a borrower who wants to participate in the PFS program and who meets the Streamlined PFS eligibility requirements, the scheduled sale date should only be postponed or cancelled if the lender has received an acceptable purchase contract. An acceptable purchase contract is one that meets the PFS requirements and meets the PFS minimum net proceeds requirement as outlined in Section J of Mortgagee Letter 2008-43[ii].
Arm's Length Requirements:
HUD defines an Arm's Length transaction as a 'PFS between two unrelated parties that is characterized by a selling price and other conditions that would prevail in an open market environment. Also, no hidden terms or special understandings can exist between any of the parties (e.g., buyer, seller, appraiser, sales agent, closing agent, and mortgagee) involved in the transaction.'
The new HUD guidelines surrounding Arm's Length requirements caused controversial reactions from NAR and CAARE. While the issues surrounding their reactions are further discussed in our article, 'FHA's Arm's Length Controversy.' outlined below are the Arm's Length requirements as they apply to PFS transactions:
1. Any PFS transaction must be an Arm's Length transaction between the buyer and seller
2. No party that is a signatory on the sales contract and any addenda, can serve in more than one capacity. This means that brokers and their agents can represent either the buyer or the seller, but not both parties
4. The broker hired to sell the property may not share a business interest with the lender and if there is a shared interest between the appraiser and the sales agent that is known to the lender, it must be noted
5. Real estate agents are not permitted to receive any sales commissions on the sale or purchase of their own property or that of an immediate family member
6. A PFS Arm's Length Affidavit is issued in conjunction with the PFS approval letter and must be signed by all parties.
7. If the lender knows or has reason to believe fraud or misrepresentation is involved, the lender cannot approve the borrower for a PFS transaction.
8. With the exception of real estate commissions, third party fees cannot be included on the HUD-1 Settlement Statement unless it is permitted by state law. Additionally, the mortgagee, its agents, or any outsourcing firm it employs must not charge any fee for participation in the PFS transaction.
After many years, we continue to see changes in the variety of programs that were developed to help homeowner's avoid foreclosure. While one would think the processes should become easier and more streamlined, they seem to become inundated with stricter guidelines that make the process more difficult and cumbersome. If you are a listing agent helping homeowners sell their home as a short sale to avoid foreclosure or a buyer's agent helping buyers purchase short sale properties, it is important to familiarize yourself with FHA's new guidelines and guidelines required by other investors. If you are aware of the requirements and stay abreast of the every-changing rules, you can be prepared for what is to come and you can outline appropriate expectations to the buyer's agent so the transaction can be completed in the most efficient way possible.