Understanding FHA and VA Distressed Property Options

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

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


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


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


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


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


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


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


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
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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

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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.

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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)

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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.

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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

Understanding FHA and VA Distressed Property Options

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