FHA Takes A Closer Look At Home Values On Refinances

HUD announced in Mortgagee Letter 2008-40 that effective January 1, 2009 that FHA will require a second appraisal for all cash-out refinances where the loan to value, exclusive of UFMIP,  exceeds 85% of the appraised value.  The new rule applies regardless of the loan amount or the location of the property.

The actual letter ruling reads as follows:

· Second Appraisal Requirements/Loan-to-Value Limits for Cash-Out Refinances: The instructions in ML 2008-09 regarding when a second appraisal is needed, and the requirements for that second appraisal, as well as the 85 percent limitation on cash-out refinances when the loan balance will exceed $417,000, remain in effect.

In addition, FHA will now require a second appraisal for all cash-out refinances where the LTV, exclusive of the UFMIP, will exceed 85 percent of the appraiser’s estimate of value. This second appraisal requirement applies regardless of the loan amount or the location of the property, i.e., whether the property is in a “declining area” or is not. This second appraisal requirement for cash-out refinances is effective for all case number assignments on or after January 1, 2009 and is to adhere to the instructions set forth in ML 2008-09. Please also note that cash-out refinances with LTVs exceeding 85 percent will be over-selected for post-endorsement technical reviews (PETR) to assure the quality of the underwriting.

Additional underwriting and eligibility criteria

· The subject property must have been owned by the borrower as his or her principal residence for at least 12 months preceding the date of the loan application.

· If said property is encumbered by a mortgage, the borrower must have made all of his/her mortgage payments within the month due for the previous 12 months, i.e., no payment may have been more than 30 days late and is current for the month due.

· The property that is security for the refinanced mortgage must be a 1- or 2-unit dwelling.

· Subordinate financing may remain in place, but subordinate to the FHA insured first mortgage, regardless of the total indebtedness or combined loan-to-value ratio, provided the homeowner qualifies for making scheduled payments on all liens.

· Any co-borrower or co-signer being added to the note must be an occupant of the property. Non-occupant owners may not be added in order to meet FHA’s credit underwriting guidelines for the mortgage.

The FHA has been gradually tightening various underwriting guidelines for some time now, probably due to a default rate of over 12%.

The  new regulation requiring 2 appraisals on cash out refinances will probably reduce the number of refinances done on higher LTV properties.  The customer typically pays for the appraisal when doing a refinance and the FHA appraisal usually costs $350.  A potential borrower will now have to come up with $700 just to find out if they have enough equity in the property.

Actually the rules could have been constructed to further restrict cash out lending.  Many lenders who have doubts about the value of an appraised property routinely require a second appraisal to be conducted by an appraiser of their choice.  Often times, the second appraisal will come in lower under this method.

The FHA has seen a large increase in loan applications in 2008 due to underwriting restrictions imposed by other lenders.  It will be interesting to see if these new guidelines reduce the number of FHA refinances in 2009.