Analyzing Risk when a “Loophole” is Present

Written By: Stacey Sprain,
Certified Ambassador Loan Processor (CALP)

This past week I jumped in to assist our underwriting department with FHA scenario reviews and to monitor incoming questions. I’ve always respected underwriters for the tremendous amount of pressures they have to deal with but I realized flat-out without question why I never took that path on a permanent basis. It always seemed to be the natural career path up the ladder for me with my many years of processing and compliance experience but after manning that desk for an entire week I concluded once again that I just don’t have that kind of patience! God bless them all for what they do every day and especially right now with this DPA crunch going on!

I noticed something last week that brought forth some real concerns. I felt strongly enough about the issue to mention it with our national underwriting manager and our Chief Operating Officer. What I noticed was an unprecedented number of situations with borrowers wanting to purchase FHA-secured homes without selling their existing homes. In some cases the existing homes were secured with FHA financing and in others FHA wasn’t involved with the existing homes. In 16 years I’ve never seen so many of these cases.

Unfortunately HUD has a pretty major “loophole” sitting there with a bulls eye on it for these situations. Take a look at HUD Handbook 4155.1 chapter one, paragraph 1-2A which stands out to me like a bloody thumb screaming “take advantage of me, take advantage of me! “

A. Relocations. If the borrower is relocating and re-establishing residency in another area not within reasonable commuting distance from the current principal residence, the borrower may obtain another mortgage using FHA insured financing and is not required to sell the existing property covered by a FHA-insured mortgage. The relocation need not be employer mandated to qualify for this exception. Further, if the borrower returns to an area where he or she owns a property with an FHA-insured mortgage, it is not required that the borrower re-establish primary residency in that property in order to be eligible for another FHA insured mortgage.

Now in today’s market, it shouldn’t take a rocket scientist to figure out how open and inviting that door can be to millions of
homeowners and how much fraudulent activity it can lead to. I mean seriously, what’s to stop someone from using this
loophole to purchase an FHA-secured residence with the full-intention of dumping their existing residence because it
lies in a declining market area and no money is to be made on selling it? What’s to stop a person from using FHA to seek
out a second home or investment property using this loophole?

These are situations that you as an originator or processor need to be thorough with. Not only do you need to provide a
valid explanation for the borrower wanting to purchase a home without selling a current home but you need to evaluate
and analyze the risk associated with allowing the borrower to maintain and be responsible for two mortgage payments on
two properties located some distance away from each other.

These are the things I took a close look at when reviewing these situations:

• Is there indeed a distance between the two properties?
• How long has the borrower owned the existing residence?
• Is the existing residence in a declining market area?
• Has the existing residence been listed recently but not sold? How long on the market?
• Does the borrower’s explanation for relocating make sense and can it be supported in any way with backup documentation?
• Does the borrower qualify easily with both PITI payments on both properties or are they presenting a new lease for tenants and rental income to offset the PITI on the existing home?
• Is it reasonable to expect the borrower will be able to manage and keep up with a rental property? Does the borrower have prior experience with maintaining an investment property?
• Does the borrower’s credit history provide credibility to the proposal?
• Is the new home bigger or smaller than the existing home?
• How far is the new property from the place of employment versus the commuting distance from the existing home?
• Are the reserves in place to protect the borrower if tenants should vacate or stop making rental payments?

A lot of risk evaluation SHOULD go into these situations where borrowers won’t sell their existing home prior to closing on their new home. As an originator or processor, these are all questions you will want to consider when putting the file together and presenting to underwriting for a decision. Be sure to clearly address the compensating factors that offset risk concerns in these situations.

Do yourself and the borrower a favor- make sure there is certainty that the borrower’s intention is true and do NOT stick a borrower in a risky situation that their overall history shows they aren’t likely to succeed with. And lastly, if you suspect that the borrower is attempting to take advantage of the loophole and has no real intention of occupying the property they wish to purchase with FHA financing, find a reason to turn them away. If you look hard enough, you’ll find one.

About the Writer. As one of NAMP's volunteer writers, Stacey Sprain is currently a NAMP member in good standing and is a NAMP Certified Ambassador Loan Processor (CALP). If you would like to become a volunteer writer for NAMP, please email us at: blog@mortgageprocessor.org.