How To Interpret Guideline Differences Based On Where You Work

Written By: Jane Harford, FHA DE Underwriter

Recently, in our office there has been an ongoing difference of interpretations based on “guidelines” and how to implement them. It is a strong lesson in how each of us when underwriting must be able to use our own vast book of experiences, dig into our bag of tricks and come out with the answers that will be able to justify an answer on each loan that has been submitted to us as FHA DE Underwriters……some FHA loans are very easy to approve and the justifications are the same practical reasons that we use on most of our HUD LT’s. You know-good stable employment, reserves and the money is coming from their own savings or excellent credit/no lates and high regard for credit (high credit scores)….those are normal, clear and satisfactory listed compensating factors.

What is much more difficult thing, when you are handed an FHA loan that is a manual review or needs to be downgraded to a manual review. Here is where the experience, ability to pick apart and put a file back together again to make a “marginal” loan approvable and saleable separates the true underwriters from the auditors…….this is where the true and best FHA DE underwriters work their hardest to ensure that what they are approving (if they do approve the loan) will be insured, sold and will not return as an early payment default, a foreclosure or a HUD PD that you will do the loan on again within 12-24 months.

I will just give you a brief background on a few of the more difficult HUD loans that I did go ahead and approve….these were done a few years back when the credit guidelines were easier and the investor overlays were not as tough. The first loan that I did approve was while working for a smaller regional lender. The borrower had 1-2 accounts that appeared on his credit report were only recently obtained….under 6 months of history that appeared on the credit report. The borrower also did not have an established housing history.

The borrower also had worked in the mechanical trades and had large dollar amounts of deductible work expenses for tools and other materials. When deducting these figures, the borrower’s qualifying income was reduced a great deal. When the file first came to me, I used the “normal” reasons to decline the loan based on my understanding of the guidelines. The Borrower’s non traditional credit history was stellar, but not 24 months old. It was a cell phone, auto insurance, tool payments and one other thing.

Also, the funds for closing were coming from his tax refund for that year-no established savings pattern…..when ticking off all of the facts, there was no reason to approve this file. In sitting down with my supervisors, we sat down and went through the reasons that we could/should make the loan. The loan officer was willing to work closely with the borrower to ensure that the mortgage payments were going to be made on a timely basis. As far as I know, the loan never went into any kind of default and the borrower became a successful home owner that was happy to be paying a mortgage versus rent.

That was then-obviously many things have changed drastically in our lending world since then…..that kind of loan would not be made now. The pendulum has swung back to the ultra conservative side and won’t move from there for quite a while. However, I do feel that those cases that do merit a second or closer review still do deserve our efforts to be reviewed closely and carefully to see if there is any way to be able to take the raw facts and work with them to turn the file into an approvable loan that is insurable, saleable and will not become an EPD or loss to HUD and the lenders.

Part of the back and forth in the office these past few weeks has to do with when and how to downgrade AUS approvals to manual review based on various items that appear on the credit report. It really boils down to how the file was initially taken, the level of detail shown by the loan officer and processor in working with the borrower to get all things documented, updated and packaged into a sensible box that would merit a loan approval without question. I think it can be best understood in this manner-if there is an item that is disputed on a credit report, is it best to leave it alone or is it best to deal with the borrower to document that it is paid/dealt with and provide the updated facts/information and corrected credit supplement to show that the issue is really no longer an issue? In doing research to try and better understand this set of circumstances, it was discovered that each HUD HOC often has its own interpretation of how the grey areas are to be handled.

So, what is important in the Atlanta HOC may not be looked at in the same way as in the Santa Ana HOC…which makes the ability to get clear answers on a national basis impossible. What it boils down to is getting the best answers on a regional basis for each HUD HOC in which the company does business. It does become more difficult if the company operates on a national basis.

Bottom line-each file still needs to be reviewed on its own merits, looking at the good, bad and ugly of the actual borrowers, their past and what their future may look like. One thing I have always loved about this business is that each file you work on is the story of someone new-even though the methods for each loan are the same, each borrower or family is new and different. That is the one bottom line reason that underwriting properly still takes time and each loan has to be reviewed on its own merits….Thus, automated underwriting helps to make a decision, but it does not make the actual decision-that is still left to a human being. I hope that this stays on as a human based decision for a long time to come.

As always, happy fraud free underwriting to you all!


About the Writer. As one of NAMP's volunteer writers, Jane brings 30 years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

FHA Well and Septic Guidelines Including Variances

Written By: Jane Harford, FHA DE Underwriter

Now, the days are longer, spring is in the air and home sales are increasing due to lower interest rates, better housing prices and the fact that the homebuyer credit is going away at the end of this month, it is time to take a quick review at FHA’s well and septic guidelines, including Waivers on properties that do not meet the regulations.

HUD does require that all properties are connected to public water and sewer whenever possible. The full regulations are published in Mortgagee Letter 2005-48. But it is always good to remember that individual water supply systems (wells) and septic systems are acceptable under HUD regulations if the cost of connecting to public or community water and sewer systems is excessive. (Generally over 3% of the cost of a home purchase is the bench Mark used by lenders).

If the costs exceed that benchmark, the DE underwriter has the option to not enforce the condition to hook up to public water/sewer systems. FHA will accept the state/local distance requirements for well/septic systems as long as they are not less than 75 feet between the well and septic tank drain field. The minimum from the well to a roadway or property line of anything other than a single family home can’t be less than 10 feet. These distances are regardless of the state and local requirements.

Please remember that the HUD standard requirement is 50 feet between well and septic, 100 feet from the drain field and 10 feet from the property line. Appraisers are no longer “required” to fully document the locations of well/septic systems. Each appraisal must be reviewed on it’s own merits, locations of the well/septic systems and ability to meet the local, state and health authority guidelines. If in doubt, the waiver from HUD is the safest way to ensure that the property will be insured after closing and not kicked back due to well/septic not meeting HUD’s guidelines.

CHECKLIST FOR WELL/SEPTIC WAIVERS
FHA CASE NUMBER: __________________

___1. Documentation from the local authority that the subject property is unable to connect to a public or community water/sewer system. If connection is available and the costs to the public or community systems are reasonable (3% or less of the property value), connection must be made.

___2. Professional sketch (Surveyor) showing the location of the well, septic tank, and drainfield with relation to the subject property and property line. The sketch must specify the actual distances separating the well and septic system components: well to property line, well to septic, and well to drainfield. HUD distance requirements: Well to Property Line 10 Ft, Well to Septic Tank ? 50 Ft, and Well to drainfield 100 Ft.

___3. Well test in accordance with Mortgagee Letter 95-34. This includes testing for Led, Nitrate (as Nitrogen), Nitrite (as Nitrogen), Total Nitrate/Nitrite, Total Coli forms, and Fecal Coli forms or E. coli. When coli form is present, how was the Coli form corrected?

___4. Evidence of the Local Authority’s approval that the well and separation distances between the well, property line, septic tank, and drainfield are in compliance with the local codes for the subject property. If the subject property does not meet the Local Authority’s requirements, a waiver granted by the Local Authority must also be submitted. When applicable, evidence that a well in the foundation, is acceptable and common to the area.

___5. Evidence that the system is working properly. And there is sufficient space for repair/maintenance.

___6. Holds Harmless agreement, a signed letter from the borrower acknowledging that the property does not meet current FHA/HUD regulations, and a waiver must be granted to obtain FHA insurance.

___7. Cover letter requesting waiver, FHA Case number, borrower's name, property address, reason for request; underwriter’s name, address, phone number, fax number, and email address.

Please be aware, the reviewer of your file may require additional documents to make a final determination.

**IF THE PROPERTY IS LOCATED IN THE STATE OF MICHIGAN, CIRCULAR LETTER PH-00-02 PERMITS A REDUCTION IN THE DISTANCE BETWEEN THE WELL AND DRAINFIELD FROM 100 FEET TO 50 FEET. (EXISTING CONSTRUCTION ONLY)

***ALSO, PLEASE REFER TO MORTGAGEE LETTER 2002-25 FOR FURTHER GUIDELINES FOR DISTANCES BETWEEN WELL FROM SEPTIC TANK DRAINFIELD AND WELL FROM PROPERTY LINE REDUCTIONS.

Please tab the documents in the above order, to assist with the processing. The mailing address is:

U.S. Dept of HUD
P&U Div - Technical Br
The Wanamaker Building
100 Penn Square East
Philadelphia, PA 19107-3389

You may contact Suzanne the same day your package is to arrive on 215-861-7511, to be assured it arrived to the office. It generally takes 1-2 days to be assigned to an underwriter. Once assigned, the underwriter has 2 weeks to process your request.

If you have additional questions you can submit them via email to info@fhaoutreach.com or contact us at 1-800-225-5342. Please do not respond to this email unless you need further clarification or wish to initiate a new service request.

FAQ : Are properties having a well acceptable for FHA financing?

Solution Details: Individual water supply systems (wells) may be acceptable when connection to a public or community water system is not available and there is assurance of a continuing adequate supply of safe potable water for domestic needs. A water test or inspection is required if it is mandated by the State or local jurisdiction;

As always-happy fraud free underwriting!

About the Writer. As one of NAMP's volunteer writers, Jane brings 30 years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Closing and Contract Fraud Schemes

Written By: Jane Harford, FHA DE Underwriter

In our fifth and final chapter of how to wage and win a war on mortgage fraud, we will cover the review of a sales contract, what to look for and how to recognize any issues that may take place on the HUD1, closing papers and other documents. Reviewing these forms prior to closing and funding a loan will ensure a smooth and legally conducted closing transaction.

The sales contract and its details are often a huge key to whether or not the entire transaction will be a fully legal transaction. If there are red flags not identified here, the likelihood of this situation being fraudulent in some capacity greatly increases. From the beginning, these items should be carefully reviewed to determine if there are any questions that require further research or investigation.

-Is the contract legible? Can all pages and addendums be read easily? Are all pages of the contract provided? Are all signatures on the pages easily readable and consistent? Do all parties to transaction make sense? The full contract of sale, with all addendums signed & dated by all parties should be legible, readable and signed/dated consistently.

-Are all purchasers listed on the contract involved in the loan? Are all names from the contract on the 1003 as a loan applicant? Are the names listed correctly on both documents consistently? Are there any parties on the contract that don’t appear on the loan-if so, why?

-Does the property address shown on the contract remain consistent on the appraisal request, appraisal report, title work and HUD 1? If they are different - why?

-Do the names of seller remain consistent from the contract to the appraisal report to the title commitment to the HUD 1? If not-what are differences?
-Does the current seller occupy the property or is the property vacant or occupied by a tenant? Does the contract confirm this? Does the appraisal state the same thing? Is that consistent with the information for the loan application?

-Does the contract provide for any giveaways by the seller? Do these include such items as-vacations, plasma TV’s or mortgage payments paid by seller? Does this include large allowances for landscaping, decorating or renovation?

-Check the details of what seller is paying for real estate commission? Does the amount for commission, finder fees and any realtor bonus exceed the norm for this area? (8% would be considered to be excessive).

-Does the sales contract include any reference for bonuses paid to realtor or purchaser? Also, are there contracts missing that may include this information? There are times when addendums regarding this type of “bonus” paid may be on an addendum that is missing from contract provided to the lender/title company? Does the list of addendums on the contract show an addendum that is missing from the contract provided for review?

-Do the parties to deal seem to have any type of non arms length relationship? This might indicate a straw buyer, someone buying a relative’s property to bail out on a short sale or foreclosure? If this seems suspicious, it probably is.

Be cautious regarding this contract of sale. All parties that assist in the processing of the mortgage loan must review the contract for any potential issues that could indicate fraud, potential excessive fees or allowances paid or illegal transfer of the property or a property flip/flop.
If the transaction/loan application indicates no issues that require further research, the next step should be to prepare and conduct the closing. The lender’s closing department and the title company work hand in hand to complete a smooth closing, funding and recording of a mortgage loan.

Here are some issues/potential red flags that could be found in the review of details of closing papers, including the title commitment, HUD 1 and other documents. The following items should be carefully reviewed while completing the documents for closing of a loan.

-Do the names of all parties to the transaction match what was on the contract of sale, appraisal? Is the property address and legal description correct?

-Is there a reference to sellers not documented or mentioned on the contract?

-Is the lender name, loan #, address and all other information consistent?

-Do all parties appear to be acting in a manner that would not indicate any non arms length transaction? (No similar names, no red flag to indicate that this is a foreclosure or short sale bailout).

-Does the sales price remain consistent throughout all documents reviewed?

-Does any EMD paid, cleared and documented by lender remain constant and appear on page #1 of the HUD1?

-Are there any references for undisclosed second liens, additional escrows or large credits from seller to unknown third parties (seller’s side of HUD1).

-Does the buyer’s bottom line indicate that he does not need to pay any money at closing or that he is due to get cash back on a purchase?

-Does the HUD1 show any debts, liens, judgments, delinquent loans not previously disclosed by title commitment/policy? Are there any other red flags that would indicate that the title commitment/policy would not insure property, transaction for lender, and owner?

-Review of the title commitment/policy-does this provides commitment #, issued by an approved title insurance company? Is the commitment signed/dated by an authorized agent for the title underwriter? Does the title commitment provide for all schedules as required by sales type, loan type and property type? If not, has this been corrected or updated from the title insurer?

-Do the liens that appear on the title commitment appear in the land record that have been researched and provided to title company? Are any liens recently added, not recorded or delinquent-but no legal action taken?

-Is the title company one that is on an approved list for the lender? Is this branch of company part of a larger company or a local firm? Is there an established relationship between closing department and title agenct, settlement officer and back office staff for each company? Have any problems arisen in the past that might have the lender believe that anything on this transaction would be different than previous transactions?

-What is the title company’s track record with the lender? Have they been willing? to correct issues in the past? Does the title company conduct it’s own QC checks on title insurance companies, county recording offices for recordation of the proper loan documents/mortgages and obtaining correct property tax bill information?

These are just some of the many questions that we as the lender’s eyes and ears should be reviewing on each transaction prepared and closed. If ANY RED FLAGS occur, the preparation of the final documents should be halted until then answers are completed in a satisfactory manner or until the investigation is completed and it is determined that no illegal activity, fraudulent intent or straw buyer/bailout scheme are taking place. This will take the research staff of the lender, title of the company, title insurer and outside parties to ensure that all information is consistent, accurate and legal.

As you can see, it takes a village to close a mortgage loan. When done correctly, lots of hands do get into the pie. Thus, the greater emphasis on conducting good research on any thing that appears unusual or “funky”. It is a vigilant effort of on the part of the lenders, title companies, and title insurance companies to ensure that we only close legal and accurate loans.

In the meantime, underwrite and close fraud free loans!

About the Writer. As one of NAMP's volunteer writers, Jane brings 30 years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)