September 28, 1992
U. S. Department of Housing and Urban Development
Washington, D.C. 20410-8000
MORTGAGEE LETTER 92-33
OFFICE OF THE ASSISTANT SECRETARY
FOR HOUSING-FEDERAL HOUSING COMMISSIONER
TO: ALL APPROVED MORTGAGEES
SUBJECT: Single Family Loan Production - Clarifications and
Modifications to the 203(k) Rehabilitation Program
Procedures
The purpose of this Mortgagee Letter is to make clarifications and
modifications to the Department's policies described in HUD Handbook 4240.4
REV-2, dated December 6, 1991.
1. ACCOUNTING OF 203(k) REHABILITATION FUNDS. In Handbook 4240.4 (para.
1-20), the lender is required to provide to the local HUD Field Office
the method(s) they will use to account for the release of
Rehabilitation Escrow Funds. The accounting system acceptable to HUD
must properly record all transactions from the escrow account. An
accounting of the escrowed funds must be made on each Draw Request and
copies of the record of transactions must be distributed to the
originating lender, the borrower and to HUD.
The accounting system must show the amount escrowed for each category
listed below. The total amount of all categories should agree with
line B-14 of Form HUD 92700. The accounting system must provide: (1)
Borrowers name and property address; (2) FHA case number; (3) Closing
date; (4) Scheduled completion date (no more than 6 months from the
closing date); and (5) Amount of funds in the rehabilitation escrow
account (line B-14 of Form HUD 92700).
A. Repairs. Show the total amount in the Repair escrow. Provide a
description and date of each draw request and include the total
amount released at each Draw. Show the amount of Holdback on
each Draw and the amount of funds disbursed (the difference
between the total amount released and the 10 percent holdback
amount). The balance remaining in the repair amount must be
properly shown.
B. Contingency Reserve. Indicate the percent of repair funds
allocated for contingency reserve. Also indicate the total
amount of funds in the Contingency Reserve Account and if they
were paid by the borrower or out of mortgage proceeds. Provide a
description and date of each Change Order (Form HUD 92577)
approved for contingency reserve. Show the amount of funds
disbursed and the balance remaining in the Contingency Reserve
Account.
C. Inspection Fees. Show the total amount of inspection fees. Also
show the number of inspections scheduled and the cost of each
inspection. Provide a description and date of each inspection.
Show the amount of funds disbursed and the balance remaining in
the Inspection Account.
D. Title Update Fees. Show the total amount of Title Update fees.
Also show the number of updates scheduled and the cost of each
update. Provide a description and date of each update. Show the
amount of funds disbursed and the balance remaining in the Title
Update Account.
E. Mortgage Payments. Show the total amount of Mortgage Payment
funds (PITI) that are escrowed. Indicate the number of months
scheduled for mortgage payments as long as the property is not
occupied. Provide a description and date of each payment. Show
amount of funds disbursed and the balance remaining in the
Mortgage Payment Account.
F. Other Fees. The amount of allowable fees (i.e., Architectural
and Engineering fees, Independent Consultant fees, Permits, Plan
Review fees, Supplemental Origination fee and Discount Points on
repair costs) necessary for the rehabilitation work, broken down
by category. These fees may be released at closing with
sufficient documentation (i.e., paid receipt for permits, bills
from an Architect or consultant, etc.), but cannot exceed the
accepted costs on the 203(k) Maximum Mortgage Worksheet, Form HUD
92700. Show the cost allowed for each item, the amount of funds
disbursed and the balance remaining for each item in the account.
G. Final Accounting of the rehabilitation escrow account must be
made after the final inspection and final draw. Any amount
remaining in the categories listed above must be properly
disbursed to paydown the outstanding principal balance of the
mortgage where applicable. The final accounting should show the
payout of any holdback according to handbook procedures.
H. Interest on Escrow. Since the escrow funds must be placed in an
interest bearing account, the interest earned must be accounted
for and distributed to the borrower. Show the interest rate
provided on the escrow account. For each draw on the escrow
account, show the number of days in escrow and the amount of
money in the account. Also show the interest earned for the
applicable time period. List disbursements accordingly and the
balance of interest remaining in the account.
2. REVISION TO FORM HUD 92700, 203(k) MAXIMUM MORTGAGE WORKSHEET.
Form HUD 92700, Section 203(k) Maximum Mortgage Worksheet (Attachment
1) has been revised. In particular, the Discount Points on Refinance
in line D-3 was removed. This was placed on the form in error. The
only time discount points can be included in the mortgage is in line
B-12 (discount points on repair costs and fees) and D-1 (discount
points on refinance when existing debt is the controlling factor).
Additional changes to the Form HUD 92700 have also been made to make
it easier to use with the sale of a HUD-owned home. The new form
should be used immediately to ensure compliance with program
procedures.
The value placed on Form HUD 92800.5B should be (1) for a purchase
transaction, line C-3 or (2) for a refinance transaction, the lesser
of line D-1 minus the closing costs and discount points or line D-2.
The lender should provide the Maximum Mortgage Worksheet to the Field
Office with information such as the contract sales price, amount of
discount points on the loan, estimated closing costs, how many
inspections are requested, title updates, and how many mortgage
payments will be escrowed. The Maximum Mortgage Worksheet must be
completed and signed by a HUD representative or the DE Underwriter and
attached to the Conditional Commitment/ DE Statement of Appraised
Value (Form HUD 92800.5B). Also, for the firm commitment (Form HUD
92900), the Maximum Mortgage Worksheet should be revised and attached
to the Firm Commitment. These forms must be carefully prepared to
ensure the rehabilitation escrow account is properly established and
the loan is properly closed by the lender. On the Mortgage Credit
Analysis Worksheet, Form HUD 92900-WS, lines 14a through 14d and
14f(1) and (2) will be left blank. For a purchase transaction, the
total acquisition costs (sum of C3 + C4 on Form HUD 92700) is placed
in line 14e; the maximum mortgage amount (line C5 on Form HUD 92700)
is put in line 14g.
3. ALLOWABLE DISCOUNT POINTS. It has come to our attention that some
lenders processing Section 203(k) rehabilitation loans are
manipulating their discount fee structure to take advantage of the
program's feature permitting discount points on the rehabilitation
portion of the loan to be financed into the mortgage. Although
Handbook 4240.4 (para. 1-10.B) permits borrowers to include "discounts
... on that portion of the mortgage proceeds allocated to the
rehabilitation," it does not permit lenders to charge a higher
discount percentage on the rehabilitation portion (which may be
financed) as opposed to a lower discount on that portion of the
mortgage not attributable to rehabilitation (which may not be
financed).
HUD will not permit, for example, a lender to obtain a yield of two
(2) discount points on a $100,000 loan by charging five (5) points on
the $40,000 rehabilitation cost rather than applying discounts to the
entire mortgage amount. While the Department recognizes that the
seller of the property may be paying discount points (and only on that
portion attributable to the borrower's acquisition of the property),
the loan transaction may not allocate discount points to the
rehabilitation costs to simply reduce the borrower's cash
requirements.
Consequently, the number of discount points charged to repair costs
and fees (line B-12 of the Section 203(k) Maximum Mortgage Worksheet,
Form HUD 92700) may not exceed the number of discount points charged
to the non-rehabilitation portion of the mortgage. The borrower is
not obligated to include discount points on rehabilitation costs in
the loan, and can decide to pay all or part of the discount points.
The HUD-1 must show the amount of discount points to be paid
out-of-pocket by the borrower or seller, because the discounts on
rehabilitation are already included in the loan proceeds. The Firm
Commitment (Form HUD 92900) or the Addendum (For HUD 92900-A) must
show the total of all discount points allowed on the loan.
Sales and financing concessions must be properly applied to reduce the
sales price or discount points prior to placing the allowable amounts
on the 203(k) Maximum Mortgage Worksheet, Form HUD 92700. See
Handbook 4155.1 REV-4 (para. 1-7B) for additional information.
4. MAXIMUM MORTGAGE AMOUNTS ON SALES OF HUD-OWNED PROPERTIES.
When HUD's Property Disposition (PD) Branch decides to allow sales
incentives (e.g., prepaids for excessive property taxes) as part of
the mortgage, then Form HUD 92700 can be modified to reflect this
policy.
The award letter must clearly state which incentives are allowed. The
maximum mortgage is calculated based upon the sum of the sales price,
the cost of repairs, and any incentives the borrower is allowed to
include into the loan amount as stated in the award letter. If the
seller (HUD) pays part of the closing costs, the estimated closing
costs in C-4 should be reduced to reflect only those costs paid by the
borrower at closing. The downpayment requirements, as shown in the
HUD accepted sales contract, are then applied. The total mortgage
amount cannot exceed the local maximum loan limits.
The following hypothetical mortgage calculation (for a HUD-owned
properly only) for Form HUD 92700 is provided for your information:
C.1. Lesser of Sales Price (A1) or
As-is Value (A2)........................................$63,000
(Use the sales price agreed to between the HUD PD Branch and
the purchaser of a HUD-owned property (shown in item 3, Sales
Contract, Form HUD 9548). No "As-is" appraisal is required on
a HUD-owned property sale)
C.2. Total Rehabilitation Cost (B14)............................14,000
C.3. Lesser of Sum of C1 + C2 ($77,000) or
110% of After-Improved Value (A4)........................77,000
C.4. Estimated Closing Costs ($3,845 (A5) - 1,250 paid by HUD
(item 5, sales contract)) + Prepaids for Excessive
Property Taxes Required Upfront Prior
to Closing ($1,075).......................................3,670
C.5. Maximum Mortgage Amount:
Sum of C3 + C4 ($80,670) less $500 (downpayment
shown on sales contract).................................80,170
Maximum Mortgage Amount cannot exceed $80,150, rounded down
to the nearest $50. This amount cannot exceed the local
maximum loan limits.
5. PLAN REVIEWER CERTIFICATION. The following certification must be
completed prior to returning the exhibits to the lender or forwarding
them to the appraiser. The plan reviewer can certify on their own
letterhead or on the Draw Request, Form HUD 9746-A. The appraisal
cannot be made without this certification.
"I certify that I have carefully inspected the property located at
____________________________________ on ________________(date). I
have reviewed the attached architectural exhibits and the
estimated rehabilitation costs listed in column two below; they
are acceptable for the rehabilitation of this property. I have no
personal interest, present or prospective, in the property,
applicant, or proceeds of the mortgage. To the best of my
knowledge, I have reported all items requiring correction and that
the rehabilitation proposal now meets all HUD requirements for
203(k) Rehabilitation Mortgage Insurance."
6. "CASH BACK" FROM REHABILITATION FUNDS. HUD Field Offices have noticed
several cases where investors have received excessive "cash back" as a
result of over-estimating the rehabilitation costs.
Handbook 4240.4 REV-2 (para. 3-2.F.) discusses the use of cost data
publications from R.S. Means "Repair and Remodeling Cost Data" book
and the "Home-Tech Remodeling and Renovation Cost Estimator." The
cost estimates include overhead and profit for a contractor or a
mortgagor doing their own work. Where the HUD Field Office has
determined that these cost estimating books are excessive for certain
localities in their jurisdiction, they now have the authority to
require further justification from borrowers to ensure the cost
estimates are reasonable. The Field Office will notify the 203(k)
lender and plan reviewer if additional information is required for a
particular case.
To guard against over-estimates of rehabilitation costs, the amount of
funds requested for a draw inspection cannot exceed the actual cost of
rehabilitation and/or the actual percent of completion of the
rehabilitation. On each draw, the mortgagor must certify the actual
costs and completion percentage for each line item used on the revised
Draw Request, Form HUD 9746-A (Attachment 2).
Where costs savings occur, the savings can be allocated to items that
have experienced cost overruns or to pay for additional improvements
to the property that are approved by a Change Order on Form HUD 92577.
The 10 percent holdback is still applicable on all draws. The
mortgagor can be paid for their own labor, where it was approved by
the lender prior to closing the loan. On the final draw:
A mortgagor acting as the general contractor can receive the
holdback and request an additional 10 percent for the cost of
administering the rehabilitation of the property, not to exceed
the estimated cost of rehabilitation. On any line item where the
borrower is doing their own work or has an "identity of interest"
with the contractor (or subcontractor), the additional cost of
administering the loan is not allowed, because the profit and
overhead is already their estimated cost of rehabilitation for
that line item. Any remaining cost savings must be applied to the
mortgage principal. For an investor/builder who is using the
Escrow Commitment Procedure, the cost savings will
be added to the escrow amount that is held by the lender for
release when an acceptable owner-occupant assumes the loan.
Cost savings that are not used must be applied to prepay the mortgage
principal to create greater equity in the property for the investor.
For the investor/builder using the Escrow Commitment Procedure, the
cost savings will be added to the escrow amount that is held by the
lender for release when an acceptable owner-occupant assumes the loan.
The Draw Request, Form HUD 9476-A (Attachment 2), is being revised to
include a certification of actual costs. Columns 4 and 5 cannot
exceed the actual cost of rehabilitation. The columns should show
the percentage for the completion of construction. In column 6, the
inspector will verify the percentage of completion and approve an
amount no greater than that percentage, and no greater than what is
requested. The following certification must be provided prior to the
release of any inspection draws:
"I hereby certify that the actual costs of rehabilitation are as
shown on the Draw Request, Form HUD 9746-A. I
understand I cannot obtain additional monies from the
rehabilitation account without the approval of the
lender. After the final inspection, the monies in the
escrow account will be distributed as required by the
203(k) program procedures."
_________________________________________________________________
Mortgagor's signature Date
Lenders are responsible to assure the mortgagor certifies to the
actual cost of rehabilitation on each draw request. Although the
mortgagor is not required to submit documentation to substantiate the
actual cost, the lender may request such documentation where there is
a question as to the validity of the amounts.
7. SECONDARY LENDERS. The volume of 203(k) activity continues to
increase. In fiscal year 1988, the Department issued Mortgage
Insurance Certificates (MIC) on 432 loans. In fiscal year 1992, which
ends September 30th, the activity has increased to about 3000
mortgages. The reason for the increase is attributed to more lenders
processing 203(k) insured loans.
The Department continues to get calls from originating lenders
requesting information about which secondary lenders buy 203(k)
insured loans. A list of secondary lenders that have indicated an
interest in purchasing Section 203(k) insured mortgages is attached as
Exhibit 4 to this letter. If other lenders would like to be added to
the list, please contact Kenneth Crandall of my staff at the telephone
number listed below.
If you have any questions concerning this letter, please call your
local HUD Office or the Valuation and Technical Support Branch in
Headquarters at (202) 708-2720.
Very sincerely yours,
Arthur J. Hill
Assistant Secretary of Housing
- Federal Housing Commissioner
Attachments
_____________________________________________________________________
203(k) SECONDARY LENDERS
(September 1, 1992)
1. Broadview Mortgage (Ohio Lenders Only)
965 High Street
Columbus, OH 43215
Contact: Lenny Zangardi (614) 436-2008
2. Federal Savings Bank and Mortgage
2800 Cantrell Road, Suite 500
Little Rock, AR 72202
Contact: Dennis Mills (501) 280-3500
(800) 395-6001
3. Liberty Mortgage Company
473 E. Rich Street
Columbus, OH 43215
Contact: Vickie Harmon (614) 224-4000
4. MLA, Incorporated
24315 Northwestern Highway
Southfield, MI 48075
Contact: Jack Goodman (800) 877-2130
Jim Milliken (800) 366-6522
5. Simmons First Mortgage Company
11101 Anderson Drive
Little Rock, AR 72212
Contact: Renee White (501) 223-4200
(800) 847-0058
6. Miami Valley Bank
P.O. Box 5000
Lakeview, OH 43331-5000
Contact: Bill Gibson (513) 843-4000
7. Malone Mortgage Corporation
8214 Westchester, Suite 606
Dallas, 75225
Contact: Ron Evans (214) 696-0386
8. Statewide Funding Corporation
P.O. Box 390
Clifton Park, NY 12065
Contact: Jane King (518) 877-3500
(800) 755-5851
(800) 726-5626
_____________________________________________________________________
Attachment 1
__________________________________________________________________________
203(K) Maximum Mortgage
Worksheet
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__________________________________________________________________________
ref: Handbook 4240.4 form HUD-927000 (09/09/92)
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_____________________________________________________________________
__________________________________________________________________________
Draw Request
Section 203(K)
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