As the saying goes, “No good deed goes unpunished!” In my blog post, dated February 24, 2016, I discussed a rather significant change in HUD/FHA policy with respect to the financing of HUD REO properties.
Effective for transactions obtaining their FHA Case Number on and after March 14, 2016, lenders will be required to obtain a new appraisal if the borrower is seeking FHA financing.
Previously, HUD (or its Marketing & Management contractors) would obtain an as-Is appraisal of the property which could be used by the lender when underwriting the new FHA loan transaction.
These appraisals often had numerous deficiencies. After March 14, 2016, however, a new appraisal MUST be obtained and the lender will underwrite the new loan in accordance with current FHA underwriting guidelines.
Sounds good so far. However – there will undoubtedly be cases in which the appraiser will report various repair conditions that will not be anticipated by HUD or the borrower.
Since the new HUD policy states that the responsibility for determination of the property’s compliance with FHA’s Minimum Property Requirements (MPRs) will now rest solely with the lender (and not HUD’s REO Asset Manager), guidelines have yet to be established for what a lender will have to do in cases. For example, whether the borrower needs a larger repair escrow will now be deemed necessary (on the repair with escrow transactions).
Since the Sales Contract is executed before the appraisal is received and the lender is not a party to the Sales Contract, what will the lender be expected to do in such circumstances? Obviously, the borrower and HUD will need to agree to modify the existing contract and/or related file documentation (which may also involve renegotiating the Sales Price) prior to closing since the amount of the agreed upon repair escrow, if any, will be inadequate.
What if the buyer no longer wants to purchase the property due to the added repairs or wants a reduced Sales Price? Who does the lender contact to obtain assistance in addressing these concerns? The current 4000.1 Handbook and previous Mortgagee Letters fail to address these situations. I hope HUD’s response is not for lenders to contact HUD’s Resource Center on such matters – for obvious reasons.
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Looking on the bright side – there is still time for Senior HUD staff to develop guidelines that will help provide underwriters with some specific protocols in how to properly handle problems that arise upon receipt of the appraisal performed on the REO property.
In lieu of initiating Handbook modifications or drafting new Mortgagee Letters, I would recommend that a listing of Frequently Asked Questions (FAQs) be developed that underwriters could refer to when confronted with value and/or repair issues on such appraisals.
FAQs have proven to be an effective means of providing lenders with much-needed guidance on topics not specifically addressed in the Handbooks. It would also help to provide consistency in the industry with respect to how various situations are handled by the originating lenders.
So, if you work for an FHA-approved lender that has been originating FHA loans involving REO sales, now is the time to start reading the “HUD Real Estate Owned Purchasing” section of the 4000.1 Handbook (starting on page #446) as well as Mortgagee Letter 2015-17 and develop your own related questions on the new procedures. It will be essential for HUD to provide answers to these concerns whether it is via Handbook modifications, Mortgagee Letters, FAQs or expanding its knowledge base in the coming weeks.
As I said in my previous Blog Post – Beware the Ides of March!