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FHA 203(k) Rehabilitation Loan Program Underwriting Seminar

FHA 203(k) Rehabilitation Loan Program Underwriting Seminar. October 4, 2011. FHA 203(k) Underwriting Seminar. Topics for Discussion:. Program Overview/Re-engineering FHA 203(k) Specific Disclosures Streamline FHA 203(k) vs. Full FHA 203(k) Permits Contractor Acceptance Procedures

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FHA 203(k) Rehabilitation Loan Program Underwriting Seminar

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  1. FHA 203(k) Rehabilitation Loan Program Underwriting Seminar October 4, 2011

  2. FHA 203(k) Underwriting Seminar Topics for Discussion: • Program Overview/Re-engineering • FHA 203(k) Specific Disclosures • Streamline FHA 203(k) vs. Full FHA 203(k) • Permits • Contractor Acceptance Procedures • Plan Review, Specifications of Repairs, Estimates • Contingency Reserves • Appraisal Requirements

  3. FHA 203(k) Underwriting Seminar Topics for Discussion: • Maximum Loan-to-Value • Maximum Mortgage Calculation • Underwriting Considerations • Funding Issues • M&T Draw Process • M&T Resources

  4. Industry Statistics and M&T Experience • Americans have spent on avg. approx $125 billion annually in home renovation since 2008 • Overall new construction lending down 72% since 2005 • 2.1 Million starts in 2005 compared to 585,000 in 2010 • 2011 down 2.3% - some estimates as low as 570,000 starts this year • National Association of Home Builders: • Remodeling Market Index – Combines ratings of current remodeling activity with indicators of future activity. • Up 10% in Q1 2011 • Softened somewhat in Q2 2011 but it is still the second highest RMI since Q3 2007

  5. Industry Statistics and Commentary • According to the Harvard University’s Joint Center for Housing Study, 2010 results indicate greater spending on larger remodeling projects, as well as core home improvement projects such as window and roof replacement. • Kitchen remodels were up nationwide by 191% year-over-year. Average major kitchen remodel is $57,000 (minor is $21,000); • Bathroom remodels increased 30 percent. Average bathroom remodeling project is $16,000 • According to this same study, they are forecasting a 13 percent increase from April through June; and spending on renovations may increase 3.5% annually through 2015.

  6. Industry Statistics and Commentary • U.S. Unemployment Rate as of last month is 9.1%. • Big Box Stores • Earlier this year, Home Depot announced they must hire 60,000 seasonal associates • Lowes just introduced the Home Improvement App for iPhone and iPod • National Retail Federation • U.S. Consumer confidence at a 3 year high earlier this year; Retail spending increased 0.4% in the second quarter • Driving force of this surge in home rehabilitation will be the baby boomers • The first of whom are reaching 65 and are preparing their homes for retirement. They need better lighting, less barriers, more things in convenient locations. • In 2011, 13% of the US population is age 65 or older • It’s estimated that there are 75 million people in the “baby boomer” generation (those born from 1946 to 1964)

  7. Why FHA 203(k)? • Traditional Loan Options Less Prevalent in the Current Market • Disappearance of second mortgage loans. Second lien production down 80% since 2008 • Home Equity Line of Credit – Borrowers have less equity to tap into • Home values down 31% since July 2006 • 100% LTV’s no longer available. Typical LTV is now 90% • Limited Competition. Fragmented Market. Few Lenders play in the 203K Arena. • 80% of US homes are 20+ yrs old. • Home improvement activity appears to be migrating from simple replacement projects and energy retrofits to broader remodels / upgrades.

  8. Why FHA 203(k)? • Negative Equity: 22.3% of all mortgage holders are upside down. This represents 14 million homes • FHA 203(k) permits after-improved value • Foreclosures – 2.2 million as of 2010. • One of the primary tenets of the program is to assist potential homeowners with acquiring and rehabilitating single family properties. • Short Sales; REO’s; distressed sales • Another principle of the program is to restore the existing housing stock

  9. Industry FHA 203(k) Rehab Volume Trend

  10. FHA 203(k) at M&T • M&T has experienced rapid growth since late 2008 and has become the third largest 203(k) lender in the country only behind Wells Fargo and Bank of America • This significant growth in volume has warranted closer management. The Six Sigma 203(k) Rapid Improvement Process initiative, effort commenced in the fall of 2010 and continues today. • Core 203(k) RIP Committee is comprised of approximately 40 individuals and includes Sales, Product Development, Ops, Accounting, Risk, Technology, Asset Management, LSS

  11. FHA 203(k) at M&T • M&T EasyBuild Construction & FHA 203(k) Rehabilitation Dichotomy: • Originated 1400+ units in 2010 • Issued 11,285 draw checks in 2010

  12. M&T Rehabilitation Program Product Mix Channel Mix

  13. 2011 Opportunities • Increase Correspondent business • Improve product knowledge • Improve file quality & U/W productivity • Better tracking & communication to customers throughout the draw process • Better technology

  14. Pre-Settlement: • Corresp Announcement (PB2010-20) • Contractor Acceptance Checklist (Exhibit 03-099) - MEME • Contractor’s Resume (Exhibit 02-410) • FHA 203(k) Borrower’s Acknowledgement (VMP457). • Homeowner/Contractor Agreement (VMP744) • Borrower’s Identity of Interest Certification (VMP601) • Consultant’s Identity of Interest Certification (VMP602) • 203(k) Permit Certification (Form 8000) • Plan Review / Specification of Repairs signed by Consultant (not required for 203(k) Streamlines) (VMP600) - Consultant • Draw Request Form (HUD Form 2452) (not required for 203(k) Streamlines) • 203(k) Maximum Mortgage Worksheet (VMP435)

  15. Revised during re-engineering efforts. • No longer require SS# - easier for the Contractor • More space to fill in data Contractor must sign and date

  16. It is very important that this disclosure is read and understood by the applicant(s). It is extremely informative. All mortgage staff members involved with 203(k)s should read it in its entirety. The applicant(s) must check one of these boxes to instruct M&T how to apply the net interest income on the rehabilitation repair escrow account. SAMPLE COPY ONLY All applicant(s) must sign and date here. The loan officer must sign and date here.

  17. This dollar amount must match the amount of the individual contractor’s estimate. On a standard 203(k), if there is more than one contractor, the sum of the totals of all the Homeowner/Contractor Agreements must equal the Total of Repairs on the Specification of Repairs and entered on line B1 of the203(k) maximum mortgage worksheet. On a streamline 203(k) the sum of the total of all the Homeowner/Contractor Agreements must be entered on line B1 of the 203(k) maximum mortgage worksheet. This is the date that the work will be completed. It must be no later than 6 months from the closing date. Each non-signature page must be initialed by the applicant(s) and the contractor. For a streamline 203(k) the contractor must also provide a detailed estimate, signed and dated by all the applicant(s) and the contractor for the work being completed.

  18. SAMPLE COPY ONLY Page 2 must also be initialed by the applicant(s) and the contractor.

  19. This page must be signed and dated by the applicant(s) and the contractor. By signing this agreement, the contractor is agreeing to do the project for the dollar amount on page 1of this agreement. It is important that the dollar amount equals the contractor’s estimate. SAMPLE COPY ONLY

  20. The 203(k) loan requires a specific Identity-of-Interest Certification form. Make sure the one you use includes the required language and has all the parties listed as in this form. There can be no Identity-of-Interest on a 203k with any other parties involved in the transaction, including the contractor and borrower(s). This blank must be checked indicating that the Borrower’s will occupy the residence. The borrower(s) sign and date here. SAMPLE COPY ONLY

  21. This form is completed by the HUD approved FHA Consultant for a standard 203(k). Consultant’s software packages may differ so the format may not be exactly the same from each one. The 203(k) loan requires a specific Identity-of-Interest Certification form. Make sure the one you use includes the required language and has all the parties listed as in this form. There can be no Identity-of-Interest on a 203k with any other parties involved in the transaction, including the contractor and borrower(s). On a standard 203(k) the consultant must sign and date here or he/she may provide a separate signed and dated certification. SAMPLE COPY ONLY

  22. Revised during re-engineering efforts • Must be completed by the Consultant or local municipality • Borrower must sign

  23. This form is completed by the HUD approved FHA Consultant for a standard 203(k). Consultant’s software packages may differ so the format may not be exactly the same from each one. However it must document the detail of repairs for all applicable construction line items. These line items must correlate to the line items on the Draw Request. Line item #1 is always for Masonry; line item #2 is always for Siding, etc. Each line item will have a subtotal. These subtotals are brought over to the last page for a “Recap of Subtotals”. SAMPLE COPY ONLY For purposes of this training, line items 4 through 35 are NOT included.

  24. This is the final page of the Specification of Repairs. It lists each line item description and the sub-total for all of the 35 construction line items and totals them in line 36, TOTAL COST OF REPAIRS. This should mirror the Draw Request. Line item 35 is for miscellaneous repairs that do not “fit” in the other 35 line items. For example, if the property is a HUD REO and HUD is paying for Lead Based Paint repair, the amount would be listed separately on line 35. NOTE: Permit fees, consultant fee, architectural fees and engineering fees are NOT to be listed in any of the line items in the Specification of Repairs nor in line #35, miscellaneous. These items must be listed separately on the 203k MMWS. If they were put in the Spec of Repairs in error, they would be included in the max mortgage calculation twice. This bottom section is preferred but not always in all consultants’ software. At a minimum the borrower(s) and the contractor must sign this Re-Cap of Subtotals of the Specification of Repairs. The TOTAL COST OF REPAIRS, line 36, is to be entered on line B1 of the 203k MMWS. The consultant will recommend a % for contingency reserves but the underwriting can override.

  25. This form is completed by the HUD approved FHA Consultant for a standard 203(k). He/she breaks down the total cost of the renovation project into 35 construction line items. The consultant completes column 1 prior to underwriting. After closing and work progresses, the consultant (after his/her inspection) determines how much money from each line item is to be paid and enters it in column 3. The consultant must sign and date here and include his/her FHA Consultant ID#. The consultant also completes the Suggested Contingency Reserve Amount as a percentage. SAMPLE COPY ONLY The Totals of repairs, Line 36, is what is entered on Line B1 of the 203(k) maximum mortgage worksheet.

  26. SAMPLE COPY ONLY Page 2 does NOT need any signatures prior to closing.

  27. SAMPLE COPY ONLY

  28. The “As-Is” value is always the sales price on a purchase (except for a HUD REO) and the “As-Is” value is the “As-Is” value stated on the appraisal for refinances. Line 36 (Totals) on the Draw Request is entered here (B1)for a standard 203(k) and the total of all the contractor’s estimates are entered for a streamline 203(k). This form must be complete when the loan is submitted to underwriting to determine the maximum insurable mortgage amount. SAMPLE COPY ONLY SAMPLE COPY ONLY The borrower(s) sign the final worksheet at closing. The borrower(s) sign the final worksheet at closing.

  29. Streamline 203(k) vs. Full 203(k) • Program Option Eligibility Matrix • Definition of Structural Repair

  30. Program Option Eligibility Matrix

  31. Permits • Municipality Requirements • Refinance vs. Purchase and application for permits • Delays in Rehabilitation Project post-closing (19% of issues)

  32. Building Permits Building Permits Proper building permits are required prior to any monies being advanced for a particular repair type. The requirements of the municipality in which the property is located must be adhered to. A lender’s permit certification must be signed by an official of the municipality for all 203(k) transaction types indentifying all recorded permits.

  33. Active Loans Problem Categories Analysis

  34. Contractor Acceptance • Maximum 3 Subcontractors or General Contractor Required • NO Self-Help • Relatives/employers not permitted (no Identity of Interest) • Correspondent Bulletin 2010-020 • Contractor Acceptance Checklist

  35. Contractor Acceptance Contractor Acceptance Contractor acceptance is required for all transactions, both Standard and Streamlines. All rehab must be performed by a qualified and experienced contractor chosen by the borrower and completed in a workmanlike manner. • Borrowers may not use relatives/employers as their contractors; review Identity of Interest disclosure for details on other restrictions. • Borrower is limited to a total of 3 sub-contractors or a General Contractor will be required. • The borrower may NOT act as the General Contractor. “Self-Help” loans are NOT permitted • Contractor’s Resume, should be completed by all contractors. • The Underwriter must validate the Contractor(s) selected by the borrowers are acceptable to lender.

  36. Plan Review/Specifications of Repairs/Estimates • Plan Review/Specifications of Repairs (not required for 203(k) Streamline transactions) • Draw Request form • Repair Estimates • Estimates from “box stores” (i.e. Lowes/Home Depot)

  37. Repair Estimates Repair Estimates • Borrowers must provide written contractor estimates for all work being included in their repair escrow. • Estimates should include the cost for labor and materials. • Estimates must itemize all work being included. • All estimate amounts must match the Homeowner/Contractor Agreement(s), Form 2420. • Compare with appraisal to ensure all required repairs match and have estimates.

  38. Repair Estimates • Materials or appliance estimates from “box stores” (i.e. Home Depot, Lowe’s, etc.) must be accompanied by labor estimates from the installing contractor who will install the materials. • Whether the installing contractor is independent OR a sub-contractor for a store, they must still provide an executed Homeowner/Contractor agreement, and be “Accepted” by lender. • Exception: free-standing appliances (or items that do not require installation or labor to install) may be presented as stand-along estimates (i.e. free-standing stove, washer, dryer). • Paint must always be accompanied by a labor estimate.

  39. Contingency Reserves

  40. Appraisal Requirements • Document Expirations/Extensions • Declining Market Policy • Second Appraisals • Properties Listed for Sale • Mixed-Use, Multi-Family Homes

  41. Appraisal Requirements Appraisal Extensions and Expiration • Appraisals are good for 120 days. If a borrower signs a valid contract or is approved for a loan prior to the expiration date of the appraisal, the term of the appraisal may be extended by an FHA DE Underwriter for 30 days to allow for the approval of the borrower and the closing of the loan. Appraisals expired beyond this one-time extension (That do not close within 150 days of the application date) are NOT eligible for an “Appraisal Update Report” (FNMA 1004D). M&T will require a full 1004 (or applicable form) to be completed. The appraiser must include a Market Conditions Addendum (100MC) with all appraisal reports.

  42. Declining Markets Policy A property is determined to be in a Declining Market if the appraiser indicates that the property is located in a declining area in both the neighborhood section as well as in the housing trend section, and/or determine if there is an “over-supply” of properties, OR the property is identified by Desktop Underwriter (DU) or Loan Prospector (LP) through Total Scorecard as being located in an area of concern.

  43. Declining Markets Policy • If deemed by the appraiser to be in a Declining Market OR if there is an “over-supply” – the appraisal must include: • Two(2) comparables (as similar as possible to subject) closed within 90 days prior to the effective date of the appraisal, and • Two (2) active listings or pending sales in comp position 4-6 or higher (in addition to the three settled sales comps in position 1-3). The listing/pending sales MUST included the original list price, any revised list prices, and total DOM (days on market); adjust active LISTINGS to reflect list-to-sale price ratios for the market; and adjust PENDING sales to reflect the contract purchase price or reflect list-to-sale price ratios for the market. • Absorption rate analysis on the 1004 MC.

  44. Second Appraisals Second Appraisals • A second appraisal will be required when: • The loan amount (excluding the UFMIP) will exceed $417,000, and • The LTV (excluding the UFMIP) is equal to or greater than 95%, and • The property is determined as being in a declining market. • The second appraisal must be completed by an FHA approved appraiser, selected by the DE Lender underwriting the loan. The Lender is NOT to request a second case number through FHA Connection, but to independently engage the appraiser.

  45. Second Appraisals Second Appraisals • If the second appraisal has an estimated value more than 5% lower than the original appraisal, the maximum mortgage must be calculated using the lower of the two appraised values. The second appraisal must be included in the FHA insurance binder. If the second appraisal is used to recalculate the maximum mortgage amount, the appropriate information from that appraisal must be entered into the appraisal logging screen in FHA Connection.

  46. Properties Listed for Sale Properties Listed for Sale • Properties currently listed for sale are NOT eligible for FHA refinances, whether fully qualifying, rate/term or, streamline. • Properties previously listed and then canceled, are eligible for a Rate-Term/Streamline Refinance subject to the following: • M&T requires that the file contain conclusive evidence, from a third party source, that the listing was canceled at least one full day prior to the application date. • Any property currently listed for sale upon or after the date of application will be ineligible for an FHA refinance transaction with M&T.

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