May 2015, Issue 05
LoanLogics
HUD/FHA's Origination Through Post-Closing/Endorsement Handbook (4000.1)
Major Policy & Procedural Changes -
Effective on September 14, 2015
Great News! An Extension in Time for FHA's New Underwriting Policies has been Granted!
In an official Notice to All FHA-Approved Mortgagees, FHA announced on April 30, 2015 that it has extended the effective date for the polices contained within its new Single Family Policy Handbook from June 15, 2015 to September 14, 2015.
These new underwriting, appraisal and Quality Control policies will continue to be the focus of my Blogs and LendingLogics Newsletters. Stay tuned.
PART TWO - Appraiser & Property Requirements
Time to prepare for HUD/FHA's new appraisal policy changes!
HUD's "Origination Through Post-Closing/Endorsement" Handbook (4000.1) has been posted to the www.hud.gov website for several months. Additional Sections were subsequently added to this draft Handbook - some as recent as March 18, 2015. One of these additions included an "Appraiser and Property Requirements" Section which will serve as the single reference point for FHA appraisal policies & procedures when this Handbook is formally adopted for use by HUD. The targeted effective date for the policies contained in this Handbook is for all FHA loan transactions in which the Case Number was assigned on and after September 14, 2015.
In the previous LendingLogics Newsletter, a listing of the major mortgage credit underwriting changes being implemented by FHA upon issuance of the 4000.1 Handbook was provided. Outlined below are some of the more significant changes in FHA appraisal & property requirements policies or past practices that are being proposed in the 4000.1 Handbook (Note: this is not an all-encompassing list):
Appraisers will be required to report on the sales history of the comparable properties for at least the past three years. This new requirement is stated in the Appraisal Report and Data Delivery Guide and not the 4000.1 Handbook.
Previously, Appraisers were only required to report on the past 12 month sales history on the comparable sales.
It is stated in the Appraisal Report and Data Delivery Guide that a property's location in a "non-disclosure" state does not remove the appraiser from the requirement to research, report, and analyze the prior sale history of the subject and comparable properties.
Previously, HUD appraisal protocols did not specifically address this topic.
For properties that have individual water and/or sewer systems (wells & septic), the Mortgagee must require that they be connected to a public or community system whenever feasible and available at a reasonable cost. However, no guidelines are provided in the 4000.1 Handbook as to what would be considered as a reasonable cost.
Previously, reasonable cost for hook-up to a public or community system was defined as 3% or less of the value of the property.
On new construction cases, the Appraiser must obtain from the Mortgagee a fully executed Form HUD-92541 (Builder's Certification) dated no more than 30 days prior to the date of the appraisal along with documents related to New Construction (e.g. Plans, Specs, etc.).
Previously, it was indicated that a completed HUD-92541 be provided to the Appraiser, but there was no reference to a fully-executed Form.
The non-residential portion of the Total Floor Area of a property may not exceed 49%. Properties must be legally permitted and conform to current zoning requirements. The term "Total Floor Area" is not defined by HUD in the 4000.1 Handbook.
Previously, HUD would only allow up to 25% of the Gross Livable Area (GLA) on mixed-use properties to be non-residential in use on Sec. 203(b) loan transactions.
Appraisers will now be required to indicate whether or not the subject property can be legally rebuilt if destroyed, if the property has a legal non-conforming zoning designation.
Previously, Appraisers were not required to report this information.
Appraisers will be required to notify the Mortgagee if the subject dwelling or related property improvements are located within an Easement of an Overhead Electric Power Transmission Line or if they appear to be located within an unsafe distance of the power line or tower.
Previously, the Appraiser only had to report on whether or not the dwelling or related property improvements were located within an Easement serving the power line or tower.
A definition of what HUD considers to be Excess Land and Surplus Land is provided in the 4000.1 HB and it is stated that Surplus Land is land that is not currently needed to support the existing improvement but cannot be separated from the property and sold off. It may or may not contribute to the value of the improved parcels. HUD should provide a better definition of what would be considered as Surplus Land along with examples. For example, how would an appraiser arrive at a value for a property containing 20 acres with comparable sales containing only 5 acres?
Previously, HUD instructed appraisers to describe any Excess Land (from the readily marketable real estate entity) but not appraise the Excess Land (since it was excluded from the maximum mortgage amount). HUD had no previous definition of what constitutes Surplus Land.
Appraisers must report when the subject property has security bars on the bedroom windows or doors. There is no further guidance provided as to what conditions (if any) an underwriter must take when this information is provided by the appraiser.
Previously, security bars were acceptable if they complied with local fire codes and if the occupants would be able to quickly get outside if there were a fire (e.g. quick-release mechanisms are installed on the security bars).
Appraisers must operate all conveyed appliances (such as a dishwasher) and observe their performance. The Appraiser must notify the Mortgagee of any deficiency if an appliance is found to be inoperable.
Previously, HUD did not specifically state that appraisers were expected to operate appliances as part of their on-site review of a property.
Appraisers must observe the roof of a property to determine whether there are deficiencies that present a health and safety hazard or do not allow for reasonable future utility. The Appraiser must report if the roof has less than 2 years of remaining life, and make the appraisal subject to inspection by a professional roofer.
Previously, Appraisers were required to observe the roof area and note any readily observable conditions. However, they were not responsible for making an assessment if the roof had a remaining physical life of at least two years.
Appraisers will be required to notify the Mortgagee if the property has a sump pump that is not properly functioning at the time of the appraisal. A sump pump may be hardwired by an acceptable wiring method or may have a factory electrical cord that is to be connected to a receptacle suitable for such use.
Previously, Appraisers only had to report the existence of a sump pump at a property.
Appraisers will be required to take a lot more photographs of the property during their on-site visit. Some examples of additional minimum photo requirements include: kitchen, main living area, bathrooms, bedrooms, any other rooms representing overall condition, basement, attic, crawl space, any updates or renovation and any repair conditions or property deficiencies. In addition, photos of common areas and shared amenities will be required on condominiums.
Previously, only photos of front and rear sides of the dwelling, a street scene and any improvements with a contributory value were required.
Appraisers must consider and attempt all approaches to value and must develop and reconcile each approach that is relevant.
Previously, the cost approach was not required on existing properties more than one year old and the income approach did not have to be performed on one unit properties.
No reference is made to HUD Form 54114 in the 4000.1 Handbook. This Form was created for use by DE underwriters to record the results of their review of the Appraisal Report. Although the completion of this Form was not deemed mandatory by HUD, many DE underwriters utilize this Form as a means to provide consistent feedback on their review findings (if any).
At the current time, Form 54114 is available off of HUD's HUCLIPS website. The new Handbook should make reference to this Form and indicate if it is still optional for use by DE underwriters.
As noted above, the proposed changes outlined in this Newsletter are not an all-encompassing listing of appraisal policy changes being implemented by HUD upon issuance of the 4000.1 Handbook. It is highly recommended that all of those entities that are currently involved with FHA financing access the www.hud.gov website - then type in "4000.1 Handbook" in the Search Box. The entire draft Handbook is accessible for all to read.
Gerry Glavey, SVP - Chief Credit Officer, LoanLogics
Mr. Glavey was the former Director of the Processing &Underwriting Division in the Philadelphia HOC for an 11 year period (2000 thru 2011) and has a total of 37 years' experience with HUD/FHA.
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This material is provided as a general information service by LoanLogics, Inc. and its applicable subsidiaries and affiliates ("LoanLogics"), and is not intended to provide financial, regulatory or legal advice on any specific matter. The information contained herein reflects the views of LoanLogics and sources reasonably believed by LoanLogics to be reliable as of the date of this publication. LoanLogics does not make any representation or warranty regarding the accuracy of the information contained in this material, and there is no guarantee that any projection, forecast or opinion in this material will be realized. Any links provided from outside sources are subject to expiration or change. 2015 LoanLogics, Inc. All Rights Reserved.
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