May 7, 2008
MORTGAGEE LETTER 2008-13

TO:                ALL APPROVED MORTGAGEES


SUBJECT:        Expansion of FHASecure

In Mortgagee Letter 2007-11, the Federal Housing
Administration announced FHASecure, a temporary initiative to
permit lenders to refinance delinquent adjustable rate
mortgages (ARMs) and/or to offer new subordinate financing
where the combined loan-to-value ratio exceeds the applicable
FHA loan-to-value ratio and geographical maximum mortgage
amount.  The Department has decided to expand FHASecure
as follows:

To include borrowers delinquent on their non-FHA ARMs due to a rate reset or the occurrence of
an extenuating circumstance but experienced no more than two 30-day or one 60-day late payment in
the 12 months prior to the rate reset or extenuating circumstance that caused the delinquency; or

•        To include borrowers delinquent on their non-FHA ARMs due to a rate reset or the occurrence of
an extenuating circumstance but experienced no more than one 90-day late payment or no more than
three 30-day late payments prior to the rate reset or extenuating circumstance that caused the
delinquency provided the loan-to-value on the FHA insured first mortgages does not exceed 90 percent.

•        Borrowers delinquent on their interest-only and/or payment option ARMs are not eligible for this
expansion: borrowers with these types of mortgages must demonstrate that a rate reset caused the
delinquency and that they were making the monthly mortgage payments within the month due during the
6 months prior to the rate reset.

•        For borrowers refinancing delinquent non-FHA ARMs the Up-front mortgage insurance premium
(UFMIP) is set at 2.25 percent of the base loan amount (loan amount excluding UFMIP) regardless of the
loan-to-value (LTV) ratio. For LTV ratios greater than 95 percent (excluding UFMIP) the Annual premium
(collected monthly) is set at .55 percent.

This mortgagee letter replaces the specific guidance regarding FHASecure issued in Mortgagee Letter
2007-11 and is effective for case numbers assigned on or after July 14, 2008.  FHA is implementing the
policies in this letter simultaneously with the implementation of risk-based pricing through notice in the
Federal Register May 13, 2008.  Mortgagees are reminded that the eligibility criteria for delinquent
borrowers and new subordinate financing under the FHASecure
initiative are temporary and require that the loan application be signed no later than December 31,
2008.  Mortgagees are also reminded that FHA has not changed its underwriting guidelines, but rather
its eligibility criteria.  Existing policies are still applicable, such as those involving bankruptcy.  This
mortgagee letter also clarifies guidance issued in Mortgagee Letter 2005-43 regarding cash-out
refinance transactions.


I. FHASecure Eligibility Criteria

All conventional-to-FHA rate and term refinances are considered FHASecure, regardless of whether the
borrower is delinquent or current.  Cash-out refinance transactions are not acceptable under this
initiative.  The following items are the eligibility criteria for originating mortgages under FHASecure.

Borrowers Current on Their Mortgages

•        The mortgage being refinanced must be a non-FHA fixed rate or adjustable rate mortgage.

•        Mortgagees are reminded that they need to verify the borrower’s mortgage payment history
through the mortgage servicer or through cancelled checks to determine if it is acceptable under FHA’s
standard underwriting guidelines.

•        If there is insufficient equity in the home, FHA will insure first mortgages where there is a:

1)        Write Down.  The existing note holder(s) writes off the amount of indebtedness that cannot be
refinanced into the FHA insured mortgage (a short pay-off); or

2)        New Subordinate Financing.  The FHA-approved lender making the new mortgage, the existing
note holder or other interested party may take back a second lien by the amount which the payoff is
short, including closing costs, arrearages, other reasonable and customary costs that are standard
servicing practices and are included in all payoff statements or previous secondary financing if the
indebtedness exceeds FHA prescribed LTV and maximum mortgage amount limits; and/or

3)        Re-subordination/Modification.  The note holder(s) of existing subordinate financing must re-
subordinate or modify the existing subordinate lien(s) and re-execute at closing if the lien is to remain in
effect after closing; and/or

4)        Other options.  State/local programs or “Rescue Funds” administered by nonprofit organizations.

•        Mortgagees must determine that the borrower has sufficient income and resources to make the
monthly payments under the new FHA-insured refinancing mortgage as well as pay other recurring
obligations.


Borrowers Delinquent on Their Mortgages

•        The mortgage being refinanced must be a non-FHA adjustable rate mortgage.

•        When refinancing a delinquent mortgage where the delinquency was caused by a rate reset  or
the occurrence of an extenuating circumstance  the borrower’s payment history must show that:

1.        The borrower was making the monthly mortgage payments within the month due during the 6
months prior to the rate reset or extenuating circumstance; OR

2.        In the 12 months prior to the rate reset or extenuating circumstance the borrower’s payment
history shows no more than one 60-day late payment or two 30-day late payments.  Borrowers with less
than a full 12 months payment history (i.e., 7-11 months payment history) must show that they have
made their monthly mortgage payments within the month due during the 6 months prior to the rate reset
or occurrence of the extenuating circumstance; OR

3.        If the borrower is unable to meet the payment history requirements specified above, the lender
may still proceed with the refinance transaction provided that the loan-to-value ratio on the new FHA-
insured mortgage does not exceed 90 percent and the borrower has no more than one 90-day late or
no more than three 30-day late payments over the 12 month period prior to the rate reset or extenuating
circumstance.

•        Mortgagees must determine that the rate reset or extenuating circumstance that caused the
delinquency does not affect the borrower’s overall capacity to repay the new FHA-insured mortgage.

•        Borrowers delinquent on their interest only and/or payment option ARMs must demonstrate that
the delinquency was caused by a rate reset and that they were making their monthly mortgage
payments within the month due during the 6 months prior to the rate reset.

•        If there is insufficient equity in the home, FHA will insure first mortgages where there is a:

1)        Write Down.  The existing note holder(s) writes off the amount of indebtedness that cannot be
refinanced into the FHA insured mortgage (a short pay-off); or

2)        New Subordinate Financing.  The FHA-approved lender making the new mortgage, the existing
note holder or other interested party may take back a second lien by the amount which the payoff is
short, including closing costs, arrearages, other reasonable and customary costs that are standard
servicing practices and are included in all payoff statements or previous secondary financing if the
indebtedness exceeds FHA prescribed LTV and maximum mortgage amount limits; and/or

3)        Re-subordination/Modification.  The note holder(s) of existing subordinate financing must re-
subordinate or modify the existing subordinate lien(s) and re-execute at closing if the lien is to remain in
effect after closing; and/or

4)        Other options.  State/local programs or “Rescue Funds” administered by nonprofit organizations.

•        Mortgagees must determine that the borrower has sufficient income and resources to make the
monthly payments under the new FHA-insured refinancing mortgage as well as pay other recurring
obligations.

•        In most of the FHA insurance programs, there is an Up-Front Mortgage Insurance Premium
(UFMIP) and an Annual premium. For borrowers refinancing delinquent non-FHA loans the UFMIP is set
at 2.25 percent of the base loan amount (loan amount excluding Up-front MIP) regardless of the loan-to-
value (LTV) ratio. For LTV ratios greater than 95 percent (excluding UFMIP) the Annual premium
(collected monthly) is set at .55 percent. These premiums reflect the relative risk associated with new
borrowers under the FHASecure expansion, within the limits applicable law places upon FHA’s premium-
setting authority.  

Maximum FHA loan-to-value ratios

The maximum loan-to-value limits are shown below and are applied to the appraiser’s estimate of value,
exclusive of any upfront mortgage insurance premium.  

Maximum Loan-to-Value Ratios

States with Average Closings Costs At or Below 2.1 Percent of Sales Price

•        98.75 percent:  For properties with appraised values equal to or less than $50,000.
•        97.65 percent:  For properties with appraised values in excess of $50,000 up to $125,000
•        97.15 percent:  For properties with appraised values in excess of $125,000.

States with Average Closings Costs Above 2.1 Percent of Sales Price

•        98.75 percent:  For properties with appraised values equal to or less than $50,000
•        97.75 percent:  For properties with appraised values in excess of $50,000


Calculating the Maximum FHA Mortgage Amount

The amount of the FHASecure mortgage may not exceed either the geographical maximum mortgage
limits or the loan-to-value ratios shown above.  FHA will permit the inclusion in the new loan amount the
existing first lien, any purchase money second mortgage, closing costs, prepaid expenses, discount
points, prepayment penalties, late payment charges, attorney fees, inspection fees, and those other
charges traditionally associated with servicing mortgages.  FHA will also permit arrearages (principal,
interest, taxes and insurance) to be added into the new loan amount provided the arrearages arose
after the reset or occurrence of an extenuating circumstance.

Subordinate Financing and Combined Loan-to-Values

If the new maximum FHA loan is not enough to pay off the existing first lien, closing costs and
arrearages, the new or existing lender may execute a subordinate lien at closing to pay the difference.  
This new subordinate lien does not have to be supported by the value of the property. The combined
amount of the FHASecure first mortgage and any subordinate non FHA-insured lien may exceed the
applicable FHA loan-to-value ratio and geographical maximum mortgage amount.  If payments on the
new subordinate lien are required, they must be included in qualifying the borrower unless payments
have been deferred for no less than 36 months.  If payments on the new subordinate lien are deferred
for 36 months, underwriters should consider the repayment terms to ensure that when the payments
begin they do not exceed the borrower’s reasonable ability to pay.

While it is permissible to establish equity sharing agreements or other similar arrangements for providing
a subordinate lien, the terms agreed to must not trigger a default on the FHA-insured first mortgage.  
Therefore, FHA has established the following conditions:

•        The terms of the subordinate lien(s) must not provide for a balloon payment before ten years,
unless the property is sold or refinanced;

•        The terms must permit prepayment by the borrower, without penalty, after giving 30 days advance
notice;

•        The required monthly payment under both the new FHA-insured mortgage and the subordinate lien
(s) – regardless of when payments begin – plus other housing expenses and all recurring charges,
cannot exceed the borrower’s reasonable ability to pay; and

•        Any periodic payments due on the subordinate lien(s) are due monthly and are essentially the
same in dollar amount.

FHA is also simplifying its policies involving combined loan-to-value (CLTV) ratios to make them as
consistent as possible regardless of the type of refinance transaction.  The following chart provides
additional guidance to mortgagees regarding CLTV ratios for refinance transactions, including cash-out
and FHA-to-FHA refinance transactions.  


Loan-to-value and Combined Loan-to-Value Maximum Mortgage Calculation
Criteria        FHASecure        FHA 95% Cash-out Refinance        FHA-to-FHA Refinance
LTV        Standard LTV on FHA first mortgage; or

90% LTV on FHA first mortgage if the borrower has one 90-day late or three 30-day late payments over
the specified period.        Up to 95% LTV on FHA first mortgage provided loan amount will not exceed
$417,000.  Otherwise, capped at 85% LTV.        Standard LTV on FHA first mortgage.
CLTV        Unlimited CLTV on new and/or re-subordination or modification of existing subordinate
financing.        New subordinate financing is not permissible.

Unlimited CLTV for re-subordination or modification of existing subordinate financing for both 95% and
85% LTVs.         Standard CLTV on new subordinate financing, i.e., combined amount of first and
second mortgages does not exceed applicable LTV ratio and the maximum mortgage limit for the area.

Unlimited CLTV for re-subordination or modification of existing subordinate financing.
Max Mtg Amount        In addition to standard rate and term, the maximum mortgage calculation may
include arrearages incurred because of interest rate reset or occurrence of extenuating
circumstance.        Standard cash-out maximum mortgage calculation up to 95%.        Standard rate and
term maximum mortgage calculation.
Value        Current appraised value is used in determining maximum loan amount.        Current
appraised value is used in determining maximum loan amount.        Current appraised value is used in
determining maximum loan amount.

Underwriting the Mortgage/Qualifying the Borrower

FHA encourages all approved lenders to use FHA’s TOTAL Mortgage Scorecard to obtain risk
classifications on each mortgage originated under the FHASecure initiative.  If TOTAL renders an
“accept/approve,” the mortgagee’s underwriter need not perform a personal review of the borrower’s
credit history and capacity to repay.  However, in the more likely event that the risk class is a “refer,” the
underwriter must:

1.        Determine that the borrower has the capacity to make future mortgage payments as well as pay
all other obligations.  The payment-to-income and debt-to-income ratios are 31 percent and 43 percent,
respectively, and may be exceeded provided there is a strong compensating factor(s) (see handbook
HUD 4155.1 REV-5, ¶ 2-13).  

For borrowers limited to 90% LTV due to their mortgage payment history, the payment-to-income and
debt-to-income ratios may not be exceeded even when compensating factors are present.

2.        Analyze the borrower’s overall credit history, especially payments on the existing mortgage.  If the
mortgage being refinanced is delinquent, the underwriter must determine that:

a.        The borrower’s mortgage payment history during the 6 months prior to the interest rate reset or
occurrence of an extenuating circumstance showed no instances of making mortgage payments outside
the month due; OR

b.        In the 12 months prior to the reset or extenuating circumstance, the borrower’s payment history
shows no more than one 60-day late payment or two 30-day late payments.  Borrowers with less than a
full 12 months payment history (i.e., 7-11 months payment history) must show that they have made their
monthly mortgage payments within the month due during the 6 months prior to rate reset or extenuating
circumstance; OR

c.        If the borrower is unable to meet the payment history requirements specified above, the loan-to-
value ratio on the new FHA-insured mortgage must not exceed 90 percent and the borrower has no
more than one 90-day late or no more than three 30-day late payments over the 12 month period prior
to the rate reset or extenuating circumstance.

d.        Borrowers with interest-only or payment option ARMs must show that they have made their
monthly mortgage payments within the month due during the 6 months prior to the rate reset.

If the borrower was offered partial forbearance, the underwriter must determine that he/she has made
payments under the forbearance agreement in a timely manner.  

For those borrowers current on their non-FHA mortgage, underwriters should not automatically penalize
borrowers who made their mortgage payment their first priority at the expense of meeting other recurring
obligations in a timely manner.
If the credit report indicates satisfactory credit prior to the reset or extenuating circumstance, and any
derogatory credit subsequent to that date can be related to the effects of the rate reset or extenuating
circumstance, FHA will consider for its underwriting standards that the borrower is a satisfactory credit
risk.   

3.        Provide comments in the “remarks” section of the mortgage credit analysis worksheet (or loan
underwriting and transmittal summary) that he or she has determined that the cause of the borrower’s
inability to make payments was directly related to the rate reset or extenuating circumstance and not
due to a disregard for recurring obligations.

Misuse of FHASecure

Lenders are also reminded that the FHASecure initiative is not to be used to solicit borrowers to cease
making timely mortgage payments.  FHA reserves the right to reject for insurance, those mortgage
applications where it appears that a loan officer or other mortgagee employee suggested that the
borrowers could stop making their payments, refinance into a FHA insured mortgage, and keep, as
cash, the amount of payments not made on time.


II. Clarification on Cash-out Refinance Transactions

In Mortgagee Letter 2005-43, FHA revised its policies regarding refinance transactions and introduced a
cash-out refinance of up to 95 percent of the appraiser’s estimate of value.  Given the popularity of this
refinance option, FHA is taking this opportunity to reiterate and clarify the eligibility conditions that must
be met in order to take advantage of the increased LTV that is permitted.  And, as noted in ML 2008-09,
if a borrower is pursuing a cash-out refinance and the loan balance exclusive of FHA’s upfront mortgage
insurance premium will exceed $417,000, the loan-to-value may not exceed 85 percent of the appraiser’
s estimate of value.

•        Borrowers who are delinquent or in arrears under the terms and condition of their mortgage are
not eligible for a cash-out refinance.  

•        The subject property must have been owned by the borrower as his or her principal residence for
at least 12 months preceding the date of the loan application.  If the borrower has not owned the
property for a minimum of 12 months, the FHA-insured new mortgage is capped at 85 percent LTV.  In
such cases, the mortgage amount must be calculated using the lesser of the appraised value or the
original sales price of the property multiplied by 85 percent.

•        If said property is encumbered by a mortgage, the borrower must have made all of his/her
mortgage payments within the month due for the previous12 payments, i.e., no payment may have been
more than 30 days late and is current for the month due.  For those borrowers who have owned their
property for 12 months but do not have a full 12 months payment history, lenders may create an
aggregate 12-month payment history from a previous mortgage the borrower held on the subject
property.  If a lender is unable to establish a 12 months payment history, the FHA-insured new mortgage
is capped at 85 percent LTV.

•        The property that is security for the refinanced mortgage must be a 1- or 2-unit dwelling.

•        Existing subordinate financing may remain in place, but subordinate to the FHA-insured first
mortgage, regardless of the total indebtedness or combined loan-to-value ratio, provided the borrower
qualifies for making scheduled payments on all liens.  FHA understands that many subordinate lien
holders have been requesting modifications to the terms of the lien (typically a reduction in the amount
of the lien) in exchange for remaining in a subordinate position.  Modifying the subordinate lien in this
manner often results in re-executing it at closing, which is an acceptable practice to FHA and therefore,
we would not consider it a new subordinate lien.  This policy regarding CLTV ratios is also applicable to
cash-out refinance transactions limited to 85 percent of the appraiser’s estimate of value (or sales price
if the property was purchased less than one year preceding loan application, whichever is less), thus
superseding current policies in Handbook 4155.1 REV-5, paragraph 1-11 B, addressing CLTV ratios in
85 percent cash-out refinance transactions.

•        Any co-borrower or co-signer being added to the note must be an occupant of the property
securing the new FHA-insured mortgage.  Non-occupant co-borrowers or co-signers may not be added
in order to meet FHA’s credit underwriting guidelines for the mortgage.

Attached to this Mortgagee Letter is an FHA Refinance Programs Comparison Matrix to use as a quick
reference guide.  If you should have any questions concerning this Mortgagee Letter, call
1-800-CALLFHA.

Sincerely,




Brian D. Montgomery
Assistant Secretary for Housing-
Federal Housing Commissioner

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