nsp webinar: fha mortgage insurance issues · 2019-03-15 · hud nsp training - fha mortgage...

HUD NSP Training - FHA Mortgage Insurance Issues, 6-19-12

Kent Buhl: So let's move on to today's NSP webinar, "FHS Mortgage Financing: Supporting Neighborhood Stabilization Programs." The webinar's designed for NSP grantees who use FHA mortgage insurance.

The presenters will cover ways in which FHA programs can be used to support the successful implementation of NSP, including acquisition, rehabilitation, and resale. In addition, the presenters will address issues surrounding FHA use with NSP as it relates to lower down payments, payment of closing costs, bulk and competitive sales programs, and other issues.

So we have two people with us today well-versed in the FHA mortgage insurance and how FHA's financing fits into an NSP program. Arlene Nunes is director of the Home Mortgage Insurance Division at HUD. Matthew Callahan is a broker/owner with Civic Center Home Loans and Renew Real Estate Sales. and Matthew's in Whittier, California. Welcome to you. And rounding out the folks you'll hear today are the NSP managers from HUD headquarters, John Laswick and David Noguera. And hello to all.

So we've got today our objective to explore the use of FHA home financing in neighborhood stabilization programs. And Arlene is going to be taking us through section one, so the FHA home financing overview. And then Matt Callahan will be discussing layering NSP subsidies with FHA loans. And both Arlene and Matt will be taking on the third and fourth sections together, special FHA issues in NSP programs and helping NSP buyers become mortgage ready. So that's what we're going to be doing today.

And with that, let me hand things over to Arlene Nunes. Hi, Arlene.

Arlene Nunes: Good afternoon, everyone. And good afternoon to you, Kent. Make sure I got a handle on these slides. Okay. So today we are going to address -- we want to address what FHA financing is about and how it can be used within the NSP program. We want to explain to you how FHA insured mortgages can be a good fit for purchases of NSP properties.

We're also want to make sure that everyone is aware that FHA insures mortgage loans that are made by approved lenders. So FHA is not a direct lender. FHA insures mortgages against default for FHA-approved lenders who actually underwrite mortgage loans in accordance with FHA guidelines.

Now, many of these FHA approved lenders are actually originators of these loans as well; some are not. But FHA originators include federally charted financial institutions such as banks and credit unions. They also have mortgage banks and brokers that originate FHA mortgages.

We finally want everyone to understand that FHA mortgage insurance helps to recycle mortgage capital back to local markets. So basically, FHA creates liquidity in the marketplace when other sources of financing have dried up. FHA has been there to fill the financing gap.

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Now, FHA supports the success of the local NSP by, of course, serving more qualified borrowers. We incorporate NSP in other home buying subsidies. We lower the down payment requirement for many of the purchasers, and we provide rehab funds that can be incorporated in with the initial acquisition financing. And this is done through our FHA 203(k) rehab products, which I will discuss on the next slide.

So basically, FHA has several types of products. But the ones that we believe that are most appropriate for NSP properties are the 203(k) and the 203(b) programs. So the 203(k) mortgage may not exceed the lesser of the sales price and the rehab cost and or 110 percent of the after-approved value. So we've got two types of 203(k) mortgages. We have the streamline product which limits the rehab amount to $35,000, and then we have our standard rehab 203(k). With this particular product, this is where you follow the lesser of the sales price or the rehab cost or 110 percent of the after-approved value.

When you are using the standard K product, you must use what's called a HUD approved 203(k) consultant. A 203(k) consultant is required for your standard products and so are inspections are also required to ensure that the work is completed. Now, when you have the 203(k) standard product, you have the lenders that are monitoring the disbursements from the escrow account. And of course there are inspections that verify that work in place has been completed. Okay.

Our second product is the 203(b) product. That, of course, is our flagship product. Now, the 203(b) loans may be used to purchase homes with a mortgage that cannot exceed 96.5 percent of the lesser of the sales price or the appraised value of the home. Now, the property must meet FHA standards prior to loan closing. So these standards are really the property in place standards, some of which relate to health and safety issues.

Now, the maximum FHA mortgage is established based on metropolitan areas and non-metropolitan areas. Now, the maximum mortgage term is 30 years. However, I do want you to also realize that we have loans with terms of 20, 10, and 15 years as well as farms. Standard practice, though, is a 30-year term for the FHA product with the 203(b). Now, FHA does not set interest rates or points. And these are normally negotiable between the borrower and the lender. When you have the 203(k) loan, you also have some extra costs that may be related to the inspections. This, of course, is with the 203(k) standard product that I mentioned earlier.

Eligible properties for the 203(b) and 203(k) are one to four units. Now, this must be your principal residence, but if you do have a two to four-unit property, you can also rent out some of those units. You're not limited to single-family one-unit property. Condominiums are located -- condominiums must be located in FHA approved projects. So individual condo units are eligible for FHA financing as long as the condo project has been approved and meets the condo project approval requirements of FHA.

The next slide deals with the costs of the mortgage, the FHA cost of the mortgage. Now, FHA loans require an upfront mortgage premium which is equal to 1.75 percent of the loan amount, and it's usually financed into the loan.

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Now, I want to be specific here and let you know that this particular slide relates to purchase loans, and we're talking normally of a 30-year product here. FHA insured loans are also subject to an annual mortgage insurance premium for purchase loans with terms greater than 15 years and an LTV greater than 78 percent. The MIP on that particular product is 1.25 percent of the loan amount. The upfront mortgage premium is paid one time when you first -- at the closing. The annual mortgage insurance premium is paid on a monthly basis.

Now, when the lender considers a borrower for an FHA insured mortgage, there are three key underwriting questions that must be addressed. First, does the borrower have sufficient documented income? They'll then look at if the borrower has enough verified assets for the down payment and assets sufficient to cover all other expenses necessary to close the loan. And thirdly, the borrower must meet the FHA credit requirement and demonstrate both the willingness and the ability to repay the loan. So these are among the key underwriting requirements. However, there are others, of course, but this is three major ones that the lender looks for.

Now, many of you already know that FHA does allow multiple liens on the property, but there are some restrictions that apply. The first is that the FHA insured mortgage, when combined with any second mortgage or other junior lien from a government agency or nonprofit agency considered an instrumentality of government, it cannot result in cash back to the borrower. That's one of our main restrictions.

The second is that the FHA insured first mortgage cannot exceed the FHA statutory limit for the area where the property is located. So the combined indebtedness of the mortgages may, however, exceed the FHA statutory limit. However, NSP limits the maximum CLTV to 100 percent.

Get into some income sources that are considered as part of the underwriting. Now, all income that's used for an FHA loan must be verified, stable, and expected to continue. And this expected to continue is especially relevant when you have social security income and disability income that are used as income sources for the borrower. Undocumented or stated income sources cannot be used to qualify for an FHA loan. And borrowers must have documented two-year employment history with explanations of gaps.

So if a lender is using our automated total system to determine whether or not this is a qualified or whether or not the loan has been approved, if they're using the TOTAL Scorecard, an explanation is required if there are gaps greater than six months for employment. If the lender is doing a manual underwrite of the loan, there is no need for an -- I'm sorry. There is a need for an explanation for any gap in employment. So 30 days or greater and you're doing a manual underwrite, then you would need to provide an explanation for any gaps in employment.

Acceptable sources of income. Now, some of them include, of course, your wages, commissions, business operations, any type of government benefits that you may receive, alimony, and child support. Now, we do require that income must be documented through pay stubs, the W-2 forms, your tax returns or any other means, depending on the source of income that you're documenting.



Acceptable sources of income, as I mentioned earlier in the previous slide, may include some direct payments from government that subsidize the borrower. So disability income, any supplemental social security income would fit that category of direct payments from the government. Mortgage credit certificates that are offered through your state and your local housing finance agencies are a great, great way to boost the NSP borrower's home buying power. And of course, any Section 8 voucher payments can also be used. And when you have your MCCs and your Section 8, they may be used to additions to gross income or to offset your monthly payment.

Here's some special considerations that we have with NSP programs. Now, FHA in their underwriting allows income from the non-occupying borrower, the co-signer, to be considered to use to qualify. NSP, however, they restrict the type of income that can be used. The NSP participants who will own and occupy the home must meet the household income requirements. But the non-occupying co-signer income will need to be excluded from the eligibility calculation. This is one of the main differences between NSP and FHA.

Another difference is pre-purchase counseling. It is a requirement under NSP. However, under FHA it is not a requirement. Of course when you're using the two programs together, certainly you would need to have or you have your borrower go through the pre-purchase counseling.

John Laswick: Yeah. This is John. Yeah. I think the difference on this is that we actually don't include co-signer income on the calculation of the income for qualifying to meet the program income requirements. So you can't go over 50 or 80 or 120 percent of area median income. I don't think we would restrict it as far as having somebody make a contribution on a monthly basis. But we get people more typically contributing to a down payment or something like that. And we don't consider them to be co-borrowers because they're not occupying the --

David Noguera: They're not part of the household.

John Laswick: But they could contribute some money to it, to the transaction. It just doesn't count against the borrower's income because sometimes that would push them over the income limits, and then they wouldn't be eligible.

Arlene Nunes: Okay.

Now, qualifying ratios. For a manually underwritten loan your total monthly housing payment or your front end ratio cannot exceed 31 percent of your gross monthly income. On the back end your maximum is 43 percent of gross monthly income. Now, higher ratios are possible with some documented compensating factors, and some of those may include in your reserves or your cash savings that you have. We would allow for some higher ratios in that case, when you're using TOTAL Scorecard -- I should say when the lender is using TOTAL Scorecard. So your front and your back end ratios can be higher for automated underwritten loans receiving an approved or an accept recommendation from TOTAL.

And when I say higher, I'm referring to higher than the 31 percent on the front end and the 43 percent on the back end. That is a weighted system. So that weighted system takes into account



other factors that on a manual underwrite you may not. So the system may generate an accept even if you have higher front and back end ratios. And you do not need any compensating factors to be cited, if you do receive the approve or an accept from TOTAL.

Now, borrowers must make a minimum down payment equal to at least 3.5 percent of the lesser of the sales price or the appraised value. That is a statutory requirement for FHA. Now, NSP limits the maximum CLTV to 100 percent even if a higher CLTV would otherwise be committed by FHA. An NSP program could assist a buyer with some closing costs as a grant but not as a lien against the property that would cause the CLTV to exceed the 100 percent.

So other eligible sources such as gifts, seller credits, they can be used for this purpose to prevent the NSP buyer from being encumbered more than the current market value of the property. And this is something that Matt will go into some greater detail in his part of the presentation.

Now, these are some of the acceptable sources of the down payment to fulfill the down payment requirement. So these are some, not all, and there's an extensive list there. So I won't go through it. But just be aware that these are some of the sources that are eligible for the down payment.

Now, there are unacceptable sources of down payment that we have, and they include contributions either directly or indirectly from the party with an interest in the transaction. And of course that has become effective or put into law, I should say, in 2008 under the HERA law. The interested parties are named as sellers, real estate agents, brokers, and lenders. And some of the NSP program sponsors may also be considered an interested party, if they take on any of these roles.

I want to elaborate a little bit more on this. When we're referring to NSP program sponsors that may fall into this category of a prohibited or unacceptable source of income -- source of the down payment -- excuse me -- really what we're talking about is a nonprofit, who is not an instrumentality of government, who offers the down payment assistance to fulfill the 3.5 percent minimum investment requirement. Anything above and beyond the 3.5 percent is allowed. However, a nonprofit, who is an NSP program sponsor, who is not an instrumentality of government would not be able to offer the 3.5 percent down payment minimum.

John Laswick: And actually, in NSP and CDBG we are limited to half of the down payment. So they could only really come in for, in this case, 1.75 percent anyway. So, I mean, that makes a big difference for people. But we -- nobody could pick up the whole thing with NSP or CDBG.

Arlene Nunes: So when you have any instrumentality of government or any government entity, are able to provide the 3.5 percent minimum down payment assistance. I do want to make that clear.

John Laswick: Yeah. And Arlene's right. This came in with HERA. It was kind of sort of moving in different directions, you might say. So the way that we've worked around this -- and it's not very streamlined, I'll admit -- but is that if a city were to own the property and want to make down payment assistance available, they can transfer title to a nonprofit.



And the nonprofit would be -- would then be selling the property. And then the city could do the down payment assistance without breaking the law. So it's -- so your only option there is to have the property transferred to a nonprofit and then have the unit of government making the down payment assistance.

Arlene Nunes: Thanks, John. Okay. I think we'll probably -- I see that there are a couple of questions that have shown up. We'll wait until the end of the first part to -- we'll address those questions at the end of the first part. So please hold tight.

Okay. So FHA does not stipulate that a minimum contribution towards the home purchase price needs to come from the borrower's own fund. In other words, if they can get that as a gift or they can get that from family members, they can get that from instrumentalities of government or any government entity, they can get 3.5 percent.

Now, many NSP programs and some FHA lenders, however, do require a minimum borrower contribution towards the home purchase. Now, that may come as a surprise to you that some FHA lenders require that minimum, but FHA lenders, they do not just underwrite on behalf of FHA. They also are underwriting on behalf of their investors, who many times provide the financing for the loan. So that may be a requirement above and beyond FHA underwriting.

So NSP program administrators should also clarify if a minimum borrower contribution will be required for their particular program. And again, if you are looking for an FHA loan, you should also check, ensure that you understand fully if that lender, FHA approved lender has any particular overlays above and beyond FHA requirements.

Now, a minimum credit score to be eligible for an FHA loan is 500; okay? A minimum credit score for an LTV over 90 percent is 580. So although those are our minimums, as I mentioned previously, most FHA lenders do require credit score of 620 or more. What they cannot do is accept a credit score below the 500 or the 580, as it is stated up there. And the reason why is because we have minimum FHA underwriting guidelines that they must adhere to. So most often what we are finding is that FHA lenders actually require credit scores to be higher than our minimum.

FHA also allows or has special provisions for qualifying borrowers with non-traditional or insufficient credit. However, not all lenders will accept borrowers without a credit score. And oftentimes, this decision is driven by their investors. So this would be the investors with FHA lenders who buy the loans from the FHA lenders. So in many cases these investors want to see a credit score. And so the lenders would not be underwriting the borrowers who do not have one.

Now, in certain situations FHA may require that debts and obligations of a non-borrowing spouse be considered as the borrower's debt. And the special circumstance in which that would be the case would be in communal property states. So in those particular states we do consider the non-borrowing spouse's debt. And then the pre-purchase counseling in NSP programs should always include a review of the borrower's tri-merged mortgage credit report.



Just to recap some of the main difference between FHA and NSP, on the FHA side we have no limit on the CLTV for 203(k) loans. On the NSP side the limits for the CLTV are the cost to acquire the property. And Matt will go over in a particular slide in his presentation what encompasses the cost to acquire the property. FHA does not have a pre-purchase counseling requirement, but NSP does. In terms of the income of non-occupying co-borrowers or co-signers, they are considered in qualifying for FHA. In NSP they are excluded from the eligibility calculation. Those are the main differences between the programs.

And with that, I will hand it over to Matt.

John Laswick: Are you taking questions?

Kent Buhl: Yeah. Let's take a couple questions first.

And Omega [ph], I see your hand up but no phone. And let me just remind you that to ask a question verbally, if you don't have a phone icon next to your name, follow these steps. And let's see.

So Jeannie [ph] would like to clarify that with NSP a buyer can have a non-occupying co-signer on the loan.

John Laswick: Yes. I mean, NSP doesn't have a prohibition against that. Your lender might, but we don't. All we're saying is that the reason we brought that up is that the question has come up, does a co-signer's income count towards the family income of the family that's buying the house? And the answer is no. They're not occupying the house. They're just a backstop on your loan. So if your lender will take a co-signer, it's still just the family's income that we're looking at, not the co-signer's income.

But yeah. That's a decision that's going to vary from lender to lender, I would think; program to program.

Kent Buhl: And let's go to Patricia. Hi, Patricia. Where are you calling from?

Q: Hi. Are you there? Hi.

Kent Buhl: Where are you calling from?

Q: Port St. Lucie.

Kent Buhl: Very good. And go ahead with your question.

Q: I'm just asking in the first part of it, and I'm not sure it wasn't clarified later, but where does it say that NSP limits the combined loan to value to 100 percent? I heard a reference to that and --

John Laswick: Kind of implicit, Patricia. But we have said for a long time that you can't sell the house for more than the lesser of fair market value or total development cost. So any time you go



over 100 percent of fair market value, assuming you got a higher development cost, then you are encumbering the family with more debt than the property can sustain. If that family had to sell it next week, they would take a loss. And so it comes from that. We're aware that other lenders sometimes go somewhat over that, and that's fine. But in our situation, we have a lot of these houses because people got in over their heads. And we don't want to keep doing that. And so we can go up to 100 percent but not over.

Q: So you're basically saying that most of the time the closing costs take you over 100 percent of the sales price.

John Laswick: But we're saying that that's --

Q: So you're not allowing the governmental entity to cover the closing costs in those cases?

John Laswick: We are allowing them to cover the closing costs. In fact, that's what we want you to do. We want you to cover them out of somebody else's money than the borrower's money. So in those circumstances, when you have NSP funds, you really have no reason to go over 100 percent because you can bring it down to 100 percent with a second or a grant or however you structure it.

Q: No. But that's what you are doing. If you're covering the purchase price plus the closing cost, you're going to go over the combined loan to value into 105 percent.

John Laswick: Now, but the loan itself is going to be 100 percent, and then the grant's going to be five percent.

David Noguera: You wouldn't structure the closing costs in the form of the loan.

Q: Oh, so you're saying that you have to give a grant for the closing costs; is that --

John Laswick: Right. Yeah. Or loan or forgive of a loan or anything else. It's just that -- a forgivable loan, yeah. Or a non-recourse loan.

Q: Well, that's what the loans are in most cases. The second lending, secondary lending is usually a forgivable loan or a deferred loan or something. So if you do that, then you're going to go to 105 or higher.

John Laswick: I misspoke. I meant non-recourse loan. So you cannot have recourse beyond 100 percent of the value. Otherwise the family is under water the day they sign the note. We don't want that.

Q: Okay. I'm not sure what you're saying, a non-recourse.

John Laswick: All I'm saying is that if your costs go over 100 percent of the value of the property, then that has to be covered with a grant or a non-recourse loan, not a forgivable loan



but a loan that just -- a note that just acknowledges that funds were paid but that they are not required to be repaid.

Now, I realize most forgivable loans are never repaid, but they are still loans. You can make a non-recourse loan. It's basically just a piece of paper that says we have this much money in the property, but we can't come back to the family and ask for that to be repaid under any circumstances. That's different than a forgivable loan. Forgivable loans are repayable under various terms. It may be 100 percent repayable for the first five years and then 10 percent less for the next 10 years. But there's still payment that's going on. A non-recourse loan is just a way of recording your investment in this property without encumbering the borrower.

Q: Okay. I'll have to find out how to do that. I've never heard of that before. Okay. Thank you.

John Laswick: Now, I'm not suggesting that you do -- you need it. I'm just saying that if you --

Q: Well, we do need it because our borrowers don't have that kind of money to put into closing costs and down payment and so on.

John Laswick: Then you make a grant for them. That's what the NSP is for.

Q: Okay. Thank you.

Kent Buhl: Thanks, Patricia. Appreciate that question.

Let's go to S. Dean [ph]. Hi, S. Are you there?

Q: Yes.

Kent Buhl: Hi.

Q: Hi.

Kent Buhl: What's your question?

Q: I actually got an answer back. I wasn't sure what the acronym "CLTV" meant, and I got a response back that it was combined loan to value.

Kent Buhl: Very good. Glad to answer that question for you. Thank you.

And let's go to Bob. Hi, Bob.

Q: Hi. I've got two questions. One is, has FHA approved loans on land trust properties? Understand that's been in the works for some time. And then the other question was for HUD. Does HUD require us to pull a tri-merged credit report? Most cases we usually use a one credit report.



Arlene Nunes: Yeah. We do require it. FHA requires a tri-merged.

Q: FHA does, but I didn't know if -- my question was is on --

John Laswick: NSP program doesn't have requirement.

Q: HA. Does HUD require us to -- if we're doing direct lending to the borrower, do they require the tri-merge?

John Laswick: Those are local policy calls, Bob. We don't require that specifically. I mean, we require that you underwrite, but we don't say whether it has to be any detail like that.

Q: Okay. I just misinterpreted one of the slides. Thank you.

David Noguera: Okay. What about the land?

Arlene Nunes: Okay. Question. I have a question for you, Bob, on the land trust property. Are those ones that you're talking about with deed restrictions?

Q: Yes, ma'am.

Arlene Nunes: Okay.

Q: This is going to be they buy the improvements, and they lease the land for under a 99-year ground lease.

Arlene Nunes: We -- yeah. We have -- we do have some properties with community land trust that have been insured with FHA financing out in Colorado. But I do want to be very clear that anything that has deed restrictions, those deed restrictions cannot survive foreclosure.

Q: Right.

Arlene Nunes: And the program --

Q: Does FHA provide -- Fannie Mae has a writer that they put on the ground lease that basically covers that. Does FHA have a prescribed writer --

Arlene Nunes: No.

Q: -- for the ground lease loan?

Arlene Nunes: No. We don't. No. We don't.

Q: Okay.



Arlene Nunes: We are aware of these -- of the Fannie Mae writer. We are looking into that. But at this time we do not allow the deed restrictions to survive foreclosure, and nor do we have a writer in place at this time.

Q: Thank you.

John Laswick: Yeah. I just [inaudible] questions on that last week too. So what happens then? Does the trust lose the land?

Arlene Nunes: The land is -- I mean, what we're insuring is the property; right?

John Laswick: Okay. So you take that with the property. They --

Arlene Nunes: Well, we're insuring -- I'm sorry. We insure the loan for the improvements on the property.

John Laswick: Right. Which is -- doesn't include the land.

Arlene Nunes: Correct.

John Laswick: So the trust won't lose the land then, if you propose on the real estate?

Arlene Nunes: Right.

John Laswick: On the program?

Arlene Nunes: Right. The land is still there. And that would be the same thing on keeping residents.

David Noguera: [inaudible] the trust has a say in who you [inaudible].

Q: Where it gets sticky is that the deed restrictions that we want to prevail are the income guidelines for the affordability period, stuff like that, but they don't want to prevail.

Arlene Nunes: Yeah. And that -- at this time the deed restrictions do not survive foreclosure. We are looking into waiving some requirements. There was a round table that took place on May 8th where we had a very lengthy discussion on deed restrictions and a lot of the CLT work, the community land trust was actually -- were actually participants of that round table. And what you juts voiced here, your concern over the lease and the lease hold and the improvements were actually discussed during that round table. And we were very clear that at this time the deed restrictions would not survive foreclosure, which essentially is the land deed.

John Laswick: Yeah. I should say that Arlene and her team have really been taking a hard look at some of these sort of [inaudible] places between our programs and really trying to figure that out. So they're not all solved yet, and some of them are embedded in legislation, which we can't



really change. But they are asking questions and learning about what's giving people problem so they can try to fix it. Hopefully we'll keep making improvements as we go forward.

Kent Buhl: Let's go to Mike, who's got his hand up. Hi, Mike.

Q: Hi. Got a couple questions for you. I heard a comment, something about half of the 3.5 percent because of CDBG.

John Laswick: Right. So in the Housing and Community Development Act, we have a category of eligible activity called home ownership assistance. It's a pretty big category because it includes mortgage insurance premiums, what's your mortgage insurance premiums. It includes -- the big one is principal and interest reductions. So in effect, you're allowed to use CDBG and also NSP money to break down the principal amount virtually without limit as long as there's a legitimate financial reason for doing so. But the law says that you can only pay half of -- you cannot pay -- you can up to half of a down payment. So we interpret that as the cash equity that a borrower has to bring to the table. And in FHA's case, that's 3.5 percent.

So you would be limited using NSP or CDBG funds to paying half of that amount, and then the borrower would have to come up with the other half. That's just part of the law. It's confusing because it was in the regulations, and then it was out of the regulations. But it never -- and then the law changed back again, and it never came back into the regulations. But we have some policy alerts on that. So that's been around for a while. But people think, oh, that applies to the -- the 50 percent applies to the principal reduction, and it doesn't. It's just to that down payment, just the equity payment.

Arlene Nunes: But [inaudible] funds could be used for [inaudible].

John Laswick: Sure. Yeah. Right. Right. It's just our funds are limited to that. So exactly. So yeah. You have your parents give you some money or something like that, then that's fine.

Q: So if you had another governmental agency program, they could pick up the other one and three-quarters for the borrower?

Arlene Nunes: You're good.

John Laswick: Yeah. You could be. I mean, I think the reason that some borrowers have these cash requirements is that it has been proven that people stick with a loan longer if they've got some of their own money in it. So sometimes it's more symbolic than anything. But no. As far as we're concerned, the only limit is that you can only pay half of the down payment with NSP or CDBG funds. Where you get the other half is not limited.

Q: And then my other question is going back to clarify on that 100 percent CLTV. So if I heard correctly, you're indicating that an NSP recipient could provide a gift for the closing cost, but they couldn't secure it with a forgivable loan --

John Laswick: Exactly right.



Q: -- through the NS -- okay.

John Laswick: That's exactly right. And again, closing costs are a part of home ownership assistance, but they're not part of the down payment or the equity requirement. So you could make a grant of that.

Q: Is -- let me ask one last question. Is the CLTV just that of the FHA first mortgage and the NSP lien or --

John Laswick: [inaudible] combined. So that's everything.

Q: That would -- so that would include eliminate another DAT [ph] program from a governmental agency from providing that closing cost assistance as well, when NSP is involved?

John Laswick: We'd rather have you pay that as a grant.

Q: Okay.

John Laswick: I mean, we would rather have you not be over 100 percent of the value. But we also know that development costs and values are backwards these days. So we're getting into that, but we just don't want to get people into a negative equity situation.

David Noguera: The other thing I just want to mention, though, is the development subsidy; right? So to the extent that beyond whatever the value is, which is the basis that FHA is going to approve a mortgage, beyond that if there is an additional expense that you have to incur in order to make the home affordable, then NSP funds would pay for that. But you'd consider that to be a development subsidy, and it wouldn't factor into the lien that was being placed on this property.

Kent Buhl: Thank you for those questions, Mike.

And let's go back to just a couple more questions now, and then we'll move on to Matt Callahan. But let's go back to Genie who has a clarifying question about the co-borrower non-occupant. Hi, Genie.

Q: Hi. How are you?

Kent Buhl: Good.

Q: My understanding was that with NSP you could not have a non-occupying co-signer, and that was because then you have another -- a second technical owner of the property that does not occupy it as their primary residence. And that kind of violates down to the core of it.

John Laswick: I mean, I think we got our -- we took our guidance from the Part 5 rules on income calculation that the home people published.


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Q: Right. Which I have no problem with what you said that there -- a co-signer that's not occupying, of course they're not a member of the household. Their income wouldn't count towards eligibility. But say I'm an eligible home buyer and my mother wants to co-sign on my loan. Unless she's living with me, the way I understood the program, she can't co-sign my loan because she wouldn't be occupying the property.

John Laswick: You say that.

Q: So I get from your side what you're saying about that of course you wouldn't have a non-occupying co-signer count towards your income eligibility. But from the other side of it, I was unaware that you were allowed to have a non-occupying co-signer because then you have an owner who it's not their primary residence.

John Laswick: Well, I don't think we consider co-signers owners. I mean, maybe technically they are. But, I mean, I'm not aware -- David and I are not aware of that restriction in NSP. In fact, why would we allow you to discount their income, if we didn't allow you to co-sign, I mean?

Q: Yeah. And at least in my area, if you are a co-signer on a mortgage for a property, your name is on the deed.

David Noguera: That's right. The focus of the rule --

Q: And if your name is on the deed, you are an owner of the property that those deed restrictions go along with.

David Noguera: Okay. But you're focusing on who the owner is and not who the beneficiary is of the funds; right?

Q: Correct.

David Noguera: And what the CDBG regulations speak to is who benefits from the NSP investment; right? So who is the [inaudible] of the household? It doesn't speak to whose income.

John Laswick: Yeah. It's really about the occupants. Right. So, well, I mean, if this person wants to take on the liability of co-ownership without the benefit of occupancy, that's their choice. But we're not [inaudible] in that.

Q: Okay. Great. Then I wanted to kind of piggyback off something that I -- a lady had touched on before. And that was the not exceeding 100 percent CLTV and then we came back to it with developer subsidy. So our particular homes were -- it cost about $150,000 to build a reasonable market home in our area, but the market can only support about $90,000. So with our deed restrictions you're -- we have to include the full amount of NSP. So we're, I mean, one 70 percent CLTV. And we've been doing portfolio load so far and haven't ventured into FHA, but I have a buyer that's interested. So I would not be able to have a recapture provision or second lien for the



John Laswick: Yeah.

Q: -- [inaudible] for the NSP funds, but I'm liable to HUD for?

John Laswick: No. So that's the development subsidy David was referring to. So any time your development cost exceeds the value, you write that off, and that's a sunk cost. And that money just hopefully plus the hole in your mortgage market.

Q: Right. But you as HUD could still come back after me for that full amount.

John Laswick: No.

Q: You guys don't write off that developer subsidy.

John Laswick: Yes. We do.

Q: You do?

David Noguera: What it comes down to is the resale or the recapture provision that you place on the property. The only rule that we would use to clamp down on that $60,000 would be if you used a resale approach, where in resale you're looking at the total NSP investment being made in the deal.

Q: Right.

David Noguera: But if you're using a recapture approach, then that amount would be based on the subsidy that's going directly to the home buyer.

Q: Okay.

David Noguera: So forget about the $60,000. Focus on the $90,000. If you're going to provide --

John Laswick: Let's say you make a down payment or -- and closing cost grant of $5,000 to the family. Then you're in a recapture scenario.

Q: Right.

David Noguera: For $5,000.

John Laswick: Right.

David Noguera: Not $65,000.

Q: Right.



John Laswick: And that's probably what you're doing. [inaudible].

Q: Okay.

John Laswick: So that's how you -- yeah. That's how you get around that problem because it doesn't make sense to --

Q: Okay. Then with closing costs and the increase over the CLTV, if you at time of -- you're selling a house for $70,000 but they write their purchase agreement for $73,000 with seller paid closing costs of $3,000, do you still run into that over 100 percent CLTV that's not okay and it needs to be actually given in a grant?

John Laswick: [inaudible].

Arlene Nunes: You do. Right.

John Laswick: Well, as long as the seller's providing the amount over the loan -- the 100 percent of value, then no.

David Noguera: Well, what is the value in that example? Is the value $70,000?

Arlene Nunes: The value is $70,000. Figure $3,000 is over.

Q: Yes.

John Laswick: But you're making the grant -- the seller's making the grant --

Arlene Nunes: The seller is providing.

John Laswick: So, I mean, in our case we would say make the grant from NSP funds or --

Q: And so don't include it in your purchase agreement?

David Noguera: Secure the property on just the $70,000.

Q: Separate grant.

John Laswick: That's what we're trying to say is don't get down to the finish line and then trip them [inaudible].

Q: Okay.

John Laswick: That make sense?

Q: Thank you very much.



Kent Buhl: Thank you, Genie. One more question and then we'll go back to our presentation.

And this question is from Evelyn who asks, "Can a principle write down equal to the rehab amount the use in combination with the 203(b) or 203(k) loan?"

Arlene Nunes: Well, this is a write down?

John Laswick: Well, [inaudible] 203(b) [inaudible]. I'm not -- 203(k) basically --

Arlene Nunes: Usually have.

John Laswick: Yeah. But those the rehab amount into the loan. So I think that's --

Kent Buhl: Did you say you think that's okay?

John Laswick: No. Not with the 203(k). No.

Arlene Nunes: Not on the 203(k).

Kent Buhl: No.

John Laswick: You can do it on 203(b) because you're just looking at -- again, you're only going [inaudible] 100 percent. So whatever that number is, [inaudible] get it down to 95 percent or 97 or something like that to [inaudible] use. But 203 is -- 203(k), well, we're going to talk more about 203(k); right? So let's hold that part anxiety for another few slides and then I'll --

Arlene Nunes: Actually, what I would like to ask about that scenario with the principle break down, are you saying that there would still be additional rehab to be done using the 203(k)? Or is the total write down the amount that [inaudible] the rehab dollars, and that's the total rehab investment in that property?

Kent Buhl: And we don't know. That was only written in, and I cannot unmute that one.

John Laswick: Kick that right back and clarify that.

Kent Buhl: Yeah.

Arlene Nunes: Okay.

Kent Buhl: So at this moment let's go now to Matthew Callahan. And he will take us through the next few parts, starting with layering NSP subsidies. Oops, and sorry about that. There you go. Hi, Matt.

Matthew Callahan: Hello, everybody. This is Matt Callahan, and we're on slide 25, which is an effort to sort of recap everything that we've discussed so far visually. And this is a way of



showing how the layered financing would work with an FHA first mortgage and subordinate financing from an NSP program.

So I think we've really gone over this, but let me just recap and maybe fill in some gaps. The first layer -- and I should back up and say the goal of doing this, the way -- the reason why we use layered financing is we want to maximize the home buying potential and power of the NSP participant. Want to give them the maximum home buying power but at the same time keep their down payment and their monthly payment as affordable as possible.

So the first layer at the top is the buyer's contribution. This is the money that they're going to bring to the table. And as we've heard so far today, FHA does not stipulate a minimum borrower personal contribution to the purchase. There's no minimum amount that has to be sourced from the borrower's own funds.

And that would be true of NSP guidelines as well. But as it was explained, NSP financing or assistance can only cover half of the buyer's contribution. So in this example in an FHA loan, the NSP assistance could cover 1.75 percent of that 3.5 percent down payment requirement or equity requirement. And the balance could come from a variety of sources, the balance of the 1.75 percent.

It could come from obviously the borrower's own funds. And many NSP programs that we've worked with do establish some minimum amount that the buyer's required to contribute. It can be a flat dollar amount. It could be a percentage of the total purchase price. But the balance of that one and a half -- 1.75 percent could come from other sources. It could come from properly documented gift funds. It could come from a sale of borrower's assets. It could also come from other secondary financing sources, other approved secondary financing sources. So if you have local housing trust funds or state housing assistance programs, those funds could also be used to make up that balance of the 3.5 percent down payment requirement.

The next layer is the FHA first mortgage. This is a loan that the home buyer is going to be making monthly payments on for 30 years. So one of the comments that was made and in a -- that Arlene highlighted and I just want to accentuate here is that the power of the Mortgage Credit Certificate program is pretty significant, particularly in an FHA loan, because the dollar value or benefit of the MCC can actually be deducted from PITI. So FHA permits this, and that's a flexibility that's not available in conventional underwriting. It's such a great way of boosting the home buying power. So certainly it's a good idea to check with your local and state housing LANS [ph] agencies to try to incorporate MCC programs wherever they're available.

The next layer is the NSP second mortgage. This is a loan that they're not going to make monthly payment. This is the deferred loan. Typically the term of that loan is the same as the term of the first mortgage, but there's no monthly payment requirement during that term. One thing I should add here is that there's also the possibility of additional layers of subordinate financing beyond the NSP second mortgage.

And to my knowledge, there's no requirement that the NSP loan actually be recorded in second position. So you could have other state or local secondary financing sources that are acceptable



under FHA guidelines that could further increase affordability and perhaps allow your NSP subsidy to go further.

The final layer is the layer of closing costs. Typically we expect closing or settlement costs to be around three to four percent of the purchase price of the home, depending on local markets and whatnot. And so what we're learning today and understanding today is that NSP funds can be used to cover closing costs only if they're provided as effectively as the grant so that there's no additional lien recorded against the property that would cause the total combined loan to value or total CLTV to exceed 100 percent.

But other sources of funds could be used to cover closing costs. Certainly the borrower's own funds, seller permitted -- seller concessions or seller credits or builder concessions are permitted up to three percent of the purchase price is the typical guideline. Lender credits, sometimes called yield spread credits, could work. And other gifts or grants from other sources could also be considered.

So that's the total structure of the financing. I'm wondering, Kent, if it would be a good idea to stop here a second and take any additional questions because it connects back so much to what we were just talking about.

Kent Buhl: Let's see what we've got here. Yeah. So you did address Omega's question, "Can you recap the down payment -- recap down payment directly and indirectly from a nonprofit developer that is selling the home? Can the nonprofit provide the 3.5 percent?"

Matthew Callahan: Well -- go ahead.

David Noguera: This is one of the things that we've been talking about for a little while now. If you, the grantee, have paid for the acquisition and the rehab, whether it be to a developer, to a nonprofit subrecipient, or if you've done it yourself in the house, you wouldn't take additional NSP funds to offer down payment assistance or to offer a second mortgage because that would be over-subsidizing the property. What you would do is you would take back less at closing; right? You would receive less at closing to cover whatever down payment amount you would have given. The only additional funds that you would need in that deal is if you were paying for closing cost or PMI or something to that effect. But you wouldn't need that extra 3.5 percent.

Arlene Nunes: Is this Sarah's question or Omega's?

David Noguera: Yes.

John Laswick: Oh, it's Sarah's. Okay. So as far as Omega's question, you still cannot use NSP funds or CDBG funds to pay more than half of the cash equity required at closing. So moving it from a nonprofit to a city or back and forth doesn't change the restriction on 50 percent of our funds being used for that. In fact, the only reason that you would do it is that -- the only way you can do that is -- the only way that a seller can provide down payment assistance to a buyer in this program that's limited by the HERA law is to transfer ownership to a nonprofit. And the city



would or the instrumentality of government would make the payment. But it would still be 50 percent of the down payment, not more.

Kent Buhl: And Ellen asks, "So one half of the down payment can be included in the principle buy down with NSP funds, and the other half is paid by the borrower?"

John Laswick: Right. Home ownership assistance. I mean, so it wouldn't be the principle buy down exactly. But yeah. I mean, it all works out for the same thing.

Kent Buhl: And scanning here. I think we can move on for now, Matt.

Matthew Callahan: Okay. So the next section, part three, has to do with the nature of the secondary financing that you structure using NSP assistance. And I think most of the agencies, the NSP providers that are on the presentation today have probably -- their programs have matured beyond this point. They've already designed their secondary financing programs. But just as a recap of what's required, the -- first of all, the provider of the NSP assistance, the secondary finance, must be a governmental entity or approved nonprofit organization operating as an instrumentality of the local government agency.

Another key point is that FHA, HUD does not approve secondary financing programs itself. It's up to the FHA lender who's going to approve that program. So it's critical to work closely with your lenders to incorporate -- to make sure your programs are going to be approved. I saw that one of the questions had to deal with a problem in getting lenders to agree to secondary financing programs. And it's so critical to have multiple lenders involved in your program because many lenders do understand secondary financing programs and are -- they're able to approve them.

So a couple of key features of your secondary financing programs is that, first of all, repayment must be deferred for at least five years. This is a feature that's going to allow you to not have to count the loan in your debt to income calculations for qualifying. Deed restrictions and covenants, as we discussed already, may not be designed so as to survive foreclosure by a senior lien holder. Accrued interest charges should avoid causing long-term negative amortization of the loan. The key here is you want to incentivize home ownership, not make people feel they're effectively losing equity over time. And then any shared appreciation or shared equity plans have to be designed so that they're effectively proportional to the amount of the NSP investment. FHA specifically stipulates that a shared appreciation can't exceed 50 percent.

So one of the issues then that Arlene discussed earlier and it was discussed during the question period has to do with the notion of the maximum CLTV not exceeding 100 percent. And then the FHA [inaudible] that deals with the so-called cost to acquire, which is the acquisition price of the property plus closing cost discount points, any repair costs needed to bring the property to -- so that it can be sold. And here of course we're talking about the FHA 203(b) loan program. What we're saying with the NSP program is that the maximum CLTV cannot exceed 100 percent. So to the extent that you need to cover those costs, they need to be covered with non-loan sources, sources that are not going to create a lien against the property.



One of the issues that we heard, when we were working on the NSP round tables around the country, was that many NSP program sponsors were frustrated because their programs would stipulate a maximum subsidy that they would provide. And low and behold, when clients were presented, applications came in from lenders. In 100 percent of the cases the maximum NSP assistance is requested for the borrower. When, in some cases when looking at the file, it would seem that the borrower didn't need the full amount of NSP assistance.

And so really the only way to guard against that problem is to establish in your program a minimum housing expense ratio, for example, 30 percent, so that the borrower's housing expense ratio is below whatever established minimum you have. The NSP subsidy would be reduced, and the borrower would need to either take on a larger FHA first mortgage or increase their own personal contribution. So that way you can stretch your NSP subsidy without having some sort of stated minimum housing expense ratio. It's going to be hard to fight against or argue against providing the maximum subsidy.

John Laswick: That's a good point, Matt. I think a lot of people think that underwriting really only applies through all the family deals. But we're expecting all the grantees and their subrecipients and developers to look at these properties and to look at the family's circumstances. And we have a wide range of folks we can serve in this program, up to 120 percent of median. They're not all going to have the same needs for assistance on this. And so you need to be looking at what the family actually needs. Basically, you could provide as much as they do need, but you shouldn't be providing more than that. So discounting it is a good way to offset that.

Matthew Callahan: And in my experience working as a lender in these programs, when you don't have these kinds of minimum housing expense ratios, it's very hard to -- because the consumer, the home buyer's desire is to have the maximum subsidy. It's human nature. And so it makes it easier for everybody if you have an established stated minimum.

203(k) loans were discussed earlier in real good detail by Arlene. And one of the things that I've been involved with actually many discussions and many locations many times about how to effectively use 203(k) loans and layering in the NSP subsidy. And there may be some good examples of that working well on one of our participants now, or maybe you know some. But to my knowledge -- and I'd check with -- for example, with the National Stabilization Trust -- there's not a lot of good examples of this working effectively.

One initiative that I'm aware of locally here in Southern California that I would bring to your attention is an effort where the NSP program is acquiring very distressed properties, properties that require rehabilitation that would exceed what 203(k) could address. Acquiring those properties, completing the most critical rehabilitation and typically the NSP lead-based paint abatement, and bringing it to the level where someone -- a home buyer could come in and use the 203(k) loan to complete not only the purchase but the balance of the renovation and improvements. And this, to me, seems like a pretty elegant way of doing it.

The next slide has to do with FHA appraisal requirements, and I'm going to pass the mike back to Arlene to address this issue. Is Arlene still available?



John Laswick: Yes.

Arlene Nunes: I'm right here. Okay. So FHA does have appraisal requirements, and FHA appraisals are valid for 120 days. There is a possibility, in case you need a few extra days to close the loan, you do have the ability to extend that FHA appraisal for another 30 days and actually even longer, if the home needed -- you need a few more days for closing. So except for the 203(k) loans, the lender should not be ordering appraisals until the NSP program administrator has confirmed that the repairs and improvements have been completed. So FHA does allow some flexibility there on the appraisal side to close the loan, if you need that extra time.

John Laswick: Now, NSP has -- like with the 30-day -- I mean, 60-day lifespan on a valuation just because values would change. In fact, I think FHA originally had 180 at the beginning.

Arlene Nunes: Yeah.

John Laswick: But we did originally add some -- we did add some flexibility to get an update on an appraisal for another 60 days, if needed. But we feel that going beyond that was just a little too chancy in our markets. So, Kent, can you pass the magic ball to Arlene?

Arlene Nunes: Okay. Then one thing that I do want to stress, that even though you have that flexibility if you need on the appraisal side to extend the validity period of that, the lender -- obviously the lender's underwriter bears the responsibility for determining if the eligibility of the property for FHA insurance and quality of that appraisal report. So really all responsibility lies with the lender. And the lender's underwriter is the last to communicate with the appraiser to request any additional clarification that they need after they review the appraisal.

So really here the point is to stress that the lender's underwriter has full control over the content of the -- or I should say the acceptance -- of that appraisal and the need for additional clarification on that appraisal.

So the next issue will be covered by Matt. So, Kent, if you will please transfer the baton to Matt.

Matthew Callahan: Okay. So one of the sort of hot topics that I know a lot of NSP program administrators are thinking about is how can a lease purchase program be incorporated into an NSP program? And in many revitalization areas finding ways to attract home buyers who may, for a variety of reasons, need an initial lease period to be -- before they actually take over full responsibility of the mortgage. It could be a very good idea. So there's quite a few discussions going on about lease purchase and how it can be used in NSP and similar programs.

And the good news is is that FHA does allow for the initial borrower in a lease purchase program to be a nonprofit entity that has been approved by HUD. So there is an underwriting process, if you will, of the borrower, which would be the nonprofit entity, that would acquire the property initially and then enter into a lease purchase contract or arrange [inaudible] private property, rent the property for a period of time and then exercise their purchase option by assuming the FHA loan in the future. And so this is something that's permitted.



Certainly, it's something that could be discussed with your lenders and with HUD to come up with a local lease purchase program using NSP assistance and an FHA. So it's -- we bring it to your attention now because we know it's a discussion about this. Obviously a lot more work needs to be done on it.

FHA lender overlays. One of the things to appreciate is that each lender -- and Arlene has said this a couple of times. Each lender, FHA lender is going to have their own overlays, and they're fully empowered to do that. They -- there's no requirement that they adhere to whatever the minimum requirements that FHA stipulates. They can typically and do impose different or more strict requirements for FHA loans.

And so that's why it's to your advantage in designing and implementing your program to have as many FHA lenders as possible participate because each will have their own different approach to it. And a buyer who may not be approved by one FHA lender could be approved by another lender.

The flip side of that -- and here I'm sort of wearing my lender hat working with NSP programs. One of the frustrations and one of the frankly disincentives part for participating in a local program is where the NSP program itself has created an overlay or an underwriting requirement that is not required by FHA that is more strict, say, with respect to credit scores or debt to income ratios or income documentation requirements than what we can get approved through normal FHA underwriting.

So what that does is make it just much more complicated for the lender to participate in your program. So my recommendation, we carefully consider whether or not it makes sense to impose your own local overlays on what's required for someone to be approved for an FHA loan using your own assistance.

Another issue that came up in the NSP round tables was frankly some frustration that NSP program administrators expressed in the fact that they were involved in quite a bit of marketing of their program, their NSP program and through a variety of ways, websites and workshops and different marketing strategies and generating a lot of consumer interest in their program.

And the normal process is to refer that interest, those leads, if you will, back to your participating lenders and real estate agents. And my advice and recommendation is not to assume that automatically those leads are going to be evaluated for your NSP program only. That more likely the -- your lender or real estate partners are going to be perhaps looking for what they perceive to be the path of least resistance or quickest close and that they may not perceive your NSP program as being that.

So it's critical to track your referrals and leads back to your lenders and reward those lead recipients who are actually converting the referrals into NSP borrowers with more leads. One of those things that we've seen with many of the local jurisdictions we work with is they'll have a comprehensive list of all of their approved lenders and loan officers and then a subset of that list



that describes their most active lenders and loan officers. So consumers are automatically directed towards the lenders and loan officers who are more likely to provide the NSP assistance.

This next section, part four, really has to do with, again, my perception of working with first-time buyers, other buyers using NSP assistance or NSP-like programs. And what are the issues or problems or barriers that they are facing in becoming mortgage ready? And my encouragement to you is to work closely with those people that are having the first contact with your NSP clients. That may be your nonprofit housing counseling agencies, the workshop providers.

And make sure that they're focusing on these issues. I think a lot of workshop -- home buyer education providers do a really good job on a lot of areas of mortgage readiness but not some of the practical nuts and bolts items. So these are the things that I'm seeing on a day-to-day basis that are perhaps causing people not to be approved for FHA financing.

The first is you almost can't emphasize enough the importance of documenting income and assets, particularly assets. Consumers really don't get why cash is not an asset, why if they have a large deposit or even a modest deposit into their bank account that can't be sourced or traced, why that would be a problem for them in getting FHA approval -- loan approval.

Another area is the importance of their federal income tax return. What I tell clients now is they should assume or consider their federal income tax return as sort of, well, their personal financial statement and that whatever they tell the IRS in their tax return, we have to believe is true when it comes time for their home loan application. So it's important to have them understand that as they're filing their tax returns. That if they, for example, claim large amount of unreimbursed employee expenses, if they claim the mortgage interest deduction on behalf of somebody else or other sort of creative things that might help lower their tax liability, it's also going to lower their chances of loan approval.

Another critical thing is the understanding that the loan approval process is dynamic and ongoing. People often ask me, how will I know when my loan is approved? And I'll somewhat facetiously say, after you've been living in the house for a month. And it's really true that up to and including the day we close, the borrower's income, assets, and credit will be completely updated and reevaluated. So buying that big screen TV or changing your job status or changing your assets in your bank account prior to closing could really jeopardize your loan approval. So it's important that home buyers understand that.

A lot of clients come thinking -- that have quite a bit of student loan debt and they think, well, I've heard it's all deferred. If it's deferred, it doesn't have to be counted. And that's true to some extent, but all deferred student loans have to be well documented. And the big challenge that consumers have is getting good documentation on the status of their student loans, the deferral period. And so as they're preparing for buying a home, that's the time to start getting all that documentation together, not when they're right in the middle of a purchase.

Increasingly, in the past FHA has had flexibility regarding collection accounts and charged off accounts. And there was some ability to waive the payment of those but -- and in my experience,



most FHA lenders now are requiring that collection accounts and charge off accounts be settled. So it's, once again, good to discuss that with their loan officers early in the -- possible in the process to discuss how those debts are going to be resolved, if they need to be.

Another issue that it's really timely and it's really something that's come up that's a big issue in the last year is the issue of disputed derogatory credit. It used to be sort of the, I would say, cavalier advice that people would get from credit counselors that if they had derogatory credit, that they could just dispute it and eventually it would go away. And, in fact, that doesn't work.

And what happens is the disputed status sticks with the credit file. And now, most underwriters are requiring that the disputed status be resolved prior to the close of escrow. And frankly, I would prefer root canal over trying to remove a disputed status on a credit file. Really, really tough. So buyers, I think, should be counseled not to dispute derogatory credit. There's other ways to resolve that, or at least not frivolous disputes.

It's very common to encounter home buyers these days, very normal, people that have long-term good employment histories but who have had periods of unemployment and -- over the last two years. And it's going to be critical that they document those periods of unemployment, the reason, and get documentation from their previous employer and the cause and reason for their unemployment. And that often could be a way to overcome those periods of unemployment.

Another issue is gift funds, and this is where it becomes even more complicated because the home buyer is going to be relying on gifts from a closely related family member to complete the purchase. And FHA is perfectly fine with gift funds, but they have to be documented in very specific ways. And so the important advice I give clients is initially what you need to do is talk with your family members about what level of assistance they can provide and their willingness to sign a letter and provide evidence of the funds that will be gifted. The actual movement of money is something that is not that urgent and just emphasizing with the borrowers the importance of documenting every step of the gift process.

And then finally, once again, that all deposits and assets that are being used through the purchase or that are identified in the borrower's bank statements are going to have to be sourced. And any unsourced deposits can very likely jeopardize their loan approval. And the very final bullet point is one I made before, that loan approval is a dynamic and continuing process until the loan closes.

So I would definitely encourage you to review these points with your pre-purchase counseling staff and home buyer education providers to make sure that they are being addressed. And I think we're at the end.

Kent Buhl: Very good. Thank you, Matt. And let's go to questions. There's a bunch of them stacked up.

And let's start with a question from Leslie and echoed by Laura. "Could you please cite your reference with regards to the maximum combined loan to value for NSP being 100 percent? Is there a date of written guidance that you can provide?"



And so while you are thinking about that, I'll go on to Tatiana [ph]. And let me unmute you, Tatiana.

Q: Hello, gang.

Kent Buhl: Hi.

Q: How are you?

Kent Buhl: Good. Where are you calling from?

Q: The city of Miami Gardens.

Kent Buhl: Very good. Go ahead.

Q: Okay. This is a silly question. We tried to close only one FHA loan. And I think that one of the issues that we had was that we had to deliver the appliances prior to closing. We tried to do that and the appliances got stolen. So therefore, we just haven't want to try FHA anymore. Is there any way to work around that because I know that most banks actually either don't want to do FHA or they don't have a secondary market for them or they don't want any deed restrictions or they have the issue with the appliances? So we haven't been very successful with any kind of FHA loans.

John Laswick: Well, I can speak to the issue of the appliances. This is a local -- each lender is going to handle this a little bit separately. But one of the solutions that we've worked out with is you can get a copy of the paid invoice for the appliances and show that to the appraiser. They very often will issue the what's called a 1004(d), which is confirmation that the appliances will be part of the transaction at closing. So I think there are ways to avoid the actual installation of this appliance part at closing. But yeah. You're right. And a lot of times, if the house is not occupied, it creates too much of a temptation to have them stolen.

Q: Okay. Do you think that they will accept copy of a piggyback contract with the county because we do not pay for the invoice and the credit card is not charged until they're actually delivered? We don't have any paid invoice.

John Laswick: You're going to need some way to confirm that the appliance will be provided has been paid for. And typically, the appraiser can use that as confirmation that the -- that that underwriting condition has been satisfied. So it's hard to go into the details of what exact document would work, but I think it's a question of talking with the underwriter and appraiser as to what they would accept as confirmation.

Q: Okay.



Arlene Nunes: On the FHA side one of the property schema requirements is that there is a stove in the property. So you want to make sure that that is available at the property for FHA -- minimum property requirement.

Q: And that includes the appliances?

Arlene Nunes: Stove. The stove in particular for FHA.

Q: Yeah. We always deliver a stove and refrigerator for both and water heater. Those are the only three appliances that we provide. And they are there in the write-up, but we just don't pay for them until they're actually delivered. So that was the only thing. And the only support that I have is a contract, a piggyback contract with the county.

Arlene Nunes: What you're saying is that you provide it after the loan is closed?

Q: Yes.

Arlene Nunes: And is there some other type of final walk-through for verification or anything like that that occurs?

Q: No.

Arlene Nunes: No?

Q: No. There is nothing else. I mean, the inspector can go back after we close and verify that, but there is no walk through.

Arlene Nunes: That happens? Does that happen? Does the inspector go back to verify that that's in there?

Q: I believe it only happened once, and that was the time that we did it with FHA. Other than that, no. Regular loans normally never go back to check that.

Arlene Nunes: Yeah. With FHA you would need to have that. So I'm glad to hear that when you had an FHA loan, that somebody went back to verify that.

Q: Yes. They actually did.

Arlene Nunes: Okay. We should continue that practice --

Q: Okay.

Arlene Nunes: -- with FHA.

Q: Okay.



Kent Buhl: Thank you, Tatiana. Good to hear your voice.

And let's go now to Dean. Hi, Dean.

Q: Hello? Hello?

Kent Buhl: We can hear you. Go ahead.

Q: Oh, yeah. I wanted to go back to the issue of co-signer on a NSP loan. We ran across a situation where a parents assisted a home buyer in NSP. The home buyer signed the NSP loan but the parents didn't but the home -- the parents signed on the mortgage with the bank and -- or included on the deed for the property. And the thought was that they caused some problems with respect to, at least legally, what happens if the actual purchaser, the person that moves into the property decides to leave for whatever reason and then parents are then owners of the property?

John Laswick: So you're saying that the parents signed -- the parents are listed on the deed but not on the note?

Q: They're not listed on anything with NSP. They're listed on the deed and the mortgage with the bank.

John Laswick: Well, so they're co-signers. I mean, so you're saying that -- did they live there?

Q: No. And their incomes weren't taken into account in terms of eligibility.

John Laswick: Yeah. Well, we will [inaudible]. So you're saying that they could take over the house after the children leave for some reason and get a good deal or something?

Q: Yes. I mean, it seems like that might happen.

John Laswick: I mean, that's where I think your recapture and your evidence or deed restrictions or liens or whatever you have to cover your long-term affordability and the repayment provisions on any of your stuff, second financing or whatever you have there, should provide for some sort of penalty if a non-occupant moves into the house. I'm sure this one didn't. So I don't know how you fixed that, but it might be something you want to look at how your attorneys look at it going forward. Did the parents actually take over possession of the property then?

Q: Oh, no. They haven't taken over possession of the property. They just --

John Laswick: Just saying that they could?

Q: Yeah.

John Laswick: Well, you might want to try getting a new lien or something that defines their rights and responsibilities better so that you don't get stuck in that situation. I mean, we've had teams going back and rewriting liens. It's not the most fun thing we ever did, but people are not



impossible to deal with on this for the most part. So they understand what you're trying to do. They understand that they're getting a benefit. And hopefully, they'll be cooperative.

Q: Okay.

Kent Buhl: Thank you, Dean.

John Laswick: And you might want to try -- you might want to put in for some technical assistance to our resource exchange just to -- maybe somebody could talk you through some alternatives as far as substitute liens or other kind of techniques. It wouldn't cost you anything.

Q: All right. Thank you.

John Laswick: Okay.

Kent Buhl: Thank you. Hope that gives you a way forward there.

And Marie asks, "In regard to income, can child support documented for two years be considered for debt repayment, if it's the only source of income?"

Lisa Ellis: Three years.

Kent Buhl: It would need to be for three years?

Matthew Callahan: So two years and three years of continuous income. Okay. So for that -- for a third year you'd have to have some other additional source of income? Is that what you're --

Lisa Ellis: The -- hi. It's Lisa Ellis speaking. In regards to child support, the two years' receipt of the child support is acceptable for documenting it and utilizing that child support as being income. However, the child support must be documented that it will continue for a minimum period of three years from the date of the note.

Matthew Callahan: So we're saying you can use it two years going back, but you got to be able to demonstrate that it will be there for the next three years.

Kent Buhl: Okay. Thanks for that question, Marie.

And now, let's go on to Patricia. Back to Patricia. Hi, Patricia. Are you there?

Q: Hi. I'm sorry.

Kent Buhl: All right.

Q: It was -- I wrote it so long ago. I didn't know I was the right one here. I had asked -- oh, okay. When we get to the 50 percent for the CDBG 50 percent of the down payment -- okay -- what it says is that you can pay 50 percent of the required down payment. We've always thought that



because we were -- and we're not paying it right now anyway, but because we were a governmental entity, the governmental entity can provide 100 percent of the funds needed.

Therefore, the down payment required in that case was nothing. So how does the cap apply, if -- and it could happen on a conventional loan, if they allow a governmental entity to cover all of the difference. What is the required down payment? It could be on a conventional loan. It could be a number of different things, if you're trying to go back to another down payment that's established for a non-governmental entity. I'm kind of mixed up.

John Laswick: Yeah. So pretty much all lenders that I know about require some sort of down payment. I mean, maybe there's a few that don't.

Q: Well, under the FHA, if you're a governmental entity, there is no required down payment.

David Noguera: I think you --

Q: And on -- and conventionally, I think that's the same thing, if it's a housing program or something and it's paying more than 20 percent, then there's no required down payment.

Arlene Nunes: Required down payment. Well, let me clarify. So according to FHA's guidelines, you are correct that the minimum investment of 3.5 percent can be paid for by a government entity. Now, if the NSP funds can only be used to cover 1.5 percent of that 3.5, then the other half --

Q: No. It doesn't -- it doesn't exactly say that. It says that we can only pay 50 percent of the required down payment. So if FHA is not requiring a down payment, it wouldn't be 1.75. It would be nothing. I mean, there would be no cap.

Arlene Nunes: Okay. So if only -- if NSP funds can only be used -- NSP funds can only be used for half of 3.5 percent, do you have another source of funding at the government entity to cover the remaining half?

Q: I don't think you're understanding exactly. I'm trying to go back and say, what is the definition of required down payment for FHA? If I'm a governmental entity and I'm covering whatever I can cover, would that not be -- I can cover the 3.5; correct?

Arlene Nunes: Yes. You can cover the entire 3.5.

Q: If it weren't -- okay. If it weren't NSP funds and I'm a governmental entity, the required down payment is nothing. So how do you go back to the 3.5 and say that it's only half of that, if this situation is different and I'm a governmental entity?

Arlene Nunes: Well, no. Okay. Let's go back. Somebody needs to put in 3.5 percent. So you as the government entity are putting in 3.5 percent for the borrower; correct?

Q: Correct.



Arlene Nunes: Okay. So NSP --

John Laswick: Can only pay half of that.

Arlene Nunes: -- requires -- yes -- allows you to only pay half of that 3.5 percent. So there is a down payment requirement. The question is who's paying it. And if you, the government entity, are paying it, NSP is limiting your use of their funds to make that 3.5 percent investment for the borrower.

John Laswick: So, Arlene, are you saying that -- there is a down payment requirement.

Arlene Nunes: There is.

John Laswick: It's just that the government could pay -- the government entity could pay all of it. So there is -- so, Patricia, there is a down payment requirement. It's not nothing. It's 3.5 percent. It's just that you can cover that any way you want to, except that only half of it can be NSP.

Q: Okay. So how would you do it, if somebody bought a house that was maybe a little bit too much for them and they came up with, okay, your down payment in this particular transaction is going to be 10 percent because of such and such? Then you're -- then NSP could only pay -- this is conventional, not FHA. Then in that case you could pay five -- half of it?

John Laswick: Right. Yes.

Q: So anything that's called down payment is subject to that?

John Laswick: Yes. Down payment. Not second. Not closing costs. Not mortgage insurance premium. You could pay 100 percent of those things. You just can only pay half the down payment. And I think what Congress is going for way back in the '90s there was some idea that people would have some cash in the transaction. And personally, I still think that's a good idea.

Q: Okay. Can I ask one other question of Arlene? And I just wanted to verify this. I was under the impression that she was saying that the HERA law does not apply to governmental entities, or did I hear something different?

Arlene Nunes: That is correct. The HERA -- the 2008 HERA law, the source of the down payment to fulfill that 3.5 percent investment minimum, if that source is -- if the government entity is the --

Q: Seller.

Arlene Nunes: -- [inaudible] that's providing that down payment, that is an acceptable source.



Q: Okay. So even if the seller is the -- so the seller in our case with NSP can pay half of the down payment?

Arlene Nunes: Yes. You are a government entity. You are not a nonprofit who is not an instrumentality of government; is that correct? You are a government entity?

Q: Correct. Yes.

Arlene Nunes: Then you are fine.

Q: Okay. Okay. And I also looked up the definition of a non-recourse loan because I had asked that question earlier. And I'm seeing that a non-recourse loan can -- is actually -- it's a loan that the borrowers don't have to pay back but they could still foreclose. So is that what you're talking about? I thought the whole theory was not to be upside down so that they couldn't foreclose. I'm not sure --

John Laswick: Right. So I am not defining it that way. I am defining it as essentially a non-performing note or something. I don't know. I mean, a non-recourse loan is one which you are not required to repay it. I don't --

Q: Right. But see. What their definition is the -- if the partnership fails or the person fails to repay a non-recourse loan, the lender has no recourse against any person except to foreclose on the assets used to secure the loan. So I don't think --

John Laswick: Well, sure. Yeah. Then you're going to be in a third position. So in order to enforce that, you're going to have to pay off the first and second mortgage. What I'm suggesting really in stead of that is make it a grant.

Q: It's a grant?

John Laswick: 100 percent. Maximum 100 percent loan to value. So let's just forget about non-recourse loan.

Q: Okay.

John Laswick: Let's just focus on 100 percent of less of loan to value.

Q: Okay. All right. That answers my questions. Thank you.

Kent Buhl: Thank you, Patricia. And let's see who's up next.

Let's go to Marie's question. She says, "NSP second lien then does not have to be filed or recorded?"

Matthew Callahan: No. Let's see. We're -- is this a written question?



Arlene Nunes: Is this a written question?

Kent Buhl: It is. Yeah.

Matthew Callahan: You can read it for us.

Kent Buhl: That's the whole thing. "NSP second lien does not have to be filed and recorded?"

Matthew Callahan: No.

David Noguera: He was trying to understand.

Matthew Callahan: All right. So again, most typically, the second mortgage lien that NSP files is below 100 percent of market value. So you have, let's say, a 95 percent first mortgage and a five percent second mortgage. Anything up to 100 percent of value should be recorded and is, in fact, your enforcement tool for the affordability period, any kind of restrictions on the resale of the property or whatnot.

If you go over 100 percent, people were saying that they wanted to have some instrument for that. I've decided that that was a bad suggestion and you should just forget about anything over 100 percent. And so anything over 100 percent is -- cannot be recaptured, cannot be returned from that property. Therefore, filing a lien against it wouldn't do you any good anyway. But anything below 100 percent of the loan to value really needs to be recorded.

Lisa Ellis: Yeah. Just as common practice in the industry, it's always best to record all liens that encumber the property just so if there's ever a refinance situation, that new lender is fully aware of what kind of liens are on that property.

John Laswick: Yeah. And it's your kind of tool. I mean, this puts the title company on your staff, to some extent, because seven years from now whenever Nellie made the loan to Mrs. Gonzalez and she wants to sell her house, there's some rules about what happens then. And so that's what your liens should describe.

In some cases the grantees will even have a separate agreement with the buyer, with the borrower that entails that your loan is forgiven at 10 percent a year for 10 years or your loan can only be forgiven after the 10-year period is up or whatever terms you decide to have. And then when people sell their houses, you make -- you're in a position then to get some money back so that you can use those for other affordable housing in your community.

Kent Buhl: Let's go to Lorraine [ph]. Hi, Lorraine. I'm unmuting you.

Q: Hello. Hi. Just we had the same question on the non-recourse loan. How would you capture the affordability period?

John Laswick: Well, so when I foolishly brought up the term non-recourse loan, I was talking about something above 100 percent of value. So you can't recapture anything above a value that -



- there's no value there to recapture. So there is no affordability period. The affordability period applies in the case of either a development subsidy, the case cost you $130,000 to fix up a house but the market value's only $100,000. That's $30,000 as a development subsidy.

And it automatically in a home defaults to a resale unless you put some direct subsidy in there. A direct subsidy is really what we're talking about with putting liens on the property because then you have provided something for somebody that basically discounts the price from fair market value to whatever you decide to sell it to them for. And that's the part you want to put a lien on. That's the part you have to put a lien on, in fact, because there's no other way to protect your interest there. So that's where it comes from, but anything above that is gone.

Q: And I guess right now, what we heard, you had mentioned -- so what would be captured in that second lien would be just the down payment. And then the closing cost assistance should be a grant? So you should have --

John Laswick: Doesn't have to be. Well, I mean, I think most people -- most grantees don't make grants, per se. They make forgivable loans, or they make loans that -- so, I mean, it's treated as a grant. I mean, it works like a grant, but you then have some ability to recapture some of that, if they sell the house because you don't want them to go out two weeks later and sell that house for $20,000 more than they paid for it because that creates a windfall for them.

Q: Because at this -- I'm sorry. At this point, I mean, that second lien, the down payment assistance and the closing cost, home buyer assistance, NSP home buyer assistance is being included in the CLTV. And so the CLTV is higher than 100 percent. And so are you saying that --

John Laswick: Well, those are a grant. If it's over 100 percent, it should be a grant. Yeah.

Q: If it's over 100 percent, it should be noted maybe on that second lien that that is --

John Laswick: Well, I don't think -- doesn't really get you anywhere.

Q: Would it be taken into account maybe?

David Noguera: The only place you'd take it into account, I guess, would be the affordability requirement.

Q: Okay. Okay. I see that. I could see that.

John Laswick: That still depends on -- I mean, if it's a grant to them, it counts towards it's a direct subsidy.

Q: So anything over how would you enforce it? You wouldn't. Anything over 100 percent is a grant is what you're saying?

John Laswick: Right.



Q: Okay.

Lisa Ellis: Basically, the bottom line is is that anything that's over 100 percent cannot be secured against the home, cannot be secured against the collateral.

Q: Okay.

John Laswick: The home's only worth 100 percent of what it's worth. So anything -- I mean, you could do whatever you want, but there's still no value. That's over the market value. But so, I mean --

Q: Interesting.

John Laswick: It's not -- I mean, so typically -- I mean, so maybe your closing costs are on top of whatever else you may have sought a second for. So you're not going to recapture those, but you will still -- I mean, most people will still make a loan or some -- a loan for closing costs or a small loan on the principle amount in order to get themselves into a recapture mechanism for the long-term affordability just because it's so much easier to work with. So that's really the number you're going off of. The number is anything between 100 percent of market value and what they actually pay for it is the direct subsidy. And that's what drives your affordability period.

Q: All righty then. Thank you.

Kent Buhl: Thanks, Lorraine. And let's see. We're getting close to the end of our scheduled time. We've got a number of questions left. Are panelists able to stay a few more minutes to answer outstanding questions?

John Laswick: Going over 100 percent, Kent? Is that what you're telling me?

Kent Buhl: That's it. We're going over 100 percent, if that works for you.

John Laswick: Kent, I'm not sure I can secure it but okay.

Kent Buhl: Let me just remind folks that this webinar is being recorded and will be archived in the NSP Resource Exchange. It will be there within usually a day or two. And also we've got some upcoming webinars in the NSP realm that may be of interest to you. Hope to see you at some of those.

And when you do leave, you'll be automatically taken to a survey form. We'd appreciate you taking just a couple minutes to answer those questions, give us some feedback, and written comments are especially helpful there. So we hope you take a moment to do that.

And let's go now, Suzanne's question goes back, again, to the down payment. "Can the seller -- a nonprofit seller of a property also provide half of the minimum down payment?"



Arlene Nunes: No.

John Laswick: No.

Arlene Nunes: No. That would be a [inaudible] source under HERA.

Kent Buhl: And let's see. We've got --

John Laswick: So this is the case where you -- the way to work that is to get the government entity to make the down payment loan or grant rather than -- but it's a little cumbersome because you have to have the nonprofits having final and so forth. But, I mean, it's not the end of the world.

Kent Buhl: And next up let's -- let's see. So going back quite a ways, Evelyn's question long ago where she had asked -- where did that go? There. She had asked, "Can a principle write down equal to the rehab amount be used in combination with the 203(b) or 203(k)?" And she provided some clarification to say that the purpose would be to offset the financing of rehab to reduce qualifying ratios.

Arlene Nunes: The principle -- who's paying down the principle?

John Laswick: The grantee was probably.

Arlene Nunes: Okay. So the grantee is paying down the principle on the what?

Kent Buhl: On the amount of the rehab cost, the hard cost.

Matthew Callahan: If they're paying all of the principle -- I mean, all of the rehab costs, then that would be -- we could just do a 203(k) loan -- I mean, a 203(b) loan.

Arlene Nunes: No. 203(k). They're paying for all of the rehab or just a portion? Because it says a write down but it doesn't specify if it's all --

John Laswick: Equal. Equal to the rehab dollars. So we -- let's assume that's all of the rehab.

Arlene Nunes: If it's all of the rehab cost, then you could use the 203(b). If it's -- you can't -- you wouldn't be able to use a 203(k) because the 203(k) obviously is to cover rehab.

John Laswick: And, in fact, this is what happens a lot. I mean, the grantee -- I mean, it might not be exactly the rehab amount. But think about it's a large chunk of money, and they're basically discounting it. And then they're coming in and putting a mortgage on the remaining value. And that's perfectly fine under 203(b).

Arlene Nunes: Yeah. Not 203(k).



John Laswick: Gets just kind of confusing with 203(k). We may need to [inaudible] some guidance on that or something but we've been struggling with how to make it work. I think one of the big problems there is that your 203(k) is financing everything. It's financing all the rehab. So except the case that Matt used where maybe you do the basic rehab to make the house habitable and then you -- and then they take out a 203(k) loan and come in and do the hazmatic improvements or things like that. But that's still two rehab processes. I'm not sure that's all that exciting either.

Arlene Nunes: That would be looked at very, very closely by the lender, if that would be at all eligible for a 203(k), depending on how much rehab is left to do.

Kent Buhl: So I'm going to go now to Dave and then after Dave to Jesus and then Jenny. So let's first go to Dave. Hi, Dave.

Arlene Nunes: I'm sorry. Before we move on can I just revisit Evelyn's question again? I do want to make clarification that normally the interest rate on a 203(b) loan is less than the interest rate on a 203(k) loan. So if you were to write down the principle equal to the rehab dollars and get a 203(b) loan, your -- you would be in a better position or the borrower would be in a better position because obviously the interest rate would be less than if they were to ever to work on a 203(k) because it's just higher [inaudible] possible a month.

John Laswick: And I think that these -- the other thing that we were assuming is that the grantee is giving the rehab. I mean, if you are trying to get money to the borrower, close on the loan and then do the rehab, it's difficult. I mean, you can't really do that with a 203(b), and it's overly complex with a 203(k). I don't know.

Kent Buhl: Okay. Let's now go to Dave's question, and it's been there for a little while. Dave, are you there?

Q: Yes.

Kent Buhl: Very good. Go ahead. What's your question?

Q: As a government entity we can acquire and rehab a property and also resell it and provide the home ownership assistance, down payment cost assistance; correct? We can do both of those activities?

Arlene Nunes: If you are a government entity. But here's where I caution you. If you are hiring or contracting a nonprofit to do either the down payment assistance on your behalf, that would not be allowed unless that nonprofit was an instrumentality of government and proven to be so.

Q: Okay.

Arlene Nunes: So be cautious of that.

Q: Okay. Thank you.



Arlene Nunes: Yes.

Kent Buhl: Very good. And let's go now to Jesus. Hi, Jesus.

Q: Hi. Good afternoon. Jesus Morales with the City of Corona in California. Can you hear me?

Kent Buhl: Yeah. We can. Go ahead.

Arlene Nunes: Hi there.

Q: The question I had had to deal with if we're doing a manufactured home, I found out Fannie Mae, Freddie Mac does not insure buy loans on manufactured homes, even if they're on a permanent foundation, if they have "resale affordability restrictions." And unfortunately, we used the money to do a manufactured home and found out we couldn't get a loan for the buyer on it.

So I guess my question is, is there any reconsideration by Fannie Mae that they need to revise this because if other parts of the country are doing manufactured loans, they're not going to be able to get a loan for the home buyer, if they have any kind of affordability resale restrictions as part of the agreement for the home buyer?

Arlene Nunes: Well, we can't really speak for Fannie Mae or for Freddie Mac. But on the FHA side, anything -- resale restrictions that survives foreclosures would not be eligible for FHA financing. So it depends on how we do have these restrictions in place.

Q: Right.

Matthew Callahan: So there would be a restriction automatically because it's a manufactured home?

Arlene Nunes: I'm sorry. Could you repeat that?

John Laswick: I don't think that's actually -- I mean, this requirement applies to any loan. So it's not just manufactured homes. But here's the thing, Jesus, and we had a couple of written in questions too. So the reason -- the time that you would have a problem with that is if you have a resale provision in your program and the home rules -- the home program rules require that you reimburse the program for the entire amount of that.

So you would never want to have a resale restriction, per se. What you would want to have is a recapture provision. And recapture provision under the home rules allows -- can be wiped out by a foreclosure basically in that situation. So the way to deal with that requirement is to set up your affordability period and your continued affordability around the recapture provisions and hope that you don't lose the mortgage. But if you do, you won't be having to empty your pockets to reimburse the fund the way that you would if you did it through the resale provision.



Q: Right. I mean, because we actually have recapture. And I kept on trying to tell them that this wasn't a resale restriction, and they kept on referring me to this underwriters guideline and the Fannie Mae book that says, "Fannie Mae will purchase mortgages subject to resale restrictions secured by one-unit properties or two-unit properties. The property must be the borrower's principal residence. Mortgages secured by manufactured homes, co-op projects, three and four-unit properties are not eligible."

And again, they were saying because we had a resale restriction. And no matter how many times I pointed out in the documents that it was an affordability covenant with recapture not resale, it's like people were blind to it and said, no. You've got resale provisions. So we can't do that loan. Consequently, we -- not even FHA lenders would want to do that loan for the same reason.

Arlene Nunes: Well, I think, again, I mean, I can't really speak to Fannie Mae. But through FHA they need to follow our underwriting guidelines, and they -- above and beyond that, they have a choice to decide what loans they're going to do and what loans they're not going to do.

Matthew Callahan: So, Arlene, this is Matt. I think Jesus' question has to do specifically with manufactured homes.

Q: Right.

Matthew Callahan: And what I'm hearing is -- correct me, if I'm wrong -- FHA doesn't have any specific prohibition against manufactured homes and any kind of secondary financing covenants. In other words, if it would be permitted otherwise by FHA, the secondary financing, just because it's manufactured home would not be a problem.

Arlene Nunes: Yeah. The type of -- I mean, if it's a manufactured home, especially one that's secured that's on a foundation; right? That's what was said.

Q: Right.

Arlene Nunes: Is --

Matthew Callahan: It's a manufactured home could otherwise be the definition of a fee simple transaction --

Q: Right.

Matthew Callahan: -- and under [inaudible] guidelines.

John Laswick: Well, this is an example of why -- of Matt's point of there's more than one --

Arlene Nunes: Lender.

John Laswick: -- lender out there too, and some of them actually have three-digit IQs.



Q: Matt, this is Jesus Morales. If you know a lender, please contact me in the City of Corona because we called a multitude of lenders and they all said no, even when I asked about FHA loans.

Matthew Callahan: I have some ideas for you, and I'll get back to you later, Jesus.

Q: Thank you.

Kent Buhl: Thank you, Jesus.

And Jenny's up next. Hi, Jenny.

Q: Hey. How are you?

Kent Buhl: We're doing well.

Q: I have a question. So one of the cities that we manage is doing a resale provision. It's developer subsidy, and they have a 15-year deed restriction on the property that the dollar amount on it is inclusive of the total subsidy, so a full $150,000 when the market value of the home is between $72,000 and $99,000.

We obviously need to record that lien and restrictive covenant or the resale agreement. What is the best way to record that without having -- the problem we've had is immediately a lender comes back and says, this is over 100 percent CLTV. However, there is no soft second or second lien that's actually filed. It's just the resale agreement is recorded in the Office of the Recorder.

John Laswick: Yeah. I think you want to go back and revisit your structure on this a little bit. So the amount over the $90,000 that it's worth -- let's say $60,000 there -- is the development subsidy.

Q: Right.

John Laswick: That's gone. Now, as you mentioned, I mean, you're defaulting to -- a the home program does, defaulting to resale restrictions, which requires you to pay back the full amount, not the borrower.

Q: Right.

John Laswick: So what you really want to do in this scenario is to -- because -- I mean, this is unfortunate because, in effect, the family is paying 100 percent of market value for a house and getting no direct benefit and has a 15-year repayment restriction. So what you want to do is come into those scenarios with writing off the $60,000 development scenario -- development subsidy and then make a soft second loan for $5,000 principle reduction. And then that gets you into the recapture model, and it's legitimate to do it that way. And we've had Jenny [inaudible] from the HOME program on a webinar last summer, and I specifically asked her this. So you're really creating -- the situation is creating an impossible sort of set of outcomes for you.



Q: Okay. Now, with this particular city, they are -- it's -- they received their funding through the state housing authority and are being required to use resale and use their resale agreement. And they're requiring us to put the total amount of NSP funds in the property on that resale agreement.

Like I said, we're not technically filing it a soft second or a second lien, but we are putting that resale agreement as a miscellaneous document on file with the recorder's office. And the problem that we've had is when they run a title search, they pull it up, and they say, well, but there's $150,000 lien on the property. It's not a lien. We're never going to ask the home buyer to pay it back. How do we get that across to a lender?

John Laswick: I'd be more worried about how you get it across to the state. I mean, I think that you really ought to see if you can sit down with the state and say, there's another way here.

Q: So I'm not crazy when I think that the state has backed us into a very difficult corner with a lender?

John Laswick: Yeah. I mean, I think in fairness there's a lot of complicated cross-cutting rules here. And everybody's a little confused. But certainly you're allowed to do that. Whether you could talk the state into doing that, I don't know. But in this scenario that you're talking about, the borrower is not liable for the $150,000.

Q: Correct.

John Laswick: There's no lien. So it's not -- you're not recording that against the borrower. You are basically pledging the resources of the grantee or the subgrantee to repay that as HUD requires in the resale program. So you're not violating the 100 percent rule, but you are getting into a financing model here that is really very -- could be very punitive, if people default.

So I mean, that's just the way it's written. And Jenny was telling me that that was the only provision at the beginning of the HOME program. And they actually went back and got some additional flexibility from Congress to create the recapture. So it's just been around for a while. Some folks have just kind of bought into it. I mean, we would be happy to talk to people, if you want to try to get maybe your field office, if you can, or somebody here in the NSP office to talk to the state and say, look. There's another way to do it.

We can't force states to do it another way because they have something called -- they receive maximum feasible deference from us. So if they want to keep it, they can keep it. I guess your choice is not to take the money, which isn't a great choice either.

Q: Right. Now, is your contact -- all of your contact information is available at the end of this or somewhere here?

John Laswick: Yes.



Kent Buhl: I'll go back to that slide.

Q: Thank you.

Kent Buhl: Yeah. Thanks, Jenny. Getting closer to the end here. Let's try to wrap this up quickly.

Patricia asks or she states that, "We can't make any money on the transaction. So at times the purchase price is less than appraised value. If we can't cover more than 100 percent of the lesser purchase price or appraisal, then the buyer may get an advantage. Are there any exceptions?"

John Laswick: Well, the buyer may get an advantage, if you create a situation where the value was higher than what you're selling it to them for. And that's true in a lot of cases here. And the way that you prevent that advantage, the way that you prevent a windfall is to put up a lien on the property that requires them to repay a certain amount.

I mean, so it's only forgiven over a period of time, or it's only forgiven at the end of the note or whatever it is. That's why you do this. And so it's a good point, but, I mean, that's what liens are all about. And they work for you in a sense that you don't create an advantage for somebody or you are giving an advantage to somebody but you are requiring them to earn that advantage by residing in the home for a number of years. And that seems like a fair deal to most people.

Kent Buhl: Very good.

David Noguera: The other point I just want to make quickly is the goal is not necessarily to make money here; right? The whole intent of the program was to address a void in the housing market; right? So you have these NSP funds that are coming in, taking -- purchasing some of the worst property that's on the market in many cases. And if that requires that you add a subsidy [inaudible] to make it affordable for the home buyer, then that's sort of what's expected.

John Laswick: We do.

Kent Buhl: And let's go back again to Laura and, I think, Leslie's question about the combined loan to value. "Can you provide a date of written guidance about that not exceeding 100 percent?"

John Laswick: Well, we could -- it's implicit in a number of things we've said. But David's volunteering to make it explicit.

David Noguera: Yeah. I'm going to -- John and I will write something up on this. But if you look at Section J, I believe, of the NSP Unified Notice on Sale of Homes, it speaks to the maximum amount that a home can be sold for.

John Laswick: Right. And people have mentioned this during the day, but the lower of market -- current value -- current market value or total development cost. So this is 100 percent of market value is 100 percent. So that's just where we go. I mean, that's the whole -- I mean, no lender is



going to do that either basically. There's a few little sort of side deals here, I guess. But we want to get people into houses that they can stay in and maintain and keep up over the years.

And so we don't want to silo them with anything great and is really fair. We've been sort of writing about this off and on for a couple years now. And obviously there's still a lot of questions, and we will try to clarify that with some new guidance here in the next couple of months.

Kent Buhl: Marie asked, "Is it required for a home buyer from 80 to 120 percent of AMI to obtain NSP home buyer assistance, if their DTI is within requirements and they have sufficient funds to cover all applicable home buyer closing costs?"

John Laswick: Well, no. I mean, you don't have to provide any direct subsidy. The problem is if you don't provide any direct subsidy, then they have to abide by the resale provisions. And most people aren't going to be willing to do that, if they're not really getting some kind of benefit out of the program.

So I mean, if you're putting somebody into a house that cost $150,000 to build and, just because the market is screwed up, only is worth $90,000 right now but it's going to be worth $150,000 in five or 10 years, then they might say, well, that's worth it. But if you're in a slow moving market and to expect somebody to get into a house that -- and pay all their own money and not get any assistance does not -- I don't think is just realistic from a sale standpoint.

Kent Buhl: And let's go to Shelly. Hi, Shelly. Are you there? Hello, Shelly. I guess not. Wait a minute. I heard something. Are you there, Shelly?

Q: Yeah. Can you hear me?

Kent Buhl: Yes. Now, we can.

Q: Okay. Perfect. Sorry about that. I was trying to use my headset.

I guess this is back on the CLTV, and I guess I just have to -- I heard the comments from Patricia. And I just wanted to -- I understand the guideline on the sale of the home. But I guess my question is, it seems like NSP is trying to put an overlaying restriction on a guideline that FHA does allow, when we're talking about the CLTV over 100 percent, if it goes to 103 or 105 percent. So I --

John Laswick: Sure. You don't have to use our money. But when you use it, that's the rule.

Q: Okay.

John Laswick: Sorry.

Q: All right. And then second thing that I wanted to bring up, the -- when you're talking about the home ownership assistance, we had originally were told, if it was principle and interest write



down or considered a gap, that that actually could go up to 100 percent, that it was not actually -- it could be, I guess, separate or different than the down payment.

John Laswick: Well, I think the down payment is always part of market value, isn't it?

Q: Down payment? No. I'm talking about -- I'm sorry. Different subject. I'm talking about the home ownership assistance. So we called our home ownership assistance as that you can use it towards closing costs or principal and interest write down, so basically, the gap that was needed. And in that situation, if it was called home ownership assistance, there was not a requirement for a down payment. Is that wrong?

John Laswick: Well, I mean, it's not our requirement. So, I mean, you can use -- the home ownership assistance, you learned that lesson. So that's good. So home ownership assistance is principle write down or interest write down, closing cost, any of that stuff. It also -- it's also down payment. If you have a down payment requirement, it's limited to half of that. We don't have any opinion about whether there is a down payment required.

Q: And even when we can, I guess, provide that to 100 percent, it still is going to cut me off at the 50 percent?

John Laswick: Right. Yeah. So you could go and --

David Noguera: Yeah. Whatever you decide is your down payment.

John Laswick: Right. I mean, so that's why you want to define the down payment as cash or closing equity, borrower's equity. Everything else is unrestricted in terms of the level -- I mean, from a percentage standpoint. Anything that's needed, you could do. But in this case, if it's an FHA loan, you could go up to 98.25 percent. You'd still have some kind of a down payment requirement, even if you covered all the other stuff.

Now, if you have other sources of funds and choose to make that the other half of that down payment, you may. But if you go above that, then if closing costs aren't included in that and you pay closing costs, then that's just on top of -- that has to be a grant, basically.

Q: Okay. Or you could have the seller pay the closing costs, and then it just comes out of -- it's just considered a development subsidy at that point; is that correct?

John Laswick: Well, I think closing costs are still closing costs, not development subsidy. But they could still be above 100 percent of value. You just can't lien them. You have to give it to them.

Q: And if you give a grant for the closing cost, what mechanism -- how would that look?

John Laswick: Well, I mean, it wouldn't be recorded. So I don't know. I mean, I would think that you'd have some sort of a summary of your transaction with the buyer that says, now, here's the sources and use of the funds. I don't know what it looks like on a HUD one, but, I mean, you'd



show that this was being paid as a grant by the county or whoever, and it's not going to be part of the financing because you can't have anything to go against.

Q: Okay. All right. Thank you.

Kent Buhl: Thanks, Shelly. And one final question here.

Angelie, I apologize. I missed your -- bypassed your question up higher and see you trying to get our attention here. And here it comes. So she asks, "Even if the approved lenders for NSP program can do a combined loan to value of up to 105 percent of the sales price, we as the seller/city are not allowed to provide, say, up to 104 percent of the sales price, even if our second mortgage is based on resale. Is this true?"

John Laswick: Yeah. That's what we've been saying. Yes. So in that scenario you'd need to cover that four percent with something that wasn't requiring repayment. And so the simplest way of doing that would be some sort of a grant. Again, if you're taking it right down to 100 percent, then you're into resale. So, I mean, as long as you're at it, you might as well make it 99 percent instead of 100 percent and get yourself into a recapture scenario. Yeah.

But yes. That's what we're saying. I'm sure that, based on this conversation today, people have done it differently. We're not going to go out and penalize you, I don't think, for honest mistakes. But you need to try to get your reins in there and fly in it straight from here on out.

Kent Buhl: Well, thank you, everybody, Matt Callahan, Arlene Nunes, and John Laswick and David Noguera, for all of your answers and presentation today. And for those of you participants who are still with us, thanks for your attendance today. We look forward to serving you again in another NSP webinar.

And again, when you leave, if you take a moment to complete the very short survey that you'll be taken to, we'd appreciate that. And we look forward to seeing you all gain soon. Take care, everyone. Thank you.

Arlene Nunes: Thank you.


nsp webinar: fha mortgage insurance issues · 2019-03-15 · hud nsp training - fha mortgage...

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