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             Mortgage Monitor                              
    A Newsletter Sponsored by Nebraska Mortgage Association                                              Aug., 2005

        2004-2005                             Booming & Busting: The Lessons of ’98
         Officers                            “2005 is eerily paralleling 1998.” — Andrew Pollock, CEO of First Franklin
                                             The buzz is growing this summer about the escalating risk scenarios that are be-
President, Susan Grieger                     coming mainstream lending. It happens during every cycle, naturally, but most of
US Bank, Lincoln                             us are so busy keeping our heads down and production up that we really don’t no-
402/421-2939 Fax 402-423-2039                tice it - that is until something bad happens. The short course: the loans you are
1st Vice President, Marlin Hupka             making today are riskier and more dangerous than the loans you were making just
TierOne Bank., Lincoln                       a year ago. Interestingly, they are somewhat akin to the loans you were making
402/473-6143 Fax 402/435-9065                seven years ago, before the Bust of 1998, remember?
2nd Vice President, Jan Meister                                                                               Continued Page -3-
Commercial Federal Bank, Omaha
402/827-2592 Fax 402/827-2594
                                                    Freddie Predicts Refi’s To Drop
Treasurer, Mark Johnson
CBSHome Mortgage, Omaha
402/964-4612 Fax 402/964-4677
                                                       Another 22% Next Year
Secretary, Gina Jerauld                       The brightest light in the U.S. economy continues to be the housing sector. In
Commercial Federal Bank, Omaha                June, new records were achieved in sales of both new and existing houses, and
402/827-2860 Fax 402/827-2883                 sales through the first half of the year are running nearly six percent higher
Board of Directors                            than over the same period in 2004 - also a record year for home sales. The
George Akers       Tony Johnson               Federal Reserve System’s (Fed) Beige Book (a periodic report on economic
Steve Kunzman      David Horak                conditions across the twelve Fed districts) indicates that the strength of resi-
Dave Hartman       Sherri O’Callaghan         dential real estate markets is widespread, with the exception of the seventh and
Robert Rutan       E. Dean Neidan             ninth districts (covering the states of North Dakota, South Dakota, Iowa, Min-
Cindy Muhlbach     Kaye Pietzyk
                                              nesota, Illinois, Wisconsin, Indiana, and Michigan) These two districts had
Education Committee Chair,                    mixed real estate performance by location and market segment due to employ-
Shelley Sullivan                              ment weakness in manufacturing and other local industries.
MidAmerican Mortgage, Lincoln
402/436-3145 Fax 402/436-3191                      The strong performance of the housing sector is attracting investors into
                                              the market for single-family homes. According to data compiled by
Lobbyist, John Boehm                          LoanPerformance, the share of prime, conforming mortgage loans for home
Butler, Galter & O’Brien Law Firm,
Lincoln                                                                                                     Continued Page -2-
402/475-0811 Fax 402/475-6416
Editor, Mary Byrnes
Great Western Home Loans, Omaha
402/952-6042 Fax 402/593-8112
                                                Homebuying Resource for Hispanic
Also in this issue…                                 Consumers is Launched
  HOEPA Triggers Raised (Page 4)             Because of its rapid growth, the U.S. Hispanic community is expected to become
  NMA Lender of Year (Page 4)                a key factor in household growth over the next decade. The result will be that
                                             more Latinos will become first-time homebuyers than any other ethnic group.
  Fighting Fraud (Page 5)
                                                  Now, there is a new online resource available in Spanish to help homebuyers
  Board Member Positions Open (Page 7)       sort out the myriad details that can make buying a home confusing and intimidating.
  NMA Fall Conference (Page 8)                    The Mortgage Bankers Association announced the launch of its new con-
  Enhancements to Home… (Page 9)             sumer website for U.S. Spanish speakers,, that provides
  As Refi Volume Falls … (Page 11)           information in a simple, easy format to help consumers understand all aspects of
                                             homebuying and homeownership. Topics include basics of homebuying, the im-
  HUD Update (Page 13)
                                             portance of credit records, finding the right home, finding a mortgage lender and
  Revised Uniform Res. Loan App. (Page 15)                                                                    Continued Page -3-
                                                                                            Aug., 2005               Page 2

Freddie Predicts Refi’s To Drop… from Page -1-
purchase that were taken out by in-         and allow it to float against an unspecified   rates on ARMs continue to make
vestors hit a new high of 10.3 percent      currency basket was hailed as a step to-       them attractive to borrowers. We ex-
in the first quarter of 2005. Another       wards reducing their government’s              pect the ARM share to average
7.3 percent of home-purchase mort-          intervention in markets. The good news         slightly over 30%. We increased our
gages were taken out by buyers of           is that Chinese goods will likely be-          forecast for the fourth quarter to 33%
second homes. The combined share of         come relatively more expensive,                of originations. As the effects of tight-
recently purchased investor-owned           boosting demand for U.S. produced              ening monetary policy kicks in at the
and second homes (17.6 percent) has         goods. The bad news is that more ex-           end of the year, the ARM share will de-
nearly doubled in three years - the av-     pensive goods will hurt U.S.                   crease steadily in 2006, but remain a
erage share in 2001 was 9.3 percent.        consumers, and China’s demand for              significant portion of loan originations.
These shares are even higher in some        U.S. debt instruments like Treasury                  • Housing starts. The second half
metropolitan markets that have experi-      bonds and mortgage-backed securities           of 2005 should see moderation in new
enced much higher than average price        may decline,. A decline in demand for          construction. One- to four-family hous-
appreciation. One concern among mar-        U.S. Treasury instruments would lead-          ing starts reached record highs in the
ket watchers is that speculative            ing to higher interest rates than we have      first quarter at 1.75 million housing
investment may be driving prices            been would otherwise expecting - and           units (annual rate). We project single-
higher than they should be on the basis     thus raining on our sunny housing market       family construction to decline in the
of population and income growth.                 • Real GDP growth. Second quar-           second half of the year; reducing total
Builders seem to be highly attuned to       ter real GDP growth dipped to 3.4%             starts (including multifamily) to 1.98
this, and are now adding in contract        from a first quarter average of 3.8%           and 1.93 million housing units in the
provisions to prevent the flipping of       due, in part, to tepid expansion in            third and fourth quarters, respectively.
homes during construction and through       U.S. service industries. Across the                  • Home sales. Likewise, house
the first year or two after completion.     board increases in service activity in         sales continued their upward momen-
      Higher interest rates will cer-       the second half of the year drive our          tum in the second quarter, increasing to
tainly dampen demand for housing            prediction that growth in the third and        a record of 7.62 million (annual rate).
eventually, but a stronger labor mar-       fourth quarters will increase to 3.7%.         We forecast that sales will decline by
ket will offset some of the interest             • Consumer price inflation. Oil           7% in 2006 (relative to the projected
rate effects. The U.S. has added an         prices averaged a record high of just          record of 7.3 million sales in 2005) ow-
average of 188,000 payroll jobs per         over $60 a barrel in June, spurring a          ing to higher mortgage rates.
month in the first six months of this       second quarter increase in the CPI                   • Home value appreciation.
year, just slightly above the 183,000       Consumer Price Index of 4.2%. We es-           Strength in home sales led us to revise
average new jobs added per month in         timate that the annualized inflation rate      our annualized house price apprecia-
2004. Approximately 35 percent of           will slow to 2.4% in the third quarter         tion estimate in the second quarter to
companies recently surveyed by the          and 2.2% in the fourth quarter as oil          13% nationally, up from an initial esti-
National Association of Business            prices moderate in the coming months.          mate of 8.6%. As the housing market
Economists said they are having                  * Unemployment rate. The unem-            cools in response to an increase in
trouble finding skilled labor - just 25     ployment rate in July remained at              mortgage rates, we estimate that house
percent reported skilled labor shortages    5.0%. Compared with our previous               price appreciation will dampen to
last year. In the same survey, 39 percent   forecast, we revised our forecast of           10.7% and 7.4% in the in the third and
of respondents indicated wages and          unemployment in the third quarter              fourth quarters, respectively.
salaries were rising, compared with 22      down one-tenth to 5.0% as well. We                   • Mortgage activity. The outlook
percent for the same period last year.      expect the unemployment rate to re-            for mortgage originations remains
      However, threatening clouds           main at or near this level for the next        strong in the third and fourth quarters.
loom over this idyllic summer eco-          five quarters, as economic growth is           We project that total originations in
nomic picture. Oil prices once again        projected to be sufficient to meet la-         2005 will be over $2.6 trillion. Refi-
hit a new record on August 1st,             bor force growth.                              nancing is expected to make up 42% of
briefly rising over $62 per barrel, on           • Mortgage rates. We project 30-          mortgage originations in 2005 and then
news of the death of King Fahd of           year, fixed mortgage rates will rise           fall to 33% of originations in 2006.
Saudi Arabia. Higher energy costs           slightly to an average of 6.0% by the                • Mortgage debt. For 2005, mort-
create a drag on the economy, and, if       fourth quarter of the year. We estimate        gage debt growth is projected to be
they should approach $100 per barrel,       that mortgage rates will grow slowly in        13.2%, revised up from last month’s
could lead to serious discussions of        2006 to 6.3% towards year-end, still           forecast because of the strength of
recession. China’s decision in July to      well below historical averages.                new construction, home sales, and
de-link the Yuan from the U.S. Dollar            • ARM Share. Discounted initial           home-value appreciation.
                                                                                       Aug., 2005               Page 3

Booming & Busting… from Page -1-                                                       Homebuying Resource… from Page -1-
      Of course you don’t, and you’re not alone. It is the nature of our business to
have a short memory, even among the best and brightest who dictate the kinds of        identifying which type of loan best
loans we make. Our advanced system of mortgage finance is strong and liquid be-        fits consumers’ financial situation.
cause the capital markets either accept or reject the loans we want to make, and if          “The Mortgage Bankers Asso-
they are rejected, those loan types either disappear or become the province of the     ciation wants to help all Americans
boutique lender. If accepted, they can become the mortgage mill’s grist of choice,     realize the dream of
and therefore the loan that everyone wants to originate. Whether they are good ei-     homeownership,” said Cheryl
ther for the industry or for the borrower is another story. The most interesting       Crispen, senior vice president of
point is that professional lenders are seldom making the decisions anymore on          communications and marketing at
which loans make sense and which do not, and for very good reasons. Our capital        MBA. “This new online resource
markets-driven system basically requires only that the loans be salable to securi-     will give Spanish-speaking people
ties investors; if they can be sold, they can be made. Unfortunately, the market       who are interested in buying a home
can be fickle, and therein lies a problem.                                             the knowledge they need to confi-
      Let’s go back to 1998 to illustrate this point. The subprime market was          dently begin planning the purchase
cranking at a rate that was making lenders, originators, and investment bankers        and financing of their new home.”
giddy. Everyone was busily making loans until the market became saturated to                 A study conducted last year by
the point where volumes began to slow measurably. The securities market was            the Tomás Rivera Policy Institute,
still hot - investors were eager to buy the bonds, drawn by attractive yields and      University of Southern California, in-
despite the prospect for greater losses in subprime than in conforming paper. The      dicates that Latinos often lack
Alt-A market was also developing, including a newly favored loan type, the 125         sufficient information about buying a
percent loan. This loan was strictly for high FICOs, and for obvious reasons,          home. However, the same study also
given that there was basically no security for the loan above 100 percent of the       found that while only 10 to 13 percent
property’s value. Even though it was technically a mortgage, it was more like an       of Hispanics are actively engaged in
unsecured loan.                                                                        buying a house, approximately 44
      As Wall Street grew hungry for more product to feed the securitization ma-       percent are planning to buy a home
chine, the lending market responded with relaxed FICOs and stated income for           within the next five years.
125s, something most traditional lending professionals greeted with alarm. These             “It appears as if some of the dis-
were people raised in the lending Dark Ages of the “Three Cs”: collateral, capac-      comfort with the homebuying
ity, and credit. A 125 percent loan obliterated the “collateral” part, the stated      process is the result of inexperi-
income took care of the “capacity” measurement, and the only thing left was the        ence,” states the Tomás Rivera
“credit” component as indicated by the FICO score. Take that away and what             Policy Institute study report. “Out-
have you got?                                                                          reach programs can take the fear out
      It was only a matter of time before defaults caught up with those pools, and     of the process and encourage pro-
when it happened, the loan type disappeared quickly, along with a number of the        spective buyers to make that leap of
companies which specialized in it. Coupled with an international banking crisis        faith and start down the path to
that took the hedge funds out of the business of buying the riskier “B” pieces of      homeownership.”
securitizations, the industry was rocked by a liquidity crisis that affected the en-         The website,,
tire subprime market segment. Some of the brands that disappeared either through       is designed to do just that. Enabling
acquisition or exit were household names, including Household Financial Ser-           Spanish-speaking Americans to
vices. Southern Pacific was among the first to go, unable to fund its pipeline of      learn the homebuying process in the
hundreds of millions of dollars. Associates First Capital, ContiMortgage, IMC,         privacy of their own home will
and the Money Store also disappeared. Present-day giants like Ameriquest, New          make them more knowledgeable,
Century, and Option One were in their growth stages in those days, weathering          more confident consumers.
well to achieve the status they enjoy today as the others faded into history.                Developed by MBA’s team of
      Are lenders today setting themselves up for a similar liquidity crunch? There    industry and consumer experts,
is a growing amount of noise around this question, fueled by the emerging prod- will provide
ucts created for the prime industry that are finding their way into the nonprime       Latino consumers with information
world. Interest-only (I/O) loans are among these, along with increased-term loans      on the mortgage process; statistics
of up to 40 years. They were developed to help people lower payments on higher-        on specific neighborhoods; an expla-
priced homes, and especially those homes in rapidly-appreciating areas. To use         nation of credit scores and how to
them otherwise has the effect of loading up a borrower’s indebtedness and slows        improve them; finding a lender; and
the accumulation of equity in the property, which is the single most important de-     laws that protect consumer rights.
                                                                 Continued Page -4-
                                                                                          Aug., 2005              Page 4

Booming & Busting… from Page -3-
terrent to default. A high FICO is the next most important deterrent, but what hap-
pens when that standard is relaxed, especially as the housing market cools and
there is little or no equity in the property?
                                                                                           Triggers Raised
      Other sound bites from this April’s MBA Secondary Conference: * “We’ll do           The Federal Reserve Board on
a stated income up to 100 percent LTV on a 580 FICO.” * “We’re introducing a              Thursday published its annual ad-
subprime answer to Alt-A and entering the Alt-B market.” * “If Wall Street will           justment of the dollar amount that
buy it, we’re going to make it.”                                                          triggers additional disclosure re-
      As mentioned, memories in the lending business are short. Increasing pres-          quirements under the Truth in
sure from the capital markets in 1998 led to 125 percent loans with FICO’s in the         Lending Act for home mortgage
low 600s. As with today’s subprime I/O loans, there was a lot of talk then about          loans that bear rates or fees above a
default risk on those loans and there was zero experience from which to judge.            certain amount. The dollar amount
The same is currently true with the newer instruments, including the I/O - there          of the fee-based trigger has been
isn’t any data to predict loan performance, outside of gut feelings from lending          adjusted to $528 for 2006 based on
veterans. According to a recent article by Clayton Services’ senior vice president        the annual percentage change re-
Paul Marchese, we’re flying blind on these loans. “[Subprime loans had] more              flected in the Consumer Price
than four times the seasonally adjusted delinquency rate for prime loans,” he said,       Index that was in effect on June 1,
citing 10.39 percent for subprime versus 2.32 percent for prime in 3Q 2004. “And          2005. The adjustment is effective
since default rates and loss severity typically hit their peak two to three years after   January 1, 2005. The Home Own-
loans are originated, we won’t know what the loss experience of subprime inter-           ership and Equity Protection Act of
est-only loans will begin to look like until at least 2006 or 2007.” Loss severity is     1994 restricts credit terms such as
a prime concern, severity being defined as the extent to which lenders experience         balloon payments and requires ad-
a loss on each loan. “...these loans do not build additional equity as fully amortiz-     ditional disclosures when total
ing loans do,” Marchese explains, “which increases the loss severity in the event         points and fees payable by the con-
of default.” There can be a double whammy in adjustable I/Os, too, most notably           sumer exceed the fee-based trigger
“...the possibility of a larger payment adjustment shock that may occur if rate in-       (initially set at $400 and adjusted
creases coincide with the beginning of the principal amortization,” he adds.              annually) or 8 percent of the total
“Borrowers whose incomes don’t rise as expected, who continue to pile up credit           loan amount, whichever is larger.
card and consumer debt and who cannot meet the payment terms... may find their
payment capacity stretched to the limit.” New Century addresses the payment
shock issue by giving borrowers an option of a two or five year IO period and by
capping the first adjustment at 1.5 percent. Look for others to follow suit with inno-
vative concepts to keep this market going.                                                   NMA Lender
      Just because you can make a loan, does it mean you should? Some origina-
tors may find this presents an ethical dilemma. A borrower comes to you who                    of Year
needs lower payments and who can qualify for a reduced FICO adjustable I/O-but
has a record of getting in trouble with consumer debt, refinancing their way out of
it every few years. The appreciation market isn’t what it was, and this loan might
get them into trouble. Do you make it, or do you counsel them to look for less ag-
gressive solutions and run the risk of losing the deal to someone else? It’s a tough
call.                                                                                      It is again time to be thinking
      The lines between prime and subprime continue to blur, especially with hybrid        about the Lender of the Year. The
programs such as “Alt-B” beginning to emerge. As Countrywide’s Debbie Rosen,               award is to honor one of our
the incoming chairwoman of the National Home Equity Mortgage Association, the              members, who has conducted
nation’s nonprime lending trade group, says in her message: “It can be difficult to ap-    themselves in the business and
ply standard dictionary definitions of ‘prime’ and ‘nonprime’ to these [new and            community service, so as to be a
emerging] programs.” Indeed it is, and the last few years have mainstreamed                credit to both. Last year’s winner
nonprime lending as an essential segment of the American mortgage scene. In this           was E. Dean Niedan of American
day and age, everyone who can qualify can find a loan; it’s up to the professional         Mortgage Company. Watch for
loan origination sector to match each person up with not just any loan, but the right      information on how to submit
one. And that takes knowledge, discipline and professionalism.                             your nomination and selection
      Are we on the verge of a 1998-style meltdown? No one is really predicting            criteria which will be emailed to
that quite yet. It certainly could happen, as many similarities exist between now          you soon.
                                                                  Continued Page -5-
                                                                                       Aug., 2005              Page 5

                                                                                      Booming & Busting… from Page -4-
                        Fighting Fraud                                                and then. Important among the differ-
Fraud. The mere mention of this loaded word makes any scrupulous originator           ences between now and then are the
quake in their desk chair. It’s a dirty word in the mortgage industry, in bed with    plans being made by lenders just in
such notions as kickbacks and predatory lending. Mortgage fraud certainly             case a liquidity crisis returns. Several
isn’t a factor in every loan, or in every office-but the ramifications of even one    large companies are reportedly turn-
bad loan can effect the entire industry. Originators and lenders stand to lose        ing to asset- backed commercial
much more than the cost of damages when fraud comes to light. If an origina-          paper as a new funding strategy,
tor cheats a customer, we lose consumer confidence as a whole. If an employee         hedging their bets, so to speak, in
skims off an employer, we lose trust in our colleagues. If a customer attempts a      case their warehouse lenders lose
scheme against an originator or lender, we lose the client-originator connection      heart in tough times. Other lenders
that fuels the industry more than anything else. Of course, there’s no reason for     are expanding their warehouse alter-
the industry to suffer these kinds of losses, which can top out in the billions an-   natives, increasing the numbers of
nually. Fraud is preventable, and it takes individual efforts, combined with          lines rather than simply increasing
industry cooperation to combat it.                                                    the size of their existing lines of
      According to William Matthews, vice president at Mortgage Asset Re-             credit.
search Institute (MARI) in Reston, Va., mortgage fraud has increased as the                When all is said and done, some
market has soared past the two trillion dollar mark. In an interview with             lessons may have been learned from, Matthews notes that part of the problem is due to the cali-        1998 after all. It was the best of times
ber of professionalism within the industry today. With regulations and                for originators, but it became the
accreditation what it is, “You can be driving a truck or selling cars today, and      worst of times for lenders and
tomorrow be a mortgage broker dealing with large sums of money.”                      securitizers. And for a while, it en-
Mea Culpa?                                                                            dangered the precious capital access
      Where does the accountability lie in identifying and stopping mortgage          that keeps our system of mortgage fi-
fraud? Originators and their teams have the unique opportunity to “touch” the         nance strong.
most people in the mortgage transaction. On any given loan they may come in                Still, for an industry that doesn’t
contact with real estate agents (sometimes two or more), borrowers, proces-           learn lessons well, it is a time to be
sors, underwriters, appraisers, lender reps, or builders. Each one of those           circumspect on the ultimate, market-
touch-points is an opportunity for fraud or honesty-they are the gatekeepers.         defining question, the question that
      On a broader plane, each of these players can transcend their roles to take     affects lenders on the back end but
an active part in fighting fraud. For example, if a Realtor knows a borrower is       affects mortgage originators most
planning to claim owner-occupancy, but has no intention of living on that prop-       profoundly, at the point of sale. That
erty, they have a responsibility to inform you. Companies also share                  question is, “What is the right thing
responsibility for their employees, partners, and customers, and should estab-        for my customers?” As film director
lish practices that both protect and examine them. When a company knows that          Spike Lee might have said, “do the
the person it has just fired has committed fraud, and then unleashes them into        right thing” and over time the rest
the industry only to wind up at another unsuspecting company, that former em-         will take care of itself.
ployer bears some responsibility (ethically if not legally) for any further                                By James Hennessy
fraudulent actions.
Of Particular Concern
      Although mortgage fraud evolves and becomes more complex as thieves
and even subtly nefarious people get smarter, there are a few basic scams that
appear to be present in nearly every market. Some, like identity theft, are ram-          New Members
pant across industry lines; others, like appraisal fraud, are a specific blight on
the mortgage field-either way, the FBI reports that most (around 80 percent)
are committed by insiders. “[Borrowers] may get their employer to fudge some            Join us in welcoming Expanded
numbers for them or get a relative to report a second job that they don’t really        Mortgage Credit as new members
have,” says Matthews. “But what they do doesn’t usually result in losses. After         of the Nebraska Mortgage Asso-
all, if you cheat to get your home, you’ll probably have to give up a lot to keep       ciation.
it.”                                                                                         And don’t forget to check us
      Mortgage fraud continues to be underreported, often because the victims           out on the web at:
are embarrassed for their oversight. “The true level of mortgage fraud is largely
unknown,” said Chris Swecker of the criminal Investigative Division of the                   Your member password on
                                                                Continued Page -6-      our site is: nmadir.
                                                                                       Aug., 2005               Page 6

Fighting Fraud… from Page -5-
FBI said in a 2004 speech to the           solely at fault. Pressures from origina-   lect the fees. He is currently serving a
House Financial Services Subcommit-        tors and real estate agents to alter       two-year sentence for his crimes.
tee on Housing and Community               borrower’s appraisal reports is high,            Occupancy fraud: Although it’s
Opportunity. The problem is com-           and appraisers express that they don’t     sometimes (and erroneously) consid-
pounded by the fact that the industry      have an outlet to report inappropriate     ered a lesser degree of fraud,
as a whole persists in a culture of hid-   behavior or requests. Appraiser status     occupancy misrepresentation (“fraud
den instances of fraud, he noted.          on licensing lists can be up to a year     for housing”) is a serious matter. Bor-
There is, of course, fraud in every        out of date, so knowing your ap-           rowers may have full intentions to
market, whether it’s reported or kept      praiser is crucial. Appraiser groups       own and pay for their property, but
mum. The list below isn’t a complete       are working with Congress to address       often falsify their income, residency,
catalogue of possible misrepresenta-       the problem, which has widespread          or other application fields in order to
tions, but instead a collection of some    consequences. Thomas Martin of the         get a loan that they would not other-
of the most common areas of particu-       National Mortgage Complaint Center,        wise qualify for. Many originators
lar concern.                               Seattle, Wash., noted, “The cumula-        have experienced this type of fraud,
     Identity theft: Possibly one of the   tive effect of appraisal fraud is you      only to catch it at the last moment and
oldest fraudulent acts (even before        may have investors holding mortgage        be unable to close the loan-others
Shakespeare did it in As You Like It)      debt that’s backed by real estate worth    simply let it slide, or even encourage
is simply masquerading as someone          less than they think it is. It’s a train   it, becoming accessories to the act. If
else for personal gain. In the mort-       wreck waiting to happen.”                  you suspect your borrower is lying,
gage industry, this can range from               Originators and support staff        even for a well-intentioned reason,
stealing your customer’s identity, to      have the choice to work with apprais-      you must stop the loan. It should go
borrowers using false names to take        ers who get continuing education and       without saying that you should never
out loans, to appraisers using             belong to professional associations,       coach a borrower to lie on their appli-
another’s name to make poor valua-         and can choose based on character,         cation, or change their information
tions. Victims are left feeling violated   not price. You can also vow never to       once the application is submitted to
and usually with significant monetary      pressure an appraiser (whether in a        you. You not only endanger yourself,
losses. Perpetrators would be jailed       seemingly positive way, e.g. gifts, or     you endanger your customer as well.
and fined in a perfect world, but are      in a negative way) no matter what                In an unusual fraud for housing
often merely scuttled away to another      their final valuation. Use your con-       case in Florida, three people were ar-
unsuspecting firm.                         tacts to learn about an appraiser          rested on charges of racketeering,
     In a Los Angeles, Calif. FBI in-      before you being working with them,        conspiracy to engage in racketeering,
vestigation, it was discovered that an     and alert colleagues (and the authori-     grand theft, and obtaining a mortgage
individual (industry outsider) was cre-    ties) to fraudulent behavior.              by fraud when they falsified their in-
ating false identifications, W-2s, pay           A recent case in California in-      come verification to obtain mortgages
stubs, credit letters, and social secu-    volved a man convicted of a federal        on several properties, totalling over
rity documents, all for profit, and all    felony (a Ponzi scheme) and awaiting       $3.3 million. To date, most of these
primarily for mortgage fraud. Over         jail time. Four months before he was       mortgage loans were not paid and
100 real estate professionals were         imprisoned, he received an appraisal       have been foreclosed or are in the
knowingly ordering and submitting          license, although he was a known           foreclosure process.
these documents to lenders, which          felon. After training with a mentor,             Property flipping: This occurs
were then insured by HUD. The loss         the man told their origination partners    when an individual (or company)
amounted to more than $18 million; 20      that his employer was unavailable and      buys a home and “flips” or sells it im-
people have been convicted to date.        to send their business his way, ulti-      mediately for a severely inflated
     Accurate valuations: Many lend-       mately embezzling $23,000 from his         price, often upwards of 30 to 50 per-
ers state that accurate appraisals are a   former employer. When he was fi-           cent of the original selling price. That
key point in avoiding fraud. There are     nally sent to prison, he continued         initial transaction is often concealed
two common types of appraisal fraud:       doing appraisals from his cell using       from the lender, and that’s when fraud
stealing an appraiser’s identity and       automated signatures and a team of         arises. Scott Husted, vice president
wrongful valuations. Whether a prop-       family members on the outside posing       and chief underwriter at IndyMac
erty is over- or undervalued, everyone     as his “assistants.” When his license      Bank, notes that lenders are victim-
involved in the transaction can be         expired, they stole the identity of an-    ized in these transactions, because
harmed by intentionally inaccurate         other appraiser and continued              they unknowingly lend in excess of
appraisals. But appraisers aren’t          submitting fraudulent appraisals to col-                        Continued Page -7-
                                                                                         Aug., 2005             Page 7

Fighting Fraud… from Page -6-
100 percent of the actual home value. The borrower has no intention of paying
                                                                                           New NMA
back the loan, takes the money, and runs. Property flipping is often associated
with valuation fraud as well, another reason to work exclusively with trusted ap-
                                                                                         Board Member
praisers. Best practices are needed here, along with a hefty dose of due diligence.
Check your borrower’s home’s background, look for recent sales, and get a sec-
                                                                                         Positions Open
ond appraisal if you feel the numbers just don’t add up. Your wholesale reps will
thank you for your careful origination practices.
                                                                                         for 2005–2006
     In many cases of property flipping, the fraudster pays a “straw” borrower (es-
sentially a decoy) to take out a loan, often with fraudulent appraisals in place.
This was the case in Atlanta, when a closing agent orchestrated a group of “flip-        The Nebraska Mortgage Associa-
pers” who purchased properties for same-day resale at prices inflated by $100,000        tion will have three Board
or more. By closing both sides of the flip herself, the woman avoided outside at-        member positions open for the
tention, paying off her partners as the loan proceeds came through. She and seven        2005-2006 year. This is a 3-year
others were convicted and sentenced for everything from money laundering to              term on the Board. The Nebraska
obstruction of justice (for trying to cover her tracks and refusing to produce           Mortgage Association meets once
records) to conspiracy and bank fraud.                                                   a month on the third Tuesday of
     Just how damaging are schemes like these? Swecker outlined the cause and            each month.
effect of mortgage fraud in his House statement: “If fraudulent practices become              We encourage members of
systemic within the mortgage industry and mortgage fraud is allowed to become            the Nebraska Mortgage Associa-
unrestrained, it will ultimately place financial institutions at risk and have adverse   tion to be a part of the Board. If
effects on the stock market. Investors may lose faith and require higher returns         you are interested in running for
from mortgage- backed securities. This may result in higher interest rates and fees      the Board position or nominating
paid by borrowers and limit the amount of investment funds available for mort-           someone to run, please send a
gage loans.” No, one bad loan won’t pull the entire industry to the floor. But one       brief resume or description of
bad appraisal can taint the appraisals of every home in the area. One identity theft     your mortgage lending experi-
and your entire firm can lose its credibility. Small actions have wide-reaching          ence and involvement in the
consequences.                                                                            mortgage lending field. This in-
     Mortgage fraud happens in every city across the country. Swecker notes that         formation can be faxed to Kaye
several fraud surveys had identified 26 states as being especially fraud-heavy. The      Pietzyk at 402-323-1530 or
two that surfaced in every survey were Georgia and Florida, although significant         emailed to
mortgage fraud problems were reported in every region. If you question that fraud        The information that is provided
occurs regularly in your area, go to While          will be presented to the NMA Of-
some of these FBI reports are unrelated to mortgages, you’re bound to find at            ficers/Board and then during the
least one or two mortgage frauds that made the big time (i.e. federal cases) in          ballot process.
your hometown.                                                                                Considerations for the Board
Laying Down the Law                                                                      Selection are based on the
     One strategy many industry observers and authorities agree is the most effective    following areas:
in preventing mortgage fraud is consistent regulation and licensing enforced en
masse. Without enforcement, regulations are almost inconsequential. In 2004 there          1. Association Membership
were over 17,000 suspicious activities reports (SARs) filed within the mortgage in-           Status;
dustry, yet only two percent were ever investigated. Without adequate resources, or        2. Competence;
an agreed- upon way to fund all of these cases, the FBI and other enforcement offi-        3. Experience;
cials are left treading water, according to the MBA Fraud Summit findings.                 4. Geographical Balance;
     You can help law enforcement by appointing a specific “point person” to               5. Member Firm
contact within your company. Keep that person informed about fraud issues and                 Diversification.
invest in their anti-fraud education. Investigators also need help tracking the loan;
servicers may know the most about a loan’s history in one company, while the                  Please contact Kaye Pietzyk
originator is on the pulse of all transactions at another. At the same time, you need    at 402-323-1735 if you have any
to know who to contact when you suspect fraud (see sidebar). A major reporting           questions about the Board of
system, in line with the current SAR program, is in the works at the FBI and HUD.        Director positions.
“Through a mandatory reporting mechanism, industry insiders would be the front
line in preventing mortgage fraud,” Swecker explains. “Zero tolerance within the in-
                                                                    Continued Page -8-
                                                                                        Aug., 2005               Page 8

Fighting Fraud… from Page -7-
                                                                                        Fraud Contacts
dustry combined with a mandatory system of reporting fraudulent activities to the             If you suspect fraud, or simply
FBI and HUD will be a major step in addressing mortgage fraud.”                         want to learn more about prevent-
     More than any other aspect, however, is the importance of information shar-        ing and detecting it, there are many
ing. The U.S. Patriot Act allows information about financial matters involving          resources available to you, including:
suspected money launderers or terrorists to be disseminated to financial institu-             • Visit the MBA’s new fraud
tions. The mortgage industry, and organizations that have established some              prevention Web site at http://
degree of clout with the government, can work together to ensure that this infor-
mation is distributed in a timely fashion. It may not prevent all fraud, but it could         There, you’ll find timely fraud
potentially prevent large-scale losses. On a smaller scale, simply reporting fraud      alerts, a resource library, topical
when you strongly suspect it is the first step to eliminating it from our financial     news and industry updates, and tips
community.                                                                              for reporting fraud
Action                                                                                        • MBA also offers a direc-
     Fraud is easiest to avoid when you catch it early on. If swindlers know that       tory of enforcement agencies at
the industry is disorganized and behind on finding and stopping fraud, they’re          www.
only encouraged to deceive. The goal, of course, should be to catch fraud before a      MBAFightsFraud/
loan closes, and treat attempted fraud with the same severity as a closed, fraudu-      reportingfraud.html.
lent loan. The more mortgage fraud you can prevent, the more time and resources               Just click on your state for a
authorities can devote to other cases in progress.                                      list of appropriate agencies and or-
     When you take action against mortgage fraud, there are a few universal dos         ganizations
and don’ts as offered by Larry Rudner, vice president of fraud at Wells Fargo                 • NAMB offers a new link
Home Mortgage (and moderator of the Law Enforcement roundtable session at               on their Web site that allows you to
the 2005 MBA National Fraud Summit).                                                    report fraud directly to the FBI.
  Do:                                                                                   report_fraud.htm.
  • Explain how you discovered the alleged fraud                                              • Contact your local FBI
  • Report what was misrepresented and what the consequences of the fraud               Community Outreach Program
    entail                                                                              (
  • Give details about your proof and how your verified it                              reach/copintro.htm) and request a
  • Identify the dollar value of the misrepresentation                                  meeting to close the knowledge gap
  • Note anyone involved in the loan                                                    and prevent fraud before it happens.
  • Notify your company’s legal department and/or executives of your report

  • Get discouraged if you don’t see immediate results
                                                                                              NMA Fall
  • Withhold information, even if you believe it to be insignificant
  • Lie, mislead, or otherwise provide false information
  • Delay in following up with any requests for additional information or               The 2005 Nebraska Mortgage
    documents                                                                           Associations conference will be
                                                                                        held in Nebraska City on October
     In addition to taking action on an individual loan, you have the power to take     12th and 13th.
action on a national level. Join a local or national coalition against mortgage fraud        On the 12th, is best ball golf at
to fight it on a grassroots level. Not only will you be working for the good of the     the Arbor Links Golf Course, and
industry, your affiliation in such an organization can instill extra trust from your    Thursday the 13th, has a super line-
customers and business partners.                                                        up of speakers and programs
     In whatever level you decide to participate, whether at your own desk, or as a     scheduled. This year’s program of
lobbyist before Congress, the point is to take action-any action-to reduce mort-        talent is expected to motivate, en-
gage fraud. A cliché never was so true, as “If you’re not part of the solution,         tice and educate all who are
you’re part of the problem.” Or if you prefer, “If not me, who? If not now,             engaged in the many areas of mort-
when?” Mea culpa? You bet.                                                              gage lending. Booth vendors will
                                                                                        be offering many products and ser-
     SARAH LYONS is an assistant at M.O.M. and author Reverse Mortgages for             vices to assist the mortgage
                     Dummies, 619/321-8008, e-mail:               lending professional. A “must see”
                                                                                        during your conference time.
                                                                                     Aug., 2005             Page 9

     Enhancements to Home Possible (SM)
  Mortgages and Loan Prospector® Assessments
In our continuing effort to meet              are nonconvertible or convertible         •The secondary financing source
changing market needs and improve             5/1 Treasury- and LIBOR-in-               may not be the property seller•If
flexibility, Freddie Mac is pleased to        dexed ARMs with 2/2/5 cap                 the secondary financing has a
introduce enhancements to Home                structures are eligible for pur-          variable interest rate
Possible Mortgages and Loan Pros-             chase if they are secured by 1- or        • Its terms must require that
pector assessments.                           2-unit Primary Residences and             the monthly payment remain con-
Enhancements to Home Possible                 are not secured by Manufactured           stant for each 12-month period,
Mortgages                                     Homes.                                    and
     Freddie Mac’s Home Possible            • Permitted secondary financing             • The change in the interest
Mortgages help Sellers meet the               is expanded to include other              rate must be limited to an in-
needs of low- to moderate-income              types of secondary financing in           crease of 1% or less during each
Borrowers who need low down pay-              addition to Affordable Sec-               12-month period, and
ment options and credit flexibility.          onds®                                     • The First Lien Mortgage
This letter updates our Home Possible         Home Possible Mortgages with              may not be subject to a tempo-
Mortgage requirements announced in            other types of secondary financ-          rary subsidy buydown plan
the Single-Family Seller/Servicer             ing must meet the requirements          • The terms of the secondary fi-
Guide (Guide) Bulletin 2005-1 (dated          of Guide Sections 25.1(b), (c)            nancing must permit prepayment
February 17, 2005) with the following         and (f) in addition to the require-       at any time without penalty
enhancements:                                 ments below:                              Affordable Seconds meeting the
   • 5/1 adjustable-rate Mortgages            • The secondary financing             requirements of Guide Section
     (ARMs) are eligible for purchase         cannot be a Home Equity Line of       25.1(g) continue to be permitted.
     Home Possible Mortgages that             Credit (HELOC)

    •    Mortgage insurance coverage levels are reduced to the following:

        1- to 4-Unit Primary Residences other
        than Manufactured homes with the
        following LTV Ratios                                              Mortgage Insurance Coverage

        Greater than 97% up to and including 100%                                       20%

        Greater than 95% up to and including 97%                                        18%

        Greater than 90% up to and including 95%                                        16%

        Greater than 85% up to and including 90%                                        12%

        Greater than 80% up to and including 85%                                         6%

        Manufactured Homes                                            As required by Guide Section H33.3(f)

Special selling requirements
     When selling a Home Possible Mortgage with secondary financing that is not an Affordable Second, Sellers must com-
plete the field titled “Secondary Financing Sources” on the Form 11, Mortgage Submission Schedule, and Form 13SF,
Mortgage Submission Voucher, as applicable, with the value of “30” to indicate “Other Secondary Financing.”
     All other requirements for delivery of Home Possible Mortgages remain the same.

                                                                                                     Continued Page -10-
                                                                                            Aug., 2005              Page 10

Postsettlement delivery fees (delivery fees) for Home Possible Mortgages
    In addition to the standard Home Possible delivery fee, Home Possible Mortgages that are originated with secondary fi-
nancing other than an Affordable Second will be assessed a secondary financing delivery fee, as shown in the chart below,
which amends Guide Exhibit 19, Postsettlement Delivery Fees:

        Product                                                                    All Eligible Financing Structures
        All Eligible Product                                                                    0.50%

     A secondary financing delivery fee is not assessed on a Home Possible Mortgage with an Affordable Second meeting the
requirements of Guide Section 25.1(g).
     Additionally, Home Possible Mortgages that are 5/1 ARMs will be assessed the standard ARM delivery fee as shown in
the following chart, which amends Guide Exhibit 19:

                                               ADJUSTABLE-RATE MORTGAGES
                                                                                             LTV Ratios
        Product                                                                                 >90%
        All Eligible Product                                                                    0.25%
      Home Possible Mortgages that are          usable Credit Score if one or more other    plete,” the Seller must document that
7/1 ARMs and 10/1 ARMs meeting the              Borrowers on the transaction have a us-     for all Borrowers without usable
requirements of Chapter A34 are not             able Credit Score, as determined by Loan    Credit Scores any debt not reported
subject to the ARM delivery fee.                Prospector. This new feature in Loan        on the credit report is being repaid in a
      Sellers should refer to this Indus-       Prospector will assist Sellers in meeting   satisfactory manner, and that payment
try Letter for information on                   the needs of Borrowers who have little or   must be included in the total monthly
secondary financing delivery fees and           no credit established.                      debt-payment-to-income ratio.
ARM delivery fees for Home Possible                  When the new feature is imple-              If any of the requirements for
Mortgages until these changes are in-           mented on September 18, 2005, Loan          Loan Prospector to assess a transaction
corporated into Exhibit 19.                     Prospector will assess transactions for     where one or more Borrowers do not
Effective dates                                 which not all Borrowers have usable         have usable Credit Scores are not met,
      Effective July 27, Loan Prospec-          Credit Scores if the following require-     Sellers must adhere to the requirements
tor will assess Home Possible                   ments are met:                              in their Purchase Documents for Manu-
Mortgages with the enhancements de-               • At least one Borrower has a us-         ally Underwritten Mortgages.
scribed above. Loan Prospector                       able Credit Score, as determined       Effective date
Feedback Certificates will also be up-               by Loan Prospector                          Effective September 18, 2005,
dated on this date.                               • The transaction is a purchase, “no      Loan Prospector will assess transac-
      Effective August 15, Sellers may               cash-out” refinance or stream-         tions for Borrowers without usable
sell Home Possible Mortgages with                    lined refinance Mortgage               Credit Scores in accordance with the
the enhancements described above to               • The Mortgage is secured by a 1-         requirements set forth above. Loan
Freddie Mac.                                         unit property and all Borrowers        Prospector Feedback Certificates will
Loan Prospector—usable Credit                        occupy the property as their Pri-      also be updated on this date.
Scores                                               mary Residence                         Conclusion
      Currently, Loan Prospector requires         • Borrower(s) with usable Credit               These enhancements demonstrate
that all Borrowers have usable Credit                Scores contribute more than 50%        our continuing support to expand
Scores to complete its assessment of a               of the total monthly income            homeownership opportunities. Appli-
transaction. For those transactions with          • Borrower(s) without a usable            cable Guide chapters, forms and
Borrowers who do not have usable Credit              Credit Score are not self-employed     exhibits will be updated to reflect our
Scores, Loan Prospector returns an AUS/              If the requirements above are          requirements in a future Guide Bulle-
Evaluation Status of “Incomplete.”              met, Sellers will receive an AUS/           tin. Until that time, this Industry
Freddie Mac is enhancing Loan Prospec-          Evaluation Status of “Complete” on          Letter serves as Freddie Mac’s written
tor so that if certain requirements are met,    the Loan Prospector Feedback Certifi-       communication amending our Guide
it will complete the assessment for trans-      cate. For all transactions with an          provisions, in accordance with Sec-
actions that include Borrowers without a        AUS/Evaluation Status of “Com-              tion 1.2 of the Guide.
                                                                                    Aug., 2005             Page 11

   As Refi Volume Falls Borrowers More Likely To Cash Out
Lower Than Expected Interest Rates       in the second quarter of 2005 to 42        homeowners spent more than $140
in Quarter Spurred Activity to           percent, down from the first quarter       billion last year on home improve-
Higher Levels McLEAN, VA - In            average of 45 percent,” said Amy           ments and remodeling, which
the second quarter of 2005, 74 per-      Crews Cutts, Freddie Mac deputy            often translate into gains in home
cent of Freddie Mac-owned loans          chief economist. “The second-quarter       values that exceed the cost of the
that were refinanced resulted in new     cash-out refinance volume reflects, in     improvement. Based on the Joint
mortgages with loan amounts that         part, borrowers responding to the fact     Center’s Remodeling Activity In-
were at least five percent higher        that they may not be able to obtain        dicator, the pace of home
than the original mortgage balances,     such favorable rates in the future to      improvement expenditures remains
according to Freddie Mac’s quar-         fund home improvements or other big        strong, increasing 4.5 percent in
terly refinance review. This is in       purchases. The strong cash-out activ-      the second quarter.”
contrast to the first quarter of 2005,   ity was due to both borrowers who               The Cash-Out Refinance Re-
when 64 percent of refinanced loans      were going to do a cash-out refi re-       port also revealed that properties
had higher new loan amounts, and         gardless of interest rate incentives and   refinanced during the second quar-
was the highest since the fourth         those who were primarily attracted by      ter of 2005 experienced a median
quarter of 2000.                         the low rates but decided to convert       house-price appreciation of 23 per-
     “Interest rates on 30-year,         some equity into cash while they were      cent during the time since the
fixed-rate mortgages dipped lower        at it. Based on our July outlook for       original loan was made, up from
in the second quarter, spurring refi-    mortgage originations and refi activ-      the 17 percent appreciation on
nance activity higher,” said Frank       ity over the next two years, we            loans refinanced in the first quarter
Nothaft, Freddie Mac vice president      estimate the amount of home equity         2005. For loans refinanced in the
and chief economist. “Mortgage           cashed-out through prime, first-lien       second quarter of 2005, the median
borrowers took advantage of these        refinances to total $162 billion in        age of the original loan was 2.6
low rates by cashing out some home       2005 and about $69 billion in 2006.        years, two months older than the
equity before rates go up as they are    Total equity cashed out in the second      median age of loans refinanced
expected to in coming quarters.”         quarter is estimated at $59 billion, up    during the first quarter.
     Freddie Mac expects home            from the revised cash-out estimate for          These estimates come from a
sales to hit a new record again in       the first quarter of 2005 of $43 bil-      sample of properties on which
2005 as low fixed mortgage rates         lion.”                                     Freddie Mac has funded at least
combined with teaser discounts on              In the second quarter of 2005, the   two successive loans. Transactions
adjustable-rate mortgages maintain       median ratio of old-to-new interest        are further screened to verify that
affordability, even as home prices       rate was 1.08. In other words, one-        the latest loan is for refinance
rise. “The Fed’s statements regard-      half of those borrowers who paid off       rather than for home purchase. The
ing expectations of a continued          their original loan and took out a new     Freddie Mac analysis does not
measured pace of increase in the         one had an interest rate on their old      track the use of funds made avail-
federal funds rate (a key short-term     loan that was at least eight percent       able from these refinances.
interest rate), while signaling the      higher than the new interest rate.              Freddie Mac is a stockholder-
Fed’s vigilance on inflation contain-          “Also, in the second quarter of      owned corporation chartered by
ment, means that rising mortgage         2005, homeowners who refinanced            Congress in 1970 to create a con-
rates should start to dampen enthu-      their mortgages lowered their rate an      tinuous flow of funds to mortgage
siasm in the housing market later        average of 0.67 percentage points. On      lenders in support of
this year,” noted Nothaft.               an average loan size of $150,000, that     homeownership and rental hous-
     Freddie Mac expects 30-year         lower rate translates into a payment       ing. Freddie Mac purchases
fixed mortgage rates to rise through     that is about $64 a month lower for a      mortgages from lenders and pack-
the end of the year, ending with a       savings of more than $760 annually,”       ages them into securities that are
fourth quarter average near 6.0 per-     said Cutts.                                sold to investors. Over the years,
cent, approximately a quarter of a             “By our estimates, homeowners        Freddie Mac has made home pos-
percentage point higher than the         extracted $140 billion in home equity      sible for one in six homebuyers
second quarter average. Home sales       through first lien refinances in 2004,”    and more than 3.6 million renters
in June set a new monthly record.        Cutts added. “Harvard’s Joint Center       across America.
     “Applications for refinance fell    for Housing Studies reports that                              Continued Page -12-
                                                                                         Aug., 2005            Page 12

As Refi Volume Falls… from Page -11-

                                                   Q2 2005 Release
                                  QUARTERLY REFINANCE STATISTICS
                                           Descriptive Statistics on Loan Terms and Property
    Percentage of Refinances Resulting in: Valuation:
                   5% Higher                    Median Ratio Median Age of Median Appreciation
                     Loan            Lower Loan of Old to New Refinanced     of Refinanced
    Quarter         Amount1           Amount        Rate2     Loan (years)      Property

    199802             51%                14%                 1.15                 4.0                     11%
    199803             48%                17%                 1.15                 4.0                     10%
    199804             44%                20%                 1.19                 3.3                     10%
    199901             54%                13%                 1.17                 4.3                     11%
    199902             56%                13%                 1.14                 4.7                     12%
    199903             68%                11%                 1.05                 5.4                     18%
    199904             77%                 9%                 0.98                 4.9                     21%
    200001             80%                 7%                 0.93                 5.0                     22%
    200002             80%                 8%                 0.91                 4.8                     24%
    200003             81%                 8%                 0.92                 4.6                     26%
    200004             74%                11%                 0.98                 3.5                     23%
    200101             53%                 8%                 1.16                 1.6                     12%
    200102             60%                 9%                 1.15                 2.5                     16%
    200103             61%                10%                 1.14                 2.7                     18%
    200104             47%                19%                 1.19                 2.8                     14%
    200201             61%                10%                 1.16                 3.4                     18%
    200202             63%                10%                 1.14                 3.4                     20%
    200203             44%                19%                 1.19                 2.9                     13%
    200204             40%                22%                 1.22                 2.4                     11%
    200301             41%                13%                 1.23                 1.9                      7%
    200302             33%                15%                 1.27                 1.7                      3%
    200303             34%                17%                 1.28                 1.7                      5%
    200304             44%                21%                 1.22                 2.2                     12%
    200401             42%                14%                 1.22                 2.0                      6%
    200402             43%                15%                 1.21                 2.0                      7%
    200403             59%                15%                 1.14                 2.5                     17%
    200404             56%                19%                 1.14                 2.2                     15%
    200501             64%                10%                 1.12                 2.4                     17%
    200502             74%                 9%                 1.08                 2.6                     23%

 Higher loan amount refers to loan amounts that were at least 5 percent greater than the amortized unpaid principal balance
(UPB) of the original loan. “Lower loan amount” refers to loan amounts that were less than the amortized UPB of the original
 Ratio of old to new rate refers to the ratio of the interest rate of the refinanced loan to the interest rate of the new loan.
                                                                                         Aug., 2005          Page 13

                                                  HUD Update
Single Family Foreclosure Policy and Procedural Changes: Reasonable Diligence Requirements;
Update to HUD’s Schedule of Allowable Attorney Fee and Update to HUD’s Foreclosure Time Frames
This Mortgagee Letter provides up-                 When a separate legal action is         the automatic stay or trustee
dates to HUD’s reasonable diligence          necessary to gain possession follow-          abandonment of all interest in the
time frames and the schedule of attor-       ing foreclosure, an automatic                 secured property. The
ney fees for all jurisdictions.              extension of the reasonable diligence         mortgagee’s claim review file
                                             time frame will be allowed for the ac-        must document that the case was
REASONABLE DILIGENCE                         tual time necessary to complete the           promptly referred to the
REQUIREMENTS AND EF-                         possessory action provided that the           mortgagee’s foreclosure attorney
FECTIVE DATES                                mortgagee begins such action                  after the bankruptcy filing.
      When foreclosure of a defaulted        promptly. Mortgagees must take the                 In general, the additional
loan is necessary, HUD regulation 24         first public legal action to initiate the     time allowed for the Chapter 7
CFR 203.356(b) provides that mort-           eviction or possessory action within          Bankruptcy delay for meeting the
gagees “must exercise reasonable             thirty calendar days of foreclosure           reasonable diligence requirement
diligence in prosecuting the foreclo-        completion to qualify for this exten-         shall not exceed 90 days from the
sure proceedings to completion and in        sion of the reasonable diligence time         date of the bankruptcy filing. Any
acquiring title to and possession of         frame.                                        delay beyond 90 days from the
the property.” That regulation also                The Department is not issuing           date of bankruptcy filing must be
states that HUD will make available          time frames for completing posses-            supported by documentation that
to mortgagees a time frame that con-         sory actions because of wide                  the delay was not due to the fail-
stitutes “reasonable diligence” for          differences in time periods depending         ure of the mortgagee to timely
each state. This Mortgagee Letter pro-       upon the location of the property and         notify its bankruptcy attorney or
vides an update to the state                 other factors outside of the                  by any failure of the mortgagee’s
foreclosure time frames and                  mortgagee’s control.                          attorney.
attorney’s fee schedules that were           Bankruptcies                                 Chapter 13 (and Chapter 11 and 12)
provided in Mortgagee Letter 2001-                 When a borrower files bank-             Bankruptcy Filings
19, dated August 24, 2001. The               ruptcy after foreclosure proceedings               HUD does not reimburse for
updates are as follows:                      have been instituted, an extension of         legal expenses associated with a
Foreclosures                                 the reasonable diligence time frame           current FHA-insured mortgage.
      Attachment 1 provides listings of      for foreclosure and acquisition of the        Where the mortgagee cannot pro-
the first legal action necessary to ini-     property will be allowed. However,            ceed with foreclosure action
tiate foreclosure on a mortgage and of       the mortgagee must ensure that all            because of a Chapter 13 (or
the typical security instrument used in      necessary bankruptcy-related legal ac-        Chapter 11 or 12) Bankruptcy,
each state. Reasonable diligence time        tions are handled in a timely and             the case shall be resolved through
frames for completing foreclosure and        effective manner. The case must be            dismissal, termination of the au-
acquisition of title in each state are       promptly referred to a bankruptcy at-         tomatic stay or trustee
provided in Attachment 2. These time         torney after the bankruptcy is filed          abandonment of all interest in the
frames identify the time between the         and the mortgagee must monitor the            secured property. The
first legal action required by the juris-    action to ensure that the case is timely      mortgagee’s claim review file
diction to commence foreclosure and          resolved. The time frame for complet-         must document that the case was
the date that the foreclosure deed           ing legal action on a bankruptcy will         promptly referred to the
(Sheriff’s, Trustee’s, etc. or certificate   vary based on the chapter under               mortgagee’s attorney after the
of title) is recorded. Delays in com-        which the bankruptcy is filed.                bankruptcy filing.
pleting foreclosure due to bankruptcy           Chapter 7 Bankruptcy Filings                    In addition to prompt and ac-
are treated as exceptions and are not              HUD does not reimburse for le-          curate notification to the
included in the time frames.                       gal expenses associated with a          bankruptcy court, the mortgagee
      The revised time frames provided             current FHA-insured mortgage.           shall closely monitor the pay-
in Attachment 2 will be effective for              Where the mortgagee cannot pro-         ments required by the bankruptcy
all cases where the first legal action to          ceed with foreclosure action            court. If the borrower becomes
initiate foreclosure occurs on or after            because of a Chapter 7 Bank-            60 days delinquent in payments
September 1, 2005.                                 ruptcy, the case shall be resolved      required under a Chapter 13 (or
Acquiring Possession                               through dismissal, termination of                      Continued Page -14-
                                                                                       Aug., 2005             Page 14

HUD Update… from Page -13-
     Chapter 11 or 12) plan, the lender     ous legal actions for purposes of cal-     bankruptcy filing. Mortgagee claims
     must ensure that prompt legal ac-      culating the maximum amount HUD            for legal fee reimbursement must be
     tion is taken to resolve the matter.   will reimburse in an insurance claim.      reasonably related to the amount of
     In general, the additional time al-    The updated fee schedules are pro-         work that the bankruptcy attorney ac-
     lowed for the Chapter 13 (or           vided in Attachment 3.                     tually performed.
     Chapter 11 or 12) Bankruptcy de-            These fees cover the customary             A bankruptcy clearance begins
     lay for meeting the reasonable         legal services performed in each type      when a petition for release of the
     diligence requirement shall not        of action. In all cases, the amount        bankruptcy stay is submitted to the
     exceed 90 days from the date of        claimed for attorney fees shall reason-    bankruptcy court. Bankruptcy clear-
     the payments under the bank-           ably relate to the work actually           ances begun prior to the effective date
     ruptcy plan became 60 days             performed. In the event a legal action     shall be reimbursed according to
     delinquent. Any delay beyond 90        is stopped for a loss mitigation option,   HUD’s Schedule of Attorney Fees
     days from the date of the account      a reinstatement or a payment in full,      that was issued with Mortgagee Letter
     became 60 days delinquent under        the attorney fees that the borrower is     2001-19, dated August 24, 2001.
     the terms of the bankruptcy plan       required to pay shall be commensu-         Possessory Actions (Evictions)
     must be supported by documenta-        rate with the work actually completed           The update to HUD’s Schedule
     tion that the delay was not due to     to that point and the amount charged       of Attorney Fees will be effective for
     the failure of the mortgagee to        may not be in excess of the fee that       all possessory actions undertaken on
     timely notify its bankruptcy attor-    HUD has established as reasonable          or after September 1, 2005. Posses-
     ney or by any failure of the           and customary for claim purposes.          sory actions begun prior to the
     mortgagee’s attorney.                  Foreclosures                               effective date shall be reimbursed ac-
Non-compliance                                   The update to HUD’s Schedule          cording to HUD’s Schedule of
     Mortgagees are responsible for         of Attorney Fees, as provided in At-       Attorney Fees that was issued with
“self-curtailment” of interest on           tachment 3, will be effective for all      Mortgagee Letter 2001-19, dated Au-
single-family claims where reason-          cases where the first legal action to      gust 24, 2001.
able diligence or reporting                 initiate foreclosure occurs on or after    Deeds-in-Lieu of Foreclosure
requirements are not met. Self-curtail-     September 1, 2005. In the interim,              The update to HUD’s Schedule
ment shall be accomplished by               mortgagees shall continue to follow        of Attorney Fees will be effective for
identification of the interest curtail-     the HUD Schedule of Attorney Fees          all deeds-in-lieu recorded in HUD’s
ment date on Form HUD-27011, Item           that was issued with Mortgagee Letter      name on or after September 1, 2005.
31. Explanation and examples are            2001-19, dated August 24, 2001.            In the interim, mortgagees shall con-
provided in Attachment 4.                   Bankruptcy Actions                         tinue to follow HUD’s Schedule of
                                                 The update to HUD’s Schedule          Attorney Fees that was issued with
SCHEDULE OF ATTORNEY                        of Attorney Fees will be effective for     Mortgagee Letter 2001-19, dated Au-
FEES AND EFFECTIVE                          all bankruptcy clearances undertaken       gust 24, 2001.
DATES                                       on or after September 1, 2005. These            Questions regarding this Mort-
     The Department has revised the         fees represent maximum allowable           gagee Letter may be directed to
attorney fees that will be considered       amounts for customary and routine le-      HUD’s National Servicing Center at
as reasonable and customary for vari-       gal services performed in each type of     (888) 297-8685.

Revised Uniform Residential Loan Application (Form 1003)
  In 2003, Fannie Mae and Freddie Mac revised the Uniform Residential Loan Application (Fannie Mae Form 1003/
  Freddie Mac Form 65) to make some technical changes and to conform to the new race and ethnicity categories required
  by the Federal Reserve Board for reporting under the Home Mortgage Disclosure Act, based on new categories used by
  the Census Bureau.
       We are now announcing additional technical and substantive changes that accommodate advances in underwriting
  and make the form more user-friendly.
       The new form incorporates several changes. The instructions on the form have been amended to recognize that ap-
  plicable law in some states, such as the California statute that became effective on January 1, 2005, provides for
  community property ownership by non-spouses. Consequently, the instructions now address a situation involving a non-
                                                                                                       Continued Page -15-
                                                                                      Aug., 2005              Page 15

applicant who shares community property with an applicant under state law. Whether or not such non-applicant is the
applicant’s spouse, information concerning the non-applicant should be recorded in the section for Co-Borrower infor-
mation. A similar addition of a reference to a non-applicant with community property rights has been made to the
instructions in Section VI, Assets and Liabilities.
     In 2004, the Federal Reserve Board clarified its ruling requiring credit applicants to indicate whether the application
is for joint or individual credit. Since then, Fannie Mae has received requests from lenders to include that information on
the Uniform Residential Loan Application. The revised form includes signature lines for the applicant to indicate
whether the application is for joint or individual credit.
     We are also revising the attestation to make it clearer to borrowers that they are allowing access to certain informa-
tion in connection with the application and the resulting loan. We have clarified the authorization with respect to the
lender’s responsibility to include information on the borrower’s sex, race, and ethnicity on the basis of appearance and
surname if the borrower declines to furnish this information.
     We have made conforming changes to Form 1003s, the Spanish language version of the Uniform Residential Loan
Application and also have taken this opportunity to make substitutions of some Spanish words to provide a translation of
the English form that more accurately reflects current usage. Because Form 1003A (Statement of Assets and Liabilities)
and its Spanish equivalent, Form 1003As, reference non-applicant spouses, these forms have also been amended to rec-
ognize the assets of all non-applicants who share community property with the applicant.
     At this time Fannie Mae is also revising its instructions for use of Form 1003. These instructions provide guidance
to lenders using this form in connection with loans to be sold to Fannie Mae. We are taking this opportunity to clarify
the instructions with respect to non-citizen borrowers, first time homebuyers, and the collection of race and ethnicity in-
     These new forms may be used by lenders immediately, but are required for loans with an application date on or after
January 1, 2006. The current version of the Uniform Residential Loan Application (Form 1003) will remain available on
our Web site through December 31, 2005.
     A copy of the revised instructions and the revised Form 1003, 1003A, 1003s and 1003As are included with this An-
nouncement as Attachment 2. These forms are also available on our Web site ( in Portable
Document Format (PDF) file. A revised interactive PDF file that can be downloaded for electronic preparation will soon
be available on our Web site.
Revised Uniform Underwriting and Transmittal Summary (Form 1008)
     With Announcement 05-03, Fannie Mae introduced new project type codes to be used to identify loans secured by
condominium units. We are now updating the Uniform Underwriting and Transmittal Summary (Fannie Mae Form 1008
/ Freddie Mac Form 1077), Section I. Borrower and Property Information, “Project Classification” to reflect these new
Fannie Mae project type codes.
     Previously, project types were identified with project type codes of A, B, and C. The new codes are:

   New Project             Project Acceptance
   Type Code               Review Type
       P                   Limited Review – New Project
       Q                   Limited Review – Established or Two-Unit to Four Unit Project
       R                   Expedited Review – New Project
       S                   Expedited Review – Established or Two-Unit to Four-Unit Project
       T                   Fannie Mae Review
       U                   FHA-approved Project

     The project type codes applicable to PUDs and cooperative share loans are unchanged.
     Lenders are reminded that they should retain the Form 1008 in the loan file for each manually underwritten loan.
Although lenders may choose to do so, they are not required to retain the Form 1008 in the file for a Desktop Under-
writer (DU)- processed loan because the Underwriting Analysis Report, which is produced by DU, contains similar
information and must be included in the loan file.
     These new forms may be used by lenders immediately, but are required for loans with a delivery date on or after
November 1, 2005. The current version of the Uniform Underwriting and Transmittal Summary (Form 1008) will re-
main available on our Web site through October 31, 2005.
     A copy of the revised instructions and the revised Form 1008 are included with this Announcement as Attachment 3.
Form 1008 is also available on our Web site ( in a Portable Document Format (PDF) file.

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