Written By: Stacey Sprain
As an FHA originator, processor or underwriter, it’s likely that in the ongoing foreclosure market you’ll run across a HUD REO loan at some point. The purpose of this multi-part article is to provide you with some useful information to help in your endeavors.
I find it’s often helpful to gain an understanding of what happens with the property before it comes to your desk for a new loan. A brief explanation of the various roles and processes are provided below for your knowledge.
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What exactly is HUD REO?
“REO” is the abbreviation for “real estate owned.” A HUD REO property comes about when a borrower defaults on an FHA-insured property causing the lender to foreclose and deed the home over to the Secretary of HUD in exchange for an insurance claim payout.
M&M Contractor Services
Upon receiving title to the property, HUD outsources the disposition of the property by utilizing the services of HUD-approved M&M (Management & Marketing) contractors. These contractors are managed by the respective HUD Homeownership Center that oversees their jurisdictional areas. Ultimately the M&M contractors manage and move the REO property through the next phases of the REO process. You can view a map and listing of the approved M&M contractors by jurisdiction athttp://portal.hud.gov/hudportal/documents/huddoc?id=DOC_13066.pdf.
The M&M Contract process is divided into three areas of responsibility.
1. The Mortgagee Compliance Manager (MCM) performs a variety of pre- and post- property conveyance services to ensure that HUD's interests are protected. The MCM
a. reviews property inspections to ensure the property is in conveyance condition;
b. resolves conveyance exceptions;
c. provides guidance to the foreclosing Lender Mortgagees relating to pre-conveyance and post-conveyance responsibilities; and
d. leverages HUD's software and information systems to execute and complete the tasks within the contract.
Currently the MCM contract is serviced by the firm Michaelson, Connor & Boul out of Oklahoma City, OK.
2. The Field Service Manager is a company responsible for maintaining, protecting and preserving the property until it is resold to a new owner. The Field Service Manager
a. Inspects the property;
a. Secures the property;
b. Makes sure utilities are turned off;
c. Performs cosmetic enhancements and repairs;
d. Provides ongoing maintenance of the property until it resells; and
e. Provides the Property Condition Report to the appraiser.
A list of HUD’s approved Field Service Managers with toll free contact information can be found on the internet.
3. The Asset Manager is responsible for the marketing and resale of the property. The Asset Manager
a. Manages the property
b. Hires an appraiser to complete an appraisal in order to determine the listing price for resale of the property.
A list of HUD’s approved Asset Managers and toll free contact information can be found on the internet.
General questions regarding Field Service Managers or Asset Managers can be directed to HUD’s Office of Single Family Asset Management at (202) 708-1672.
Now on to the next phase in the process- the REO appraisal. In order to determine the listing price for the HUD REO property, the M&M Asset Manager requests and coordinates an FHA appraisal inspection from a state certified FHA roster appraiser. The Asset Manager provides an REO case number to the appraiser along with a copy of the Property Condition Report (PCR) at the time of request.
• The appraiser must inspect the entire property. (If the entire property can’t be accessed at time of initial inspection, he/she may need to return to re-inspect at a later date)
• The REO appraiser is responsible for inspecting the property and providing an appraisal in accordance with USPAP and the requirements of HUD Handbook 4150.2 Appendix A (REO) and Appendix D (Valuation Protocol).
• The appraisal should be done “as is” in order to provide the market value for the property on the effective date of the appraisal. The appraiser must report deficiencies to the site and improvements and note repairs that are required in order for the property to meet HUD minimum property requirements (MPR) for existing property or HUD Minimum Property Standards (MPS) for newly constructed property. Each repair requirement must include an estimated cost to cure.
• The appraiser must disclose and explain any discrepancies discovered between the Property Condition Report and what the appraiser observes during the appraisal inspection. Such discrepancies should be clearly explained and highlighted or bolded.
• Appraisers must accurately report conditions in accordance with UAD Condition Rating Definitions in accordance with the information given in Mortgagee Letter 2011-33 and Mortgagee Letter 2009-28.
The REO appraisal must include a “Statement of Insurability” in bold font in the Comment Section of the appraisal report to relay whether or not the property can be sold with FHA mortgage insurance. The Statement must indicate one of the following:
• Insurable; which means the property meet HUD MPR or MPS and is insurable in “as is” condition with no necessary repairs;
• Insurable with Repair Escrows; which means the property does not meet HUD MPR or MPS at the time of inspection but is completed “as is” since it will meet MPR or MPS upon completion of repairs listed in the Supplemental Addendum estimated at $5000 or less; or
• Uninsurable which means the property does not meet HUD MPR or MPS at the time of inspection and requires repairs in excess of $5000.
Need FHA Training? CLICK HERE: http://www.FHA-Classes.org
When the property is insurable with completion of repairs for up to $5000, an FHA loan under Section 203b can be closed on the property for the new buyers. If the repair costs exceed $5000, the loan is not eligible under Section 203b but may be eligible for a 203k loan for the new buyers.
Keep watch next week for Part Two of this article series on Understanding HUD REO where you’ll find additional appraisal requirements for REO property and more useful information to help with your originating, processing, and/or underwriting knowledge!
About The Author
Stacey Sprain - As an NAMP® staff writer, Ms. Stacey Sprain is currently a NAMP® member in good standing, and is a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution. If you would like to become a volunteer writer for us, please email us at: firstname.lastname@example.org.