To: VHDA Originating Lenders
Re: Affordable Housing Programs/ADU’s with Resale Restrictions
Date: June 4, 2010
A recent review of local affordable housing programs, including affordable dwelling unit (ADU) programs, has identified conflicts between the program ordinances/guidelines and the requirements of FHA and private mortgage insurers. Since most VHDA loans are at loan to value levels where mortgage insurance is required (generally, loan to value levels above 80%), it is critical that VHDA loans financed with mortgage insurance (including FHA insurance) meet the applicable insurers’ guidelines. VHDA Lenders originating VHDA loans on properties subject to affordable housing programs are required to evaluate the specific program ordinances/guidelines to determine whether those ordinances/guidelines meet the requirements of the applicable insurer (including FHA) as a matter of standard underwriting practices.
Requirements and Restrictions of Affordable Housing Programs:
There are numerous and varied affordable housing programs. Local governments develop their guidelines, policies and requirements in an effort to ensure that affordable housing properties are preserved for low and moderate income homebuyers. Many of these programs offer homes to the homebuyers at below market prices. However, in many instances there are restrictions regarding the resales of the properties with regard to the incomes of the purchasers and the prices for which the homes may be sold. Many programs provide for the locality or a nonprofit organization to have a right of first refusal or an option to purchase the home under certain circumstances (such as a loan default or resale of the property). Most programs also have a restriction on the price at which the home can be sold and/or the equity share the current homeowner may receive.
Important Issues to Consider:
The notice or other requirements for the exercise of a right of first refusal or an option to purchase and/or resale restrictions could impede VHDA’s ability to meet the requirements of FHA or other mortgage insurer if default occurs. These restrictions must not impair VHDA’s right to foreclose or to otherwise protect the interest of VHDA or the applicable mortgage insurer under the mortgage.
FHA requirements regarding restrictions related to affordable housing programs are provided in mortgagee letter 94-2 (dated 1/11/94). Although the DE lender is responsible for determining that the program ordinances/guidelines comply with the FHA mortgagee letter, local governments do share responsibility to ensure that their ordinances/guidelines are available and clearly defined. Lenders must obtain a copy of the program ordinances/guidelines and must review the requirements in the FHA mortgagee letter to determine that the program ordinances/guidelines comply with the FHA requirements. You can read a summary of the key provisions of the FHA mortgagee letter is by clicking here.
Private Mortgage Insurers:
Each private mortgage insurance company has its own guidelines regarding properties that are subject to affordable housing programs with resale restrictions. Many will require a review of the specific program ordinances/guidelines. A survey of several of the companies indicated consistency in the requirement for the restrictions to terminate at foreclosure, deed in lieu of foreclosure, short sale or assignment to the insurer. The restrictions cannot impede the insurer’s right to protect its interest.
Identifying Properties with Program Restrictions:
There is no uniform method to identify properties with program restrictions. Some purchase contracts include notification of the restrictions; however, not all do. The appraisal may indicate that the property is subject to a resale restriction. Most restrictions are identified or referenced in the deed or recorded covenants, usually not available until the closing review process and should be noted on the title policy. Closing review staff should carefully review the deed and title insurance commitment to identify if these restrictions exist and then return to underwriting to determine eligibility. Some localities require second deeds of trust to be recorded.
If a property is identified as being subject to an affordable housing program at any stage of loan origination prior to loan closing, it is required that the lender underwriter verify the terms of the specific program and determine that the program ordinances/guidelines meet the mortgage insurer’s requirements. The lender’s underwriter is to provide a certification to VHDA that the program ordinances/guidelines have been evaluated and determined to meet the applicable insurer’s requirements. VHDA Exhibit LL has been revised to incorporate the required certification regarding affordable housing program restrictions and secondary financing. This certification is to be executed by a representative of the affordable housing program or secondary financing provider and the lender’s underwriter. If it is determined after loan closing that a property subject to an affordable housing program is not eligible under the insurers’ requirements, then the lender is subject to repurchase of the loan from VHDA and indemnification to VHDA for any loss suffered as a result of such ineligibility.
Lenders who work with local governments and their affordable housing programs are advised to discuss the requirements and restrictions of their programs with the local governments to determine eligibility for VHDA loans with mortgage insurance prior to the origination of new loan applications.
If you have any questions or concerns, please contact Janice Burgess at (804) 343-5926 or Janice.firstname.lastname@example.org or your Business Development Officer.