Green Mortgage Northwest recently had a great success with a specific technique developed by Taylor Watkins, a local Portland appraiser, and Martin John Brown, with some funding from Portland Metro. It relies on the income valuation approach, which treats the ADU as an income-producing property rather than a shed, garage or other structure that doesn’t add much value to a property compared to a building that can potentially add hundreds of dollars a month to the owner’s cash flow.

At Green Mortgage Northwest, we contract with an Appraisal Management Company that is local. That allows us to request that certain green-educated appraisers be added to their roster of appraisers. Rather than bringing in someone from out in the suburbs to value a property in Hawthorne or Alberta, a local appraiser with a knowledge of green building and the latest valuation techniques can be called upon.

We can’t specifically request a certain appraiser to value ADU’s. However, here’s what we CAN do for green properties:

• We CAN request a green-educated appraiser. We have about five of them, including Taylor Watkins.
• We can also request that the appraiser calls to speak with Taylor regarding the correct way to value ADU’s and that the appraiser reviews the report Taylor put together. How much reading they do, we can’t control…
• It is a slight crap shoot because the mortgage broker can’t affect the valuation of the property or choose a specific appraiser. However, we just had a great recent victory with a ADU owner in Portland who runs www.accessorydwellings.org. The latest blog post goes into this process in detail (this is a synopsis).

A few best practices:

• Request a green appraiser when ordering the appraisal.
• Attach a few guides for the appraiser’s convenience along with some back history on the project.
• Let the appraiser know the property can be financed as either single family or multi-family, depending which nets the highest value.
• Make sure the appraiser knows this is a legal, permitted, habitable, ADU as defined by the City of Portland Bureau of Development Services. You can even link to Portland Maps to show the certificate of occupancy.

There is a necessary set up with underwriting to make sure expectations are clear regarding the type of property and other requirements. We’re here to guide you through that!

HARP is a federal government program originally rolled out in March 2009. It’s goal is to help people with underwater mortgages (about 5 million people) with loans owned by Fannie Mae and Freddie Mac to refinance even if they don’t have equity in their homes.

HARP 1.0 had a loan-to-value ratio (LTV) that was capped at 125% of the home’s value. For instance, if the home was worth $200,000, the maximum loan was $250,000. This limited the scope of the program for many people who were in the hardest hit areas.

On Oct. 24, 2011, President Obama announced that HARP would be revamped to expand its reach. HARP 2.0 for LTV’s over 125% will roll out through Fannie Mae and Freddie Mac on March 17th, at which point wholesale lenders and mortgage brokers will start offering it.

Wasn’t HARP 1.0 good enough?

There were many restrictions to HARP 1.0 that made it difficult for people to use it. Private Mortgage Insurance was one of those, as there were restrictions by some lenders or mortgage insurance providers that didn’t allow going over 105% LTV. These are now no longer requirements under HARP 2.0. If you have mortgage insurance and a home that’s underwater, no problem!

What does the new HARP 2.0 program do for me?

New changes that can potentially benefit you include:

• You can refinance no matter how much value your home lost. Previous limits were at 125% of the home’s value; now, it doesn’t matter what your home appraises for!
• Eliminating appraisals! Most people won’t be required to get an appraisal.
• Lower risk-based fees for shorter-term loans such as 15 year fixed mortgages.
• The program is extended through December of 2013.

Can I get a HARP loan?

Not everyone can do HARP. One of the government-sponsored enterprises, Fannie Mae or Freddie Mac, must hold your loan. To check if it is, visit:

• Fannie Mae
• Freddie Mac

Then what do I do?

Give us a ring to see if the HARP 2.0 program works for you!

Compared to current up-front mortgage insurance of 1% (soon to be 1.75% starting April 1, 2012), the number for the new program will drop to 0.1% of the loan amount. For monthly mortgage, that will drop to 0.55% from 1.15% (1.25% on April 1, 2012). Both of those are for 30 year fixed loans.

For a $300,000 loan that is the difference between $5,250 as the up-front funding fee versus $300 and $312.50 versus $137.50 for the new program, or $175 lower for Obama’s new program. That is a huge savings!

If you have an FHA loan from prior to June 1, 2009, this new Obama FHA streamline program will cut your monthly payment dramatically compared to the current rates FHA is charging. Drop me a line to see if it makes sense for you to refinance!

Effective April 1, the Federal Housing Finance Agency, which oversees Fannie and Freddie, is increasing guarantee fees by 10 basis points on single-family residential mortgages. Instead of this money going to the GSE’s to help cover loan losses, this goes directly to the U.S. Treasury to fund the Payroll Tax Cut of 2% for people receiving W2 income. This means if you make $50,000/year, you are saving about $165…which sounds great for the politicians looking to trumpet lower taxes right before elections.

If you’re a homeowner refinancing or are buying a home soon, this is NOT good. This is translating to an increase of about .125% for mortgage rates, which means you are going to be paying $20-30 more per month for your mortgage. This translates to thousands of dollars extra over the life of the loan. Even worse, the fee increase is good for 10 years (!) to fund the paltry two month payroll tax cut extension.

This goes into effect April 1. However, because loans need to be delivered to Fannie and Freddie by then from the lender originating the loan, it means any loans started in mid-January 2012 are likely going to see the rate increase. If your lender has a sudden spike in their rates versus others that you’re comparing them to, this is the reason! Soon, every bank will pass this through to their consumers and make it a moot point for comparison purposes. Not so much if you’re paying the extra money per month on your mortgage…

One way to think of ADUs is as affordable housing. With a strict urban growth boundary and the resulting scarcity of land, ADUs are a great alternative for Portland. Also known as mother-in-law units, they are an option for adding extra, private living space to a property without buying a new house. And it isn’t just limited to converting garages – you can build an entirely new structure if you’d like, or perhaps convert a basement space into separate living quarters.

The benefits are many:

• Small buildings require comparatively little energy to heat or cool versus McMansions;
• In-fill development keeps housing close to transit lines or within the new 20-minute neighborhoods that Portland’s city planners are embracing;
• Families can assist one another as parents age;
• More open space can be devoted to parks and community spaces.

There are probably some downsides – perhaps a neighbor who doesn’t want to look at your new building? – but it seems a small price to pay. I look forward to seeing more ADUs popping up backyards in the coming years!

There isn’t even the possibility of “conditional commitments” because no one is sure when or if there will be more funding available.

For now, an FHA loan is the best option for a low-down payment loan. You can purchase a home with as little as 3.5% down and credit requirements that are more lax than conventional loan requirements.

Eligible Properties:

1. All properties designated by Fannie Mae at www.homepath.com as eligible are good to go
2. Primary residences
3. Second homes
4. Investment properties

*Notice that there are NO condos, cooperatives or manufactured homes allowed by Fannie Mae for a HomePath loan.

Program Details

1. No appraisal required
2. No mortgage insurance required
3. Low down payments (minimum 5%)

This is a GREAT program for anyone looking to aggressively shop foreclosed properties. And not just that, but HomePath and Fannie Mae are offering the following incentives on top of the above:

1. 3.5% incentive for buyers who purchase and close between January 28, 2010 and April 30, 2010. The 3.5% can be used for:
   • Closing costs
   • Purchase of new Whirlpool® appliances
   • A mix of closing costs and appliances, up to a maximum of 3.5%.

*Sorry investors, only owner-occupied primary residences are eligible for the 3.5% closing costs credit.

The waiver is limited to those sales that meet the following conditions:

1. All transactions must be arms-length, with no identity of interest between the buyer and seller or any other parties participating in the sales transaction, including:

• Seller must hold title
• LLCs, Corporations and trusts must be established in accordance with state and federal law
• No evidence of previous flipping within 12 months
• Evidence that property was marketed openly, such as via MLS, auction or for-sale-by-owner.
• The waiver is limited to forward mortgages and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.

2. If the sales price of the property is 20% or more above the seller’s acquisition cost, the waiver will apply only if the lender meets the following conditions:

• Significant work has been done to the home (documented by a second appraisal verifying that legitimate repairs and rehabilitation have been done to substantiate an increase of more than 20%); or,
• In cases where no work has been done, the appraiser must provide explanation to support the increase since the prior transfer; and,
• A property inspection must be provided to the buyer prior to closing. (The lender may charge the borrower for the inspection.) The inspector does not need to be FHA approved, but must have no interest in the property, must not receive compensation other than from the lender and may not be involved with the repairs recommended from inspection.

For complete details, visit the HUD website at http://www.hud.gov/offices/hsg/sfh/waivpropflip2010.pdf

The FHA will also increase up-front mortgage insurance premium (UFMIP) from 1.75% to 2.25%. Also being discussed is raising the monthly mortgage insurance premium from 0.55% to a higher amount. Pending approval by Congress, get ready for higher private mortgage insurance.

Update: the increased UFMIP is increasing effective April 5, 2010.

Here is an attempt to describe the changes and the impact they’re going to have:

Lenders will no longer be doing spot approvals. Instead, there are two options, both based on criteria put forth by the U.S. Department of Housing and Urban Development (HUD):

• DELRAP Approval (Direct Endorsement Lender Review and Approval Process)
• HRAP Approval (HUD Review and Approval Process) and

The big difference is this: for DELRAP, I work with the bank and their builder approval group to get an approval, which takes a couple weeks. For HRAP, it goes to HUD, this can take a month or two…if you’re lucky. And with all the new projects that will now need approval, the HRAP times will most likely increase.

Details:

DELRAP Review Eligibility and Process Requirements Process

• Brokers still have the option of working directly with HUD for an HRAP review for projects requiring a project approval (read: slow approval, harder to get)

OR

• Brokers can work with their bank’s account executive (AE) to get a DELRAP approval through the Builder Project Approval Group (BPAG). Once all required documents are received, BPAG will complete the DELRAP review or, if necessary, forward to HUD for a HRAP review and approval. BPAG will determine DELRAP eligibility based on a few additional bank overlays (underwriting rules) defined below.

Note – If an extension or recertification is requested on a project not originally processed as a DELRAP through BPAG, a full review of the project documents will be required.
BPAG DELRAP project reviews will be completed within about two weeks of a complete submission. Compared to the month-plus timeline for HRAP, which is likely to increase, that is pretty good!

DELRAP Eligibility

The following are ineligible for a DELRAP review and must be sent to HUD for an HRAP review:

1. Anything identified on the builder certification, appraisal, or other documentation obtained pertaining to environmental hazards.
2. Any unobstructed view of an oil refinery, propane distribution center, large gasoline storage tank(s), etc. Note – projects next to a gas station are eligible for DELRAP.
3. Superfunds (dumps or landfills) identified on the EPA Web site that have ongoing maintenance.
4. Project is located on wetland or national wetland and insufficient documentation approving the project’s location.
5. Historic districts and insufficient documentation approving the project’s location.
6. Budget without at least a 10% line item allocation for capital replacement unless a reserve analysis is obtained.
7. Fidelity bond coverage not in the name of the association, i.e. Management Company provided fidelity bond coverage.
8. Manufactured home projects.
9. On a case-by-case basis, any project within a potential noise issue that does not have sufficient mitigating factors.

My take on all of this: FHA condo financing is about to get tougher. If the project is not currently approved by HUD/FHA, it’s going to be difficult to get FHA financing.

Realtors – make sure you know whether a condo is FHA-approved before taking a client using FHA financing out to see it. You don’t want them to form an attachment to a property they can’t buy and set their expectations based on that.

For complete information on this, visit HUD’s press release on the topic.