SUBJECT: Second Appraisal Requirements/Limits on Cash-Out Refinances

Mortgagee Letter 2007-11, announcing the FHASecure initiative, also included information regarding appropriate appraisal practices in declining markets; those instructions remain in effect. Now, with FHA in position to insure mortgage amounts greatly in excess of what has been its experience as a mortgage insurer, we believe it prudent to set forth additional underwriting and collateral assessment practices for “high-balance” loans.

Specifically, for mortgage amounts that will exceed the January 1, 2008 conforming limit of $417,000, FHA is establishing a second appraisal requirement for loans on properties in declining areas, and limiting the loan-to-value for cash-out refinances. These requirements are further described below and are effective for all mortgages with FHA case number assignments made on or after the date of this mortgagee letter.

Second Appraisal Requirements in Certain High-Cost Areas

Recognizing FHA’s counter-cyclical role in the mortgage market, and its ability to help stabilize declining housing markets, FHA is not at this time establishing higher downpayment requirements or borrower credit bureau score thresholds for properties located in declining areas. However, to mitigate risk to the FHA insurance fund as well as FHA borrowers, FHA will require a second appraisal for higher balance loans secured by properties in declining markets as indicated on the appraisal report or determined by the lender using other sources.

When is a Second Appraisal Required? A second appraisal will be required when:

· The loan amount, excluding the upfront mortgage insurance premium, will exceed $417,000, and

· The LTV[1], excluding upfront MIP, equals or exceeds 95%, and

· The property is determined as being in a declining market.

[1] Loan-to-Value is defined as the mortgage amount, excluding any financed upfront mortgage insurance premium, divided by the lower of the adjusted sales price or the appraiser’s estimate of the property’s value.