Since Mayer Brown issued a Legal Update describing guidance issued by Fannie Mae, Freddie Mac (together with Fannie Mae, the "GSEs"), the Federal Housing Administration and the Veterans Administration ("VA") relaxing requirements with respect to appraisals and income/employment verification during the COVID-19 emergency, the agencies have continued to revise their guidance as the market adjusts to the challenges encountered by mortgage lenders. The GSEs and the VA have all issued revised letters, and the US Department of Agriculture ("USDA") issued new guidance to provide relief in connection with guaranteed single-family loans. Below we describe the USDA's guidance regarding appraisals and employment verifications performed in connection with RHS loans and provide updates on the changes made by the GSEs and the VA to their appraisal guidance.
Department of Agriculture
On April 8, 2020, the USDA issued a stakeholder announcement in connection with its Single-Family Housing Guaranteed Loan Program ("SFHGLP") that contains flexibilities largely similar to what the other housing agencies have issued regarding appraisals and the verification of a borrower's employment prior to closing. For both purchase and non-streamlined refinance transactions, an appraiser may complete an Exterior-Only Inspection Residential Appraisal Report if the appraiser is not able to conduct an interior inspection due to concerns associated with COVID-19. The appraiser must complete the appraisal in accordance with Uniform Standards of Professional Practice and the Uniform Appraisal Dataset, and appraisers will not be required to certify the property meets standards from HUD Handbook 4000.1. The USDA will not permit these appraisal flexibilities with regard to new construction properties or construction-to-permanent loans. Moreover, for those loans where a completion certificate is not available to confirm repairs on an existing dwelling, the lender must obtain a letter signed by the borrower confirming that repair work was completed, along with evidence of that completion, including photographs of the completed work, paid invoices indicating completion, occupancy permits or other similar documentation. This exception is not available for loans for rehabilitation and repair with purchase of an existing dwelling.
The announcement also permits flexibilities with respect to verification of employment. While reiterating that lenders must continue to document and verify the borrower's income in accordance with USDA regulations, the announcement notes that lenders may explore alternatives if they are unable to obtain a verbal verification of employment ("VVOE") within ten business days of a loan closing due to a temporary closure of the borrower's employment (which could include email correspondence with the borrower's employer). However, the USDA waives the ten-day VVOE requirement if the lender cannot obtain either a VVOE or acceptable alternative, provided the borrower has at least two months of cash reserves. Moreover, if the borrower has experienced a reduction of income, the announcement notes the reduced income must still be sufficient to support both the new loan payment and the borrower's non-housing obligations. If the borrower has no income at the time of closing, he or she is not eligible for a SFHGLP loan, regardless of cash reserves. This USDA guidance is slated to expire June 14, 2020.
Fannie Mae and Freddie Mac
Fannie Mae issued an updated Lender Letter 2020-04 and Freddie Mac issued Bulletin 2020-11 on April 14, 2020 to update and clarify existing guidance on various topics, including the GSEs' flexibilities regarding appraisals. The GSEs confirm that appraisal flexibilities contained in their previous guidance may be combined with existing lender variances (Fannie Mae) or negotiated provisions in the purchase documents (Freddie Mac), unless the applicable GSE informs the seller otherwise. The GSEs also clarify that appraisers may use virtual inspection methods to augment data used in an exterior-only or desktop appraisal, but warn that a virtual inspection is not a substitute for onsite interior and exterior inspections for traditional appraisals.
With respect to HomeStyle® Renovation loans, Fannie Mae will allow renovation draws while the loan is in a forbearance status, though an onsite interior and exterior inspection is still required to confirm completion of the renovation. Freddie Mac treats CHOICERenovationSM Mortgages in the same manner.
Veterans Administration
The VA released Circular 26-20-13 on April 10, 2020 to simplify its policies regarding exterior and desktop appraisals, which largely brings the VA policy in line with the GSEs. The new guidance requires an appraiser to access the interior of the property for a traditional interior appraisal only in connection with purchase transactions on vacant properties. The VA previously required interior appraisals on occupied property for purchase and refinance transactions unless the parties would not agree to an interior appraisal or were sick, at high-risk or otherwise subject to stay-at-home or isolation orders. Under the new circular, appraisers may perform an exterior-only appraisal with enhanced assignment conditions in connection with VA purchase or refinance transactions, provided the appraiser's geographic region does not restrict individuals from leaving their homes (or the jurisdiction has deemed appraisers to be essential). Consistent with the VA's prior guidance, if an appraiser is subject to a mandatory quarantine order or is deemed non-essential, the appraiser may complete a desktop appraisal. Based on this revised guidance, it is no longer necessary to consider whether the parties will agree to an interior appraisal or may be sick or at high-risk of contracting the virus in determining whether an exterior-only appraisal is acceptable (although the VA still permits interior inspections where the appraiser "poses no harm to themselves or others"). Mayer Brown's prior Legal Update describes the VA's specific requirements for exterior-only and desktop appraisals.
The new circular specifies that lenders should not request an exterior-only or desktop appraisal if the loan limit will exceed one and a half times the maximum 2020 Freddie Mac Conforming Loan Limit. The VA also has revised its guidance regarding a Reconsideration of Value to restrict the reconsideration to not more than the greater of 7% or $10,000 from the appraiser's opinion of value. The guidance related to inspection of repairs now applies to all loans, regardless of application date, and permits lenders to close purchase transactions on properties with needed repairs if the veteran accepts responsibility to complete the repairs within 180 days after close. Finally, the VA has also issued a circular describing new technology for use in the appraisal process.
Originally Published 20 April, 2020
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