The Credit Union HLPR Mortgage

Home Loan Payment Relief
Frequently Asked Quesions
(updated 03/05/07)

Since the announcement of the HLRP program we have received a number of questions from credit unions about specifics of the program. These questions, and answers, are provided below. The Qs and As are intended to provide credit unions with useful information, some of which may be compliance related. CUNA is not engaged in rendering legal or other professional advice in presenting this information. If you need legal advice, please seek the advice of your credit union's legal counsel. Each answer is followed by an "as of" date.

If you have a question not covered in this FAQ, please submit it to hlpr@cuna.coop. We will reply directly to your question, and post it here.

HLPR Sign-up

Q: What does it mean for a credit union to sign up?

A: It means the credit union will attempt to lend out the committed amount (typically 0.5% or 0.75% of assets) under the basic conditions of the HLPR program. Once that volume had been achieved the credit union could make additional loans to the target audience at market rates at its discretion. (9/9)

Q: How can our credit union sign up for the program?

A: Right here on this website or by sending an email to hlpr@cuna.coop. (9/9)

HLPR Loan Mechanics

Q: In reading through the Power Point Presentation on the CUNA HLPR site, it states that the rate must be locked in at time of application. Is this a requirement of the program or do the credit unions have flexibility on how they handle the rate lock process?

A: It is up to each credit union how it handles the rate lock. (1/9)

Q: In the Q and A section of the HLPR website I am confused by the answer to the question concerning specific underwriting criteria. Is the maximum LTV for this program 97%? Can I offer it to someone with no money down for a 100% LTV loan? Can I offer it to someone who wants to put a larger down payment so the resulting LTV is less than 97%?

A: No, yes, and yes. More specifically, the credit union cannot require a down payment of more than 3%. However, a credit union may grant a loan with a down payment of less than 3% if it so wishes. Also, a member may make a down payment of more than 3% if the member so wishes. Sorry for the confusion. (1/9)

Q: I am aware of the income limits for the HLPR program. Is there a loan size limit?

A: No. The maximum loan size if of course influenced by the income limit, but there is no explicit loan size limit. (1/9)

Q: Does a credit union have to use any specific underwriting program or standards for HLPR loans?

A: No. The only requirements for a loan to qualify under the HLPR program are:

Beyond these criteria, all the specifics of the program are up to each credit union to determine. We do, however, have a number of additional suggestions:

Q:Can a credit union require an escrow for payment of taxes and insurance?

A: Yes. (8/23)

Q:Is there a maximum permissible loan under the program?

A: There is no explicit loan maximum. However, loan sizes will in effect be limited by the combination of borrower income limits (at or below local area median with high cost area overrides), the 42% backend ratio, and the amount of other monthly payments. (9/16)

Q: Our credit union is considering this new mortgage package. We want to help our members and also grow. We were wondering if we offered the HLPR if we could require our borrowers to sign up for direct deposit and checking accounts. We basically have free checking and online services so we're not trying to take them on fees like most banks seem to want to do. Would something like this be allowable?

A: We strongly advise against requiring HLPR members to sign up for direct deposit and checking accounts. Doing so may be beneficial for the member, but it just creates one more obstacle to getting a HLPR loan. Since getting a mortgage is already a complicated, often difficult process for first-time homebuyers, additional complications or requirements should be avoided. Cross selling your checking account after the loan has been approved would be fine. (1/9)

Q: Could a credit union make the loans with a back end ratio of total payments to income of more than 42%.

A: Yes. The program requires credit unions to go up to 42%. Credit unions are free at their option to exceed that level. Some credit unions have said that they would be willing to exceed the 42% ratio. (8/23)

Q: What closings costs are allowable? What closing costs are not allowable?

A: That's up to the standard practices of the credit union. It is important that the credit union not add any extra closing costs on these loans that are not charged on similar loans. In keeping with the goal of the program, which is to increase affordability as much as possible, credit unions are encouraged to minimize their own closing costs and to negotiate discounts from other vendors on HLPR loans to "match" the credit union's discount of 1%. (8/23)

Income and Program Eligibility

Q: When will the income limits be updated for 2006?

A: Freddie and Fannie base the income limits on local area household median income data determined by HUD. Last year, HUD released household income updates in mid-February. We are not aware if that was sooner or later than usual. As soon as Freddie and Fannie update the income data, the links to “Borrower Income Limits” from the HLPR website will be directed to the new data. We will also send an announcement to all participating credit unions as soon as we become aware of the update. (1/9)

Q: Is the program just for first time homebuyers?

A: No. We believe that most members who qualify for the program will be first-timer buyers. That’s why much of the publicity surrounding the program will refer to first-time buyers. However, many credit unions may have members who qualify who are not first-time buyers. Care should be taken to let these members know that they may qualify even if they are not first-time buyers.

HLPR Interest Rates and Rate Index

Q: When do new monthly HLPR rates get posted on the website?

A: We post rates weekly, typically on Fridays. Credit unions have two choices on what rate to use. First, a credit union can chose to adjust the rate only monthly. In that case, the rate of the last Friday of a month is in effect for the entire following month. Second, a credit union may adjust the rate weekly based on the latest published weekly rate. (1/9)

Q: Where do you get the data for the initial HLPR rates that you post on your site?

A: They come from DATATRAC, the largest national financial institution rate reporting service. They report daily the national average initial rates for banks and credit unions on 3/1 ARMs. We take the simple average of those two rates. Any discounts or premiums are incorporated into the averages. In other words, we don’t know the indexes, margins, discounts and/or premiums involved. We simply report the average of the initial rates. (10/14)

Q: Does the CU have the option of choosing the newly issued one-year Treasury for the index after the initial 3-year period, or must it use the Constant Maturity Treasury (CMT)?

A: That’s up to the credit union. There is no requirement to use the CMT. However, we believe that the CMT is more standard for purposes of the secondary market, and therefore we suggest using it. (9/23)

Q: After the initial three-year period, will the HLPR loans be indexed to the one-year Constant Maturity Treasury (CMT) rate or newly issued one-year Treasuries?

A: To make the loans as similar as possible to standard 3/1 ARMs, they will be indexed to the Constant Maturity Treasury rate. (9/9)

Q: Is there a required or suggested margin on the loans?

A: There is no required margin to qualify for the program, so it's up to the credit union. For purposes of future acceptability by the secondary market, a margin of 2.75% above the one- year Treasury index after the initial three year fixed period would be typical. (8/23)

Q: What index will the 3/1 ARM be tied to?

A: The index once the initial three-year period ends will be the 1-year Treasury yield.

(8/23)

Mortgage Insurance

Q: In our state, a credit union cannot grant a purchase money loan over 90% LTV without mortgage insurance. How are credit unions handling this, and could we get an exception?

A: Of course, a credit union could chose to require mortgage insurance. However, we are also checking with your regulator to see if there might be a waiver for this specific program. In discussions with regulators, we are pointing out that the adjustable rate feature of HLPR loans appropriately manages interest rate risk, making salability to the secondary market less crucial. We are also pointing out that HLPR loans will constitute only a small portion of a credit union’s balance sheet. (9/16)

Q: Because the loan-to-value ratio (LTV) will be well over 80%, should these loans have some form of mortgage insurance?

A: Whether to add some form of mortgage insurance is entirely up to the credit union. A credit union may require mortgage insurance and be in compliance with the program. However, the purpose of the program is to increase housing affordability by lowering monthly payments. After the payment reductions allowed by the rate reduction, typical monthly mortgage insurance premiums would be a considerable portion of the monthly payment. Because of this, some credit unions have said they will forgo mortgage insurance on HLRP loans. That of course limits the marketability of the loans, especially in the first few years after their origination. This is because Freddy and Fanny are precluded from buying loans with LTVs over 80% without some form of credit enhancement. We expect that most credit unions will plan to hold the loans in portfolio for at least three years, until the rate reduction expires. The LTV on a 97% loan will decline to 80% after three years if price appreciation averages at least 5% a year. Appreciation of less than half that rate (2.3% per year) is required if the loan is held for five years. We are currently discussing these issues with FNMA, FHLMC, NCUA and some of the state supervisors. We are also discussing with CUNA Mutual Group the availability of some form of pooled mortgage insurance for credit unions to buy on loans that have been seasoned for three to five years, but that still have LTVs above 80%. In summary, a credit union might chose to forgo mortgage insurance because: 1. losses on first-time home buyer loans tend to be modest, 2. the credit union may plan to never sell the loans because the amount outstanding relative to total assets will never be very large, 3. with modest price appreciation and/or the availability of reasonable pooled mortgage insurance, the loans will be marketable on good terms after three to five years. (8/23)

Financial Implications to CUs

Q: I've run the numbers, and it appears to me the HLPR loan will just about match the alternative of a three-year Treasury or Agency security. In other words, these loans won't provide a positive return compared to other opportunities the credit union might have with the money. Has this been taken into consideration?

A: Yes. That's really the point of the whole program. It is designed to offer a special deal for three years to a subset of the members: those in the bottom half of the income distribution. After that, the loans will begin to price to market rates. The designers wanted a program that credit unions would not have to lose money on, but one on which credit unions would give up their normal net income, i.e., cost recovery only. Because rates on the 3/1 ARM and three year investments do not move in complete lock step, there will be times when the loans will earn a bit more or less than the investment alternatives. However, based on analysis of data for the past five years, we believe that yields on the 3/1 ARM will match or slightly beat three-year investment yields. (9/2)

Q: By committing 0.5% to 0.75% of total assets, are we required to set-aside those funds, or does the percentage represent our maximum loan fundings for this program?

A: The latter. By committing for example 0.75% of assets, a credit union says it will seek qualified borrowers into the program, and will fund loans under the terms and conditions of the program up to 0.75% of its assets so long as there are sufficient qualifying borrowers. (8/23)

Qualifying Alternative Loan Programs

Q: We would like to know if one of our current programs would qualify for HLPR. We currently offer the following 3/1 ARM Products: 95% LTV Purchase at a rate of 5.75%, 97% LTV Purchase at a rate of 6.00%, and 100% LTV Purchase at a rate of 6.25%. We self insure so there is no PMI on these products. We allow a debt ratio up to 45% on these products. There is no income requirement for these loans. Would the absence of PMI qualify our products under this HLPR Program, even if our rate may not have a 1% reduction?

A: The two major features of the HLPR system are not included in this program. First, there is no rate discount for the first three years, and second, there is no income limitation. Therefore, these loans would not qualify under HLPR. (1/9)

Q: Our credit union already has a mortgage program targeted at modest means homebuyers, but it is not identical to the HLPR loan. Is there any way our program can qualify as participating the in the HLPR program?

A: It might. When the original designers of Home Loan Payment Relief (HLPR) came up with the basics of the program (3/1 ARMs, 1 percent loan rate discount for three years, modest means income limits, increased payment ratios) they were seeking to create a common national program that virtually all credit unions could get behind, and that would be standardized enough to support a powerful public relations punch. However, they recognized that some credit unions already have successful first-time or modest means homebuyer programs that the credit union would not wish to abandon.

When considering your participation in the HLPR program, we STRONGLY urge you to offer the standard HLPR mortgage loan. The more credit unions that offer this standard program, the more powerful will the message be to policy makers and the media. However, if you feel doing so would disrupt your existing, successful modest means mortgage program, it is possible that your existing program (perhaps with some modifications) can qualify as participating in the program.

Recall that the main benefits of the HLPR program to modest means members is that their payments are reduced by an interest rate reduction, and qualification is increased by the higher payment ratio. For an existing program to be considered sufficiently similar to the standard HLPR loan to qualify, the financial advantage to the member should approximate that of a one percent rate reduction for three years.

If you believe your current program or a modified version of it might qualify, please send a description of the program to hlpr@cuna.coop. (9/27)

Legislative and Regulatory Issues

Q: Does the HLPR program violate any NCUA rule or regulation?

A: To the best of our knowledge, the HLPR program does not violate any NCUA rule or regulation. The only concern is that NCUA’s Examiner Guide does suggest that mortgages with LTVs above 80% should have mortgage insurance. Although that is guidance and not a rule, we’ve had further discussions with NCUA about this, requesting they inform examiners that loans that meet the HLPR program not even fall under the “should” guidance. The initial reaction from senior NCUA staff has been positive because of: a. the limited amount of assets that would be in HLPR loans, and b. the fact that the loans would be ARMs, making them reasonable candidates to hold in portfolio.

We met this week with senior staff from Fannie Mae, and are scheduling a similar meeting at Freddie Mac. The folks from Fannie opined that the HLPR program appears to be a reasonable approach for credit unions to help lower income borrowers buy houses. We discussed the fact that credit unions would unlikely be looking to sell the loans shortly after origination because of the temporary below market interest rate, and in many cases the absence of mortgage insurance. Nevertheless, they suggested that should credit unions wish to sell the loans at some point in the future, having originated them according to some form of standard guidelines would be very helpful, something along the lines of Fannie Mae’s MyCommunity program or Freddie Mac’s HomePossible program. Use of standard lending guidelines would of course not guarantee salability of the loans in the future, but it would certainly remove some possible stumbling blocks.

Q: Are there any implications under Reg. B that could occur if we ask for a borrower's household income, when other members of the household are not necessarily on the application? Reg. B prohibits us from asking for income information from a spouse unless they are contractually liable or are responsible for repayment. We did find that this may not apply under Reg. B for Special Purpose Credit Programs. Does the HLPR loan qualify as one of these?

A: We believe the HLPR loans do qualify as Special Purpose Credit Programs under Reg. B. A credit union may request information that is otherwise restricted by Reg. B to determine eligibility for a special purpose credit program. Generally speaking, it appears that the HLPR program would be considered a special purpose credit program since it is a "credit assistance program offered by a not-for-profit organization, as defined under Sec. 501(c) of the Internal Revenue Code...for the benefit of its members or for the benefit of an economically disadvantaged class of persons" -Sec. 208.(a)(2). To qualify, the program cannot discriminate against an applicant on a prohibited basis (race, gender, etc.), however, program participants may be required to share certain characteristics as long as the program was not established or administered with the purpose of evading Reg. B requirements. (1/9)

Q:Won't a program like this, with a single suggested national price, run afoul of antitrust provisions?

A: We have been advised by outside counsel that the HLPR program would not violate the antitrust laws. We are further advised that it seems very unlikely that the Department of Justice would challenge it. It is conceivable that the banking industry might try, but if they did our counsel is convinced they would lose. (8/23)