Homeowners continue to face challenges in repairing damaged properties because of insufficient insurance coverage and/or delays in receiving insurance proceeds or related assistance. Some have resorted to using subordinate financing or incurring significant out-of-pocket expenses to fund the repair of their properties.

Based on this information, Fannie Mae reevaluated its limited cash-out refinance guidelines and is making changes in an effort to assist homeowners who have been impacted by any natural disaster and experience similar difficulties. These enhancements are applicable to mortgages secured by properties for owner-occupied, principal residences only.

The enhancements to the existing limited cash-out refinance guidelines will:

• permit the refinance of non-purchase money subordinate mortgage loans obtained to finance disaster-related property repairs, and
• provide for a higher cash-out amount to reimburse borrowers for documented out-of-pocket expenses related to disaster-related property repairs.

Eligibility for these flexibilities is based on:

• Location of the property. These enhancements may be applied to mortgages on properties located in counties, cities, or parishes designated by FEMA for individual assistance as a result of natural disaster, including the 2005 hurricanes. Lenders may refer to the FEMA web site located at http://www.fema.gov/ for listing of FEMA Disaster Areas.
• Date of the FEMA Disaster Declaration. Mortgages originated in connection with these flexibilities must be delivered to Fannie Mae within two years of the FEMA disaster declaration date, including disasters that occurred prior to and after the 2005 hurricanes and any eligible disaster declared in the future.
• Occupancy Status. Only mortgages secured by properties that are principal residences are applicable.

The standard limited cash-out refinancing guidelines for borrowers impacted by disaster are being amended to allow the following:

• Subordinate Financing. A borrower may obtain a limited cash-out refinance to consolidate non-purchase money and subordinate financing used to repair disaster-related damages to his or her principal residence. The borrower will then be able to pay off the entire home equity line of credit through the limited cash-out refinance.
• Cash-Out Amount. A borrower may obtain cash-out for reimbursement of documented out-of-pocket expenses for fully repairing disaster-related damages to his or her principal residence in an amount not to exceed the lesser of 10% of the balance of the new finance mortgage, or $15,000.

The lender provide documentation including receipts, work orders, and cancelled checks, among others, to show the subordinate financing was used to complete the disaster-related repairs. All documentation must post-date the disaster. The borrower will not receive any reimbursements for his or her time spent completing repairs on the property.

The property must be appraised following the completion of the repairs to ensure no conditions exist that affect the livability, soundness, or structural integrity of the property.

All loans for which the cash-out refinance offer is utilized must be delivered to Fannie Mae no later than two years from the date of the declared disaster.

Certain underwriting flexibilities were announced for borrowers impacted by Hurricanes Katrina and/or Rita in Lender Letter 02-05, published Oct. 14, 2005. Lenders may continue to use those temporary flexibilities for borrowers impacted by the 2005 hurricanes, but the mortgages must be closed on or before Dec. 31, 2006.

To view the full release please click here: Fannie Mae Lender Letter 06-14.