Is This a “Reasonable” Policy – You Decide!

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You are an underwriter processing a FHA loan transaction and the appraiser has reported that the subject property has a private well & septic system yet public utilities may be available.  Should you require evidence of hook-up to the public system as a condition of your approval?  HUD’s draft 4000.1 Handbook (which is scheduled to go into effect for loan transactions obtaining FHA case number assignments on & after June 15, 2015) is very vague on this matter.

HUD/FHA’s current policy on this situation (as outlined in para. 3-6 of the 4150.2 Handbook) states that hook-up to public utilities is not required, if documentation can be provided to demonstrate that it will cost more than 3% of the appraised value to connect to the public water or sewer system.

However, the draft 4000.1 Handbook (which will supersede both the 4150.1 and 4150.2 Handbook) states the following: “The Mortgagee must confirm that a connection is made to a public or Community Water System whenever feasible and available at a reasonable cost.  If connection costs to the public or community system are not reasonable, the existing on-site systems are acceptable, provided they are functioning properly and meet the requirements of the local health department”.  Similar language is provided for the sewage system.

Since it is not specifically defined, what it meant by the term “reasonable cost” in the new Handbook? This could lead to many inconsistent interpretations of this policy made by underwriters, Quality Control Auditors, HUD underwriters, HUD Quality Assurance staff, HUD OIG staff and maybe even DOJ staff at some future point if the loan subsequently goes into default.

Let’s hope that HUD staff will modify this vague policy before it becomes effective on June 15, 2015 by providing specific guidelines on what is considered to be a “reasonable cost” to hook-up to public and/or Community Water/Sewer systems.

It is my intent to continue to point out potential problems or misleading information with the draft 4000.1 Handbook as part of my ongoing series of LoanLogics Blog Posts.  Stay Tuned!

To access the draft Handbook go to the www.hud.gov website and type in “4000.1 Handbook” in the search box.

About the Author

Gerry Glavey

Gerard (Gerry) Glavey is Senior Vice President / Chief Credit Officer for LoanLogics. Gerry has decades of experience working in residential mortgage credit and compliance and brings insights that few in the industry can match. In his role, he develops new services and provides support for all post close quality control and quality assurance, pre-close quality control, due diligence services, and document processing services. He spent 37 years with the US Department of Housing and Urban Development, where most recently he was the Director, Processing and Underwriting Division for the Home Ownership Center (HOC) in Philadelphia. In this capacity, Mr. Glavey was responsible for the administration of all HUD/FHA Single Family Loan Origination activities, including underwriting, appraisal and endorsement for the 16 state jurisdiction of this HOC.