B5-5.1-02: Community Seconds Loan Eligibility (06/05/2018)

© Fannie Mae Single Family Selling Guide

Community Seconds Mortgage Terms/Proceeds

A Community Seconds mortgage may be funded by a federal agency, municipality, state, county, state or local housing finance agency, nonprofit organization, regional Federal Home Loan Bank under one of its affordable housing programs, a federally recognized Native American tribe and its sovereign instrumentalities, or an employer (see B3-4.3-08, Employer Assistance (09/29/2015)). It may not be funded by the property seller or any other interested party to the transaction; however, a lender may fund a Community Seconds mortgage that an employer guarantees as part of its affordable housing program.

The Community Seconds financing must be subordinate to the mortgage purchased by Fannie Mae.

A borrower of a mortgage loan secured by a principal residence may use funds received from a Community Seconds mortgage to fund all or part of the down payment provided the Community Seconds is not funded in any way through the first lien mortgage, such as premium pricing. Additionally, Community Seconds proceeds may fund closing costs, renovations to the property (including energy-related improvements), or a permanent interest rate buydown. Community Seconds are not allowed on co-op share loans, second homes, or investment properties. See B5-6-03, HomeReady Mortgage Underwriting Methods and Requirements (07/25/2017), for additional information about HomeReady mortgage minimum borrower contribution and down payment requirements.

Rural Development Section 502 Leveraged (Blended) Loan Program

The subordinate lien originated in connection with a conventional first mortgage under the RD Section 502 Leveraged (Blended) Loan Program is eligible for the Community Seconds program. The standard review of Community Seconds programs described in B5-5.1-01, Community Seconds Mortgages (04/09/2013), is not required; however, the subordinate lien must meet all RD guidelines. See B6-1-05, Eligible RD-Guaranteed Mortgages (12/15/2015), for additional information.

Minimum Borrower Contribution Requirements

The following table describes the minimum borrower contribution requirements for transactions that contain a Community Seconds:

In addition to HomeReady mortgages (see Chapter B5–6, HomeReady Mortgage), non-community lending mortgages may be used in a Community Seconds transaction with the following limitations:

• All non-community lending mortgages are eligible, with the exception of ARMs with an initial fixed-rate period of less than 5 years.
• The transaction is limited to a purchase or limited cash-out refinance.
• For a limited cash-out refinance transaction, the Community Seconds mortgage holder must acknowledge the lien position by executing a subordination agreement, which must be recorded to ensure enforceability.
• Only principal residences are eligible.
• If the product is secured by a manufactured home, the loan must comply with all manufactured home policies, including the LTV and CLTV ratios.
• The maximum LTV of the underlying product remains unchanged.
• If the mortgage does not have an independent CLTV cap (such as the CLTV cap for manufactured housing that does not meet the MH Advantage requirements), the CLTV can be expanded to 105%, provided the subordinate financing meets all conditions of a Community Seconds mortgage.
• Non-community lending mortgages do not mandate any income restrictions for the borrower(s); the income limits that the Community Seconds provider imposes will apply.

Repayment

Repayment of the Community Seconds mortgage may be structured in any number of ways as long as the terms are consistent with the type of terms Fannie Mae considers acceptable, such as:

• requiring fully amortizing, level monthly payments;
• deferring payments for some period before changing to fully amortizing, level monthly payments;
• deferring payments over the entire term, unless the mortgage is paid off or the property is sold before the maturity date of the mortgage; or
• forgiving the debt over time.

When the borrower’s employer is the provider of the Community Seconds mortgage, the financing terms may provide for the employer to require full repayment of the debt should an employee’s employment terminate (either voluntarily or involuntarily, for reasons other than those related to disability) before the maturity date of the Community Seconds mortgage.

Where repayment of the Community Seconds mortgage is deferred for five years or more, a lender is not required to include a monthly payment for the Community Seconds mortgage in its calculation of the borrower’s debt-to-income ratio.

Where repayment is deferred for fewer than five years, the lender must include the monthly payment amount that will be required after the end of the deferral period in its calculation.

Fannie Mae will purchase or securitize a first mortgage with subordinate financing under the Community Seconds option that provides for a balloon payment no earlier than fifteen years from the note date of the first mortgage loan or the maturity date of the first mortgage loan.

The interest rate for the Community Seconds mortgage may not be more than 2% higher than the interest rate of the first mortgage.

Note: Interest that is imposed as a penalty should the mortgage be declared in default and called due and payable under its terms is not subject to this interest rate cap.

The Community Seconds mortgage may not provide for negative amortization.

However, because negative amortization will occur if the interest rate is greater than zero and the payment of interest is deferred for a period of time, negative amortization will otherwise be acceptable as long as:

• interest is accrued on a simple-interest basis at a rate that is not more than 75% of the rate of the related First Lien Loan, and the accrued interest is fully deferred until
  • sale or transfer of the property,
  • the mortgage loan is refinanced or other full repayment of the first lien loan, or
  • declaration of an event of default under the subordinate note or the security instrument, or
• the accrued interest is assessed only as a penalty upon declaration of an event of default under the subordinate note or the security instrument.

Subsidizing the Sales Price

As an additional affordable lending tool, the Community Seconds option is sometimes used by eligible providers as a means to “subsidize” the sales price of a property. Unlike traditional Community Seconds in which the funds are used to supplement the borrower’s down payment or closing costs, the Community Seconds transaction secures the subsidy amount, thereby imposing a type of resale restriction.

Occasionally, a government agency will contract with a local nonprofit corporation to administer the subsidy. Under these circumstances, the nonprofit corporation may be considered a “government agency” if the lender can document that the sole source of the subsidy provided by the nonprofit is from the government agency and the nonprofit is merely acting as the administrator. A typical scenario where the subsidization may occur is the case of a government agency approaching a developer with incentives to provide a certain percentage of the units within the project at a below market sales price (typically 10% to 20% less).

These incentives can include:

• reduced permit and inspection fees, and
• expedited review and approval of permit applications for the builder.

In addition, because the government agency typically maintains a waiting list of eligible applicants, the builder is provided with prospective buyers for the properties.

The eligible provider secures a Community Seconds mortgage against the property representing the difference between the market sales price and the reduced sales price accepted by the builder (referred to as the subsidy). In most cases, the subordinate mortgage has deferred payments and will be forgiven at the end of a set period of time, typically the term of the first mortgage. The subordinate mortgage acts as a resale restriction by preventing the borrower from selling the property at a profit or obtaining a cash-out refinance. The terms of the mortgage may not, however, restrict the sale of the property upon foreclosure or acceptance of a deed in lieu of foreclosure.

When the subordinate mortgage is used as a subsidy to reduce the sales price to the borrower, the “unsubsidized sales price” must be used in determining:

• the minimum down payment;
• the borrower contribution, if applicable, that must be made from the borrower’s own resources; and
• the level of mortgage insurance.

The unsubsidized sales price represents the market sales price, and is calculated by adding the reduced sales price by the builder plus the subordinate mortgage amount secured by the government agency.

The LTV and CLTV ratios are calculated using the lesser of the unsubsidized sales price or the appraised value.

The following example is provided for clarity. It assumes:

• the market sales price equals the appraised value, and
• a borrower contribution of 5%.

Lenders must review the terms of the Community Seconds program to ensure that the program otherwise meets the requirements of Community Seconds found in B5-5.1-01, Community Seconds Mortgages (04/09/2013).

These transactions can be underwritten manually or with DU. When using DU, the lender must enter “Affordable LTV” in the Product Description field in the Additional Data section on the online application, which will result in DU calculating the LTV and CLTV ratios based solely on the appraised value for purchase transactions (and not the lesser of the sales price or appraised value).

Provider’s Share in Appreciation in Value

The repayment terms of the Community Seconds mortgage may provide for the provider to share in any appreciation in the value of the security property in lieu of charging interest.

If the Community Seconds mortgage provides for both a stated interest rate and a sharing in the property appreciation, the first mortgage cannot be sold to Fannie Mae unless the provider chooses only one of the options.

The appreciation in value must be based on:

• the actual sales price of a property that is sold on the open market,
• the appraised value of the property, or
• the amount of a successful bid at a foreclosure sale.

When the property is subsequently sold (or foreclosed), the sales price or value determination should be paid, first, to the first mortgagee in an amount required to pay off the first mortgage in full, and only then, to other entitled parties, such as the Community Seconds provider and the borrower.

The provider’s share of the equity generally may not exceed the percentage derived by dividing the original principal amount of the Community Seconds mortgage by the original value of the property.

However, the provider’s share in the appreciation can be greater than this calculated percentage in two instances:

• As long as the Community Seconds program gives the borrower the right to recover all of the following before the provider is able to share in the appreciation:
  • any portion of the down payment that came from the borrower’s own funds,
  • reasonable costs of selling the property (such as a sales commission),
  • the costs of any improvements made to the property (as long as they were allowed under the program guidelines),
  • the principal portion of all payments the borrower made on the first mortgage.
• As long as the provider’s share does not initially exceed 75% and is reduced over time so that the percentage of the appreciation will be equal to or less than the percentage usually allowed by no later than five years after the date the Community Seconds mortgage was originated.