Recapture

[Eminent Domain]

Folks,

Just wondering if anyone else is running into refinance problems with recapture on FHA loans. I hardly ever check into this forum so if this has been covered previously I apologize.

Anyway, several homeowners have had appraisals ordered which were refinancing for the obvious reasons of lower rates and/or consolidation purposes. Apparently some FHA spoke people state that what ever the home owner has spent on the property during the FHA lien period can be used to off set the recapture. However, when I spoke to an FHA spokes person he stated that rarely does this change the recapture except with capital improvements which can be shown to have added market value.

So my question is what is recapture? The amount which the government subsidized the loan over the holding period or what? I know this is probably a stupid question but I do not do FHA appraisals and have never had an FHA loan. My impression was that if the owner made capital improvements (ie. adding additional GLA footage, finished the pre-existing basement, added a garage or carport, etc....) this could be used to off set recapture should the value of the property have increased from the time of the initial FHA loan and the refinance. However, home owners are giving us lists of how many times the home has been painted, when new carpet was installed, new phone jacks installed and the driveway was paved. Most of these items and many others are merely, IMO, regular maintenance and upkeep and not capital improvement. And for a paved driveway versus a gravel driveway, extra phone jacks, etc I can't prove by market data that these items add value to a particular property.

In a round about way is the home owner penalized (via the recapture payment) just simply because the home appreciates in value over time? And if so why is it my fault? In all of these I have encountered the borrower states they were never told of this at the time of the initial funding. If this is the case I think FHA should do a better job of explaining this because I am getting tired of being blamed for loan recapture problems which arose while I was still crapping my diaper. :x

We are either pressured to be high in value and in cases like this low. I finally look forward to some time in the future when I may get to do an appraisal when true market value is what is being sought.

Bryan

 

[Jo Ann Meyer Stratton]

Are you talking about Federal Housing Administration (FHA) loans or USDA (Rural Economic & Community Development, formerly known as Farmer's Housing Administration, FmHA)? If a borrower is paying off a USDA/FmHA loan ahead of time, they have to pay not only the amount owed on the loan but the interest that was not paid over all the years of the loan (recapture). Since their payments are based on their income at the time of the origination of the loan, they typically have paid very little of the principal and a very small amount of the actual interest. And because the value at the time of origination was low compared to today's market prices, they get to include some of any physical improvements they have made to the property. So it sounds like you are dealing with a USDA loan and not a FHA loan. But todays value of the property is whatever a similar home would be worth today. The borrower should provide you a copy of a letter from the USDA of exactly what is to be discussed and disclosed in your appraisal. In some cases the refinancing is because there has been a changed in economic circumstances--an adult child moves back home with a single parent, a single person gets married, etc, which means their total income now makes them ineligible for the USDA loan. But get a copy of their letter and include a copy of that letter in your appraisal package.

 

[Eminent Domain]

Jo Ann,

You are absolutely right. It is a USDA loan. Called the bank got a copy of the letter you spoke of and the recapture is apparently the subsidy the governments paid for the borrower. They will consider capital improvements, however, no matter what happens I think recapture is almost always due according to the one person I spoke to.

Anyway its something they have to deal with. I guess I was just venting because they were wanting a low appraisal (its always about pushing high or low). Now that I know its not an FHA loan I realize I put this in the wrong forum.

Oh well, get treated like a mushroom for so long and I guess you begin act like one. 8)

BF

 

[Pamela Crowley (Florida)]

Bryan,

We could add USDA/FmHA to our heading.

This post was just fine here and you received a quick and excellent answer. Just what was supposed to happen!

 

[rtubbs]

Bryan, somewhere in the past I have downloaded info regarding recapture from usda's site. you might try the following link to get you started in your search, if you still need the info. there are a lot of complicated formulas that you don't need to worry about. If I still have the file on my computer, I'll email you.

 

[Pamela Crowley (Florida)]

Ron,

What 'following link'?

 

[Eminent Domain]

Ron,

I would appreciate the info. I did get another sheet from USDA that detailed what is acceptable and what is not acceptable for capital improvements. The list eliminated about 80 - 90% of the items the home owner turned into the bank. Just as I expected things which are maintenance (painting, new floor covering, etc.) is not acceptable.

Thanks for the information.


Bryan

 

[rtubbs]

Sorry about the missing link:

http://rdinit.usda.gov/regs/index.html

 

[rtubbs]

This is a better link to the documents:

http://rdinit.usda.gov/regs/hblist.html

 

[Eminent Domain]

Thanks for the information Ron.

BF