Strengthening the HECM Reverse Mortgage Program through Updated Rules

On January 9, 2017, the U.S. Department of Housing and Urban Development (HUD) published a final rule entitled Federal Housing Administration: Strengthening the Home Equity Conversion Mortgage Program. The final rule, which followed the May 19, 2016 proposed rule, takes effect September 19, 2017, and “codifies several significant changes to FHA’s Home Equity Conversion Mortgage program that were previously issued under the authority granted to HUD in the Housing and Economic Recovery Act of 2008 and the Reverse Mortgage Stabilization Act of 2013, and makes additional regulatory changes.”

Two of Summit’s housing experts—Dr. Edward Seiler and Andrew Netter—provide an overview of the additional regulatory changes contained in the final rule. If you're interested in HECM mortages more generally, read our blog series.

Codifying Previous Program Changes

Under the Reverse Mortgage Stabilization Act of 2013, Congress gave the HUD Secretary power to “establish, by notice or mortgagee letter, any additional or alternative requirements that the Secretary, in the Secretary’s discretion, determines are necessary to improve the fiscal safety and soundness of the program...” In other words, rather than making changes to the Code of Federal Regulations (CFR) through the rulemaking process, HUD can establish or revise program requirements by issuing a Mortgagee Letter (ML). This final rule codifies program changes related to:

1. Financial Assessment and Property Charge Funding Requirements,
2. Deferring the Due and Payable Status for Eligible Non-Borrowing Spouses,
3. Limiting Disbursements During the First 12 Months of the HECM,
4. Eliminating Future Draws on Fixed Interest Rate HECMs,
5. HECM for Purchase Program,
6. Allowable Loan Origination Fees and Charges,
7. Amount of the Mortgage Insurance Premium (MIP), and
8. Seasoning Requirements.

HECM MLs previously implemented and detailed many of these regulations. In some cases, FHA changed language in the CFR to allow for further changes in the future. For instance, FHA clarifies that, “FHA is not changing actual MIP charges, which may be set outside of the rulemaking process by mortgagee letter or other similar administrative issuance.”

Additonal regulatory changes

In the final rule, FHA makes additional regulatory changes through eight new, not previously published, “Origination and Servicing Policies.” Below we list the eight policies along with a brief description of the policy:

1. Disclosure of Available HECM Program Options

This rule requires mortgagees (lenders) to inform potential HECM borrowers of all the FHA-insured HECM product options “irrespective of the particular HECM products offered by the mortgagee.”

2. Interest Rate Lock-In

This rule amends the definition of ‘‘expected average mortgage interest rate.’’ Under this rule, the expected average mortgage interest rate for a borrower may be locked in prior to, or on the date of, loan closing.

3. Appraisal Requirements

This rule requires the mortgagee to have the HECM property, pending-sale, appraised no later than 30 days after receiving a request from an involved party.

4. Limiting Reimbursement of Property Charge Advances

This rule limits the mortgagee’s claim reimbursement for property charges to two-thirds of the total payments, and not in excess of a HUD-determined reasonable rate. (Note that property changes are defined as “(a) Taxes, ground rents, and water rates; (b) special assessments, which are noted on the application for insurance or which become liens after the insurance of the mortgage; and (c) hazard insurance premiums on the mortgaged property.”)

5. Acquisition and Sale of Property

This rule changes the property sales value requirement from “at least 95 percent of the appraised value” to a Commissioner-determined value adapted to market conditions and other factors. This rule also limits closing costs from the sale of a HECM property to 11 percent of the sales price or a Commissioner-determined amount.

6. Cash for Keys

This rule provides an “incentive for parties with legal authority to dispose of a property that serves as the security for a HECM to complete a deed in lieu of foreclosure more quickly.” The rule also applies the “Cash for Keys” incentive when a tenet vacates the property prior to eviction.

7. Pay-Off Debt Not Secured by the Property

This rule allows HECM borrowers to use HECM proceeds to pay off debt that is not secured by the property if the debt qualifies as a Commissioner-determined mandatory obligation.

8. Property Charge Payments

This rule allows the Commissioner to establish an “incentive for the borrower voluntarily electing a Life Expectancy Set Aside.”

CONCLUSION

The HECM program has undergone a significant amount of program changes over the last several years. This HUD final rule codifies some of these previous changes and makes additional updates to existing regulation language to allow for the possibility for future regulation changes.