Tag Archives: hecm

Keeping Up With The HECMs

3 Mar

This past weekend saw the most recent of many changes to the HECM Reverse Mortgage program, when HUD set a new date for the implementation of Financial Assessment.  Here is a summary:

* Financial Assessment – All reverse mortgages with FHA case numbers assigned on or after April 27, 2015, will be subject to Financial Assessment.  Lenders must now check credit history and funds available to determine a borrower’s willingness and ability to keep up with property charges (real estate taxes and homeowners insurance).

* New Principal Limit Factors – August 4th of last year saw a change in the figures used to calculate the amount of money a HECM borrower may receive.  Most borrowers will see an increase in funds available.

*Maximum First Year Draw – Borrowers are limited to 60% of available funds during the first year of their reverse mortgage, with the exception of “Mandatory Obligations” ie: funds which satisfy liens that must be paid at closing, including closing costs, upfront FHA mortgage insurance premiums, mortgages and home equity loans being paid off by the HECM.

* Reduced Up-Front Mortgage Insurance – Closing costs are significantly lower for those borrowers who access less than 60% of available funds at closing – higher for those whose Mandatory Obligations brings the initial draw over 60%.

*Protections for Non-Borrowing Spouses – the new Principal Limit Factors include non-borrowing spouses younger than the qualifying age of 62.   There are certain protections for these spouses should they survive the borrower.

 

For details on these changes, contact Tradition’s President, Karen Keating.  She holds the prestigious Certified Reverse Mortgage Professional designation and can answer any questions or direct you to the pertinent Mortgagee Letter.

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New Reverse Mortgage Qualifications Do Not Allow For “Deadbeats” – The Mortgage Professor Comments

28 Jan

One of the attractive features of the HECM reverse mortgage has been that there
are no income or credit requirements. All homeowners 62 and older who live in
their homes without a mortgage have been eligible, and those with mortgages
may also be eligible if the balance is not too large.

But all that will change effective March 2, 2015 when a series of drastic new FHA rules come into play.
The precipitating factor underlying the new rules is the marked rise that has
occurred in recent years in property tax defaults by HECM borrowers. While
such borrowers are violating their obligations under the reverse mortgage
contract, and are thereby subject to foreclosure and eviction, FHA has been
understandably reluctant to allow elderly homeowners to be thrown into the
street. Because of the potential political and public relations fallout,
those critical provisions of the HECM contract are essentially unenforceable.
Instead, FHA has elected to impose income and credit requirements on future
applicants. The purpose is to assure that henceforth borrowers will have both the
capacity and the willingness to pay their property taxes and homeowners
insurance. While this won’t affect existing loans that are now in default, it
should sharply reduce the default rate on new loans. The downside is that future
borrowers will have to pay the higher costs of originating and servicing HECMs,
and wait longer for deals to be completed.
The new underwriting requirements that lenders will apply to all applicants are
very detailed, and in some respects tougher than those used with standard
mortgages. I went through the new rules with an underwriter, who pointed out a
series of provisions that went beyond anything in the rules pertaining to standard
mortgages. This is strange, considering that applicants for reverse mortgages pay
only taxes and insurance whereas applicants for standard mortgages also pay
principal and interest, which is usually much larger.
On the other hand, the applicant for a standard mortgage who fails to meet the
underwriting criteria is rejected whereas the applicant for a reverse mortgage
who fails the test has another option, called a FullyFunded Life Expectancy SetAside.
The SetAside is an amount drawn under the HECM that is reserved for
payment of property taxes and insurance by the lender. The amount, calculated
using a formula provided by FHA, is viewed as sufficient to assure the required
payments can be met though the entire life span of the borrower.
I calculated the required SetAside for a borrower of 75 with life expectancy of
144 months, taxes and insurance charges of $5000 a year, and interest rate plus
mortgage insurance premium of 5%. It was $54,000, not a trivial sum. If this
borrower had equity in his home of only $100,000, the SetAside
would use virtually all of it, and no additional funds could be drawn. If his equity was less,
the required SetAside would not be possible and he would be rejected.
There is another possible option, however, termed a PartiallyFunded Life
Expectancy SetAside. This is available to applicants who meet the credit
requirements and are therefore viewed as willing to meet their obligations, but
don’t have enough income. This SetAside, which can be much smaller, is used
to draw funds from the HECM twice a year, which are sent to the borrower who
makes the payments.
In addition to their complexity, the new rules have two remediable weaknesses.
One is that the new underwriting requirements must be applied to every
applicant. But applicants with plenty of equity in their homes might find that the
fullyfunded SetAside imposes no burden on them at all, in which case the
underwriting costs could be avoided. There is no reason why lenders and
borrowers should not have that option.
The second weakness is mandating that the lender make the required payments
under the fullyfunded SetAside.  Why not give borrowers the option of making
the required payments with their own funds, with the inducement that an
equivalent amount will be transferred from the SetAside account to the
borrower’s credit line? The purpose is to encourage borrowers to become
responsible. This would involve no risk to FHA, since the lender will make the
payments if the borrower doesn’t.
Copyright © 2015 The Mortgage Professor

Reverse Mortgages to Require Financial Assessment Starting March 2, 2015

14 Nov

The Department of Housing and Urban Development has issued a financial assessment for reverse mortgage borrowers that will take effect for all case numbers issued on or after March 2, 2015.  The financial assessment is detailed by HUD through Mortgagee Letter 2014-22 published Monday.

“The mortgagee must evaluate the mortgagor’s willingness and capacity to timely meet his or her financial obligations and to comply with the mortgage requirements,” HUD writes in defining the purpose of the financial assessment. “In conducting this financial assessment, mortgagees must take into consideration that some mortgagors seek a HECM due to financial difficulties, which may be reflected in the mortgagor’s credit report and/or property charge payment history. The mortgagee must also consider to what extent the proceeds of the HECM could provide a solution to any such financial difficulties.”

NRMLA issued a statement in support of the financial assessment following its release.

“At NRMLA, we are always concerned about protecting those aging Americans who cannot afford to meet the responsibilities of reverse mortgage loans,” said NRMLA President and CEO Peter Bell. “Financial Assessment will help determine if the product is right for the potential borrower. By implementing this process, HUD is responsibly making the HECM a safer product.”

HECM Default Risk Analysis – Abstract

18 Aug

An Analysis of Default Risk in the Home Equity Conversion Mortgage (HECM) Program


Stephanie Moulton

Ohio State University (OSU) – John Glenn School of Public Affairs

Donald R. Haurin

Ohio State University (OSU) – Department of Economics

Wei Shi

Ohio State University (OSU) – Department of Economics

July 18, 2014

Abstract:

While reverse mortgages are intended as a tool to enable financial security for older homeowners, in 2012, nearly 10 percent of reverse mortgage borrowers in the federally insured Home Equity Conversion Mortgage (HECM) program were in default on their property taxes or homeowners insurance. A variety of policy responses were implemented in 2013, including establishing underwriting guidelines for the first time in the program’s history. However, there is a lack of data and analysis to inform such criteria. Our analysis follows 30,000 seniors counseled for reverse mortgages between 2006 and 2011. The data includes comprehensive financial and credit report attributes, not typically available in analyses of reverse mortgage borrowers. Using a truncated bivariate probit model, we estimate the likelihood of tax and insurance default. Financial characteristics that increase default risk include the percentage of funds withdrawn in the first month of the loan, a lower credit score, higher property tax to income ratio, low or no unused revolving credit, and history of being past due on mortgage payments or having a tax lien on the property. We simulate the effects of alternative underwriting criteria and policy changes on the probability of take-up and default. While a simple limit on the initial withdrawal percentage substantially reduces default, it also substantially reduces participation in the program. A greater reduction in the default rate with less effect on participation can be achieved by setting thresholds based on credit score or derogatory credit indicators. Further reductions in the default rate with a minimal effect on participation can be achieved by requiring that participants with low credit scores to set aside some of their HECM funds for future property tax and insurance payments, a form of escrowing.

 

Older Reverse Mortgage Borrowers Get More Money

30 Jun

The Department of Housing and Urban Development is making more proceeds available for some reverse mortgage borrowers, under new principal limit factors(PLFs) released Friday.

The new PLF tables now include figures for ages under 62 following a decision by HUD to allow for non-borrowing spouses of new reverse mortgage borrowers after August 3 to remain in their homes following the passing away of the borrower, under certain terms and conditions. The PLFs reflect loans for borrowers who are age 62 and older, but also loans for married couples where one borrower does not meet the traditional 62 year old age requirement.

A “special table” now includes PLFs for loans where one of the parties is age 18 to 61.

The new tables also make the Home Equity Conversion Mortgage program more sensitive to interest rates than previously.

“The biggest impact of these updated tables will be the reductions in PLF for higher interest rate scenarios, making the HECM market more sensitive to interest rates than it is currently,” says John Lunde, president and co-founder of Reverse Market Insight. “Right now home price appreciation is the biggest factor behind HECM to HECM refinance volume, and while that is likely still the case these new tables put more of a balance in place between home price appreciation and interest rates.”

HUD announced the new PLF tables via Mortgagee Letter 2014-12 on Friday, noting the change since last year’s PLF update. The new factors will go into effect as of August 4, 2014. However, the agency also specifies that lenders allow borrowers who have not yet closed on their mortgages but have FHA case numbers assigned prior to the effective date of Mortgagee Letter, to elect to use the PLFs announced Friday.

“The new Principal Limit Factor (PLF) tables have been wholly revised and now also include PLFs for use where the Borrower has a Non-Borrowing Spouse younger than 62,” HUD writes in its description.

 

More on this from the NRMLA newsletter

FHA Releases a Mortgagee Letter that Makes Several HECM Policy Changes and Limits the Insurability of Fixed Interest Rate Products Under the HECM Program

On June 18, 2014, the Federal Housing Administration (FHA) released a Mortgagee Letter (ML 2014-11), under the authority granted to U.S. Department of Housing and Urban Development (HUD) in Sections 202(a) and 255(c) of the National Housing Act and in the Reverse Mortgage Stabilization Act of 2013 to amend the FHA Home Equity Conversion Mortgage (HECM) program, that makes several policy changes to the HECM program and limits the insurability of fixed interest rate mortgages under the HECM program to mortgages with the Single Disbursement Lump Sum payment option. As stated in ML 2014-11, the HECM fixed-rate product changes eliminate potential hedging and interest-rate risk associated with post-closing future draw features on fixed-rate HECMs. These changes also align FHA’s policy with the previously announced Ginnie Mae (GNMA) policy that made fixed-rate HECMs with future draws ineligible for GNMA-guaranteed HMBS securities. See GNMA APM 2014-04 (April 1, 2014); see also GNMA APM 2014-08 (May 30, 2014).

The HECM policy changes made by ML 2014-11 include, but are not limited to:

·         Limiting FHA insurance to fixed-rate HECMs that: 1) provide for a single, full draw to be made at loan closing; and 2) do not provide for future advances to the mortgagor under any circumstances;

·         Eliminating the availability of the Single Disbursement Lump Sum payment option for adjustable interest-rate HECMs;

·         Changes to unused Repair Set-aside funds for fixed-rate HECMs;

·         FHA Connection updates; and

·         Removing the requirement to use a HECM Second Security Instrument and HECM Second Note for fixed interest rate HECMs.

In addition, ML 2014-11 provides two sets of revised Model Fixed Interest Rate HECM Loan Documents. The first set of documents is for HECMs with FHA Case Numbers assigned on or before August 3, 2014, which mortgagees may use to update fixed interest rate loan documents for new mortgages and pending mortgages that did not close prior to the effective date of ML 2014-11. The second set of documents is for HECMs with FHA Case Numbers assigned on or after the effective date of FHA Mortgagee Letter 2014-07 (ML 2014-07), which mortgagees must begin using on or after the effective date of ML 2014-07 (August 4, 2014).

The policy changes made by ML 2014-11 are effective as follows:

Policy Description Effective Date
Limitations on Fixed Interest Rate
HECMs
HECMs with FHA Case Numbers assigned on or after June 25, 2014
Limitations on Adjustable Interest
Rate HECMs
HECMs with FHA Case Numbers assigned on or after June 25, 2014
Unused Repair Set-Aside Funds HECMs with FHA Case Numbers assigned on or after June 25, 2014
FHA Connection Updates HECMs with FHA Case Numbers assigned on or after June 25, 2014
Loan Documents
Mortgagees may use the “first set” of Model Fixed Interest Rate HECM Loan Documents for HECMS with FHA Case Numbers assigned on or before August 3, 2014, to update fixed interest rate loan documents for new mortgages and pending mortgages that did not close prior to the effective date of ML 2014-11.
Mortgagees must begin using the “second set” of Model Fixed Interest Rate HECM Loan Documents for HECMs with FHA Case Numbers assigned on or after the effective date of ML 2014-07 (August 4, 2014).

FHA will allow “pipeline” fixed rate future draw HECMs to close if certain requirements are met. When a mortgagee has initiated the origination of a fixed interest rate traditional or refinance HECM transaction that allows the mortgagor to access the loan proceeds after loan closing, but did not close on or before the effective date of ML 2014-11, the mortgagee must ensure the following requirements are met for the mortgage to be eligible for FHA insurance: 1) the FHA Case Number is requested on or before July 2, 2014; 2) HUD systems will reflect the mortgagor’s payment option of either Term, Tenure, Line of Credit, Modified Term or Modified Tenure; 3) all other HECM program and property eligibility requirements are met; and 4) loan closing is completed on or before September 30, 2014.  We note, however, that the release of ML 2014-11 leaves some uncertainty regarding the effective date for certain fixed rate traditional and refinance HECM transactions that are in the “pipeline.” For example, although on the first page of ML 2014-11 it states that the effective date for the limitations on these pipeline fixed interest rate HECMs is June 25, 2014, on page 8 of ML 2014-11 it states that the FHA Case Number must be requested on or before July 2, 2014.  With that said, until HUD provides further clarification on this issue, for HECM mortgagees that currently offer fixed rate HECM products with future draws, it appears that it would be prudent to cease offering such products prior to June 25, 2014.

In addition, as stated in ML 2014-11, “[c]urrently, FHA only permits a mortgagee to order a purchase transaction FHA Case Number in FHA Connection for a mortgage on a property that has been issued a Certificate of Occupancy and the required HECM counseling has been completed.”  To avoid any negative impact on a HECM mortgagor who had previously entered into a bona fide sales contract and made an earnest money deposit on a property before the effective date of ML 2014-11, FHA will allow HECM mortgagees to request a purchase transaction FHA Case Number with a fixed interest rate where: 1) the mortgagee requests the FHA Case Number on or before July 2, 2014; 2) the mortgagee obtains a copy of the mortgagor’s bona fide sales contract and evidence of the earnest money deposit that were executed and paid by the mortgagor before June 18, 2014; 3) HUD’s systems will reflect the mortgagor’s payment options of either Term, Tenure, Line of Credit, Modified Term or Modified Tenure; 4) the required HECM counseling will be completed prior to the date of loan closing; 5) the Certificate of Occupancy will be issued prior to the date of loan closing; and 6) these mortgages comply with existing FHA Case Number expiration requirements.

The full text of ML 2014-11 can be found at:  http://portal.hud.gov/hudportal/documents/huddoc?id=14-11ml.pdf

 

 

HUD Invites Comment on Non-Borrowing Spouse Letter

5 May

As a follow-up to our last post, HUD has requested that interested parties comment on the new requirements.  Here is their summary:

On April 25, 2014, the Federal Housing Administration (FHA) issued Mortgagee Letter 2014-07, announcing the amendment to HECM program regulations and requirements concerning due and payable status where there is a Non-Borrowing Spouse at the time of loan closing, consistent with the authority to make such changes by the Reverse Mortgage Stabilization Act, signed into law on August 9, 2013. The new HECM requirements are necessary in order to ensure the financial viability of the HECM program and the Mutual Mortgage Insurance Fund (Fund), and to comply with the statutory requirement concerning the Secretary’s fiduciary duty to the Fund. The new HECM requirements will take effect for case numbers assigned on or after August 4, 2014. This notice solicits comment for a period of 30 days on the new requirements announced in Mortgagee Letter 2014-07.”

The entire notice from the Office of the Federal Register can be seen here:

https://www.federalregister.gov/articles/2014/05/02/2014-10102/home-equity-conversion-mortgage-hecm-program-non-borrowing-spouse-solicitation-of-comment

 

HUD Issues HECM Non-Borrowing Spouse Guidelines

30 Apr

Important news in the reverse mortgage world:  Mortgagee Letter 2014-07 was released by HUD this week, to become effective for FHA case numbers assigned on or after August 4, 2014.

The spouses of HECM borrowers who are not on the loan documents may remain in those homes after the death of their borrowing spouse for a newly defined “deferral period.”

The letter clarifies to whom the new guidelines will apply, the obligations of the non-borrowing spouse, and new at-closing certification requirements. 

The letter itself consists of 14 pages of definitions plus several attachments containing the new loan documents.  It can be read in full at the link above.