Atare is a passionate man. What he writes, he believes. Although I believe HUD's ML 2008-38 is correct, I am not an attorney.

What bothers me is the same that bothers Atare -- HUD can freely with total impunity decide one thing one day and 20 years later when the number of borrowers is much greater, flip that policy on its head with no grandfathering of loans endorsed before the issuance of ML 2008-38.

HUD has every right to change its prerogative on defining terms not defined in the statutes prospectively but it is unreasonable and far more than just draconian to apply that definition RETROACTIVELY after 20 years.

I think it's really up to HUD. After all, "The Critic" is right, they have every right to change their prerogatives. However, if it will only worsen things and make them lose their clients, then it wouldn't be such a great idea after all.

Wow! I just read more of Atare's article. This changes the whole process. What heir ot parent would not want to keep control of the property within the family? This will turn off many seniors. Leave it to politicians who are omniscient. They always get it right (sarcasm). What happens to people when they get elected into office? Do they check commom sense at the door? Anyway, we will see what happens.

I agree with The Critic. HUD has a lot of power and crosses the regulatory function of government into the legislative branch when they unilaterally change the rules of play, as far as non-recourse is concerned. In actuality this is ex-post-facto and is federally illegal. Shame on HUD! Once again they prove that the Fed is not interested in seniors but only themselves. They are as quick to hurt seniors as any party in the industry.

At its core, the policy is similar to the forward side. If you want to stay in "your" home you've got to pay every penny due. If you're willing to give up your home to someone else, you can pay less then what is owed. I wonder at the underlying philosophy? By losing your home we'll let you "win" when it comes to paying what you owe. But if you wish to "win" you're home, you'll have to lose by paying every penny owed. Does HUD really "trust" more the buyers at fire sale to do right with the home than they trust the owners and their heirs of 10, 20, 50 years or more, and for this reason is willing to take a loss if the home passes to a non-family member but is not willing to take a loss if it stays within the family of decades? Seems rather non-humanistic to me . . .

Who exactly misinforms their clients on this? When the property is sold, it's sold for market value period. If you want to pay the loan off, you pay the balance. If an heir wants to buy it, market value... it is treated like any other non-recourse mortgage.

I reside in a non-recourse state where all mortgages fall into this catagory. It's obvious that the bank wouldn't allow you to refi or pay off the loan for the appraised value. In this declining market they would be volunteering to write down the debt to the bottom of the market.

Ok, now I am confused.

This is on the NRMLA website.


"Furthermore, the MIP guarantees that you will never owe more than the value of your home when the HECM must be repaid."

So, just to clarify, is this statement from NRMLA correct or incorrect?

Hey Victor,

The good news is that this is not the elected politicians who made this decision. The bad news -- it is our friends at HUD/FHA that made this policy decision. Believe me, I like your take on it better.

Mr. Swain,

I like your take on this. I wish it were federally illegal but I do not believe it is. Maybe some lawyer reading this blog can shed some light on your excellent position.

When the accrued principal balance,plus accrued interest
plus miscellaneous accrued charges against the Senior's
home reaches 98% of Fair Market Values,the loan is
shipped to FHA under provisions of its secondary position of financial interest and warranties as guarantor which are filed at closing of the loan.

The time line is 150 years. The reason for this is so FHA will not have to overcome positions of financial interest that other lenders or creditors might try to super impose upon the trust deed or mortgage

HUD under the guaranties of FHA (HECM) Reverse Mortgages
clearly state that no matter what there will be
no recourse of the monies advanced to the Senior Home Owners or their estates.

This is likely to stand the test of time.

Industry Expert,

And I quote: "If an heir wants to buy it, market value…" If I understand your truncated statement, you are saying that heirs could acquire the property for market value if less than the balance due.

Mortgagee Letter 2008-38 states: “Non-recourse means simply that if the borrower (or estate) does not pay the balance when due, the mortgagee’s remedy is limited to foreclosure and the borrower will not be personally liable for any deficiency resulting from the foreclosure.”

The Mortgagee Letter then goes on to say: “In any circumstance where a mortgagee agrees to the acceptance of less than the full mortgage balance, such sale of the property by the borrower (or the borrower’s estate) should be an arm’s length transaction. An arm’s length transaction is characterized by the following (1) the absence of a relation between the buyer and seller;”

While I may be wrong, I do not believe that heirs can acquire the property from the estate for anything less than the balance due. If the heirs directly inherited as say “remainder men” in a life estate, I think they would have to pay the entire balance due.

I don’t like my conclusion but I think it is right. What are your thoughts?

Hattori,

That statement on the NRMLA website is technically wrong; however, the vast majority of HECM debtors who follow that statement will be OK. The reason for that conclusion is that most HECM homeowners (or their estates) sell the home to unrelated third parties at full market value or if the debt is larger than the value of the home, the lender sells the home through foreclosure or trustee's sale.

Generally the homeowner will never owe more than what the gross proceeds less sellig expenses from the sale at market value will result in. The cash available to the lender from such a sale will usually be less than market value.

Further Mortgagee Letter 2008-38 makes it plain that if the homeowner (or that person's estate) is paying off the debt and will be retaining title, the amount due cannot be anything less than the total due on the HECM.

In speaking to a major reverse mortgage servicer this clarification was expected. The unfortunate piece is that there will be plenty of disappointed families.

The repayment terms really come down to two questions.
1) Is the loan due and payable?
2) Does someone wish to retain ownership?

Below is how I feel non-recourse needs to be explained to borrowers.

Is the loan due and payable? No
Does the borrower, heirs or estate wish to retain ownership? Yes
The borrower may repay the FULL mortgage balance at any time.


Is the loan due and payable? No
Does the borrower, heirs or estate wish to retain ownership?No
The borrower may select to sell the home for at LEAST the lesser of the mortgage debt or the current appraised value.


Is the loan due and payable? Yes
Does the borrower, heirs or estate wish to retain ownership? Yes
The outstanding mortgage debt MUST be repaid in FULL. Additional guidance about arms-length transactions included in ML.

Is the loan due and payable? Yes
Does the borrower, heirs or estate wish to retain ownership? No
The property may be sold for at LEAST the lesser of the unpaid mortgage balance or 95% of the current appraised value.

No wonder there's so much confusion in the market place, the folks who are supposed to know and adhere to the rules are interpreting them different from one another.

The Critic's last reply is correct, if the loan is worth more than the market value, the only way for a family member to keep the home is to pay the entire reverse mortgage amount, interest and all. They can't purchase on open market if during a sale, the buyer can not be directly connected to the borrower.

The rules are the rules. I don't like it any more than anyone else does but my cognitive thinking skills and opposable thumb separate me from other animals.

what is unfair is that an investor can buy below market and the familly can not take advantage of the market value or do a loan modification. and Hud will still be able to make up the diffrence with the MIP insurance. I guess no one thought home values would go down this much. FHA want the whole 2% Mip in case of default. But again how many seniors taking a monthly income will use up all the equity? Maybe if we make it harder for agents to strip the equity we won't have a problem. This should be explained by counsler what happens in the futuer.and how much has MIP inurance taken in and how much has it paid out for seniors?

Pity and invstor can buy the property at market price or less but the family must be an arms length.

Maybe if counslors explain take a monthly income chances the family could still pay of the loan balance. The program was to suplement thier income.
How about FHA do a laon Modification since every one else who bought a home and lied abouth thier income are now getting a loan modification.

I applaud Atare for his well written article and his challenge to HUD to get it right. For years we have been putting up with subpar communications from HUD that are confusing, vague and sometimes flat out wrong! It is our government and we should be able to hold them to a higher standard. After all, this is a new age and the change I would like to see is more professional communication. As for the content, I couldn't agree more. Since HUD's newly defined meaning (although practiced as such) was not clearly in writing, rather written to the contrary, I believe that it can be legally challenged. As for the principal, let's look at this for a moment. The seniors are paying for the non-recourse aspect. Why should it only be extended to them and not their heirs? Since it must be arms length, it invites fraud and explaining how to commit fraud on the part of the loan officers since this law is simply circumvented by arranging for a friend/relative to purchase the property. So, we will have this situation of misrepresentation to contend with. It's unnecessary. I believe that HUD should leave their description as is, retracting ML 2008-38 AND begin practicing as is.
I also am appauled at the wording in the letter as it speaks down to the lending industry. We aren't the people who put out purposely vague and/or poorly worded communications, we are just the people who have to deal with them! Shame!

I applaud Atare's article and agree wholeheartedly! For years we have been tolerating subpar communications from HUD. Mortgagee Letters are vague and poorly worded and cause confusion in the industry. I do believe that 2008-28 should be retracted. Athough, the non-recourse has been practiced with this 'implied' procedure, the reg reads differently and I believe, is legally challengable. If HUD chooses to clarify at this point, not allowing the heirs to purchase the property at the market value seems unfair and frought with all kinds of problems. This is easy enough to circumvent and involves misrepresentation. Not a good idea! Thanks Atare for bringing this critical issue to light. I believe this is a cause for concern and debate for all of us in the industry.

FHA likes to think of itself as an insurance company; however, until recently it held the unique position of being the only insurance company in America which insures mortgages while at the same time being a division of a department of the executive branch of the US government. Even though HECMs are a speck in the overall mortgage market, HUD helped create the HECM program and has actively overseen this product for over 20 years.

Unlike some, I believe HUD/FHA has every right to change the insurance program at any time within the structure of the law and regs that govern it. If HUD does not like the current regs, all it has to do is follow the federal rules governing the rewriting of those regs and reissue new ones. Getting laws changed is a much harder process in that it involves the cooperation of Congress and the President.

Our industry must conform to Mortgagee Letters (MLs) affecting HECMs. MLs are positions of HUD and can be changed at will as long as the changes are not in violation with any existing law, reg, or non-challengeable court decision.

Although not legal counsel, there appears to be nothing wrong with the substance of ML 2008-38; in fact for many of us, that is our general understanding of nonrecourse. The problem with ML 2008 38 is its retroactive application. It is one thing if HUD has consistently applied this position to all similar situations in all prior years; it is an entirely different issue, if not. Still further, if FHA/HUD employees promulgated the idea that FHA nonrecourse had no exceptions, then it seems ludicrous that FHA would be able to make any retroactive change. Or just as critical, if when the nonrecourse nature of HECMs, FHA employees sat quietly while others made such claims.

Sad to say, the only way that this change may be successfully challenged is in the courts. But is it worth it to borrowers or their heirs to go through the cost and time to see this through? No major corporations with large legal budgets will be affected by this change, just the less affluent among what should be a protected class, our seniors along their heirs. The timing of the ML is suspicious since it was issued near or hopefully at the bottom of the current housing crisis when the HECM fund looks most vulnerable.

If you agree with Atare that ML 2008-38 should be repealed, then don’t wait for others to do something about it, email/write NRMLA and those officials you know at HUD/FHA. If you disagree with the retroactive application of this ML 2008-38 again email/write NRMLA and HUD/FHA. Many of us agree with one position or the other and many believe in both.

Nothing will change by the several articles Atare has written on this subject. Dennis Haber, a New York attorney, has also strongly written against this ML and has a similar stance to Atare. But it is doubtful their articles alone will achieve any change.

Only our concerted efforts have any chance of producing change. Should we involve seniors? That is a question each reader needs to decide.

Do you really think that if FHA were a private insurance company and an insured complained about this seeming policy change 20 years after creation of the insurance program to a state department of insurance (DOI), that DOI would stand ideally without some kind of inquiry? FHA is generally free from any such inquiries.

If you believe FHA should be held accountable, it is important you speak up by emailing/writing NRMLA and FHA/HUD now.

Talk about the law of unintended consequences: I was explaining HUD's "clarified" HECM non-recourse policy (and arms-length policy)in Mortgagee Letter 2008-38 to a senior and her daughter recently when the middle-age daughter exploded:
"Atare!" she screamed. "This policy amounts to ELDER ABUSE [my emphasis]by our federal government!! They collect hefty mortgage insurance premiums from seniors. Then, they arbitrarily deny them and their heirs one of the benefits of those expensive premiums? It is an outrage! It stinks!!"

I was shocked by the vehemence of her reaction. I am sure the high-minded formulators of Mortgagee Letter 2008-38 never thought that their policy could be construed as ELDER ABUSE. More than ever, I am convinced that Mortgagee Letter 2008-38 is bad policy.

As seniors, their heirs(i.e., all of us),Congress,the Obama White House, AARP, and the public wake up to the unacceptable implications of Mortgagee Letter 2008-38, there will be a political firestorm. Silence is not an option in the face of bad public policy.

Although most borrowers (or their heirs) will not attempt to keep their home when it is time to pay off their HECM, some will. To some the home is their heritage. Many generations may have occupied it and raised their families in it. Some borrowers want to pass it along to their heirs. Whatever their reason keeping the home is important to them.

Now we have Mortgagee letter 2008-38. It carves out the borrower, the estate, and most likely the heirs from not being able to purchase the home at market value. While this is not an uncommon definition of nonrecourse, it was not the definition that was used by the vast majority of the industry to define nonrecourse for two decades. In fact Mortgagee Letter 2008-38 is the first written authoritative HUD document defining nonrecourse for HECMs in this way. For years, the vast majority of the industry has been defining nonrecourse to mean that even the borrower, the estate, or the heirs can purchase the property at market value. Our industry has boldly printed this policy in its marketing materials for years.

Here is how HUD informally described its nonrecourse policy in the October 2005 issue (Volume 2, Number 9) of its publication Reseach Works in an article titled “Reverse Mortgages: Converting Equity into Cash:”

“If the sale proceeds do not cover the amount owed, HUD will pay the lender the shortfall. FHA collects an insurance premium from all borrowers to provide this coverage, so a homeowner can never owe more than the home’s value at the time the loan is repaid.”

This is not a publication produced by anyone other than HUD. This is not someone else’s understanding, this is how HUD described its own nonrecourse policy.

It does not seem fair or reasonable for HUD to change its policy two decades after the program started. HUD should either apply Mortgagee Letter 2008-38 prospectively or rewrite Mortgagee Letter 2008-38 to make its policy coincide with that expressed in Research Works.

Simply put, Mortgagee letter 2008-38 was HUD’s attempt to prevent reverse mortgage holders whose loan balance exceeds the value of the loan from selling their homes to family members at less than fair market value. It’s is reasonable that HUD would want to protect itself from borrowers or estates from taking advantage of the insurance pool by selling the property in a non-arms length transaction at less than market value and less than the mortgage balance to an interested party. HUD chose to deal with this issue by effectively prohibiting the sale of property for less than the balance owed except in foreclosure.

While the “misunderstanding or deception” we all suffered under as to what non-recourse means is lamentable. The law of unintended consequences, as is often the case, comes into play. Since the policy forces the estate to allow the property to go foreclosure, HUD’s policy, in the long run, may benefit heirs who want to keep the home in the family.

The result is a lose-lose proposition for HUD since they will still have to payout on the insurance guarantee, incur the added expense of foreclosure, stabilization, and sale of the property, all why risking the further deterioration of the property. The heir(s), while running the risk that the property will be sold to some other party, will likely is better off. They can now buy the property back at auction or from the foreclosing lender at a price that is likely far less than fair market value of the property.