HUD Provides More Information About HECM For Purchase

All Reverse Mortgage Company just informed me that after speaking with HUD’s Atlanta Home Ownership Center, HUD has posted new guidelines regarding the HECM for purchase that supersede Mortgagee Letter 2008-33.

The big question on everyone’s mind has been how is the benefit calculated for the HECM for purchase?  According to HUD’s new HECM for purchase FAQ:

How is the maximum claim amount and principal limit calculated?

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For HECM purchase transactions only, The maximum claim amount will be the lesser of the appraised value, sales price or FHA mortgage limit for a one family residence. The principal limit is determined by multiplying the maximum claim amount by the principal limit factor corresponding to the age of the youngest mortgagor and the expected interest rate. This guidance replaces the policy guidance found in Mortgagee Letter 2008-33.

What this means is that if a senior is able to find a home for sale at a price less than the appraised value, the benefit amount will be calculated from the sales price and not the appraised value as previously reported.

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To get this answer, ARMC worked with its borrower, a representative from Congress, and many different HUD representatives.  They posted the letters used and provide a better description of the details at the link below.

What remains to be seen is if HUD will issue a new Mortgagee Letter to clear this up.  I would be shocked if any lenders would take the FAQ on HUD’s website and use it as guidance over Mortgagee Letter 2008-33. Nice work ARMC.

Reverse Mortgage Purchase using “Appraised Value” … HUD Answers No

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  • You may want to rethink the way you stated your conclusions above. HUD’s new guidance does NOT mean that “Because of this, senior will need to bring less money to close compared to using the appraised value.”

    The actual effect is the opposite. Using the sales price means that the borrower will have to bring MORE to close in those situations where sales price is lower than appraised value. For instance, a 65 year old borrower purchasing a $200,000 home for a price of $100,000 will have to bring about $47,000 to the close, using HUD’s new guidance of basing the loan amount on the sales price. Using what was in the ML, they would have had to bring nothing at all.

    This effect is clear in the original source, but didn’t make it into your post.

  • Financial Freedom has been using the lesser of appaised value, sales price, or lending limit since they started taking HECM Purchase applications in January.

    Other Purchase notes:

    FF submits all Purchase appraisals to an additional in-house appraisal review by their Property Analysis underwriters. The principal underwriter on the file does not perform this review, so its another FF “black box” process. This can add some days of underwriting time just to complete a successful review with no additional conditions.

    The main problem we have had so far is that the realtors involved in the purchase do not understand reverse mortgage lender’s turn times, so they don’t think they need to talk to you when they are negotiating deadlines on the REPC. That can mean that the deadlines are all too short and had to be extended in re-negotiation. FF will not forward a HECM Purchase application to underwriting unless there is sufficient time (they like two weeks) between the time that UW receives the file and the Settlement deadline. No 3-day day rescission period on Purchases, so you don’t have to factor that into the settlement deadline.

    There is some confusion about how to account for earnest money deposits in calculating the down payment amount. Watch your closing docs package to maske sure the borrowers earnest money gets credited.

  • How is HUD going to look at refinancing land contracts? I have a deal pending now with a two year old land contract on a property that was bought cheap and rehabbed. The state SEV has even been adjusted to the new value. The improvements are documented and obvious. The lender will not commit until the new guidelines are published.

  • Considering the financial constraint on federal budgets and the current economic downturn, I would not count on mortgagee letter 2008-33 and expect there will be a more official clarification mortgage letter coming from HUD Secretary Donovan regarding HUD purchases. Given all considerations with foreclosures and home prices falling dramatically, the risk level for investors to accept higher than sales price or appraised value could spell another financial disaster down the road. Basically, it appears the logical remedy would mirror the forward side. The principal loan limit would be calculated on the lesser of the sales price and/or appraised value, not to exceed the HECM loan limits. Let’s hope that HUD will issue a clarification soon, so the guessing will end and our senior clients can be assured they are receiving the right advise and information.

  • The problem with using the Lesser of Sale Price or Appraised Value is one of the primary problems that the HECM for Purchase was designed to eliminate: the need for two transactions, a purchase and then a HECM.

    Seniors could always purchase a home for any amount they could negotiate and then apply for a HECM, the Principal Limit of which has always been calculated based solely upon the appraised value or the lending limit, whichever was lower. But by basing the Principal Limit upon the Sales Price — in the case where the sales price is lower than the FHA appraised value — HUD inadvertently and unwisely reintroduces the necessity of doing two transactions in many cases, a purchase at the best negotiated price and a HECM at the appraised price (enabling the senior to borrow more), thus costing seniors unnecessary time, effort and money for a second closing. This is self-defeating, cost ineffective, and illogical.

    And will likely eliminate the possibility of some very sensible and otherwise doable deals simply because some seniors will not qualify first for a regular mortgage to purchase the home in the first place because of too-lowed fixed incomes and/or poor FICO scores.

    HUD could eliminate this inefficiency, costliness, and illogical circumstance simply by sticking with its original Mortgagee Letter 2008-33 and the genius contained therein: efficiency, cost effectiveness, and compassion for senior homeowners who are able to purchase a home from a family member, friend, or concessionary seller below appraised value.

    I emailed Secretary Donovan today regarding this issue and argued as much. Let’s see his response.

  • With all due respect to Sam Collins and his ability to see things through the eyes of a bankrupt and otherwise inefficient government, it is illogical and a non sequitur to insist that traditional HECM Principal Limits be based solely upon a trusted FHA-appraisal, and then for lenders and watchdogs to engage in risk management (what lenders, FNMA, Freddie, and other institutions should have been engaging in all along but which they neglected terribly) to properly structure the terms of the loan to reduce, but never eliminate risk; but the same FHA appraisal can’t be trusted sufficiently to engage in proper risk management in the case of a HECM for Purchase.

    Either we trust FHA certified appraisers and their appraisals sufficiently to structure loans properly or we don’t. Which is it?

    If we do trust them — and we should — then it should not matter whether it is a HECM for purchase or a HECM on a home purchased a couple months ago.

    IF the appraisal is accurate then let the risk managers do their job and structure the loan accordingly. But don’t penalize seniors who can negotiate a sales price below appraised value because risk managers were previously asleep on the job.

  • Until the first Mortgagee Letter is replaced, aren’t lenders required to present the examples contained in it to the borrowers? In those examples, example 3 shows the principle limit being based on the appraised value — which is greater than the sales price (unlike the example 3 shown above). Until an official mortgagee letter is issued, aren’t we in a kind of no man’s land offering one thing while having to show the borrower another? This smacks of slight of hand while in reality it is the result of no clear communication of changes in policy being made from HUD to the lenders.

  • As if the foreclosures were not sufficient cause for alarm and reaction among lenders and at HUD, we also had the crisis at FNMA, the largest reverse mortage investor. And the latter part of 2008 also brought us another as-yet-unseen phenomenon: a surge in new fraudulent HECM apps. Property flipping and straw buyers and foreclosure properties were part of this, but apparently some other schemes were so crafty that the lenders have not been willing to describe them for fear that others would copycat them.

    The new HVCC rules which go into effect May 1st make it abundantly clear that many of the powers that be not only do not trust appraisers, FHA licensed or not, but that they do not trust loan officers as well.

    These strong currents all combine to create the environment in which we, the lenders, and HUD itself have to stumble forward with the HECM For Purchase to comply with HERA 2007.

    So, while the program guidelines and its processes have their flaws that we can try to get the powers to address and remedy in the future, we at least have a beginning. That is, if you’re willing to engage and learn in order to help those folks who can benefit from the program ‘as is’. Sometimes, to do what’s best for your client, you have to venture out into terra incognita.

    Prepare to have your understanding and knowledge tested, and for your client’s sake, make sure they know that we are ALL beginners in this process and there will be confusion and uncertainty for some time forward.

  • Im trying to purchase a house CASH that is listed as a reverse mortgage short sale property listing

    My question is: Will HUD accept an offer for review of acceptance for a property if the offer is less than 95% of the appraisal if the offer is a CASH OFFER.

    Also can you please also include the web link that provides this answer.

    Please respond back to hobby0002000@yahoo.com Thanks

  • Uness I’m missing something, I don’t think HUD would be involved in the transaction at all.

    If you’re not trying to use a HECM for Purchase to buy the home (and you’re not) and if the existing servicing company is not out of business (which would be the only circumstances in which HUD had either temporarily taken over the servicing or was trying to get it assigned to a new servicer), the sales price would be whatever you can get the seller to accept.

    The seller would presumably be the homeowner who took out the reverse mortgage in the first place, or their beneficiary or legal representative if that homeowner has passed away, but not HUD or the loan servicing company.

    Oh wouldn’t it be wonderful if there were a distinct weblink for every question.

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