HUD Publishes Additional Guidance Regarding HECM For Purchase

image Today, the U.S. Department of Housing and Urban Development (HUD) published Mortgagee Letter 2009-11 to provide a compilation of guidance issued under ML 2008-33 and to address other aspects of the HECM for Purchase program.  According to HUD’s statement, ML 09-11 supersedes ML 2008-33.

There have been loads of questions regarding the HECM for purchase and below are a few topics that ML 09-11 covers:

Property Flipping

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If borrowers using the HECM for Purchase for a new primary residence choose to retain their existing home as a rental property, lenders must ensure that they  have sufficient income to:

  1. Maintain the costs associated with the new home financed with the HECM for Purchase (ie: taxes, insurance, maintenance);
  2. Satisfy the monetary investment for the HECM for purchase transaction; and
  3. Continue to make the mortgage payment and tax and insurance payments on the existing mortgage.

The ML states the guidance is to prevent the practice known as “buy and bail” where the homebuyer purchases, for example, a more affordable dwelling with the intention to cease making payments on the previous mortgage.

Maximum Claim Calculation

According to ML 09-11, the maximum claim amount is used to determine the principal limit and mortgage insurance premium for FHA-insured mortgage transactions. For purchase mortgages only, the maximum claim amount will be the least of

  1. The appraised value;
  2. Sale price; or
  3. FHA mortgage limit for a one family residence.

Counseling

HUD-approved housing counseling agencies that have been approved to provide reverse mortgage counseling must counsel those who anticipate using the HECM for Purchase option on all topics covered in this mortgagee letter and other HUD requirements and issuances.

Right of Rescission 

In most cases the right of rescission will not be applicable to HECM for purchase transactions, unless there may be instances when the loan would be rescindable. For example, if the mortgagor intends to finance a balloon payment due under a land sale contract, the three day right of rescission would be applicable. FHA does not have purview over right of rescission requirements found in Regulation Z, 12 CFR Part 226. FHA strongly encourages lenders to seek an outside counsel’s opinion to assure compliance with all applicable Federal or State laws.

HUD also included a new document which shows required investment examples.  These are just a few of the points covered in ML 09-11, it’s 7 pages long so I encourage everyone to read it over carefully.  

Mortgagee Letter 2009-11

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  • It is obvious that Mortgagee Letter 2009-11 was hastily put together. There are some easily detectable errors. So please be forewarned.

    Here are two from the attachment.

    In Example 3, the Maximum Claim Amount is $280,000 but the upfront MIP is only $4,800. It should be $5,600. Don’t we wish we could offer a upfront MIP lower than 2% of the Maximum Claim Amount?

    The Servicing Fee Set Aside in each case is $5,900 but unless the monthly Servicing Fee is $32.18, the amount shown is wrong.

    Beyond that the term “Monetary Investment” is a poor description of the “cash needed at closing.” The term Monetary Investment on the attachment at Line 13 does not include the earnest money shown on Line 3 of each example.

  • Keeping things simple,

    It appears that they are now ok. Gift funds are an allowable FHA funding source, so I don’t see why a borrower couldn’t use them at this point. Thoughts anyone?

  • Keeping things simple,

    Mortgagee Letter 2009-11 restricts gifts from parties to the transaction but fails to restrict gifts from other sources. Good catch.

    Mortgagee Letter 2009-11 states in part: “The monetary investment requirement can also be met by the use of approved funding sources as defined in HUD Handbook 4155.1 REV-5, section 2-10, with” specified exceptions. This appears to be an incorrect citation but you can find a copy of this Handbook at:

    http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4155.1/41551hbHSGH.doc

    On Pages II-46 to II-51 of the Handbook, you will find Chapter 2, Section 3 at 2-10 presenting information on the borrower’s cash investment in the property and specifically funds to close. Part C. states in part: “Gift Funds. An outright gift of the cash investment is acceptable if the donor is the borrower’s relative, the borrower’s employer or labor union, a charitable organization, a governmental agency or public entity that has a program to provide homeownership assistance to low- and moderate-income families or first-time homebuyers, or a close friend with a clearly defined and documented interest in the borrower.”

    Again, the citation is just additional evidence that Mortgagee Letter 2009-11 was written in haste. The citation and the limited number of exceptions come as a huge surprise since HUD had previously asserted — no funds could be used other than those that come from the borrower directly or from proceeds generated from assets owned by the borrower. This is not a 180° turn by HUD but close to it (maybe 150°).

    All of this is very interesting; however, the lender may interpret the Mortgagee Letter differently or may have additional prohibitions beyond those contained in Mortgagee Letter 2009-11. You will need to check with your lender(s).

  • KidReverse,

    You can compute the Servicing Fee Set Aside on Excel or some other spreadsheet with financial calculator functions. It can also be done on a cheap financial calculator; I compute it using a HP 10B all of the time. This computation is known as the present value of a constant cash stream. You can find the math formula in the HECM Handbook on the HUD website.

    On Excel in the Insert selection on the menu bar, go to function and select the financial category. In that category you will find and click onto PV which will open the Function Arguments box.

    In the Rate box you will put in: (5% + 0.5%)/12. This will give you the rate per month. It consists of the Expected Interest Rate plus the annual MIP rate.

    In the Nper box you will put: (100-67)*12. This will result in the number of months until the borrower reaches age 100 using the borrower’s HECM age (per the example in the attachment to Mortgagee Letter 2009-11 – 67) times 12. You use whole years in all cases.

    The Pmt is the amount of the Monthly Servicing Fee which is for this example is -30 meaning $30 per month. The Fv is 0 and the Type is 1. When you click OK, the result should be $5,500.27.

    If you leave everything else the same and use -35 in the Pmt box (that is $35 per month) you will find the result changes to 6,416.98 but if you use -32.18 in the Pmt box, the result will become $5,899.96 (this is the $5,900 on the Attachment sheet for Mortgagee Letter 2009-11). If you do not use a negative sign before the number in the Pmt box you will get the same results but they will be negative rather than positive.

    You will find these amounts agree to the official HECM calculator you can obtain on the HUD website.

    I hope that answers your question.

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