HUD Issues Guidance for Subordinate Lien Financing Under the HECM

image The US Department of Housing and Urban Development issued Mortgagee Letter 2009-49 to provide guidance for addressing FHA requirements for secured subordinate financing under the Federal Housing Administration’s reverse mortgage program. 

According to the ML, Home Equity Conversion Mortgage (HECM) regulations require that there shall be no outstanding or unpaid obligations, either unsecured or secured, incurred by the HECM mortgagor in connection with the HECM transaction, except in cases involving repairs to the property required under 24 CFR 206.47, or mortgage servicing charges permitted under 24 CFR 206.207(b), or both.

The following are allowable subordinate liens at HECM origination:

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  1. State and Local Court Judgments and Judgment Liens
  2. Federal Judgments and Debts

ML 09-49 also states that it’s the mortgagee’s responsibility to ensure that the first and second HECM liens are the first and second liens of record, and that other liens, where permitted, do not intervene between the first and second HECM liens.

The mortgagor may seek a home equity loan, or another type of real estate financing transaction, after a HECM is endorsed for insurance by the FHA. Liens required by the additional financing must be subordinated to the HECM first and second liens.

To read more about ML 09-49, check out the link below.

Mortgagee Letter 2009-49

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  • I’ve re-read the Mortgage Letter several times and the key words are “in connection with the transaction”. The example in the Mortagee Letter supports those key words with the example, whereas the borrower needs to obtaining “new” subordinate financing to enable the HECM to work – not pre-existing financing.rnrnThat clearly says a pre-existing second lien can be subordinated.

  • In the case written by Mr. Kelly, the lender to whom my firm delivered the loan approved the loan because there was not a new second lien established in connection with the reverse mortgage. There was an existing second lien held by a bank who executed a subordination agreement whereby they agreed to take a subordinate position behind the first and second liens created by the HECM.rnrnPast guidance clearly stated that no NEW subordinate financing could be created in conjunction with the HECM transaction. In our borrower’s case there was no new financing, rather an existing lienholder agreed to subordinate.rnrnThe guidance issued in ML 2009-49 appears to change HUD’s previous stance with regards to existing subordinate liens. However, many individuals in the industry would appreciate clarification from HUD that ML 2009-49 does in fact clearly prohibit ANY subordinate financing in conjunction with the HECM, be it existing or new.

  • While the letter was ambiguous, I think it specifically forbids NEW subordinated financing, rather than EXISTING second liens. In the case of Mr. Kelly’s story, then, it seems as if this was perfectly legal. rnrnYou can read my full analysis here:rnhttp://www.reversemortgage.net/confusion-over-subordinate-financing-in-reverse-mortgages/

  • REVGUYJIM,rnrnA few days ago, Admin cited a story written by a genuine friend to this industry, Mr. Tom Kelly. He is a good writer but hardly an authority on HECMs. Mr. Kelly wrote a story based on a loan provided by the firm Mrs. Sarah Hulbert works for. Mrs. Hulbert is a former NRMLA chairwoman.rnrnThere is no way that HUD would allow a second mortgage. HUD must have the second lien. The existing second referred to the story could have become a third. I hope RMD will interview Mrs. Hulbert and provide a clear summary of the facts.rnrnI fully agree with your analysis that the subordination in the story by Mr. Kelly would be a violation of the mortgagee letter. It could have been permitted as an exception.

  • So, how does this play against the stories circulating here and elsewhere about existing 1st and 2nd mortgagees accepting partial payments and/or subordinating to a HECM to solve a shortage of HECM proceeds problem? Would appear to be a violation of the terms of ML 2009-49, would it not?

  • I’ve re-read the Mortgage Letter several times and the key words are “in connection with the transaction”. The example in the Mortagee Letter supports those key words with the example, whereas the borrower needs to obtaining “new” subordinate financing to enable the HECM to work – not pre-existing financing.rnrnThat clearly says a pre-existing second lien can be subordinated.

  • In the case written by Mr. Kelly, the lender to whom my firm delivered the loan approved the loan because there was not a new second lien established in connection with the reverse mortgage. There was an existing second lien held by a bank who executed a subordination agreement whereby they agreed to take a subordinate position behind the first and second liens created by the HECM.rnrnPast guidance clearly stated that no NEW subordinate financing could be created in conjunction with the HECM transaction. In our borrower’s case there was no new financing, rather an existing lienholder agreed to subordinate.rnrnThe guidance issued in ML 2009-49 appears to change HUD’s previous stance with regards to existing subordinate liens. However, many individuals in the industry would appreciate clarification from HUD that ML 2009-49 does in fact clearly prohibit ANY subordinate financing in conjunction with the HECM, be it existing or new.

  • While the letter was ambiguous, I think it specifically forbids NEW subordinated financing, rather than EXISTING second liens. In the case of Mr. Kelly’s story, then, it seems as if this was perfectly legal. rnrnYou can read my full analysis here:rnhttp://www.reversemortgage.net/confusion-over-subordinate-financing-in-reverse-mortgages/

  • REVGUYJIM,rnrnA few days ago, Admin cited a story written by a genuine friend to this industry, Mr. Tom Kelly. He is a good writer but hardly an authority on HECMs. Mr. Kelly wrote a story based on a loan provided by the firm Mrs. Sarah Hulbert works for. Mrs. Hulbert is a former NRMLA chairwoman.rnrnThere is no way that HUD would allow a second mortgage. HUD must have the second lien. The existing second referred to the story could have become a third. I hope RMD will interview Mrs. Hulbert and provide a clear summary of the facts.rnrnI fully agree with your analysis that the subordination in the story by Mr. Kelly would be a violation of the mortgagee letter. It could have been permitted as an exception.

  • So, how does this play against the stories circulating here and elsewhere about existing 1st and 2nd mortgagees accepting partial payments and/or subordinating to a HECM to solve a shortage of HECM proceeds problem? Would appear to be a violation of the terms of ML 2009-49, would it not?

  • So, how does this play against the stories circulating here and elsewhere about existing 1st and 2nd mortgagees accepting partial payments and/or subordinating to a HECM to solve a shortage of HECM proceeds problem? Would appear to be a violation of the terms of ML 2009-49, would it not?

    • REVGUYJIM,

      A few days ago, Admin cited a story written by a genuine friend to this industry, Mr. Tom Kelly. He is a good writer but hardly an authority on HECMs. Mr. Kelly wrote a story based on a loan provided by the firm Mrs. Sarah Hulbert works for. Mrs. Hulbert is a former NRMLA chairwoman.

      There is no way that HUD would allow a second mortgage. HUD must have the second lien. The existing second referred to the story could have become a third. I hope RMD will interview Mrs. Hulbert and provide a clear summary of the facts.

  • In the case written by Mr. Kelly, the lender to whom my firm delivered the loan approved the loan because there was not a new second lien established in connection with the reverse mortgage. There was an existing second lien held by a bank who executed a subordination agreement whereby they agreed to take a subordinate position behind the first and second liens created by the HECM.

    Past guidance clearly stated that no NEW subordinate financing could be created in conjunction with the HECM transaction. In our borrower's case there was no new financing, rather an existing lienholder agreed to subordinate.

    The guidance issued in ML 2009-49 appears to change HUD's previous stance with regards to existing subordinate liens. However, many individuals in the industry would appreciate clarification from HUD that ML 2009-49 does in fact clearly prohibit ANY subordinate financing in conjunction with the HECM, be it existing or new.

  • In the case written by Mr. Kelly, the lender to whom my firm delivered the loan approved the loan because there was not a new second lien established in connection with the reverse mortgage. There was an existing second lien held by a bank who executed a subordination agreement whereby they agreed to take a subordinate position behind the first and second liens created by the HECM.rnrnPast guidance clearly stated that no NEW subordinate financing could be created in conjunction with the HECM transaction. In our borrower’s case there was no new financing, rather an existing lienholder agreed to subordinate.rnrnThe guidance issued in ML 2009-49 appears to change HUD’s previous stance with regards to existing subordinate liens. However, many individuals in the industry would appreciate clarification from HUD that ML 2009-49 does in fact clearly prohibit ANY subordinate financing in conjunction with the HECM, be it existing or new.

  • I've re-read the Mortgage Letter several times and the key words are “in connection with the transaction”. The example in the Mortagee Letter supports those key words with the example, whereas the borrower needs to obtaining “new” subordinate financing to enable the HECM to work – not pre-existing financing.

    That clearly says a pre-existing second lien can be subordinated.

  • I’ve re-read the Mortgage Letter several times and the key words are “in connection with the transaction”. The example in the Mortagee Letter supports those key words with the example, whereas the borrower needs to obtaining “new” subordinate financing to enable the HECM to work – not pre-existing financing.rnrnThat clearly says a pre-existing second lien can be subordinated.

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