Questions Persist About Subordinate Liens Behind Reverse Mortgages

Despite a HUD Mortgagee Letter issued last month, ostensibly clarifying the agency’s policy on subordinate liens, reverse mortgage originators contend they were unclear about the acceptance of the practice. ML 2009-49 held that “no financing that results in a subordinate lien behind the HECM is permitted. If the homeowner does not qualify for a large enough reverse mortgage to pay off an existing loan, then that debt must be paid off or forgiven before the reverse mortgage closes.”

Sarah Hulbert, CEO, Senior Financial Corp., a brokerage based in Renton, Wash. says: “The [HUD] guidance appears to change its previous stance with regards to existing subordinate liens [although] HUD historically has always insured these loans.” As a result, Hulbert tells RMD: “One major lender is saying it’s [still] okay to re-subordinate and another huge lender says [the opposite].”

Meg Burns, director, Office of Single Family Program Development at HUD, says “there has been no change in policy. We know that some lenders are claiming that we previously permitted subordinates,” she acknowledges, “but we did not. We issued this guidance because we were concerned with that rumor circulating and wanted to clarify the policy – yet again.”

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Multiple clarifications notwithstanding, one Florida originator says there was a time when “even thirds were permissible under certain hardship circumstances – especially if there was a payment moratorium on [that] third so the senior was not harmed. Then,” he says, “we were served ML 09-49, [followed by] ML 09-52, which says the exact opposite regarding trailing balances of refinanced loans.” Consequently, he goes on, lenders “must determine which part of this ‘battle of the Mortgagee Letters’ applies to HECMs, which part does not, and which part to question.”

[Two large reverse mortgage originators were asked to comment on this subject but did not do so prior to this posting.]

Neil J. Morse has been a communications professional working in the mortgage finance industry for more than a decade. He can be reached at nmorse@reversemortgagedaily.com

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  • Mr. Gruley,rnrnI fully agree with your first paragraph.rnrnHowever, when it comes to projecting cash flow for people living primarily on fixed income the techniques employed by the mortgage industry to determine suitability are notoriously poor. The reason is our cash flow projections are performed as if we were gathering information needed for a balance sheet; we look at the current situation. For most situations, such analysis is hardly adequate.rnrnWhen it comes to those who are employed, in a more robust and employment growing economy increased salaries usually outpace increases in costs and deterioration in other forms of existing income covering up a wide girth of incorrect and poor projection assumptions; in most cases the other forms of income are not deteriorating, but rather expanding. In such cases relatively moderate debt payment to income ratios make a lot of sense.rnrnMany in the industry agree with your position. While reducing the instances of triggering foreclosure related covenants is a noble and worthy goal, the application of suitability standards can eventually become a political football. For example, once placed into the MMI category the credit subsidy issue became a political football in the hands of the current Administration against HUD; there is no need to address who it is who really suffered and is suffering. rnrnInstead of just preventing foreclosure due to failure to pay taxes and insurance on 2%-3% of all borrowers, 10% of those who would normally acquire a HECM may now find themselves ineligible. Generally in business attempting to remove all risk results in diminishing returns and significant unintended but very negative consequences.rn

  • I’ve closed several HECMs in GA where a Dekalb Housing Authority lien was subordinated. I know I’m far from alone in that regard since speaking with a contact at DHA. I hope we don’t lose the ability to subordinate these types of liens*. rnrn*Dekalb Housing Authority liens are usually a ten year home repair loan with no monthly repayment required. The balance is reduced each year, and released after the tenth year, assuming the borrower remains in the home.

  • Mr. John B.,rnrnI remember Mrs. Meg Burns discussing a pilot program in the MidWest about doing subordinations on certain types of debt; I think it was Michigan.

  • The understanding that I have always had was that any “New” subordinate financing could not be created to fund a loan. However, an existing second could subordinate because it was already in existence. I work for a bank and closed a HECM for a client of ours that had an existing second with us. We were allowed to subordinate and the deal funded.

  • Getting back to the issue, Jim Veale makes some key points, as usual. Still it appears that all liens are not created equal. I had a client with an expensive home who owed $160K on a first mortgage and had a second lien in the form of a municipal loan at 0% for $80K. He didn’t want to do the reverse if it meant having to pay off the zero interest loan with the L.A. Housing Dept.rnI went back and forth with F.F. who finally admitted that ‘certain’ types of loans could be subordinated. Then it was a question of who would initiate. Both parties said that they’d agree if the other party approved the subordination first. Finally, the LAHD did an analysis and determined that their third position was adequately secured by the existing LTV even with the negam component of the reverse. So the reverse went through although it took some real effort.rnFurther clarification from F.F. stated that ‘certain’ permitted subordinations were limited to low interest “municipal, state and federal” loans. I guess the FHA agreed at some point and/or has changed its mind.

  • I’d like to get back to the issue itself. JIm Veale as usual, raises some important points. But clearly, all subordinations are not equal. A year and a half ago I had a client with who had a $900,000 home with a $116K first and a second in the form of a 0% interest municipal loan for $80K with the LA Housing Dept. The borrower had no interest in paying off a zero interest loan and wanted to subordinate it. After going through the gyrations with Fin. Freedom, they determined that ‘certain’ subordinations were permissible and IF the LAHD would agree to be in third position it would be okay. After much internal analysis the LAHD agreed their loan was more than adequately secured and the reverse went through. The ‘certain’ lien category was interpreted as ‘a low interest, municipal, state or federal loan’ according to F.F.

  • Mr. Nelson,rnrnMr. Peter Bell is not NRMLA but he is a part. I am sure NRMLA is fully involved in the subordination issue. It impacts the entire industry. However, the policy of NRMLA is to avoid public comments during negotiations.rnrnI have no idea what compensation Mr. Peter Bell is paid for his services. The reason I provided the information I did was for comparison purposes. Mr. Bell openly presented some of that information at the convention. Since the NRMLA 2008 Form 990 is public information as is all Form 990 information, I suggest you pursue it from that angle.rnrnBy the way I did respond to your earlier post about my views on the NRMLA CRMP designation in the comments on the other article. I hope you have received my reply.rnrn

  • To Michael Pinter,rnrnMike, your question is a good one. It is my understanding that after the closing and funding/recording of a HECM a lender could make a third lien on the property. rnrnThis can only be done after the HECM is completed. If their is a shortage and the existing lender wants to wait to place a third lien on the property, that lender better make its pay off less or it will show a shortage and the HECM loan will not be able to be made.rnrnGets tricky, give me a call on that Mike.rnrnJohn A. Smaldone

  • To Michael Pinter,rnrnMike, your question is a good one. It is my understanding that after the closing and funding/recording of a HECM a lender could make a third lien on the property. rnrnThis can only be done after the HECM is completed. If their is a shortage and the existing lender wants to wait to place a third lien on the property, that lender better make its pay off less or it will show a shortage and the HECM loan will not be able to be made.rnrnGets tricky, give me a call on that Mike.rnrnJohn A. Smaldone

  • Ms. Apanay,rnrnIf the first and second were paid off in a HECM transaction leaving an existing third in place fully subrodinated behind the lender and HUD, how would your position change, if at all?

  • Same to you, Wealth One; aren’t you the one who started mr Peter (…) (……)rnBell “vendata? Shame on you; shame on me. You know, Wealth One, a long time ago because of some high test scores in US Army Basic training I initally was placed in a computer outfit which was shipped from Ft. Lewis, Wa. to Ft. Monroe, Va. This historic post was engineered by Robert E. Lee prior to the Civil War; Edgar Allen Poe served there as a Private; President Jefferson Davis was incarcerated there after the War Beteen The States (as Southers proclaim), Colloquially, Ft. Monroe was call “The Little Pentagon” but we Privates called it “The Land Of Sleeping Colonels”–a spot where all too many old Officers, who couldn’t make their first Star, went to die or retire. There was, however, sixteen Generals stationed on Post, then, since it was Continental Army Command Headquarters. (The Commanding General was four Star General John Waters, General Patton’s Son-In-Law; The number two man was Lieutenant General Truman–former President Truman’s nephew.) My whole point of this story, Sir, is I have been around men who possess genuine power in my life; I’ve seen how they treat others of lesser importance. A giant doesn’t use a sledge hammer to swat a nat; Peter (…) (……) Bell made a real mistake in embarassing me: The power of words (or dots) can be a powerful tool of humiliation in the hands of some folks. And yes, Happy New Year to you, too.

  • Soooooooom where is the vaunted NRMLAS in all of this? Mr. Veale, you think so highly of Peter (…) (……) Bell, what is he doing in all of the “muddle”? Pretty serious stuff: The letter seems pretty clear to me–“lenders are claiming that we previously permitted suborinates but we did not”. What is the financial impact to a Senior (remember I’m different than rnsome in this Industry, I think of the Seniors welfare first.) or to a Lender, if any? By the way, Mr Veale, I’m still waiting for your position on Peter (…) (……) Bell’s ruse to raise revenue for his group: The $1,000 CRMS designation program. I’m curious if NRMLA wants $1,000 donations from Loan Originators, why cowardly hide behing this tatic? Why not just ask for a $1,000 tax deductable donation? (I know I know, Mr Veale, few perhaps would give except through a form of economic coercion; but maybe just maybe NRMLA isn’t worth $1,000 donation to many Loan Originators.) Also, while you told how much the President of AARP was paid yearly, I noticed you didn’t state how much Peter (…) (……) Bell receives in total income annually. How much, if you please.

  • It seems to me from HUD’s point of view, this is less about HUD’s risk, and more about borrower suitability. HUD’s seems to be saying that this is not in the best interest of the borrower. I disagree in most situations, and especially in our current economic environment.rnrnPerhaps having debt/income qualifications on the HECM’s would eliminate subordinated lien suitability issues, and make HUD feel more comfortable. It would certainly mitigate some of the ongoing issues related to deliquent taxes and insurance.rnrnEither way, HUD’s current position(s) on lien subordination is(are) in conflict, and they are counter productive to seniors efforts in surviving the economic challenges they currently face.

  • I closed a HECM earlier this year where the first and second lien holders took large principle reductions. The second lien holder was owed $106,000 and only received $3,000 from the proceeds of the reverse mortgage. To release their lien the lender required the homeowner sign a promissory note for $10,000 that was non-secured debt. This loan funded and was insured. This was prior to the release of the mortgagee letter 09-49. The ML states no secured and unsecured debt will be allowed. If HUD is no longer allowing any secured or unsecured debt in connection with the HECM it will difficult to get principle reductions on large second liens. More senior homeowners will face foreclosure because of this ruling.

  • ML 2009-49 reads, in part:rnrn”Therefore, any excess balance due on an existing lien must be paid in full, forgiven, or otherwise extinguished prior to or at closing of the HECM loan transaction.”rnrnWhere’s the ambiguity here?

  • The question that Sherry brought up is a good one. What if a lender is willing to subordinate to the HECM after closing? I have a borrower with a HECM on a home valued at five million dollars, there are lenders willing to lend in third position because the HUD liens are at such a low LTV. Is this a problem for HUD or not?

  • I closed a HECM earlier this year where the first and second lien holders took large principle reductions. The second lien holder was owed $106,000 and only received $3,000 from the proceeds of the reverse mortgage. To release their lien the lender required the homeowner sign a promissory note for $10,000 that was non-secured debt. This loan funded and was insured. This was prior to the release of the mortgagee letter 09-49. The ML states no secured and unsecured debt will be allowed. If HUD is no longer allowing any secured or unsecured debt in connection with the HECM it will difficult to get principle reductions on second liens that are owed a substantial amount of money. More senior homeowners will face foreclosure because of this ruling.

  • I agree with Sarah, it has always been my understanding that HUD would not allow you to “create” a new lien (taking 3rd position) in order to make the HECM work. But when an existing lien holder is willing to take a 3rd lien position behind a HECM what is the risk to HUD? GMC will adhere to HUD’s re-clarified position but it is a new position for sure and one that makes no sense to me.

  • This article is of vital concern to most of us in the industry. It is not surprising that lenders are reacting differently. Lenders do this all of the time. Just look at how many lenders still are not doing HECMs for purchase or HECMs for manufactured homes on condo owned land. It is disappointing, however, to see quoted originators unwilling to be identified; the value of such quotations is marginal at best.rnrnThe final paragraph is very confusing. Is there any subordinated debt that has a higher position than a third once HECM financing goes into effect? If the u201cthirdu201d was its priority before HECM financing, were the existing first and second mortgages subordinated also or were they paid off before or as part of the HECM transaction? Why was the payment moratorium significant on the third? To understand why it would not hurt the borrower, what would revive the payments?rnrnWhat difference should it make to FHA if there are six mortgages that subordinated or one as long as the borrower has the cash flow necessary to make the required payments on the other mortgages? Of course the real problem with such determinations is that most are extremely subjective. Not all cash inflows have the same quality or duration. Also by contract, costs can change dramatically as can be seen in collectively bargained employee benefit plans when retirement takes place. rnrnToo many people succumb to the simplicity of electronic spreadsheets. A template that provides categories of income and expense will not necessarily provide any information about the ability of a borrower to pay insurance, taxes, and other homeowner costs over time. Such information gives no information about the three most important issues about such items: their quality, their duration, and the impact of the ravages of inflation. rnrnFor example, retirement income that comes through an ERISA qualified retirement plan is much different than one that is paid from the general assets of an employer. Even retirement income coming from ERISA qualified plans vary substantially. There is a huge difference in the quality and reliability of a fully funded defined benefit plan and the typical 401(k) [or as some comedians have jokingly come to call them u201c200.5(f)u201d] plan.rn

  • This article is of vital concern to most of us in the industry. It is not surprising that lenders are reacting differently. Lenders do this all of the time. Just look at how many lenders still are not doing HECMs for purchase or HECMs for manufactured homes on condo owned land. It is disappointing, however, to see quoted originators unwilling to be identified; the value of such quotations is marginal at best.

    The final paragraph is very confusing. Is there any subordinated debt that has a higher position than a third once HECM financing goes into effect? If the “third” was its priority before HECM financing, were the existing first and second mortgages subordinated also or were they paid off before or as part of the HECM transaction? Why was the payment moratorium significant on the third? To understand why it would not hurt the borrower, what would revive the payments?

    What difference should it make to FHA if there are six mortgages that subordinated or one as long as the borrower has the cash flow necessary to make the required payments on the other mortgages? Of course the real problem with such determinations is that most are extremely subjective. Not all cash inflows have the same quality or duration. Also by contract, costs can change dramatically as can be seen in collectively bargained employee benefit plans when retirement takes place.

    Too many people succumb to the simplicity of electronic spreadsheets. A template that provides categories of income and expense will not necessarily provide any information about the ability of a borrower to pay insurance, taxes, and other homeowner costs over time. Such information gives no information about the three most important issues about such items: their quality, their duration, and the impact of the ravages of inflation.

    For example, retirement income that comes through an ERISA qualified retirement plan is much different than one that is paid from the general assets of an employer. Even retirement income coming from ERISA qualified plans vary substantially. There is a huge difference in the quality and reliability of a fully funded defined benefit plan and the typical 401(k) [or as some comedians have jokingly come to call them “200.5(f)”] plan.

  • I agree with Sarah, it has always been my understanding that HUD would not allow you to “create” a new lien (taking 3rd position) in order to make the HECM work. But when an existing lien holder is willing to take a 3rd lien position behind a HECM what is the risk to HUD? GMC will adhere to HUD's re-clarified position but it is a new position for sure and one that makes no sense to me.

    • Ms. Apanay,

      If the first and second were paid off in a HECM transaction leaving an existing third in place fully subrodinated behind the lender and HUD, how would your position change, if at all?

      • Unfortunately it appears that HUD is no longer allowing any flexibility here. If we could get assurances from HUD that they would insure such a loan we would be happy to accommodate the senior.

        Sherry B. Apanay
        Senior Vice President

        Generation Mortgage Company
        sherry.apanay@generationmortgage.com
        Direct: 404-995-5490
        Cell: 404-805-1732
        fax: 404-995-5345
        Toll Free: 866-733-6085

  • The question that Sherry brought up is a good one. What if a lender is willing to subordinate to the HECM after closing? I have a borrower with a HECM on a home valued at five million dollars, there are lenders willing to lend in third position because the HUD liens are at such a low LTV. Is this a problem for HUD or not?

    • To Michael Pinter,

      Mike, your question is a good one. It is my understanding that after the closing and funding/recording of a HECM a lender could make a third lien on the property.

      This can only be done after the HECM is completed. If their is a shortage and the existing lender wants to wait to place a third lien on the property, that lender better make its pay off less or it will show a shortage and the HECM loan will not be able to be made.

      Gets tricky, give me a call on that Mike.

      John A. Smaldone

  • ML 2009-49 reads, in part:

    “Therefore, any excess balance due on an existing lien must be paid in full, forgiven, or otherwise extinguished prior to or at closing of the HECM loan transaction.”

    Where's the ambiguity here?

    • No ambiguity, but the word “therefore” is utterly disingenuous. It follows a sentence that cites 24 CFR 206.32(a), which says no new subordinate lien can arise “in connection with the HECM transaction.” I think that's bad policy too, but the regulation does NOT say that all existing liens need to be extinguished. Closing off this small avenue means that thousands more elderly victims of predatory lending — or just plain bad fortune — will lose their longtime homes.

  • I closed a HECM earlier this year where the first and second lien holders took large principle reductions. The second lien holder was owed $106,000 and only received $3,000 from the proceeds of the reverse mortgage. To release their lien the lender required the homeowner sign a promissory note for $10,000 that was non-secured debt. This loan funded and was insured. This was prior to the release of the mortgagee letter 09-49. The ML states no secured and unsecured debt will be allowed. If HUD is no longer allowing any secured or unsecured debt in connection with the HECM it will difficult to get principle reductions on large second liens. More senior homeowners will face foreclosure because of this ruling.

  • It seems to me from HUD's point of view, this is less about HUD's risk, and more about borrower suitability. HUD's seems to be saying that this is not in the best interest of the borrower. I disagree in most situations, and especially in our current economic environment.

    Perhaps having debt/income qualifications on the HECM's would eliminate subordinated lien suitability issues, and make HUD feel more comfortable. It would certainly mitigate some of the ongoing issues related to deliquent taxes and insurance.

    Either way, HUD's current position(s) on lien subordination is(are) in conflict, and they are counter productive to seniors efforts in surviving the economic challenges they currently face.

    • Mr. Gruley,

      I fully agree with your first paragraph.

      However, when it comes to projecting cash flow for people living primarily on fixed income the techniques employed by the mortgage industry to determine suitability are notoriously poor. The reason is our cash flow projections are performed as if we were gathering information needed for a balance sheet; we look at the current situation. For most situations, such analysis is hardly adequate.

      When it comes to those who are employed, in a more robust and employment growing economy increased salaries usually outpace increases in costs and deterioration in other forms of existing income covering up a wide girth of incorrect and poor projection assumptions; in most cases the other forms of income are not deteriorating, but rather expanding. In such cases relatively moderate debt payment to income ratios make a lot of sense.

      Many in the industry agree with your position. While reducing the instances of triggering foreclosure related covenants is a noble and worthy goal, the application of suitability standards can eventually become a political football. For example, once placed into the MMI category the credit subsidy issue became a political football in the hands of the current Administration against HUD; there is no need to address who it is who really suffered and is suffering.

      Instead of just preventing foreclosure due to failure to pay taxes and insurance on 2%-3% of all borrowers, 10% of those who would normally acquire a HECM may now find themselves ineligible. Generally in business attempting to remove all risk results in diminishing returns and significant unintended but very negative consequences.

  • Soooooooom where is the vaunted NRMLAS in all of this? Mr. Veale, you think so highly of Peter (…) (……) Bell, what is he doing in all of the “muddle”? Pretty serious stuff: The letter seems pretty clear to me–“lenders are claiming that we previously permitted suborinates but we did not”. What is the financial impact to a Senior (remember I'm different than
    some in this Industry, I think of the Seniors welfare first.) or to a Lender, if any? By the way, Mr Veale, I'm still waiting for your position on Peter (…) (……) Bell's ruse to raise revenue for his group: The $1,000 CRMS designation program. I'm curious if NRMLA wants $1,000 donations from Loan Originators, why cowardly hide behing this tatic? Why not just ask for a $1,000 tax deductable donation? (I know I know, Mr Veale, few perhaps would give except through a form of economic coercion; but maybe just maybe NRMLA isn't worth $1,000 donation to many Loan Originators.) Also, while you told how much the President of AARP was paid yearly, I noticed you didn't state how much Peter (…) (……) Bell receives in total income annually. How much, if you please.

    • Mr. Nelson,

      Mr. Peter Bell is not NRMLA but he is a part. I am sure NRMLA is fully involved in the subordination issue. It impacts the entire industry. However, the policy of NRMLA is to avoid public comments during negotiations.

      I have no idea what compensation Mr. Peter Bell is paid for his services. The reason I provided the information I did was for comparison purposes. Mr. Bell openly presented some of that information at the convention. Since the NRMLA 2008 Form 990 is public information as is all Form 990 information, I suggest you pursue it from that angle.

      By the way I did respond to your earlier post about my views on the NRMLA CRMP designation in the comments on the other article. I hope you have received my reply.

  • Same to you, Wealth One; aren't you the one who started mr Peter (…) (……)
    Bell “vendata? Shame on you; shame on me. You know, Wealth One, a long time ago because of some high test scores in US Army Basic training I initally was placed in a computer outfit which was shipped from Ft. Lewis, Wa. to Ft. Monroe, Va. This historic post was engineered by Robert E. Lee prior to the Civil War; Edgar Allen Poe served there as a Private; President Jefferson Davis was incarcerated there after the War Beteen The States (as Southers proclaim), Colloquially, Ft. Monroe was call “The Little Pentagon” but we Privates called it “The Land Of Sleeping Colonels”–a spot where all too many old Officers, who couldn't make their first Star, went to die or retire. There was, however, sixteen Generals stationed on Post, then, since it was Continental Army Command Headquarters. (The Commanding General was four Star General John Waters, General Patton's Son-In-Law; The number two man was Lieutenant General Truman–former President Truman's nephew.) My whole point of this story, Sir, is I have been around men who possess genuine power in my life; I've seen how they treat others of lesser importance. A giant doesn't use a sledge hammer to swat a nat; Peter (…) (……) Bell made a real mistake in embarassing me: The power of words (or dots) can be a powerful tool of humiliation in the hands of some folks. And yes, Happy New Year to you, too.

  • To Michael Pinter,

    Mike, your question is a good one. It is my understanding that after the closing and funding/recording of a HECM a lender could make a third lien on the property.

    This can only be done after the HECM is completed. If their is a shortage and the existing lender wants to wait to place a third lien on the property, that lender better make its pay off less or it will show a shortage and the HECM loan will not be able to be made.

    Gets tricky, give me a call on that Mike.

    John A. Smaldone

  • I'd like to get back to the issue itself. JIm Veale as usual, raises some important points. But clearly, all subordinations are not equal. A year and a half ago I had a client with who had a $900,000 home with a $116K first and a second in the form of a 0% interest municipal loan for $80K with the LA Housing Dept. The borrower had no interest in paying off a zero interest loan and wanted to subordinate it. After going through the gyrations with Fin. Freedom, they determined that 'certain' subordinations were permissible and IF the LAHD would agree to be in third position it would be okay. After much internal analysis the LAHD agreed their loan was more than adequately secured and the reverse went through. The 'certain' lien category was interpreted as 'a low interest, municipal, state or federal loan' according to F.F.

  • Getting back to the issue, Jim Veale makes some key points, as usual. Still it appears that all liens are not created equal. I had a client with an expensive home who owed $160K on a first mortgage and had a second lien in the form of a municipal loan at 0% for $80K. He didn't want to do the reverse if it meant having to pay off the zero interest loan with the L.A. Housing Dept.
    I went back and forth with F.F. who finally admitted that 'certain' types of loans could be subordinated. Then it was a question of who would initiate. Both parties said that they'd agree if the other party approved the subordination first. Finally, the LAHD did an analysis and determined that their third position was adequately secured by the existing LTV even with the negam component of the reverse. So the reverse went through although it took some real effort.
    Further clarification from F.F. stated that 'certain' permitted subordinations were limited to low interest “municipal, state and federal” loans. I guess the FHA agreed at some point and/or has changed its mind.

    • Mr. John B.,

      I remember Mrs. Meg Burns discussing a pilot program in the MidWest about doing subordinations on certain types of debt; I think it was Michigan.

  • The understanding that I have always had was that any “New” subordinate financing could not be created to fund a loan. However, an existing second could subordinate because it was already in existence. I work for a bank and closed a HECM for a client of ours that had an existing second with us. We were allowed to subordinate and the deal funded.

  • I've closed several HECMs in GA where a Dekalb Housing Authority lien was subordinated. I know I'm far from alone in that regard since speaking with a contact at DHA. I hope we don't lose the ability to subordinate these types of liens*.

    *Dekalb Housing Authority liens are usually a ten year home repair loan with no monthly repayment required. The balance is reduced each year, and released after the tenth year, assuming the borrower remains in the home.

  • As usual, an FHA “clarification” needs more clarification. This time, it's regarding a subject that was always confusing to begin with.

    Reverse lenders are divided as to whether the lastest mortgagee letter represent a re-statement of a previously established ongoing policy or new restriction. That's created a new twist on the underwriting side.

    There's also a new set of development affecting the potential subordinating lienholders ability to subordinate. If you have a bank or credit union as the potential subordinator, they are facing new scrutiny from their auditors that can prevent them from signing a subordination agreement even if they genuinely do want to do it to help their customer.

    Most of these institutions have guidelines that tie the upper limit of the total liens on the property to a percentage of its value, say 80% for example. If the total of all liens exceeds that 80%, or could exceed it in the future, their auditors will penalize them for signing an agreement that violates their own guidelines and lending standards.

    The problem here is that the amount recorded on the HECM Deeds is a range from $0 to the Maximum Principal Limit. The Maximum Principal Li mit is a little-discussed reverse mortgage calculation equal to 150% of Max Claim Amount. It is usually 150% of the property's appraised value (it could be calculated from a lower county lending limit or a lower purchase price within the past 6 months). The subordinator has to agree to subordinate their lien and secure it with a property that is already committed to pay another lender up to one and a half times its present value. That's no downside security at all; it's a bet on property value appreciation.

    Talk all you want about how the borrowers' improved cash flow in the absence of the 1st mortgage payment will allow them to pay down the subordinated balance before the loan balance exceeds their 80% CLTV cap, but payment plans are just plans. They can be disrupted by loss of income, medical crises, and death.

    Cross-collateralizing the subordinated lien with a secondary guarantee to another asset or property or shifting some of the mortgage balance to another loan will often satisfy the local bank or credit union. They will then sign the subordination agreement because they have an alternate recourse for repayment. Unfortunately, these measures run up against the FHA rules against new loans of any sort and/or the use of borrowed funds done in connection with a HECM loan.

    The highest rates of successful subordinations have and will continue to involve private lienholders like sellers and family members.

    Suitablity concerns (maybe even some misguided assumptions about suitability) are be behind the FHA subordination rules in the first place, but it has no real bearing in the lenders decision to accept applications with subordinated liens or in the underwriting of a HECM loan.

  • No ambiguity, but the word “therefore” is utterly disingenuous. It follows a sentence that cites 24 CFR 206.32(a), which says no new subordinate lien can arise “in connection with the HECM transaction.” I think that’s bad policy too, but the regulation does NOT say that all existing liens need to be extinguished. Closing off this small avenue means that thousands more elderly victims of predatory lending — or just plain bad fortune — will lose their longtime homes.

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