FHA Official Statement: HECM Financial Assessment Is Allowed

In a letter published today by Federal Housing Administration Acting Commissioner Carol Galante, FHA stated that there are no restrictions on underwriting for tax and insurance for HECM loans and that FHA is working on changes to the HECM program that will make it more successful.

“HUD does not prohibit the inclusion of additional financial capacity and credit assessment criteria and processes in the origination and approval of HECM transactions,” the letter states. Those processes, however, may not violate FHA statutes or regulations, or any other applicable laws.

Galante’s letter points to several recent changes to the HECM program that were in an effort to respond to poor economic and housing market conditions.

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“In response to these conditions, FHA has implemented several adjustments to the HECM program over the last several months to support the financial health of the Mutual Mortgage Insurance fund and sustainability of the program for FHA and eligible borrowers,” Galante wrote.

Those changes include the introduction of the HECM Saver, increased annual mortgage insurance premiums, reduction of principal limit factors and guidance on handling property charge related delinquencies with detailed requirements for notification to borrowers, reporting to HUD, loss mitigation and counseling support.

FHA has some additional changes under way that will take time to develop, the letter notes.

“FHA is currently in the process of revisiting its regulations to propose and ultimately adopt changes that are necessary to make the HECM program even more successful,” the letter states. “Many changes that are under consideration will require notice and comment rule-making, which is a complex and lengthy process.”

The baseline requirements, Galante notes, do not prohibit lenders for underwriting for tax and insurance.

“As we move forward in our efforts to strengthen the HECM program, we look forward to engaging the HECM stakeholders and working together on this important program for elderly borrowers,” the letter states.

View the letter here.

Written by Elizabeth Ecker

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  • Well not exactly.

    Lenders do not just want to deny applicants.  Per the letter to Karin Hill, they want to be able to modify the terms of the loan by mandating taxes and insurance set asides and specific forms of payouts when warranted.

    Right now all that has been confirmed is that lenders can deny applications based on their assessment of risk regarding the ability of borrowers to pay ongoing home ownership obligations and meet other loan covenants over time.

    • Does it look like the “boots on the ground” originator is going the way of the horse and buggy?
      If you had a kid just out of school, looking to get married, buy a house, have kids, would you advise him / her to go into reverse origination
      when the average production is onesie-twosie per month? Thats lunch money. And it looks like its getting worse.   This profession is good only for people who only need a little “lunch money” to help pay for —well…lunch.  Very sad…
      Somebody tell me if I am wrong.  Please.

  • HUD policy (Handbook 4235.1)  explicitly says that lenders may not impose minimum draw requirements on line-of-credit borrowers, and yet lenders have been forcing borrowers getting fixed rate loans to take a full draw at closing.  It also says that all lenders must offer an annually-adjusting interest rate, and we know what happened to that option.  Manufactured homes are explicitly an eligible property type, and yet at least one major lender, I am told, will not do HECMs on manufactured housing anymore. 

    Given the willingness to go beyond/against HUD guidelines in these areas, I don’t see what would stop lenders from requiring set-asides for property charges rather than turning the borrower down outright.  Hmmm.  I wonder what it could be.  Might it be that loans with set-asides are not as attractive to investors??

    • rmcounselor,

      As to your first point, ML 2008-08 permits fixed rate HECMs to be closed ended. 

      As to property type eligibility,  Congress and the President told HUD that co-ops are now eligible properties.  To be eligible and required to be offered are two different issues. 

      As to the mandate to offer annually adjusting, that is an enforcement issue not an insurability issue.

      What seems to be preventing lenders from modifying the terms of an individual HECM is the ability of HUD to deny reimbursement or assignment.  NO lender wants to take that risk.  So on that point, most of us expect lenders to tread through those waters lightly.

  • Regulations, regulations and regulations for more regulations. Wow, we sure know how to implement the “KISS” theory, don’t we?How do you comment on this article? I realize FHA is in a potential bind, mainly due to the drop in values. The job market and economy has not helped and so was there inability to recognise the problem a long time ago!Is change upon change and regulation upon regulation really need to be added to what has already been done? Are things finally getting so out of control that we now have a major problem the management area of FHA/HUD? I see “rmcounselor” talks about lenders actually establishing a set aside fund for the T&I, rather than turning them down. Good point but it seems there is an easier way to handle the T&I issue, which by the way is one of the key concerns with default! I have said this before and I will say it again, instead of going through a separate credit assessment analysis on borrowers look at an alternative. We all know the credit assessment was spawned out of the major concern for the taxes and insurance. I feel and have felt all along that we need to set up an escrow fund on the borrowers loan. Not a “Set aside fee” but an “Escrow Fund”. The escrow fund would serve as the bucket to collect taxes and insurance on a monthly bases from our senior borrower. At closing collect the first year of the T&! along with what ever months are needed to pay the T&! coming up. This is much better than setting up a set aside fee, which would have to be an enormous amount of funds and most likely would kill the deal. Once the fund is established, the servicer, at closing, would issue the borrower a coupon book which would contain 12 coupons, one for each month commencing 30 days after the closing. The borrower would make monthly payments to the servicer to pay the T&I when due.  A senior can budget themselves on a monthly basis, it is when a lump sum comes due is where the problem is. Sure, we are talking about more expense for the servicer but this beats what is being talked about now! That is my theory until I am shown where I could be wrong in my thinking! Thank you, John A. Smaldone

    • John,

      I have to disagree with your overly simplistic response to a complex issue.  By most estimates seen in various publications, the tax and insurance default problem is limited to approximately 5% of all outstanding reverse mortgages.  Therefore, 95% of the borrowers are handling their tax/insurance payments just fine.  

      If the 5% were not able to afford to pay their taxes or insurance bills, what makes you think that they will all of a sudden be able to pay them if they had a monthly escrow payment?  The old saying goes “you can’t get blood out of a turnip…”

      Escrow payments would create a burden on the 95% of the compliant borrowers – not the mention the collection work and expected rising costs involved with servicing the loans.  As much as it would be nice to think, not every one would pay their monthly escrow payment turning the lenders into some type of “collection agencies”.

      Sorry…I just don’t agree.

      • Reverse Guy, I am not disagreeing with you on the complexity of the issue but who makes it complicated? Some time a common sense and simple approach to the solution is what is needed, especially in this economic and regulatory environment we are in. Let me respond to your comment by pointing out two items. First off, I agree with you on the 95%, you make sense on that point. However, one way to solve that is to give borrowers a choice of escrow or not. I say this because many people would like the opportunity to have a payment program, it is a form of discipline for them. Also, many people know their forth comings in this area! Second item, when you refer to the 5% not affording their payment regardless the method of payment, I do disagree with that. A large amount of people that are on fixed income and budgets plan their obligations according to their monthly income. If many of these people could plan the payment of T&I in their monthly budgeting process, they would be able to make their T&I payment ok. It is when they are hit with the large lump sum is causing many to default. I appreciate your comment and make it a great day. John A. Smaldone

      • John,
        T & I Escrows are specifically prohibited in the HECM Statute. As such, congressional action and a presidential signature would be required to implement your suggestion. One has to believe that there is a “simpler way” to a solution. Whatever the outcome, the old adage that “you can’t please ALL the people ALL the time” will, I’m sure, hold true.

      • ReverseGuy,
         
        We started financial assessment a year ago; it is now fully in place in the new counseling protocol.  We have already seen a drop off in the conversion rate from receiving a FHA Case Number to endorsement go to 69.5% for the fiscal year just ended from 73% for each of the two fiscal years which preceded it.  What is worse we have seen an overall increase in the dropout rate from counseling to endorsement of over one-third going from 30% to 40%; as we get more details from HUD we expect that percentage to rise.
         
        While some focus solely on a 5% default rate, a senior vice president at RMS recently estimated that the default rate could be as high as 8% in an interview with Brett Varner.  So if counseling is eliminating 10% more of the counselees than we have ever seen in the recent past, how many applicants need to be eliminated or have their HECMs modified.  It is doubtful if many of those who have gone through the new protocol have defaulted not because of the new counseling but rather because not many have had to make tax and insurance payments yet and not all those who default do so in the first few years after funding.
         
        Will just 5% of the applicants be impacted?  Where there is a subjective part of financial assessment will some lenders have higher standards than others?  Should marginal borrowers shop?  Will lenders reject or require that HECMs be modified in 10% of the cases resulting in only 3% closing loans?  Will originators shop for employers which are less stringent regards modifications and rejections?
         
        Between counseling and lender financial assessment could we see as much as 47% of all counselees not getting HECMs?  Imagine that result!!
         
        Then remember we have started a transition.  The first step is accept or reject.  Will lenders reject 10% of all applications?  The rejection percentage will not match the percentage which is in default.  It will probably be higher since the costs of one default can exceed the profit from several HECMs depending on the balance due versus the then current principal limit, who owns the note, the time remaining before assignment or termination, and finally how many times the same borrower eventually defaults before the earlier of termination or assignment.
         
        If HUD permits HECM modification (remember there is no guarantee they will), how will lenders respond especially if HUD gives very different options as to approach.  Counseling results could just be the tip of the iceberg.  How low will Standard endorsements go this fiscal year?  With the loss of Wells and Bank of America the true picture as to why lost endorsements are occurring could be clouded for some time to come.

        This will be an interesting 18 to 24 months even without other program changes.

    • KatyDog,

      Someone supported (and support) them, their children, their grandchildren, and possibly their greatgrandchildren.  Do you have something against kids going to public schools?   

      • Nope!!!! When I was under 65, I did my part, although we did not have any children, paying school taxes, but now that we are seniors, not working, I feel that seniors should be able to keep their own money. If one does not own a car, they do not have to pay a gasoline or license plate tax to subsidize the highway system, why then do you feel that a senior should pay to have someone else’s kid go to a public school? If you can have a child, then you should have the financial responsibility to pay for their education—- if not, then don’t have kids. Sorry for my opinion, but seniors JUST DON’T HAVE THE MONEY for this any more!!!!

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