Echoing a similar precedent set by Ginnie Mae, the Department of Housing and Urban Development (HUD) said Wednesday via mortgagee letter that it will not insure Home Equity Conversion Mortgages (HECMs) that allow future fixed-rate draws against the principal limit.
Mortgage Letter 2014-11 states that while HUD has implemented various changes to the HECM program with the purpose of ensuring its financial sustainability, new product variations pose “new risks” to the program.
“FHA believes that these new variants of fixed interest rate HECM products pose a threat to the future financial soundness of the HECM program, to the Department’s ability to operate the HECM program, and to Ginnie Mae’s ability to operate a financially sound securitization program,” HUD states in the letter.
FHA will insure all fixed-rate reverse mortgages that closed on or before the publication of Wednesday’s Mortgagee Letter, provided that the loans allow a single, full draw to be made at loan closing, and that the loan does not provide for future draws by the borrower under any circumstances.
The effective date for these limitations are for case numbers assigned on or after June 25, 2014—the same effective date for limitations on adjustable rate HECMs, for which HUD states FHA will only insure loans where the payment plan option is either tenure, term, line of credit, modified tenure or modified term.
Additionally, adjustable rate HECM limitations also state the single disbursement lump sum payment option shall not be used for these loans, while all other HECM program requirements remain unchanged.
If a lender has already initiated the origination of a fixed rate HECM that allows the borrower to access mortgage proceeds after closing, but did not close the loan on or before the Mortgagee Letter’s effective date, then the lender will be required to ensure several requirements have been met in order for the mortgage to be eligible for FHA insurance.
Such requirements include an FHA case number that has been requested on or before July 2; all other HECM program and property eligibility requirements are met; HUD systems will reflect the borrower’s payment option of either term, tenure, line of credit, modified term or modified tenure; and that loan closing is completed on or before September 30, 2014.
HUD’s mortgage letter arrives more than two months following Ginnie Mae’s ruling that it would no longer securitize these types of fixed-rate HECMs where borrowers can choose a payment plan option that allows future loan advances against the principal limit.
“A fixed interest rate option with future draws is untried and unproven in the mortgage market and it is likely that mortgagees will continue to encourage large draws early in the life of the loan to reduce potential hedging risk,” the ML states. “The hedging and interest rate risk posed by continued future availability of funds at a fixed interest rate set at origination is significant, and what FHA believes, excessive.”
The mortgagee letter also includes sample fixed rate HECM loan documents lenders may use for case numbers assigned on or before August 3, 2014.
View Mortgagee Letter 2014-11.
Written by Jason Oliva