[Updated] FHA Proposes New Consumer Protections for Reverse Mortgages

The Federal Housing Administration today proposed a set of new rules aimed at strengthening the Home Equity Conversion Mortgage (HECM) program, including changes to the origination and servicing process.

In a notice published in the Federal Register, FHA plans to take several actions to ensure that reverse mortgages remain a viable and sustainable resource for senior homeowners who wish to remain in their homes and age in place, while also protecting the Mutual Mortgage Insurance Fund (MMIF).

The proposed rule will reinforce and codify recent HECM reforms that FHA has implemented in the past several years, and will also add new consumer protections.

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These changes include making certain that required HECM counseling occurs before a mortgage contract is signed; require lenders to fully disclose all HECM loan features; cap lifetime interest rate increases on all HECM adjustable rate mortgages (ARMs) to 5%; reduce the cap on annual interest rate increases on HECM ARMs from 2% to 1%.

FHA is also proposing to require lenders to pay mortgage insurance premiums until the HECM is paid in full, foreclosed on, or a Deed-in-Lieu (DIL) is executed rather than until when the mortgage contract is terminated.

Additionally, the proposal would include utility payments in the property charge assessment; and create a “cash for keys” program to encourage borrowers to complete a (DIL) and “gracefully” exit the property versus enduring a lengthy foreclosure process.

“We’ve gone to great lengths to protect seniors and ensure they can remain in their homes where they’ve raised families and where they hope to live out their days,” said Ed Golding, Principal Deputy Assistant Secretary for Housing at the U.S. Department of Housing and Urban Development (HUD) in a written statement. “As we grow older as a nation, we have a responsibility to ensure reverse mortgages remain a safe, secure, and sustainable financial option for future generations of senior homeowners.”

FHA expects the policies outlined in its proposal may reduce HECM endorsements by $1.9 billion per year, “representing transfers from potential HECM borrowers to other debtors.”

Also, FHA anticipates its rule will reduce the MMIF credit subsidy for the HECM portfolio by $42 million per year; reduce foreclosures due to tax and insurance default by up to 6,000 cases each year, totaling about $1.5 billion in loan amount.

The  proposal follows the most recent program changes the agency has made to the HECM program over the past several years, including the introduction of the Financial Assessment, upfront draw limitations, as well as updates to the non-borrowing spouse policy.

Several reverse mortgage originators contacted by RMD admitted they were still reviewing FHA’s more than 200-page proposal, but indicated the new rules positively address some lingering issues associated with the HECM program, though newer policy changes will require immediate attention during the commenting period.

FHA is inviting interested persons to submit comments regarding this proposed rule to the Regulations Division, Office of the General Counsel at the Department of Housing and Urban Development. Comments may be submitted electronically through the Federal eRulemaking Portal here.

Written by Jason Oliva

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  • Reducing the lifetime cap on all adjustable rate HECMs is huge as is the annual cap on the annually adjusting HECM coming down from 2% to just 1%. Cash for keys is a long overdue change.

    The importance of the following wording cannot be understated: “FHA is also proposing to require lenders to pay mortgage insurance premiums until the HECM is ….” This essentially is saying that the liability for making MIP payments rests with the lender; however, the lender is free to charge the HECM with such payments.

    As to interest rate caps, these drops will no doubt spell higher margins for adjustable rate HECMs since the product will be less inviting to investors.

    So far improving consumer HECM safeguards and protecting the MMI Fund have done nothing to increase HECM endorsements. Continuing this trend will … (well, you know the rest). I am not against these improvements and safeguards but it does seem as if, HUD should be stepping back to see the impact of its recent changes.

    Perhaps with its new found aggressive policy on HECM improvements and protections, HUD might consider increasing principal limit factors and reducing some of the more draconian aspects of financial assessment.

  • You think we have seen the last of changes for a while? Well, guess what, it is not over yet!

    The Iron Arm of the Dodd-Frank Bill rides again, known as the famed CFPB! My friends, this board has just begun until the Dodd- Frank Bill can be repealed!

    John A. Smaldone
    http://www.hanover-financial.com

      • Cynic, I do understand what you are saying and in theory you are 100% right.

        However, can you whole heartedly say that the CFPB did not have any influence what so ever in the proposed changes??

        Do me a favor and think on that one for a bit, I would appreciate it. By the way, I also appreciate you coming back on some of my comments with your opinions or corrections!

        I have learned many years ago and I mean many, that I am smart enough to know, that I am NOT smart enough!!

        Thanks again my friend,

        John Smaldone

      • John,

        More likely this is the swan song of Secretary Julian Castro in regard to HECMs. He wants his mark on the program. There is not much time before we have a new President and he is more likely to be in a different position in either a Clinton or Sanders Administration and completely out of the job under a President Trump.

        The CFPB is not the only pro consumer influence in the mortgage industry today; so is Castro and his appointed staff. After all we are dealing with Democrats from which the CFPB arises through their liberal leader, Senator Warren.

        While FHA stated it wanted time to see how the changes were working they have not. There has NOT been a full fiscal year since the implementation of financial assessment. So with little knowledge about how effective the policy is on operations, HUD is moving forward with numerous and significant changes.

        There is also a conservative influence in the changes. We see that in lower estimated budget requests. Even though HUD could not acknowledge a 9.7% loss in endorsements for the seven months ended April 30, 2016 when compared to the same seven month period ended April 30, 2015 earlier this month at the NRMLA western convention, it is acknowledging an anticipated loss in endorsements that would be caused by the adoption of the proposed changes.

      • You bring up very good points, which I appreciate you taking the time to get back to me on them. You make the rest of today a good one.

        Thanks Cynic,

        John

  • I am sure that I am not alone in wondering why the Powers that Be feel like more is never enough? If there is a more scrutinized, over regulated, ever changing, misunderstood industry presently doing business I would like to know what it is? Can we just leave it alone for more than 5 minutes, Please?

    • Hi Eric,

      They have a two fold issue, they want to protect the potential borrowers and they want to protect the government. The private sector seems to be on its own. So, having two competing interests that, while not mutually exclusive, have completely different agendas, HUD keeps tinkering with the program. The other thing to remember is that, in the greater scheme of things, HECMs really are not all that old. Our normal, forward paying mortgage is a mature product. People know what to expect and how to deal with it. And, as long as we do not monkey with it too much, it has a proven track record. HECMs are still a new phenomenon and, as such, will be tinkered with, adjusted, poked, prodded, examined, folded, spindled, and mutilated, until we can finally come to a point where we mostly agree that it has been done. Personally, I am not sure that we are there yet. (Oh, and having it run by a political organization that changes every so often doesn’t help much.)

      Frank J. Kautz, II
      Staff Attorney

      Community Service Network, Inc.
      52 Broadway
      Stoneham, MA 02180
      (781) 438-1977
      (781) 438-6037 fax
      FrankKautz@csninc.org

  • In what was a surprise to some of us and has woken us up from a lull, this two hundred page filing covers a number of topics which in some states could go a long way to making condos ineligible for origination. Until a call late this afternoon, I sleepily read the summary above. After the call, I began reading the 220 page document itself.

    Under a heading called Super Liens, FHA summarizes one of its changes as follows: “This rule proposes to require, as a condition for a HECM to be eligible for loan assignment, that the HECM mortgage be in lien status prior to homeowners association and condo association liens.” Stated in a different way, the document states: “Finally, in § 206.136, FHA proposes to address concerns with super lien states by requiring the HECM mortgage to be in first lien status prior to homeowners association and condo association liens.”

    The wording of the proposed change is included in the following:

    Ҥ 206.136 Conditions for assignment.

    (a) In order for a HECM to be eligible for assignment, the following must be met:

    (1) Priority of mortgage to liens. The mortgage is prior to all mechanics’ and materialmen’s liens, homeowners association liens or condo association liens filed of record, regardless of when such liens attach, and prior to all liens and encumbrances, or defects which may arise based on any act or omission by the mortgagee except such liens or other matters as may have been approved by the Commissioner.”

    Could this be the end of the vast majority of condos and townhouses in Super Lien states (or those states where HOA and Condo Association liens are given special status) being pragmatically eligible properties?

    CoreLogic states on their website: “Nearly half of the states in the nation have laws that give priority, or ‘super’, status to liens resulting from delinquent Home Owner Associations (HOAs) dues. This can mean significant risk exposure to mortgage servicers and investors.”

    Generally accepted as Super Lien and modified Super Lien states are the following: Alabama, Alaska, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Nevada, New Hampshire, New Jersey, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Washington, West Virginia and not to be left out Washington, DC.

    As to how the change may apply in the states you are qualified to do business, it is strongly recommended to seek the counsel of either your in-house or external legal counsel.

    • Hi Jim,

      This will cause additional problems for counselors as well, particularly here in MA and the other states that you mentioned. How can I tell a counseling client that they should consider downsizing to something smaller, like a condo, if I know that they cannot utilize a HECM there? Not to mention all of the potential borrowers that are in condos who now will not be able to stay there? I am hoping that HUD rethinks this rule.

      I am also concerned about the utility issue that I am noticing. That will add a new “crash landing” (foreclosure triggering event) to the current six, unpaid utilities. If a utility puts a lien on a property, then that would become a due and payable event. If that happens, it will add additional problems for borrowers, particularly those that may be marginal to begin with or who may become marginal a decade or so into their HECM.

      There is a lot in these new proposed rules, I really encourage people to take the time to look through them. Some will cause some radical changes to the industry as a whole.

      Frank J. Kautz, II
      Staff Attorney

      Community Service Network, Inc.
      52 Broadway
      Stoneham, MA 02180
      (781) 438-1977
      (781) 438-6037 fax
      FrankKautz@csninc.org

  • Can anyone explain the meaning of these two paragraphs?

    FHA expects the policies outlined in its proposal may reduce HECM endorsements by $1.9 billion per year, “representing transfers from potential HECM borrowers to other debtors.”

    Also, FHA anticipates its rule will reduce the MMIF credit subsidy for the HECM portfolio by $42 million per year; reduce foreclosures due to tax and insurance default by up to 6,000 cases each year, totaling about $1.5 billion in loan amount.

  • The more I am reading into the proposed changes I find myself asking a lot of questions that will require clarification, I am sure many of you out there are saying the same thing.

    I feel The_Cynic made excellent comments and brought out some of the strong benefits of the proposal. I liked the last sentence of The_Cynics comment, “increasing principal limit factors and reducing some of the more draconian aspects of financial assessment would be something that should be considered”!

    However, there are other disturbing parts to the proposal, especially pertaining to condominiums. All and all, there will be a lot of going back and forth on this new proposal of changes by HUD?

    John A. Smaldone
    http://www.hanover-financial.com

  • Where does NRMLA, the association that claims to represent our industry, stand on all this? Were they blindsided and unaware these changes were forthcoming (like other changes in the past)? Their silence is deafening.

    • Mr. Klawans,

      Why didn’t our friends at HUD warn us about these changes at the NRMLA western convention earlier this month? Or perhaps they did but no one has informed the vast majority of us.

      When HUD changed counseling rules back in 2010, there were several meetings changed and added to the 2010 western convention to help us understand FIT and BCU along with other counseling changes. It seems the same could have been done at the 2016 western convention with these proposals?

      We need an industry wide telecon with HUD to hear from HUD about the changes, the reasons behind them, the expected results, and how firm HUD is about the details of the changes. The sooner that is done, the better for everyone.

      • I agree whole heartedly Mr. Klawans.

        We need to have a unified front in our industry. Especially when you consider the amount of fees that are collected when we are members of these organizations.

        I would think this is also the reason why mortgage industry as a whole took the brunt of the financial collapse. We did not have the proper lobbying efforts in place. When you compare how the National Association of Realtors had 1 million paying members to fund a stronger effort to help them become exempt from the Dodd-Frank legislation. They are still earning record commissions. The difference between our industry and theirs– lobbying, organization and strong communication.

        Excellent post Mr. Klawans.

      • Mr. Metzgar,

        You state: “…when we are members of these organizations.” But what other organizations besides NRMLA (the only organization that Mr. Klawans mentions in his comment) are you bringing up?

        Have you ever looked at a NRMLA Form 990 and compared it to the Form 990 NAR files annually. If you think you pay fees, find out what fees are. Welcome to the world of nonprofits!!

        To help you understand, NRMLA (which has no significant state affiliated organizations) had about $3.6 million in income in 2014. NAR had $209 million. The California Association of Realtors had $33 million. Even CAR can run circles around us from a dollar power point of view. CAR represents over 400,000 licensees. How many originators does NRMLA represent, even 1,000?

        Yeah NRMLA could do better and put their resources to better use BUT is that a 3% difference or 80%? Your attack does not come from objective data!!

        We could get into the numbers and see how much comes to NRMLA which it can only spend on designated activities such as conventions. Then there is the cost of running the organization. If you don’t know the numbers, don’t come to the kitchen table to discuss finances.

    • Mr. Klawans, maybe if you belonged to NRMLA, you could get involved in what they do and give them and the industry that voice which you so desire and feel is missing.

  • One item that has been overlooked in conversations about the proposed rule changes is the congressional mandate to integrate mortgage disclosures (TRID). The CFPB was tasked with this initiative, and HECMs were passed over… for now. Having completed a successful TRID roll-out last year on the forward side, I really don’t want to make this change on the reverse side at the same time FHA decides to implement regulatory changes of their own. Let’s just pray the left hand knows what the right hand is doing.

  • If I’m not mistaken, the super lien status does not only apply to condo’s, but ALL homes in a PUD with an HOA. Seniors living in retirement communities would no longer be eligible for a HECM so long as they are in an HOA and the HOA has super lien status. Florida would absolutely be hit the hardest if this proposal is approved.

    Think about the percentage of seniors that live in super lien states where seniors live in a community. All of these seniors would no longer be eligible for a HECM. If HUD is really that concerned about a $1,500 HOA bill causing a foreclosure, then at the worst they should consider a mandatory set-aside for HOA dues even if a LESA is not required so those seniors aren’t disqualified simply for having an HOA in a super lien state. Otherwise, it would appear those seniors that live in an HOA and super lien state would not qualify for a HECM at all.

    This proposal could potentially disqualify such a large percentage of seniors from obtaining a HECM that it would do so much more harm than good.

    • ravens9111,

      Not quite right since PUDs are not the only form of homeowner’s or condo associations with lien rights; however, the regulation specifically names condo association liens besides HOA liens. It seems HUD is applying the rule to the widest range of HOA and condo associations as possible.

      This proposal may not be the disaster in Florida you make it out to be since many HECM originators in that state already complain about the difficulty of HUD condo approval in that state. But if HUD condo approval was not such a big deal, the Super Lien regulation proposal could be a huge pediment to HECMs getting approved in Florida.

      As to the Super Lien issue HUD has few other concerns than the financial well being of the MMI Fund. If you believe it is otherwise please explain.

      • I don’t see how the proposal won’t be a disaster. If HOA and Condo Associations both have super lien status, that eliminates a large percentage of retirees that would be eligible for HECM who no longer won’t be able to because they live in a community that has an HOA. Condo approval is not the issue. Look at the SFR and TH’s that are in HOA’s and there are large numbers that live in these types of community. Chances are you live in one yourself, just as I do.

      • ravens9111,

        No, I have owned two homes and neither was in a HOA. I have also rented homes, none of which were in HOA communities. California has few such communities in older tracts.

        How lenders accept this potential cost will be interesting.

      • ravens9111,

        Even if California were a super lien, if you do not live with C, C, & Rs, what does it matter? There is an adult community near us with tens of thousands of residents (Laguna Woods) where the minimum monthly HOA dues are over $450 per month.

      • Exactly my point. Imagine a community like the one you suggested in a super lien state, such as The Villages in Florida. There are HOA dues. If a senior does not pay the HOA, the HOA can foreclose on the home and wipe out the mortgage. It does not matter if it’s a condo or not. The relevance is for all HOA’s in a super lien state no matter the property type. Condos are really the least of my concern. There are many seniors living in HOA communities that will not be able to get financing for a HECM and it has nothing to do with being a condo or not. The mere fact there is an HOA will prevent every senior in that community from obtaining a HECM.

      • ravens9111,

        I have no dog in the fight about COAs vs. HOAs. But what is clear is that HUD is addressing both in its proposal about Super Liens.

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