Less than a week remains until the Federal Housing Administration (FHA) ends the comment period for its most recent round of proposed changes to the Home Equity Conversion Mortgage (HECM) program. As the comment period draws down, several reverse mortgage industry stakeholders are voicing their concerns over which proposed rules stand to adversely impact the future of the HECM marketplace.
FHA made headlines earlier this year when it proposed a set of new rules for the HECM program. While the proposal aims to reinforce and codify recent HECM reforms that FHA has implemented over the years, it also includes several new rules that have industry members crying out for FHA to reconsider some of its proposed changes.
The last day to submit comments on FHA’s proposed rule is Monday, July 18 at 11:59 PM (ET). To date, the proposal has generated 25 comments, according to those already posted on Regulations.gov as of this writing.
Rate cap pressures
Collectively, industry commenters call into question several major proposals outlined by FHA, notably FHA’s proposal to cap lifetime interest rate increases on all HECM adjustable-rate mortgages (ARMs) to 5%; as well as the proposal to reduce the cap on annual interest rate increases on HECM ARMs from 2% to 1%.
The suggested changes to the rate caps have the potential to create unintended consequences that could adversely affect senior borrowers, the FHA and the reverse mortgage marketplace, according to the comments of several industry stakeholders.
“Adjustable interest rate caps appear to protect the consumer at first glance but ultimately will cost future HECM borrowers more,” comments Shannon Hicks, president of Reverse Focus. “I would ask HUD to reconsider their continued efforts to re-engineer the HECM by adjusting interest rate caps.”
Not only would these interest rate caps force lenders to increase the HECM ARM margins to compensate for increased costs, Hicks states, but may also negatively impact FHA’s Mutual Mortgage Insurance fund due to the immediate increase in loan margins, “thus immediately increasing loan balance negative amortization in a low interest rate environment.”
“If the lifetime caps are lowered to 5% above the starting rate lenders will necessarily increase margins (as mentioned in the proposed rules), thus immediately increasing the cost to the consumer as the mortgagee seeks to recoup their operational costs,” Hicks writes.
The reduction in annual cap from 2% to 1% is also “problematic” as this may reduce or eliminate the current secondary market for reverse mortgages and drive up the rates and costs for seniors, comments Glen Smart, senior loan officer and manager of the reverse mortgage division at Nova Home Loans in Tucson, Ariz.
“At the very least, don’t alter the structure on both the annual and lifecap without having an appreciation of the immediate impact on the markets; and therefore, seniors,” Smart states.
Community association concerns
Other commenters raised concerns over FHA’s proposals related to its rules on HECM eligibility for community association, such as condominium homeowner associations and housing cooperatives.
Section 206.136(a)(1) requires the entire amount of a community association’s lien for unpaid assessments to be subordinate to the HECM mortgage if such a mortgage is to be considered acceptable to the Secretary, according to the Community Associations Institute (CAI), an international membership organization with more than 35,500 members.
“This requirement will have a substantially negative impact on otherwise eligible senior citizens living in association lien priority jurisdictions,” writes Thomas M. Skiba, CEO of the Institute, in his submitted comment to FHA.
In direct conflict with the statutes of 21 states and the District of Columbia, which provide a limited priority for community association liens, the CAI states that FHA proposes to exclude senior citizens living in these community associations from the agency’s HECM program.
“The proposed requirement that community association liens in these jurisdictions be in a fully subordinate position to a first lien is in direct contradiction of these state statutory frameworks,” comments N. Karpel, a CAI member. “Not only is this bad public policy, it is dangerous.”
The CAI urges FHA to withdraw its proposed HECM rule and submit a revised proposal that does not endanger the financial security of community associations and the senior citizens who call these residences their homes.
“Rather than attack senior citizens in association lien priority jurisdictions, FHA should ensure compliance from the lending community with program rules and guidelines concerning foreclosure, property preservation, and title conveyance,” Karpel comments. “The FHA should respect state statutes that provide limited priority for community association liens and require FHA-approved mortgagees to follow state law and program guidelines.”
To electronically submit a comment to FHA’s proposed rule, click here.
Written by Jason Oliva