A proposal that would require reverse mortgage lenders to assign loans to the Department of Housing and Urban Development (HUD), if enacted, would adversely impact the future of the Home Equity Conversion Mortgage program by exposing market participants to higher costs and potentially catastrophic losses, according to industry advocacy organizations.
Addressing HUD’s solicitation for public comments on a supplemental proposal that would require mortgagees to assign a HECM to the Federal Housing Administration (FHA) once the loan balance reaches 98% of the maximum claim amount (MCA), reverse mortgage industry members and other stakeholders voiced their opposition in efforts to dissuade HUD from adopting this suggested policy into its formal rulemaking.
Groups such as the Mortgage Bankers Association (MBA) and the National Reverse Mortgage Lenders Association (NRMLA) submitted comments last week on the supplemental proposal, urging HUD to maintain its current guidelines regarding a mortgagee’s election of loan assignment.
Currently, HUD mortgagees have the option, before the HECM is submitted for insurance endorsement, to assign the HECM to the agency if the mortgage balance is equal to or greater than 98% of the MCA. Mortgagees may also partake in the shared premium option, which allows the mortgagee to retain a portion of the monthly mortgage insurance premiums, but does not allow the mortgagee to assign the HECM unless the mortgagee fails to make payments and the HUD Secretary demands assignment.
Based on a survey of its members, NRMLA indicated that most, if not all, originating mortgagees gravitate toward the assignment option rather than the shared premium method.
The organization also stated that most servicers strive to assign HECMs when the MCA reaches 98%, the reason being that for HECM loans that have been pooled into Ginnie Mae HECM mortgage-backed securities (HMBS), Ginnie Mae guidelines provide for an issuer to buy out HECM loans from Ginnie Mae pools when a loan reaches the 98% threshold.
“These HMBS related repurchases impose intensive capital requirements upon such issuer-mortgagees,” NRMLA stated in a letter to HUD in response to the supplemental proposal. “Thus, when such HECM loans are repurchased, servicers look to assign them to HUD as soon as possible, and not wait.”
The customary practice of issuer-mortgagees seeking to assign eligible HECMs to HUD as soon as possible already supports FHA in its risk management objectives, says the Mortgage Bankers Association, which suggests that a mandated threshold has the potential to cause unintended consequences for both reverse mortgage borrowers and servicers.
“Though MBA understands FHA’s efforts to enhance its risk management and assessment mechanisms, there are instances in which some HECM loans may not be assignable when the loan balance reaches 98 percent of the maximum claim amount because the loan is either in due and payable status or in default and may not be assigned while ‘uncured,’” stated MBA in a letter to HUD signed by Stephen A. O’Connor, MBA senior vice president of public policy and industry relations.
Servicers already face economic challenges when dealing with HECM loans repurchased out of HMBS pools that are not immediately assignable to FHA, according to NRMLA. If the supplemental proposal is finalized in its current form, those costs will be “hugely increased.”
NRMLA servicer members developed several potential HECM servicer loss scenarios that would occur if the proposal were adopted by HUD as currently drafted based on loans in their servicing files. The servicers described HECM loans not eligible for assignment to HUD when the unpaid principal balance (UPB) on such loans originally reached 98% of MCA because the loans were in default at that time.
Source: NRMLA (click to enlarge)
“We are informed by our members that there are an enormous number of loans that are in this position, but then later cure,” NRMLA said. “If servicers are forced to then assign HECM loans such as these at a later date at the time of cure, but are limited to the MCA with respect to their FHA claim, the table above illustrates the potentially catastrophic losses that servicers would incur.”
Given these potential losses, HUD’s proposed rule may create a disincentive for servicers to offer loss mitigation to HECM borrowers who are in tax and insurance default, if and when such loans, while still “uncured,” cannot be assigned to HUD, but while the UPB grows beyond 98% or 100% of the maximum claim amount.
“In these instances, an economically rational but consumer-friendly approach might be to liquidate such loans sooner to avoid the ‘carrying cost’ on the servicer’s or investor’s balance sheet,” NRMLA stated. “We believe that this potential creates a perverse, but draconian, choice at odds with the policies outlined in HUD’s recent Mortgagees Letters 2015-10 and 2015-11.”
As previously mentioned, some HECM loans are not assignable when the loan balances reaches 98% of the MCA because the loan may be in due and payable status, as the result of either the borrower’s death or default.
In these circumstances, reverse mortgage industry groups press HUD to consider defining an “assignable window” within which a servicer may assign a HECM loan to HUD once a HECM becomes assignable.
“This would provide additional flexibility for servicers who may be unable to assign when a HECM loan reaches 98 percent of the maximum claim amount,” stated the MBA.
NRMLA urges HUD to consider if there would be a point at which the servicer would not be able to assign such a loan, and thus would have to continue to carry it on its books for a further elongated period of time.
“HUD should clarify that if HECM loans will not be assignable if such loans are in due and payable status, then servicers should be able to assign such loans after the loan is cured (if curable) even if the loan balance has exceeded 100% of the MCA, and be entitled to and be paid the full amount due with respect to such insurance claims,” NRMLA stated.
Both NRMLA and MBA also push HUD to clarify whether a servicer can or should assign a HECM loan if a sale of the home is pending, and whether a servicer may assign a loan with a balance in excess of 100% if the sale ultimately falls through. In both instances, industry groups argue that this may cause an undue burden on an older homeowner who may be attempting to sell their property In response to a life event or other changed circumstance.
Time will tell
The comment period of the supplemental proposal ended Monday, September 12, leaving HUD with six total items of feedback to consider as it moves forward in its rulemaking processes.
While there is still no clear timetable in sight as to when HUD might take further action on the proposal, or even the broader proposed rule the agency introduced earlier this spring, each passing day brings HUD closer to the end of its fiscal year on September 30, 2016.
Whether or not the reverse mortgage industry will see any of HUD’s proposed changes come to fruition for the HECM program, only time will tell.
Written by Jason Oliva