What HECM Lenders Can Expect from HUD’s New Loan Review System

As the Department of Housing and Urban Development (HUD) readies the roll out of a new loan review system for certain Federal Housing Administration mortgages this year, agency specialists this week discussed what FHA mortgagees can expect under the new guidelines.

Earlier this month, HUD published Mortgagee Letter 2017-03, announcing its plan to implement a new Loan Review System (LRS), which will be used to manage quality control functions for FHA Title II Single Family loan programs.

This includes Home Equity Conversion Mortgages (HECMs), said Justin Burch, director in HUD’s Quality Assurance Division, during a webinar Thursday that discussed the new Loan Review System implementation and process changes.


“We will review HECMs through LRS the same way we would review forward mortgages,” Burch told RMD during the Q&A portion of the webinar. “Just like we will currently review them through the PETR [Post-Endorsement Technical Review] process, we would expect you, even if you are entirely a reverse mortgage lender, to prepare to have access to and use LRS once we go live.”

FHA manages risks to Single-Family insurance programs through various quality control processes. The new Loan Review System is HUD’s latest initiative to minimize and better manage those risks, said Jack Higgins, project manager for the Loan Review System.

“Our various quality control efforts help us to ensure that lenders comply with FHA guidelines, which are designed to protect the insurance fund and borrowers,” Higgins said. “We’re also constantly working to strike the right balance—making sure that our compliance and enforcement efforts are appropriate while maintaining access to credit for qualified borrowers.”

But in order to do that, HUD’s loan review processes, and the results they produce, need to be as consistent and transparent as possible. Enter the Loan Review System (LRS).

First, the LRS unifies various loan review processes that currently fall under either the Quality Assurance Division or the Processing and Underwriting Division in each of FHA’s homeownership centers. Second, the new system allows HUD to implement FHA’s Defect Taxonomy, a simpler, more user-friendly rating system for documenting the results of loan reviews, Higgins said.

“Currently, our loan reviews come in a few different shapes and sizes—and we use different systems to manage them,” he said. “This makes it nearly impossible to consolidate data for reporting.”

LRS will manage test cases for lenders working towards their unconditional Direct Endorsement (DE) authority, however, a much larger volume of LRS reviews will be post-endorsement, plus some loans that HUD selects on an individual basis outside of what is currently known as the Post-Endorsement Technical Review (PETR) process.

“The PETR name is something that you won’t see at all in LRS,” Higgins said. “Under this unified process, a loan review is a loan review.”

This also means that after HUF fully transitions to LRS, the new system will replace the Underwriter Review Functions and eFindings Functions that are currently found in FHA Connection.

It is important to note that LRS will not be used to manage any part of FHA standard loan origination or endorsement processes, such as case number assignment, case processing or appraisal logging.

“LRS won’t change these functions as they are currently carried out in FHA Connection,” Higgins said. “But the vast majority of our post-endorsement reviews processes and data will be consolidated into a single system.”

As HUD continues to work on ongoing system development, the agency intends to confirm the effective date for the new Loan Review System in a subsequent Mortgagee Letter no later than March 1, 2017.

Written by Jason Oliva

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  • It is interesting to see that you are moving more and more towards HECM that favor wealthier persons – those who own expensive homes and who are “downsizing” to perhaps an exclusive condo retirement association (such an enormous proliferation of those — the money is coming from somewhere). People such as myself are being squeezed out of the ability to use an HECM loan to ease their financial burden and to be able to maintain and repair their stay-in-place option – yet this was originally the idea behind developing the equity loans. I perfectly understand the problems caused by greedy mortgage brokers who apparently had no ethics and did a big money grab for the first few years of the program – similar to their destruction of the home-ownership programs ten years ago. I also understand the complexities attached to any kind of of mortgage, whether forward or backward. However, as usual, the advantages are thrown towards those who have always had more money available to them from one source or another. People like myself have been left in the cold. I started the process of applying for a reverse mortgage a year ago and still don’t have one. Among other issues, there have been three appraisals within the year, all different, with the value of my home being diminished in spite of the rise in the market and in home prices; I have not been able to make the improvements, especially the energy-saving ones, that I had been counting on; I am another year older (at my age, years wasted become extremely important); and I still don’t know whether I am going to be given an HECM. My life and options, as is anyone’s at my age, are extremely complicated and this delay has forced me to apply for welfare/food stamps/heating assistance. None of these assistance programs would have been necessary for me to make use of had the HECM process been smoother. Even if I had been denied I would have been in a better situation, as I could have put other options in place, even though they would not have been my first choice. This program has become a sham and as so many others it has deteriorated into a golden opportunity for those of great wealth to empty the pockets of struggling people – this time of seniors who have worked a lifetime to support this country in hundreds of ways.

    • Ms. Daisymaygnome,

      Our comments are merely anecdote and opinion.

      In your first description of wealthier persons, you bring up downsizing with “an exclusive condo retirement association (such an enormous proliferation of those — the money is coming from somewhere).” Do you have a condo and need condo association approval? Some condos in the past have been easier to get qualified than others because of the wealth of the association itself. It is hard to argue with that position.

      You go on to say: “People such as myself are being squeezed out of the ability to use an HECM loan to ease their financial burden….”

      1. You are correct there as well if you needed the higher loan proceeds of 2012 but must deal with the much lower proceeds of today.

      2. For others who want to relieve themselves of high interest on non-mortgage loans when the mandatory obligations are near 60% can also find themselves being squeezed in the first year due to the first year disbursements limitation. This limitation has only been around for 3 and 1/3 years

      3. Then there are those who must accept a LESA as part of the terms of the loan. This set aside can take a high percentage of the proceeds that would otherwise be available to the borrower. This has been around for about 1 and 3/4 years.

      By the current design and structure of the HECM, it has more adaptability to the needs to wealthier seniors than our traditional needs based senior homeowner. The adaptation has always been there for wealthier seniors but few of us could present that benefit as we can now through the research by several financial planners. It was always easier to sell to our traditional market base since there was ample proceeds to help in so many cases but now much of that market is gone.

      Yes, HUD changed the HECM. Some of those changes our industry demanded such as financial assessment. Some were caused by now extinct products providing handsome proceeds in the years just before the housing downturn of 2008. And, yes, some came about through the greed of originators in not presenting all products available to borrowers and also from seniors who intended on defaulting on taxes and insurance at the time they got the reverse mortgage if the economic environment got worse.

      Yet the important thing is why have you been denied a HECM and why have you had to have 3 appraisals? Years are wasting.

  • Ms. Daisy: It is, as always, distressing to hear you feel that HECM’s favor “wealthier” persons as that is not the case at all, now or ever. Yes, there have been guidelines put in place to verify that borrowers can continue to pay taxes and insurance and maintain their homes, but I can assure you that last week alone I did a reverse mortgage for a couple that together make $1,100 a month in income and a 95 year old who has gone through her savings with home health and only has social security of $800 a month. And while, yes, there were “greedy” folks who have since been mostly knocked out of the industry, there were also a huge amount of mortgages that went upside down when values plummeted during the recession. All reasons why new guidelines had to be put in place. You did not explain why you had to have three appraisals nor if you are having to payoff a current mortgage, but if you are working with a lender that follows ethical procedures (such as those certified with the National Reverse Mortgage Lender’s Association) I am sure they are doing everything they can to try to make the loan work. In some folks cases, it is just not a workable option no matter how much “wealth” you may or may not have. I can promise you the program is not a “sham” and you have many outlets that you can report concerns to (the Consumer Financial Protection Bureau being just one.) This industry is full of caring, concerned individuals and companies who definitely care about those who worked hard during their lifetime. I do hope you are able to work out your situation if at all possible.

  • I see the comments made so far, however, I don’t know where HECM’s favoring the wealthy fit into the contents this article?

    Getting back to Jason’s article, the LRS sounds good in theory, however, we need to see the actual details before making a final judgment call! My concerns are to many new innovative moves being made continually.

    Don’t get me wrong, this may be a very good move in the right direction and could streamline the process, I hope? This is why I reserve a judgment call until all the details are in!!

    John A. Smaldone

  • Daisy, I too am sorry to hear your frustrations on obtaining a reverse mortgage and that you feel it is only for wealthier people. The HECM was first insured by FHA in 1989 for the purpose of providing a valuable financing alternative for senior homeowners to help them remain in their home and have access to funds by withdrawing a portion of their home equity. No where does HUD suggest it was a program focusing on JUST a needs based, poor homeowner.

    There have always been several reasons one does a reverse mortgage including:

    Needs based: Need funds immediately for covering living expenses.

    Maintaining one’s lifestyle: Having funds for travel, buying a car, purchasing vacation home

    Protecting or delaying draws from other investments: Using the reverse mortgage to tap home equity rather than accessing other investments or retirement funds that may have penalties or are taxable; let the investments or retirement funds grow so more retirement funds are available later in one’s life; use the home equity so other investments can be left as the inheritance

    Planning for long-term care needs: Taking the reverse mortgage at a younger age then leaving in the line of credit which grows to have funds to draw from in the future when “life happens”

    And more recently, purchasing a new home: Whether downsizing, moving closer to family or buying a dream home, the reverse mortgage can be used for financing.

    While there is always a bad apple in every industry, there have also been borrowers who misused the reverse mortgage funds that have caused the need to make changes to make the program stronger, including implementing the Financial Assessment, making sure borrowers are able and willing to pay property taxes and insurance into the future.

    As Melinda points out, reverse mortgages are not a sham and there are many of us who care about and do what can be done for those who have worked hard during their lifetimes. I along with many other originators have worked with homeowners with lower valued homes and $800 in Social Security Income and still be able to do the reverse mortgage. But as with any loan, one needs to meet the qualifying requirements.

    Not knowing your full circumstances, if you are receiving assistance of welfare, food stamps, heating assistance your income versus your expenses may not be meeting the residual income requirements outlined in the Financial Assessment. I wish you luck with your situation.

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