Obscure Regulation Halts Reverse Mortgages, FHA Lending in Some Towns

Thanks to the abrupt enforcement of a decades-old regulation that the Federal Housing Administration had seemingly ignored, consumers looking to buy homes or take out reverse mortgages in some 55+ communities have had their FHA loan applications rejected at the last minute in recent months.

Starting this past fall, applicants in the Sun City and Sun City West, Ariz., developments were told that their FHA mortgage applications violated the “free assumability” clause in the Code of Federal Regulations, and that they thus could not receive FHA-insured loans — typically only three days before the close of escrow.

In short, the regulation means that FHA and the Department of Housing and Urban Development can’t be on the hook for any outstanding payments should the home enter foreclosure. This is a problem in certain public-private retirement communities, which have unique governing structures: For instance, Sun City West receives street maintenance and law enforcement services from the Maricopa County government, but parks and recreation initiatives are overseen by a private corporation, the Recreation Centers of Sun City West, Inc. Homeowners typically maintain separate agreements with the local homeowners’ association and the recreation corporation.


Under the facilities agreements included in home transactions in these communities, all buyers must pay a one-time property preservation fee that goes towards the maintenance of collective recreational facilities, such as golf courses and rec centers. In Sun City’s case, this $3,500 fee is levied by the Recreation Centers of Sun City, and it applies even when properties are transferred to heirs through the probate process.

Critically, the agreements require that mortgage lenders pay the fee in the case of foreclosures or deeds-in-lieu of foreclosures — which, according to the Code of Federal Regulations, is against HUD’s rules, as it would require the FHA to make an additional payment upon assuming ownership of the property.

Enforcement finally catches up 

According to Vicki Frye, the broker/owner of Frye Realty in nearby Surprise, Ariz., these fees have been in effect since at least the mid-1990s, and yet she first heard of the FHA rejecting applicants over free assumability issues in December 2016. Since then, she’s seen two Home Equity Conversion Mortgage for Purchase applications that have been rejected, and has heard of multiple other cases in Sun City and the surrounding areas.

Eddie Knoell of Signature Home Loans in Phoenix provided RMD with the text of an FHA rejection email, which specifically mentioned 24 CFR 203.41, the section of the Code of Federal Regulations that lays out the free assumability clause. Public legal records show that this part of the Code has been in effect since 1993, but Knoell said he’s been in the mortgage business in Arizona for 15 years, and he only heard of these rejections within the last few weeks.

Clearly, HUD has been approving HECMs in these communities for a long time: Just between January 2015 and December 2016, the Reverse Market Insight research firm found 151 reverse mortgage endorsements in three Sun City ZIP codes, along with 123 in Sun City West.

So why did the FHA suddenly start enforcing the rule now? RMD reached out to multiple public affairs spokespeople at HUD by phone and e-mail, and none could provide detailed comment at press time.

But Liz Recchia, government liaison for the West Maricopa Association of Realtors in Peoria, Ariz., has a hypothesis: Up until recently, older people purchasing property in retirement communities didn’t need the help of FHA products, as they either paid in cash or had sufficient assets for a significant down payment. But as baby boomers with less retirement savings and smaller pension plans retire, FHA loans are becoming increasingly common in 55+ communities, whether it’s a forward product to fund a purchase, an refinance loan, or a HECM.

“It’s only been within the last few years that FHA was even a product that retirees looked at, let alone actually used,” Recchia said in a phone call with RMD.

But Recchia also cautioned that the problem isn’t limited to 55-and-over communities. After all, the text of the code states that “a mortgage shall not be eligible for insurance if the mortgaged property is subject to legal restrictions on conveyance.”

Recchia said she’s heard of rejected applicants in non-age-restricted communities that have shared property preservation fees, as well as denials involving homes with leased solar panels; since the homeowner maintains a separate lease with the company that owns the panels, the FHA could technically be left holding the bag for future payments were the home to enter foreclosure.

Splintered views on a solution

Cathy Peterson, a management assistant at the Recreation Centers of Sun City West, told RMD that her organization feels just as blindsided and hamstrung as the real estate agents and borrowers, emphasizing that the property preservation fee has been in place “forever” and pointing out that the problem is a national issue.

“Nothing’s changed since I’ve been here, and yet they’re saying now that their translation of this rule means something that they didn’t enforce previously,” Peterson said of HUD. “So we don’t get it, and nothing’s changed on our part.”

Peterson said that carving out exemptions for FHA borrowers would be unfair to other residents who paid cash or used non-FHA products to fund their purchases.

“You cannot have non-uniform dues and assessments and fees just because one person does one thing and one person does another,” she said.

An attorney for the recreation center has been working with HUD, Peterson said, and the organization remains hopeful that the administration will change its interpretation of the law.

But Recchia believes the solution lies not with the FHA changing its rules, but with the associations themselves shifting course. She pointed out that the rule has merit, as it allows the government to avoid laying out funds for the maintenance of assets that it doesn’t own. The Recreation Centers of Sun City’s lineup of amenities, for instance, includes seven recreation centers, eight golf courses, two bowling alleys, the Sun Bowl amphitheater, and a 33-acre lake, according to its website.

“Put on your taxpayer hat,” she said, adding that recovering the most money for the American taxpayer is the entire point of the FHA foreclosure and resale process.

Instead, Recchia said, homeowners’ associations need to decide how to mitigate the effects of FHA’s regulations. She typically asks homeowners in these communities to think about the potential solutions: Would they prefer to just exempt reverse mortgages from the foreclosure payment requirements, or remove the stipulation for all types of FHA products? It’s the only way to bring about real change, Recchia said, as any amendments to federal rules could potentially take years — and that’s even if anyone at at FHA or HUD cares enough to craft exceptions for what is admittedly a small portion of homeowners in the grand scheme of FHA.

“Realistically, I don’t see any way we’re going to get something out of FHA, even in the foreseeable future,” Recchia said. “I’m going to be dead and gone before that happens.”

Until then, homeowners seeking reverse mortgages in these communities remain in financial limbo. Frye said she had a client who needed a reverse mortgage to help pay his wife’s medical expenses after she entered a third-party care facility, but was thwarted by the FHA regulations.

“This is a financial hardship on a lot of our senior residents out there,” Frye said.

Written by Alex Spanko

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  • Where was underwriting???? Certainly some attorneys believe that they can get a waiver to continue the practice that overrides the regulations!!! But is HUD bound by any of that? I am not an attorney so my opinion does not and should not count in that debate.

    Right now there is some question in the industry if HUD will enforce the cap on the line of credit at 24 CFR 206.19(f) in the existing regulations [and 24 CFR 206.19(h) and 206.25(f)] in the final proposed regulations which are scheduled to go into effect on 9/19/2017. Currently pro industry financial academicians and most FHA approved mortgagees have been in the lead in promoting that the only two limits on the maximum amount that can be drawn from the line of credit at any time is 1) during the first 12 months, the lower of a) the limitation on disbursements and b) the available line of credit and 2) thereafter, just the available line of credit.

    HUD regulations show a third limitation on payments from the line of credit which is the maximum mortgage amount (150% times the Maximum Claim Amount) minus the balance due. The third limitation normally will not apply until the total current principal limit equals or exceeds the maximum mortgage amount as shown in the first lien security documents.

    So let us say a 62 year old has a home currently worth $600,000 but at an expected interest rate of 4.75% must take a fully funded LESA of $86,284 and will only finance the upfront costs of $10,000 taking no payouts and making no pay downs throughout the life of the HECM. The available line of credit will be $218,116 at closing. During the first year the total cash available from the line of credit during the first 12 months is just $171,440. In this case, the limit of all payouts during a month then becomes the available line of credit for the next 203 months. Based on an average effective interest rate of 4.75%, at the 216th month, the amortized fully funded LESA is about $19,822; the current principal limit is $923,320; the balance due is about $262,942; and the available line of credit is $640,556, making the regulation limitation about $637,058; thus because the regulation limit is the lower than the available line of credit, the regulation limitation is the limitation on how large total payouts for the month can be for the 216th month. At the 215th month the regulation limit would have been about $638,967 but the available line of credit would be just about $637,370 so the maximum payouts for the month from the line of credit would have been limited to the available line of credit. So in this case the peak of the regulatory limitation is reached at the 215th month and diminishes from that month forward.

    At the 217th month, we begin to see the impact of diminishing returns when the regulatory cap comes down to about $635,141 despite the available line of credit being about $643,760. So, yes, without any activity in the line of credit, based on the regulatory limitation, the maximum payouts in a month from the available line of credit can shrink.

    The reason for using the modifier “about” in the prior paragraph is that the only payouts from a fully funded LESA are the actual real estate taxes and homeowners’ insurance which are not known until they become due and payable which in turn if different than the amount amortized as estimated above impacts the amortized LESA set aside, and thus the balance due, the available line of credit and even the regulatory limit.

    Complicated? Yes, but the regulation also makes the HECM so that it is NOT “too good to be true” in respect to the growth in the line of credit.

    • James,

      Are you sure about the third cap? No one has mentioned the regs. before. Why?

      With almost 200 CRMPs who have to study the regs for their exam, NRMLA, HUD and underwriting out there, why wouldn’t someone have spoken up about this before now. Wouldn’t the CFPB have mentioned this error in its ad findings last December 7?

      I’ve seen some of our most respected leaders in reaching out to the financial industry using charts that show that there is no such cap. Most likely HUD is not enforcing this reg, right?

    • Thank you for your analysis. I’ve been wondering about this too, especially as the uses of the LOC in retirement planning are being touted. Is this a true limitation, or does HUD’s second lien come into place to permit additional draws after the loan is assigned?

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