FHA Extends HECM Second Appraisal Rule, Expands Non-Borrowing Spouse Protections

The Federal Housing Administration (FHA) announced Monday that it will continue its Home Equity Conversion Mortgage (HECM) collateral risk assessment requirements announced in 2018, and will relax requirements for some non-borrowing spouses to defer repayment of reverse mortgage loans.

The agency relayed the changes in two separate mortgagee letters issued Monday, both being effective immediately.

The first, Mortgagee Letter 2019-15, updates the Mortgagee Optional Election (MOE) Assignment for HECMs with case numbers assigned prior to August 4, 2014. Under the MOE options previously available to non-borrowing spouses, some eligible non-borrowing were able to defer loan repayment under certain terms and time frames.

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The changes outlined Monday under the FHA’s Reverse Mortgage Stabilization Act (RMSA) authority include updates to the MOE assignment election and assessment deadlines and notification requirements; elimination of the 120-day timeframe for bringing current all property charges on a HECM that is subject to a pre-existing loss mitigation repayment plan; establishment of a 180-day reasonable diligence timeframe to initiate an MOE Assignment; elimination of the requirement for an eligible surviving non-borrowing spouse to obtain good and marketable title to the HECM property or demonstrate the legal right to reside in the property for life, and modification of related certifications and assignment criteria; and a new requirement for mortgagees to request information from borrowers to attempt to identify Non-Borrowing Spouses.

The National Reverse Mortgage Lenders Association welcomed the adjustment in spite of a challenging implementation timeline.

“Our Servicer members have been challenged by fairly rigid timelines when trying to offer the Mortgagee Optional Election of assignment to certain Non Borrowing Spouses,” the association said in an emailed statement Monday. “NRMLA greatly appreciates HUD’s decision to adjust the MOE requirements, via Mortgagee Letter 2019-15, in a manner that should provide relief to the HECM servicers, and the seniors they serve. While it will be difficult to operationalize this guidance with the immediate effective date, we believe the outcomes should be welcome by all stakeholders.”

Under the second Mortgagee Letter, ML 2019-16, the agency states it is extending indefinitely the collateral risk assessment requirement for FHA-insured reverse mortgages, commonly known as the second appraisal rule.

FHA previously indicated it would review the impact of the requirements periodically and extend them accordingly.

“As a result of periodic reviews, FHA has determined that the collateral risk assessment requirements announced in ML 2018-06 are having the desired effect in mitigating collateral risk valuations and will remain in effect,” the agency stated in announcing the extension.

NRMLA expressed its understanding of the extension, given its protection of the Mutual Mortgage Insurance Fund, which provides insurance to HECM borrowers.

“NRMLA understands that the Collateral Risk Assessment is having its intended impact in protecting the MMI Fund, therefore we understand the Department’s decision to continue this policy through Mortgagee Letter 2019-16,” the association said in its statement. “The HECM is a collateral based loan program, and accurate valuation of that collateral is imperative to the long-term success of the program.”

The changes come just days in advance of a scheduled House of Representatives hearing centered around the the HECM program.

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  • My thoughts on collateral risk assessment –

    1) I get why HUD is doing it, but it’s a head scratcher to us in the business that use a completely independent AMC. They call it fraud, but maybe they need a more stringent FHA appraiser licensing process? Why are you putting the “fraud” on us, when we have zero input on the appraisal result. If they get more stringent with appraiser licensing, you’ll have severe issues in states like CO, where demand significantly exceeds supply.

    2) Homes X% over the $726,525 limit should not be subject to collateral risk assessment. I tend to think 5% or more above the limit should be excluded. Asking a borrower of a $1M+ home to get a second appraisal on a HECM is just poor policy. If it’s not obvious, these homes are the highest performing in the portfolio.

    3) Lenders are confused about what data is being used to trigger a second appraisal. The confusion is causing problems with borrowers having to wait until very late in the process to find out if a second appraisal is needed.

    This is not a smooth process for the borrower and really drags out the loan process. The underwriter is waiting to log the appraisal and run collateral risk assessment until all of the first appraisal conditions are back, vs. the second they get the loan in underwriting. That can be an additional week of waiting depending on appraisal conditions.

    I get when a value changes after an appraisal is conditioned, but how often is that happening? It’s been years since that happened on any of my loans.

  • Wow.

    ” Elimination of the MOE Assignment election and assessment deadlines, along with associated notification requirements”

    “FHA no longer requires … that the Non-Borrowing Spouse possess or demonstrate the ability to obtain good and marketable title to the property or a legal right to remain in the property for life. ”

    Again, Wow.

    Trying to probate or get a spousal property petition granted within the existing timeframe was a virtual impossibility. Servicers showed absolutely no mercy when enforcing the timelines and the cost was often prohibitive.

    Pretty significant changes. Perhaps someone at HUD took my suggestion to sit at the dining room table with a few of these grieving spouses that were losing their home because of some completely arbitrary deadline.

    This NBS matter should have been handled so much differently (and in my opinion is still being mishandled).

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