[UPDATE] 27 State AGs Seek New Reverse Mortgage Relief During Pandemic

A coalition of attorneys general from 27 different states, led by New York A.G. Letitia James, sent a letter Friday to the Secretary of the U.S. Department of Housing and Urban Development (HUD), Dr. Ben Carson, urging the Department to take further action to protect seniors with Home Equity Conversion Mortgages (HECMs) who have been impacted by the economic effects of the COVID-19 coronavirus pandemic.

While the coalition of states approves HUD’s actions thus far in allowing borrowers certain forms of relief as laid out in Mortgagee Letters (MLs) 2020-06 and 2020-12 – which allows a delay on foreclosures for reverse mortgages and guidance for new assignment of loans to HUD, respectively – the national response thus far is insufficient to protect American seniors from risk, they contend.

“Our national response […] must continue to evolve to meet the impact of COVID-19,” the letter reads. “The proposals outlined in this letter are based on our collective experience with past disasters and financial crises, and our acknowledgment that COVID-19 will present unprecedented challenges to senior homeowners and the mortgage servicing industry. We urge HUD to implement these recommendations to ensure that senior homeowners are given a fair opportunity to retain their home as we fight this pandemic together.”

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The need for servicers to contact borrowers proactively, recognize local forbearance options

The coalition of attorneys general lists five specific recommendations in their letter to HUD. The first recommendation is for HUD to require reverse mortgage servicers to solicit borrowers for an extension period under ML 2020-06 whenever a default occurs, instead of relying on the borrower to make the request themselves. Because many reverse mortgage borrowers may not be in regular contact with their servicers, they may not know to make this request, the AGs write.

New York State Attorney General's Office | CC0
New York Attorney General Letitia James

“For example, a borrower who needs additional time to make property tax payments may contact their local taxing authority without thinking to inform their servicer,” the letter reads. “Therefore, servicers should be required to contact their customers and advise them of the availability of an extension period when a default occurs. HUD should advise servicers to make repeated efforts to contact homeowners who are difficult to reach, and to use plain language notices to explain the benefits of forbearance relief to any borrower who has a COVID-19-related hardship.”

Second, the attorneys general recommend that HUD allow servicers to recognize local property tax forbearance, deferral, repayment and forgiveness plans, which are ordinarily not allowed under HECM contracts and rules in the event they create a lien of priority over the HECM itself.

“However, additional flexibility is needed to help local governments protect their senior homeowners through this crisis,” the letter reads. “Servicers should also give borrowers additional time to seek local property tax relief before making delinquent payments.”

At-risk extensions, CARES Act forbearance, time extension

The third recommendation states that HUD should automatically renew at-risk extensions, or allow the homeowner to self-certify. Currently, there is a HUD requirement that servicers submit renewal applications with supporting documentation for at-risk extensions during the current national emergency, but this should be waived, the attorneys general write.

“HUD should not require senior citizens to seek unnecessary documentation or visits with their physicians when doing so may pose a significant health risk to the borrower,” the letter reads.

The coalition also recommends that HUD provide HECM borrowers with a “forebearance-like product” under the Coronavirus Aid, Relief, and Economic Security (CARES) Act by permitting reverse mortgage servicers to add missed tax and insurance payments to the end of the reverse mortgage loan balance.

In this specific recommendation, the letter contends that existing forward mortgage borrowers can defer forborne payments to the end of their loan term under emergency servicing guidelines for FHA-insured mortgages. Reverse borrowers, the attorneys general argue, should have the same capability when they miss tax and insurance payments as a result of financial hardship that stems from the coronavirus.

“Therefore, HUD should allow servicers to add missed property tax and homeowner insurance payments to the end of the loan balance,” the letter reads. “This may create additional costs to HUD’s Mutual Mortgage Insurance Fund (MMIF). But the cost to the Fund will be relatively minor when compared to the overall costs of COVID-19 relief for our nation – or the overall costs to these seniors if they lose their homes while they remain vulnerable to COVID-19.”

Finally, the coalition recommends that HUD should be preparing now to extend protections for HECM borrowers beyond 12 months, if so needed. This is because even when current virus mitigation efforts begin to wind down, seniors will remain at risk of serious illness from COVID-19 until there is a viable vaccine developed, the letter reads.

“HUD should start preparing now for this possibility and consider ways to extend the above requested actions beyond the CARES Act’s 12-month protection,” the attorneys general wrote.

Initial response

The Federal Housing Administration says it is continuing to streamline processes but points to its COVID-19 Standalone Partial Claim option for borrowers as the best option for borrowers requesting forbearance, according to a statement provided to RMD.

“FHA’s new COVID-19 Standalone Partial Claim takes a borrower’s missed payments and converts them into an interest-free subordinate lien that sits behind the first mortgage once they are able to resume their prior mortgage payment,” according to a senior HUD official. “That subordinate lien is only due at the end of the first mortgage. For most borrowers, this will be when they sell the home, refinance, or come to end of their mortgage term. We believe the COVID-19 Standalone Partial Claim is the best option for the majority of borrowers who obtain forbearance, and the one that is likely to be the most successful in helping them avoid further loss mitigation. In terms of ensuring that servicers are meeting their commitments to borrowers, FHA is continuing to work with stakeholders on opportunities to streamline processes.”

The National Reverse Mortgage Lenders Association (NRMLA) is in the process of reviewing the full scope of the recommendations made by the attorneys general, according to NRMLA President Steve Irwin.

“NRMLA appreciates the heightened sensitivity to consumer protections at this time,” Irwin said. “HUD has always been a careful steward of the HECM program, and we are confident they will act as necessary when there’s a better understanding of the scale of this crisis.”

Representatives of HUD could not be reached for comment by press time. Read the full letter at the New York Attorney General’s website.

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  • As to the financial portion of these HECM suggestions one must ask if the Secretary of HUD has the power to accept this additional risk to the MMIF? It would not seem so under the Reverse Mortgage Stabilization Act (RSMA) of 2013 [as codified 12 USC z-20(h)(3)] which states the following:

    “The Secretary may … (3)establish, by notice or mortgagee letter, any additional or alternative requirements that the Secretary, in the Secretary’s discretion, determines are necessary to improve the fiscal safety and soundness of the program authorized by this section, which requirements shall take effect upon issuance.”

    The key words in the RMA as to accepting the financial changes suggested are: “…the Secretary, in the Secretary’s discretion, determines are necessary to IMPROVE the fiscal safety and soundness of the program.” Paying property charges on behalf to HECM borrowers who are facing financial distress due to Covid-19 does not appear to meet that standard. Whom the state AGs should be requesting the financial changes to HECM to is Congress, not HUD. Congress can fund these additional costs to avoid further harm to the HECM portion of the MMIF.

    The changes adopted by HUD on forward mortgages make more sense since most FHA forward mortgages are paid down monthly and eventually get paid in full over the scheduled amortization period. Thus few FHA forward mortgages will suffer loss due to the deferral since once the mortgage is paid in full (other than deferrals), since forward mortgage borrowers should easily be able to pay off the amounts deferred over time at the end of the amortization period. Thus it is doubtful if this policy change will result in substantial losses to the forward portion of the MMIF.

    Since so many HECMs terminate underwater, it is hard to perceive how deferred payment of property charges will not result into anything but large losses to the HECM portion of the MMIF.

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