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HUD Finally Issues Long-Awaited Program Changes for Reverse Mortgages

The Department of Housing and Urban Development (HUD) issued its final rule on Thursday, spelling out several program changes the agency is making to Home Equity Conversion Mortgages (HECMs) set to take effect later this year.

Published in the Federal Register on Thursday, the final rule titled “Strengthening the Home Equity Conversion Mortgage Program” codifies several significant changes to the Federal Housing Administration’s (FHA) HECM program that were previously issued by HUD under the Housing and Economic Recovery Act of 2008 and the Reverse Mortgage Stabilization Act of 2013.

The provisions of this final rule, which are scheduled to take effect September 19, 2017, also make additional regulatory changes to the HECM reverse mortgage program, including new origination and servicing policies, among other changes.

Under the final rule, mortgagees will be required to inform potential HECM borrowers of all of the HECM products, features and options that FHA insures, “in a manner acceptable to the [FHA] Commissioner, irrespective of the particular HECM products offered by the mortgagee,” the rule states.

On limiting disbursements during the first 12 months of the HECM, HUD stated that while FHA does not intend to change the current limits of 60% and 10% at this time, this final rule provides “flexibility for this limit to be changed in the future to respond to market changes or other factors.”

“Specifically, this rule revises the regulations such that the 60% cap will never be modified to be less than 50%, and the additional percentage will never be modified to be less than 10% absent future rulemaking,” the final rule states.

HUD also spells out changes related to the acquisition and sale of property, stating that the final rule replaces the requirement that the property be sold for at least 95% of the appraised value with a “more flexible provision” which allows the FHA Commissioner to lower this amount as necessary to adapt to market conditions and other factors.

This rule also requires that the closing costs from the sale be no more than the greater of 11% of the sales price, or a fixed dollar amount as determined by the Commissioner through Federal Register notice.

HUD also made an important change to the HECM for Purchase program related to the existing prohibition on interested party contributions.

“The rule permits the seller to pay fees required to be paid by the seller under state or local law and fees that are customarily paid by a seller in the locality of the subject property and to purchase the Home Warranty Policy,” the rule states. “The rule also allows the Commissioner to define the types and parameters of other allowable interested party contributions through Federal Register notice for comment.”

The final rule follows publication of a May 2016 proposed rule and takes into consideration the public comments received on the proposed rule since that time.

During one of these public commenting periods, a commenter suggested that HUD should require mortgagees to assign a HECM to FHA if the outstanding loan balance is equal to or greater than 98% of the maximum claim amount—a proposal for which HUD later opened up an additional, supplementary public comment period.

“HUD is deferring its final determination as to whether to adopt the commenter’s proposal at this time, and after HUD fully reviews and takes into consideration the comments received, HUD will issue, or choose not to issue, its final determination of this proposal through a subsequent final rule,” the final rule states.

HUD also stated that it will defer making its final determination on the proposed rule to impose a 5% cap on interest rate adjustments for monthly adjustable HEMC products—a rule considered controversial by many reverse mortgage industry members.

After months of uncertainty around HUD’s rule making process, the long-awaited final rule from HUD was welcomed by the reverse mortgage industry, including the National Reverse Mortgage Lenders Association (NRMLA).

“Personally, I am glad to see this final rule get out the door. It implements some important program changes that will enhance the HECM program’s ability to operate on a financially self-sustaining basis, which is critical for assuring the program’s long-term viability,” said NRMLA President and CEO Peter Bell in a statement provided to RMD. “NRMLA will have further analysis once we’ve had time to read and digest the entire rule.”

View the final rule published in the Federal Register here.

Written by Jason Oliva