The Department of Housing and Urban Development closed the public commenting period for its latest round of reverse mortgage proposals last month, but now the agency is seeking additional feedback for one particular proposal that allows lenders to file claims for loans nearing their maximum claim amount (MCA).
In a notice published Thursday in the Federal Register, HUD invites interested persons to submit comments solely on its proposed rule regarding the lender’s election of to assign reverse mortgages to HUD once the loans reach 98% of the MCA.
The provision gives HUD mortgagees an option—before the reverse mortgage is submitted for insurance endorsement—to assign the HECM to HUD if the mortgage balance is equal or greater than 98% of the MCA.
Mortgagees may instead choose to participate through the shared premium option, which allow the mortgagee to retain a portion of the monthly mortgage insurance premiums, but does not allow them to assign the mortgage unless the mortgagee fails to make payments and HUD demands assignment.
HUD’s proposed rule issued in May aims to codify several changes that have been implemented for the HECM program through various Mortgagee Letters over the years. The agency solicited public comments on the proposal, with the commenting period ending July 18.
But while HUD has yet to disclose its next steps in the rule-making process, the agency identified one area that requires considerable attention, following a comment submitted on June 23 by Robert Van Order, chair of the Department of Finance and professor of Finance and Economics at George Washington University.
“The commenter stated that, in some cases, a mortgagee may decline to file a claim in this scenario if the property value has risen rapidly and the loan has an above-market rate,” HUD stated in the Federal Register notice published Thursday.
The commenter concluded that lenders in this way have a “put option” and “can choose to keep the best loans and make claims for the worst ones.”
“In particular, there will most likely be a claim if the loan balance exceeds property value, but there need not if property value has risen rapidly and the loan has an above-market rate,” Van Order wrote in his submitted comment to HUD.
“Even if the credit spread at origination is market-based and correct, the same spread will be above or below market later on, depending on how house price evolves, and the issuer will tend to retain the HECM, rather than make a claim if the current market-required spread on the loan is below the origination spread,” he added.
In order to address this issue, Van Order suggested that HUD require that an assignment claim be made when the loans reach 98% of the maximum claim amount.
“A possible fix is to require that a claim be made when loans are taken out of pools, so that FHA gets the future upside as well as downside from the loans,” he wrote. “I suspect that was the original intent of the program.”
If HUD were to implement this proposal, it would amend Section 206.107(a) to require the mortgagee to assign the HECM to the Commissioner if the mortgage balance is equal to, or greater than, 98% of the MCA; or the mortgage has requested a payment which exceeds the difference between the MCA and the mortgage balance.
HUD is soliciting public comment solely on this proposal for a period of 30 days. The due date for all comments is September 12, 2016.
View the notice in the Federal Register.
Written by Jason Oliva