As the industry has positioned the Home Equity Conversion Mortgage as a strategic retirement tool for more affluent borrowers, an industry trade group recently issued an important warning: Do not accidentally terminate your loan by paying down your balance too low.
Called a “HECM non-claim termination” in the Federal Housing Administration’s HERMIT system, this type of loan event is a risk specifically for borrowers who are making partial payments to maintain a revolving line of credit as part of a broader retirement plan, Shelley Giordano, chair of the Funding Longevity Task Force at the American College of Financial Services, told RMD in an interview.
“It has come to our attention that, in a few cases, servicers have closed out loans without doing due diligence to see if that is what the borrower intends,” according to the task force’s statement.
Borrowers who have terminated their loans also lose their possibility of getting a HECM-to-HECM refinance, Giordano said, and may feel as though they did not maximize the benefits of the loan compared to the closing costs. But the exact amount that must remain in the balance is unclear and has not been specified by the Department of Housing and Urban Development.
While all originators interviewed said they urge their borrowers to maintain a certain balance, that exact number differs, with amounts ranging from about $50 to $1,000.
Dan Hultquist, vice president of education and organizational development at Live Well Financial and author of “Understanding Reverse,” said he also has not seen a firm amount mandated by HUD.
“In my book, I recommend not making payments that will drop the loan balance below $100,” Hultquist said. “I chose the figure because of HERMIT training offered several years ago that indicated HUD’s threshold was ‘currently set at $100.'”
This type of inadvertent loan payoff is a fairly new concern for the industry, as the client profile has changed and financial planners and retirement researchers, such as Wade Pfau, have recommended reverse mortgages as part of larger retirement strategies.
“In the past, people were taking out a reverse mortgage with no intention of making payments,” Giordano said. “But now it’s part of a bigger retirement landscape where we have clients looking at ways to use housing wealth strategically — the same way people have historically used a HELOC.”
To protect the borrower, Giordano said that all reverse mortgage professionals — servicers, counselors, loan officers, and financial planners — must be educated about this rule, urging borrowers to contact their specific servicer to find out what minimum balance to keep. Furthermore, she said that servicers need to be aware of the changing clientele and motivations for using a HECM.
“We just want servicers in particular to know that there is a different clientele out there,” she said. “We want to make sure that everybody is given the opportunity to make sure that it is the client’s intention to close it out.”
Patty Parish, manager of the property and loan servicing department at Celink, the nation’s largest subservicer for HECMs, said in a statement to RMD that their company has numerous checks and balances in place to notify borrowers of internal suggested minimum balances and proper payoff procedures.
“From a servicing standpoint, there is a real desire for HUD’s clear direction on the topic of the minimum loan balance, which in turn must be provided to every party involved in the loan from counseling to servicers,” Parish said.
Sydney Godbehere, the first vice-president of loan operations for Celink, recommends their borrowers keep a low-end balance of $50, “but will pay down to $1 if that is what the borrower wants.”
The task force suggests that when servicers receive a payment they should require in-writing acknowledgment that a borrower wants to close a loan. In addition, servicers should go over the costs and benefits that will be lost when the loan has been terminated, the task force suggested.
Godbehere said their internal controls have helped prevent these negative experiences for their borrowers.
“At Celink, when we are speaking with a borrower who is asking what the minimum balance required is, we advise the borrower to send in a written statement with the payment specifying it is not to pay off the loan,” Godbehere said.
Written by Maggie Callahan