Sweeping Changes Coming for HECM Lenders

 

Mortgage bankers are bracing for sweeping changes that are coming to the FHA's reverse mortgage program, which could lead to reduced loan volumes, but also a safer product.

Later this month, the Department of Housing and Urban Development plans to introduce a new "low cost" FHA-insured home equity conversion mortgage product. This new option will make HECMs more attractive to senior citizens who need to tap home equity to cover daily living and health care costs.

The FHA also is moving ahead addressing technical defaults on HECMs which occur when seniors get behind in paying their property taxes and homeowners insurance.

Late payments are a lingering problem and a recent HUD inspector general audit found that four major HECM servicers have paid out $35 million to cover taxes and insurance payments while waiting for the FHA to issue new guidance.

"If HUD does not take action, additional payments will occur in the next 12 months," according to the IG audit report.

HUD is preparing to issue a mortgagee letter in the next 30 days that will provide "formal and clear" guidance on curing these defaults, according to HUD deputy assistant secretary Vicki Bott.

"We certainly have to evaluate the delinquencies and capabilities of seniors to get on valid prepayment plans," Bott said in an interview with National Mortgage News. In some cases, servicers and counselors will have to seek the support of local government officials and family members to help them get back on track.

The FHA also wants to adopt policies that prevent seniors from getting into new HECM loans if they do not have the long-term resources to make T&I payments. These policies will be issued as part of a proposed rule for public comment.

The standard HECM with a 2% upfront is generally designed to help borrowers pay off their existing mortgage or in some cases purchase a new home.

The new "HECM Saver" is expected to have a de minimus upfront premium, but the typical borrower will receive 10% to 18% less in available funds than the standard HECM, according to the National Reverse Mortgage Lenders Association.

"The upfront insurance premium has been a deterrent to some prospective borrowers, particularly those needing less than the full amount available under the traditional HECM Standard program," said NRMLA president Peter Bell. "This new variation—the HECM Saver—presents a sensitive response to their needs," he added.

The HUD deputy assistant secretary told this newspaper that the FHA wants to issue a mortgagee letter soon (possibly in mid-September) that spells out the specifics of the "low cost" reverse mortgage product.

The FHA has been meeting with lenders, preparing them for the changes that come when offering a new federally guaranteed loan product. But the director of the FHA single-family program said she did not want to discuss specifics about the product until the mortgagee letter is issued.

Meanwhile, HUD IG auditors estimate that 20,000 seniors—affecting 4% of the FHA's HECM portfolio—are behind on insurance and taxes payments.

In some states, such as Florida that are prone to natural disasters, it is difficult to obtain homeowners insurance. HUD officials note that some borrowers are behind on taxes or insurance, not always both.

Nevertheless, the office of inspector general estimates these defaults could result in a loss of $1.47 billion to the FHA insurance fund if the defaulted HECMs end up in foreclosure and the properties are sold.

The FHA's analysis of the defaults indicates it is "financially manageable" provided loss mitigation efforts are employed and preventative steps are taken.

So the agency it taking a "two pronged" approach to this issue.

First, the FHA is issuing the mortgagee letter to servicers that will lay out a clear process for loss mitigation and repayment plans.

"We are ensuring that they can take the necessary steps without invoking any kind of requirement to foreclose too early in a process," Bott said in the interview.

Second, HUD will be issuing a proposed rule on preventive policies that ensure seniors understand their obligation to pay taxes and insurance and mitigate the risk of seniors becoming delinquent on taxes and insurance.

The FHA's goal is to prevent seniors from getting a HECM loan if they don't have the long-term capacity to pay taxes and insurance.

Bott expects the proposed rule will be issued in the next 60 to 90 days so the industry and other interested parties can comment on this new strategy.

 

By Brian Collins