Changes to the HECM Program
This issue of Weekly Report is devoted to explaining the various reforms to the HECM program announced by the Department of Housing and Urban Development on September 3 in Mortgagee Letter 2013-27.
Following is a detailed summary of the various changes:
Initial Draw (effective date September 30, 2013)
According to HUD’s analysis of the HECM portfolio, loans where all or a substantial portion of the loan proceeds are disbursed at closing have a higher tendency to end in technical default. The reforms announced by HUD in ML 2013-27 will help ensure that consumers can financially sustain themselves for longer periods of time in retirement.
ML 2013-27 limits disbursements at loan closing, or during the initial 12 months after closing, to 60% of the Initial Principal Limit. If there are mandatory obligations, such as paying off an existing mortgage, then the disbursements can equal the sum of those obligations, plus an additional 10 percent of the Initial Principal Limit.
If a borrower selects a line of credit or monthly payments, mortgagees must monitor and track all disbursements during the initial 12 months to ensure they do not exceed the allowable limits.
Single Disbursement Lump Sum Option (effective date September 30, 2013)
Historically, HECM borrowers had to take all of the loan proceeds available to them.
ML 2013-27 creates a HECM “mini” option by giving borrowers the option to take a single lump sum payment at closing equal to 60 percent of the Principal Limit or Mandatory obligations plus 10 percent of the Principal Limit. This option allows borrowers to preserve the equity in their homes by utilizing a smaller amount of funds.
The option will be available for adjustable and fixed interest rate HECMs for case numbers assigned on or after September 30, 2013.
Changes to MIP and PLF (effective date September 30, 2013)
The HECM Standard and Saver pricing options have been eliminated and replaced by a new upfront MIP structure that is calculated by the amount of funds disbursed at closing or during the initial 12 months after closing.
As long as disbursements do not exceed 60 percent of the Initial Principal Limit, HUD will charge an upfront MIP of 0.50 percent of the Maximum Claim Amount (MCA). If, however, disbursements exceed 60 percent of the Initial Principal Limit, HUD will charge an upfront MIP of 2.50 percent. The existing annual MIP rate of 1.25% will continue to be in effect for all HECMs.
All HECM Standard or HECM Saver loans that were assigned a FHA case number on or before September 28, 2013, may be processed as either a HECM Standard or HECM Saver, but only if these mortgages close on or before December 31, 2013.
Click here to view the new Principal Limit Factor tables.
Financial Assessment (effective date January 13, 2014)
HUD is concerned by the number of borrowers who have fallen into technical default because they no longer had the financial means to continue paying taxes, insurance and other property charges. To help reduce future defaults, HUD will require mortgagees to conduct a financial assessment of all prospective borrowers participating in a traditional, refinance or purchase transaction.
Mortgagees must conduct a credit history analysis and a cash flow/residual income analysis to determine if a borrower has demonstrated an ability to manage finances and credit and pay taxes and insurance on a timely basis. The financial assessment also includes careful evaluation of extenuating circumstances and compensating factors, including assessing whether the HECM positively impacts the mortgagor’s financial capacity.
Accompanying the Mortgagee Letter, HUD has published a HECM Financial Assessment and Property Charge Guide that provides underwriting guidance and documentation requirements for completing the financial assessment of HECM mortgagors.
Set-Asides (Effective January 13, 2014)
Based on the results of the financial assessment, if a mortgagor determines that a borrower poses a potential default risk, ML 2013-27 authorizes the creation of a Lifetime Expectancy Set-Aside (LE Set-Aside) to pay future T&I charges. The amount of the LE Set-Aside will be based on the life expectancy of the youngest borrower. If set-aside funds run out, the borrower must continue paying property charges using whatever funds are available.
Borrowers who do not require a set-aside can still elect to have one established, or they can voluntarily authorize the mortgagor to pay property charges from a line of credit or by withholding monthly disbursements.
To read the full Mortgagee Letter and the HECM Financial Assessment and Property Charge guide, click here.
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