Reverse Mortgage Stabilization Act of 2013 Passes: What’s Ahead

For all those who have been asking when we would know about the coming changes to the reverse mortgage program, hang on to your hat!  Late Tuesday, July 30th, the Senate passed the House Bill, H.R. 2167 which is known as the Reverse Mortgage Stabilization Act of 2013.

The President is expected to sign the Bi-Partisan Bill.  The legislation empowers HUD to make changes to the reverse mortgage program more quickly by use of Mortgagee Letters allowing them to more closely monitor the program and make any changes deemed necessary as they identify the needs.

This allows HUD to make changes to the program to help limit the losses that the program had seen in the audit of the FHA insurance fund in 2012.  Without the ability to make those changes where necessary, HUD would have been required to make sweeping changes to the entire program that would have affected all reverse mortgage applicants that may have severely impacted the program’s viability with the seniors who rely on it.

Rather than large cuts in the benefit amount across the board, HUD can now look at specific areas where losses occurred and take a more reasoned approach to changes.

In response to the losses shown by the program, Congress and HUD had already moved earlier this year to eliminate the Fixed Rate Standard Program.  HUD is now free to make other changes such as limiting the amount of the available initial draw on certain programs to just the amounts that make sense.

This may mean that borrowers who took a full draw of all the funds available to them for purposes other than to pay off existing liens on their homes may soon find that they will no longer have this option.

HUD has not commented yet, but when borrowers who do the purchase reverse are coming in to closing with a large amount of cash rather than taking money out of a property, therefore the risk of default is much lower so the HECM for purchase program should not be affected by this change but we need to wait and see.

HUD can now also require the set up of escrow or impound accounts, or possibly set-asides on reverse mortgage loans for the payment of taxes and insurance.

This has been a large concern for HUD recently as more and more borrowers have defaulted on their taxes and insurance after receiving a full draw available on a reverse mortgage.  The combination of not allowing borrowers to take all their available funds immediately and setting funds aside for the payment of taxes and insurance should lower these defaults.

This legislation now also clears the way for the Financial Assessment considerations that HUD has wanted to introduce for quite some time. Borrowers may not have the same qualification guidelines as other, forward loan borrowers, but there will be tests to be certain that borrowers do have a minimum amount of creditworthiness and the ability to pay their obligations after the reverse mortgage has been received or those borrowers will no longer be eligible for the loan.

Borrowers with credit issues or little income may soon find that a reverse mortgage is no longer a viable alternative for them.

Reverse mortgage borrowers who do not have a case number by the time HUD announces their changes will be subject to the new guidelines.  Borrowers who have been waiting and waiting may soon find that all the information they gathered has changed based on these new guidelines if they have not already started their loans by the time the changes are announced.

The HUD changes are necessary for the viability of the program but if you have questions about your ability to qualify under the new program parameters and you have been considering a reverse mortgage for a while, you may want to consider starting your loan now before the changes go into effect.

Official from NRMLA:

Senate Committee Passes FHA Solvency Act With HECM Amendments

The Senate Banking Committee overwhelmingly passed a bipartisan bill on July 31 that gives FHA new tools to improve its financial condition by strengthening underwriting standards, enhancing lender accountability and making alterations to the HECM program.

Passed by a 21 to 1 vote, the Federal Housing Administration Solvency Act of 2013 would allow the Secretary of Housing and Urban Development to manage the HECM program through mortgagee letters issued concurrently with rulemaking, thus allowing the Department to make changes quickly but also providing a window for public comment.

The Committee adopted an amendment sponsored by Republican Senators Mark Kirk (IL), Bob Corker (TN), Patrick Toomey (PA) and David Vitter (LA) that would:

  • Authorize HUD to establish escrow accounts or set-asides following a financial assessment of prospective borrowers, if such actions mitigate the risk of loss to the mortgagee, mortgagor, HECM program and mutual mortgage insurance fund;
  • Limit payments made under a reverse mortgage;
  • Require HUD to issue a notice of proposed rulemaking within one year of the law’s enactment that would eliminate the use, issuance or establishment of any standard fixed rate, full draw product under the HECM program;
  • Require HUD to report to the Banking Committee on a quarterly basis the status and financial condition – including default rates, foreclosure rates and losses – of each production option offered under the HECM program, including HECM Standard Adjustable, HECM Saver Fixed and HECM Saver Adjustable. If HUD determines that default rates or losses for a particular product are noticeably higher compared to its counterparts, the Department must explain in its next quarterly report what is causing the high default and loss rates and what actions are being taken to reduce such losses.

In addition, the Solvency Act would raise the capital reserve ratio for the Mutual Mortgage Insurance Fund from two to three percent and require FHA to monitor annual mortgage insurance premium levels to ensure the ratio remains stable and that expected losses are covered.

The full Senate is expected to debate the Solvency Act in September when Congress returns from its summer recess.

Also this week, the Senate passed by unanimous consent The Reverse Mortgage Stabilization Act (H.R. 2167), which the U.S. House of Representatives approved on June 12.  H.R. 2167 paves the way for FHA to make programmatic changes by mortgagee letter – including draw limitations, mandatory escrows and financial assessments –  rather than by rulemaking.

08/21/13: HECM Update: A Preview of Changes Ahead

By Peter Bell, President and CEO
We have been getting a lot of questions from members regarding the forthcoming changes to the HECM program, now that the Reverse Mortgage Stabilization Act has been signed into law. While many details remain to be ironed out, we thought we would provide the following update. The gaps in what we know will be filled once HUD issues a Mortgagee Letter implementing the changes, if not sooner. Our understanding is that the M.L. will be out prior to the end of this month and effective as of October 1st.
HUD’s analysis of the HECM program’s history has revealed that the risk in loans is directly proportional to the size of the upfront draw. Therefore, r an intent of these program changes is to bifurcate the pricing accordingly and to encourage consumers to draw the HECM funds over a longer period of time.  In order to achieve this:

  • FHA will be “consolidating” the two current versions of HECM products, Standard and Saver, into one new product.
  • The “new product” will have PLFs somewhere between the two current versions. The exact levels remain to be seen.
  • There will be two “pricing options” under the new product:
    • Borrowers who draw 60% or less of Initial Principal Limit (IPL) at closing will pay a nominal upfront Mortgage Insurance Premium, somewhat similar (but probably slightly higher) than the current Saver MIP.
    • Borrowers who draw over 60% of Initial Principal Limit at closing will pay a full upfront MIP, similar to current Standard (although this might be slightly higher than the current 2% MIP).
  • There will be a “principal limit use restriction,” as follows:
    • Borrowers who have no “mandatory obligations” or “mandatory obligations” below the 60% threshold will be able to draw up to the 60% threshold at closing (or within the first year of closing).
      • The balance of IPL (plus line of credit growth) would be available as a Line of Credit or fixed-monthly payments, starting one-year after closing.
    • Borrowers who have “mandatory obligations” above the 60% of IPL threshold will be able to draw enough at closing  to cover mandatory obligations, plus probably some additional amount of cash.
      • The actual amount of cash beyond mandatory obligations remains to be determined, but 10% of IPL  may be what is ultimately allowed.
      • The balance of IPL (plus line of credit growth) would be available as a Line of Credit or fixed-monthly payments, starting one-year after closing.
      • Mandatory obligations will include costs associated with obtaining the HECM, liens secured by the property, plus any outstanding federal debts.(Liens incurred shortly before application for the HECM might require some investigation to ascertain that they were not placed to circumvent the PLU restriction.)
  • On HECM for Purchase, the full IPL could be considered a mandatory obligation allowing the full amount of funds to be utilized, but the two different pricing options (less than 60%, nominal upfront MIP; greater than 60%, full MIP) would apply. Several other details of H4P remain to be worked out.

In addition to the above, Financial Assessment will be implemented at a later date, probably in January.
Tax & Insurance Set-Asides will be implemented in conjunction with Financial Assessment.
These changes are designed to stabilize the HECM program (as indicated by the name of the Act) by addressing the factors that have led to problematic loans and respond to criticisms lodged by the program’s opponents in Congress. While a period of adjustment lies ahead, once we get through it, I am confident that we will have a financially sound program that will find acceptance among consumers.

09/03/2013 Promised HECM Program Changes Issued

Today, the U.S. Department of Housing and Urban Development officially issued the changes to the HECM program that have been under discussion since last year’s insurance fund audit and have been authorized as a result of the passage of the Reverse Mortgage Stabilization Act by Congress. The changes contained in Mortgagee Letter 2013-27 include:

  1. Limits to the amount of loan proceeds that can be disbursed at closing or during the initial 12 months after closing;
  2. A new upfront mortgage insurance premium structure;
  3. Elimination of HECM Standard and Saver;
  4. New PLF tables;
  5. A requirement that every prospective borrower undergo a financial assessment (effective for Case Numbers assigned as of January 13, 2014), and
  6. Instructions for setting aside funds to pay property charges if a borrower fails the financial assessment.

HUD called for these changes because, since the 2009 housing crisis, the HECM portfolio has experienced major demographic and behavioral shifts that have contributed to additional risks to the Mutual Mortgage Insurance Fund (MMIF). “These critical program changes will realign the HECM program with its original intent, and thereby aid in the restoration of the MMIF and help ensure the continued availability of this important program,” says the mortgage letter.

All of the changes are effective for case numbers assigned on or after September 30, 2013, except for the financial assessment and guidelines for paying mandatory obligations, which become effective January 13, 2014.

Among the details in the Mortgagee Letter are:

  • Limiting 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. FHA provides illustrations to help explain the policy and defines what constitutes a mandatory obligation.
  • As long as the disbursements at closing, or the initial 12 months after closing, 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 percent will continue to be in effect for all HECMs.
  • HECM Standard and HECM Saver ADP codes will no longer be available in FHA Connection after September 28, 2013.
  • All HECM Standard or HECM Saver loans that and were assigned a FHA case number on or before September 28, 2013, may be processed as either an HECM Standard or HECM Saver, but only if these mortgages close on or before December 31, 2013.
  • A financial assessment will be required of all prospective mortgagors on all HECM transaction types, including traditional, refinance, and purchase, for loans with case numbers assigned on or after January 13, 2014. Key components of underwriting HECM transactions include a credit history analysis, a cash flow/residual income analysis, analyzing compensating factors and extenuating circumstances and determining if the HECM applicant has the financial means to continue paying property taxes, insurance and other obligations.

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.

Once we have time to fully digest all of the information, NRMLA will publish a more detailed memorandum.

To read the full Mortgagee Letter and the HECM Financial Assessment and Property Charge guide, click here.