Last week, the Federal Housing Administration (FHA) released for notice and comment a set of proposed rules affecting Home Equity Conversion Mortgages (HECM), more commonly known as reverse mortgages. Below are highlights of the major changes.
On the origination side, the proposed rules revise the definitions of expected average mortgage interest rate and Initial Disbursement Limit in ways that will have substantive effects, but these changes are designed to, respectively, provide borrowers with greater peace of mind and introduce more flexibility. Further, as a result of the Bennett v. Donovan and Plunkett v. Donovan lawsuits filed by non-borrowing spouses in recent years, the new rule will replace the term “mortgagor” with “borrower” and provide protections for non-borrowing spouses originally mandated under Mortgagee Letters 2014-07 and 2015-02.
Other origination-related changes include a requirement that a mortgagee must disclose all available HECM products insured by the FHA to potential HECM borrowers, even if the product is not offered by the lender, and prospective borrowers must complete the required HECM for Purchase counseling prior to signing a sales contract or making a deposit. The rule clarifies that origination fee limits include originating, processing, and closing the HECM, while also proposing to cap periodic interest rate adjustments on annual-rate HECMs at one percentage point and lifetime interest rate adjustments on annual or monthly adjustable-rate HECMs at five percentage points. Showing its attentiveness to recent litigation regarding HOA or condo association super liens, the FHA has proposed a commonsense addition to the rules: in super lien states, FHA will require a contract provision giving the agency priority over any HOA or condo association liens.
The proposed rules also include changes to the servicing of HECM loans. For example, payment of utilities would now be a borrower responsibility. More dramatically, FHA has expanded the methods of paying property charges following the mandatory Financial Assessment. Where the results indicate a need, the mortgagee may require establishment of a Life Expectancy Set Aside (LESA) to handle the payment of regularly occurring property charges. Stated simply, fixed-rate HECMs must pair with fully-funded LESAs, while variable-rate HECMs may choose to fully- or partially-fund the LESA, even if the Assessment does not reveal a need and it is the borrower choosing to establish one. The different LESA types correspond to different disbursement patterns: fully-funded LESAs pay property charges directly while partially-funded LESAs disburse funds to the borrower to assist with payment.
Among the significant changes to reverse mortgage servicing are two proposed rules regarding the acquisition and sale of property following a default: (1) a more flexible rule permitting discretion by HUD with respect to price as a percentage of appraisal value in the sale of encumbered property and (2) new rules surrounding deeds-in-lieu of foreclosure. The proposed rule imposes a new nine-month time limit in which to use the deed-in-lieu option, with plans to incentivize borrowers under a “Cash for Keys” initiative. In practice, this will allow as much as six months to dispose of the property, and another three to conduct a title search and sign the deed assuming no clouds on title.
Other key changes include a wider range of acceptable monthly mortgage insurance premiums (MIP) charge amounts; a timeframe for appraisals of 30 days of a foreclosure sale or receipt of request by an applicable party in connection with a pending sale; and a limit of two years on the amount of reimbursable advances from the mortgagee to the borrower for certain categories of charges, with discretion vested in the Commissioner for an extension.
Interested parties desiring to influence the final language of the rule should take advantage of the 60-day notice and comment period that began 5/19/2016. Submit comments electronically here, or by mail to the following address: Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street, SW, Room 10276, Washington, DC 20410-0500.