Last year, the Federal Housing Administration (FHA) released a set of proposed rules affecting Home Equity Conversion Mortgages (HECMs) for notice and comment. After receiving 83 comments and responses, the Department of Housing and Urban Development (HUD) released its final rule on January 19, 2017. The final rule, entitled “Strengthening the Home Equity Conversion Mortgage Program,” provides several changes to both the origination and servicing of Home Equity Conversion Mortgages (HECMs, more commonly known as reverse mortgages). It is scheduled to go into effect on September 19, 2017, but it is unclear exactly how this effective date will be applied to existing HECMs, particularly those that are or will become due and payable before the rule takes effect.
The final rule codifies several existing policies that were previously issued under the Housing and Economic Recovery Act of 2008 (HERA) and the Reverse Mortgage Stabilization Act. Additionally, the final rule adds certain provisions from the proposed rule, as well as other provisions that have been revised in response to the comments received.
On the origination side, the new rule mandates that mortgagees must inform the borrower of all HECM products and features that the FHA will insure, regardless of whether that particular mortgagee offers each product. This new feature is designed to allow the borrower to gain knowledge of HECM products, as well as provide the borrower with the information necessary to make an informed decision on which products suit his or her needs.
An additional origination change impacts the HECM for Purchase Program. The original program requirements, which were located in Mortgagee Letter 2009-11, have now been codified and amended. Specifically, HUD modified the existing prohibition on interested party contributions to permit the seller to pay fees customarily paid by the seller as a permissible interested party contribution. Moreover, the seller can also purchase a home warranty for the buyer.
Finally, the new rule changes the seasoning requirements originally implemented through Mortgagee Letter 2014-21. The final rule changes the calculation of the 12-month seasoning requirement, starting the clock at the time of the HECM closing, rather than the HECM application. Moreover, the final rule will now allow the borrower to pay off a Home Equity Line of Credit (HELOC) that does not meet the seasoning requirements by using either borrower funds, HECM funds, or a combination of the two.
The final rule also changes several aspects of servicing a reverse mortgage. For example, the final rule mandates that a mortgagee ask the borrower, at closing, if the borrower would like to designate an alternate contact. If the borrower so chooses, the mortgagee would then be required to contact that third party if they are unable to reach the borrower. This change will place an additional communication burden on the mortgagee for borrowers that choose to designate an alternate contact.
Other changes to the servicing of reverse mortgages revolve around the current appraisal requirements. The new rule calls for an appraisal 30 days prior to a foreclosure sale, as opposed to the existing requirement to order an appraisal 30 days after the due and payable event and again no less than 15 days before a foreclosure sale. Additional appraisals may be required if the mortgagee is the successful bidder at the foreclosure sale in order to dispose of the property or if the property does not sell within six months of acquisition to file a claim based on the appraised value.
A final substantial change to servicing reverse mortgages is the new “cash for keys” program. HUD has long used this program with forward mortgages, and the final rule now adopts the program for reverse mortgages. Under the “cash for keys” program, HUD may reimburse mortgagees for providing a monetary incentive to the party with the legal capacity to execute a deed in lieu of foreclosure within six months of the HECM becoming due and payable. The program can also be used to reimburse mortgagees that provide an incentive to a bona fide tenant to vacate the property after a foreclosure. These incentives will help mortgagees avoid costs related to foreclosure and eviction and provide the borrower a cash incentive to expedite the closing process.
The final rule aims to codify the many policies that are currently in place for the origination and servicing of reverse mortgages. While the final rule adopts many of the provisions found in the proposed rule, some comments and responses that were received during the comment period are still being evaluated and considered. Additionally, once the rule takes effect in September 2017, the commissioner will have the ability to introduce new policies related to both origination and servicing. Therefore, there is still considerable room for future changes and modifications to the requirements involved in the origination and servicing of reverse mortgages.