On the last day of Obama’s presidency, just hours before the administration turnover, HUD released its long-awaited ruling on changes to the reverse mortgage program. The 53-page document codified policies outlined in past mortgagee letters and instituted new rules that will impact HECM origination and servicing.
The final ruling follows a proposal released by the agency in May, which inspired more than 200 public comments. It took HUD exactly nine months to weed through the feedback before issuing its final ruling, including 18 pages of responses to the commentary.
In this month’s feature story, we outline the highlights of HUD’s final rule, taking a look at what was put into rule, what was left out, and discussing the changes that will likely have the greatest impact on HECM origination when they take effect September 19. With help from Jim Milano, the industry’s leading legislative expert, we break down some of the new policies and take a look at how they will affect reverse mortgage lending.
HUD’s final ruling, titled “Strengthening the Home Equity Conversion Mortgage,” contains more than 50 mandates. Here are some of the highlights:
H4P seller concessions → HUD has finally agreed to allow the seller in an H4P transaction to “pay fees customarily covered by this party in the locality of the subject property.” This rule is considered a major win for H4P proponents, who have long claimed that a ban on seller concessions was holding back the product from achieving any real success in the marketplace. HUD has also granted the Commissioner the power to determine what other types of interested party contributions will be allowed.
Milano’s take → This change will finally do away with the negative audit feedback a few HUD Homeownership Centers were giving to lenders for allowing sellers to do what is required under some state laws—the payment of mortgage recording taxes. The new rule allows so-called interested party contributions as follows: (i) fees required to be paid by a seller under state or local law; (ii) fees customarily paid by a seller in the subject property locality; and (iii) the purchase of the Home Warranty policy by the seller. The new rule also provides that FHA may define additional permissible interested party contributions and impose requirements for these contributions through a notice in the Federal Register. Some have already questioned what includes fees customarily paid by a seller, and this is an area for clarification that the industry may wish to submit to FHA.
Full disclosure → Lenders must fully disclose all HECM loan features and options, even if this includes products that it does not offer. When mentioned in its proposal last spring, this policy drew applause from advocate groups like the AARP, who commended HUD for “implementing this important provision.”
Milano’s take → While this is a positive development for consumer protection and builds on prior guidance from HUD under Mortgagee Letter 2014-10, as drafted, this provision could use some further guidance or clarification from FHA regarding how and when all available HECM products must be disclosed.
Loosened seasoning requirements → HUD will now allow borrowers to pay off at closing HELOCs that do not meet seasoning requirements as long as the draw on HECM funds does not exceed draw limits during the first 12 months of the loan.
Milano’s take → This is a positive development both for lenders and potential HECM consumers.
Non-borrowing spouses on title → By redefining “borrower,” HUD will now allow non-borrowing spouses (NBS) to remain on title even if they do not qualify for the loan. This is a win for originators who complained of the unnecessary burden and potential legal issues involved in removing an NBS from title to complete the loan.
Milano’s Take → This is a positive development for seniors and takes away the need for younger, non-qualified spouses to come off of title before a couple obtains a HECM.
Super lien restrictions removed → In its proposal, HUD suggested that homeowner association fees and condominium super liens take priority over HECM liens, inciting staunch criticism from numerous commentators who claimed that this would make such properties unloanable (and potentially prevent more than 4 million seniors living in condominiums from qualifying for a HECM). Acknowledging these protests, HUD withdrew its language regarding super liens in a major win for the industry. HUD did, however, include a reminder to lenders that “in order for a HECM to be eligible for loan assignment, the mortgage must be a valid, legally enforceable first lien and title to the property securing the mortgage must be good and marketable.” The agency added that, “in the event that HUD discovers later that good and marketable title is lacking due to a lien, HUD may require a purchase.”
Milano’s take → HUD received a number of comments on this issue, especially from “homeowner’’ associations, indicating had this rule been finalized as proposed it would have severely impacted HECM lending secured by condominiums. HUD’s clarification has made this issue less onerous, preserving HECM lending on condominiums.
Cash for Keys → Designed to prevent borrowers from undergoing a lengthy foreclosure process, the “Cash for Keys” program is largely considered a benefit for both the lender and the consumer.
Milano’s take → This is a positive development for the HECM program as it is designed to lessen the timeline for consensual HECM property liquidations and thus lessens the impact of such loans on the MMI Fund.
Greater flexibility on property sales → A new provision adds greater flexibility to the previous requirement that properties must be sold for at least 95 percent of the appraised value. Now, the FHA Commissioner has the power to lower this percentage as necessary to adapt to market conditions and other factors. The new rule also specifies that closing costs from the sale can be no more than 11 percent of the sales price or a fixed dollar amount determined by the Commissioner.
Milano’s take → This is also a positive development for the HECM program as it is designed to not only lessen the timeline for consensual HECM property liquidations, but also allow a borrower’s heirs to purchase the property for less than 95 percent of the appraised value. This item, however, will require FHA to issue further guidance as to what percentage a borrower’s heirs may purchase a home.
Reimbursement of property charge advancements → Set to directly impact servicers, this rule limits insurance claim reimbursements to two-thirds of the total payment for taxes, ground rents, water rates, hazard insurance and special assessments, meaning that servicers will have to shoulder these costs.
Milano’s take → This rule will cost servicers more money to service HECM loans as it further limits the amount of reimbursement from HUD for expenses incurred by servicers on matured or defaulted HECM loans.
HUD declined to make a decision on several key issues, stating more time was needed to fully consider the feedback it received. Here are some of the more important mandates that were left out of the final rule:
Interest rate caps → Perhaps the most contested proposal was HUD’s suggested cap on lifetime interest rate increases on all adjustable-rate HECMs to 5 percent, and the reduction of the cap on annual interest rate increases on HECM ARMs from 2 to 1 percent. The suggested policy change incited heated comments from members across the industry. Many claimed that the cap would decrease the loan’s appeal on the secondary market. “These proposed caps create significant liquidity and issuer risk in an already delicate HECM market,” NRMLA wrote, referring to a poll of HMBS investors who nearly unanimously agreed that the appetite for the adjustable rate product under the proposed caps would be “greatly diminished, if not eliminated.” HUD has left the issue to be determined in future policy guidance.
Milano’s take → This proposal was very controversial for the industry. Interested parties shared their feedback and comments with HUD, and HUD listened. But, the department did state that it may review this issue further in the future.
The CO requirement → H4P transactions require that a Certificate of Occupancy be completed before a loan application can be taken. The rule has long been protested by H4P proponents who claim that the practice seriously impedes seniors from pursuing the loan for new builds. Acknowledging this, HUD said it “appreciates the comments concerning the timing for collecting habitability documentation and will take it under consideration for future policy guidance.”
Milano’s take → Originators in the reverse mortgage industry were perhaps most disappointed that HUD declined to rule on this issue. While the agency did state it will continue to review and consider the CO requirement and perhaps take action in the future, until this issue is addressed, it will continue to have a huge chilling effect on HECM for Purchase lending with new construction.
Counseling in H4P transactions → HUD has deferred making a decision on its suggested requirement that all prospective H4P borrowers undergo counseling prior to signing a contract or making an earnest money deposit. NRMLA and others protested the suggestion, asserting that this would be inconsistent with customary real estate practices as most borrowers do not make financial decisions at such an early juncture.
Milano’s take → While the Certificate of Occupancy issue needs to be cleared up, this counseling issue also needs to be made more reasonable in order to make HECM for Purchase lending more viable.
Utilities → HUD’s proposal to expand the definition of property charges to include utilities was met with objections, as the failure to pay a utility bill could result in a lien against the property. Several respondents claimed that this would be unfair to seniors, burdensome to servicers and unnecessary in furtherance of the goal to protect the MMI Fund.
Milano’s take → HUD’s deferring action on this item was a positive result of the rulemaking process.
Initial disbursement exceptions → HUD proposed to establish extenuating circumstance exceptions that would allow borrowers to exceed initial disbursement limits. The rule was praised by some senior advocate groups like NCOA, who wrote that this is particularly important in situations when a borrower or non-borrowing family member is seriously ill and requires home care.
Milano’s take → Additional guidance from HUD in this area is sorely needed.
The Quest for Clarification HUD no doubt worked hard to pass its final rule before the administration turnover, but it might not see all of its carefully considered mandates be put into action. Ten days into his presidency, Trump passed an executive order that could seriously impede regulation.
In a “Presidential Executive Order on Reducing Regulation and Controlling Regulatory Costs,” Trump orders that for every one new regulation issued by a federal agency, at least two prior regulations must be “identified for elimination.”
Milano says it’s hard to know what this will mean for HUD and its reverse mortgage program.
“As the Trump Administration continues to implement its regulatory agenda, it remains to be seen whether the effective date of this rule will be pushed back; if FHA will issue the further guidance needed that it promised; and if the clarifications that the industry desires will get caught up in the broader discussions of regulatory reform,” he says.
“Given that it was issued on the last day of the Obama Administration and perhaps ‘rushed out the door,’ HUD obviously deferred on addressing many key issues raised by commenters to the proposed rule,” he says. “The industry will need more guidance or confirmation from FHA on this HECM rule before its effective date.”
In the meantime, the industry is digesting the new policies and submitting requests for clarification. Milano says that HUD’s responses will need to be more formal and robust than a simple FAQ, as exact details are needed on numerous issues.
“Whenever any new rule comes out, it invariably raises more questions that it was designed to answer. So we will have to go through that process and work through it,” he says, adding that despite this, the final rule could be considered a win. “Overall, I think the industry views this rule as a positive step in the right direction.”
