The Federal Housing Administration (FHA) this week released a new document clarifying some of the requirements related to Mortgagee Letter (ML) 2023-15, which implemented changes to the FHA in instances of anticipated or actual default of a lender’s payment obligations to borrowers of Home Equity Conversion Mortgage (HECM) loans.
The questions broadly cover two separate topics: HECM monthly mortgage insurance premiums (MIP), and HECM borrower payments.
HECM MIP questions
In the document, FHA reminds stakeholders that monthly MIP is due to FHA on the first business day of the month, and can be remitted through the Home Equity Reverse Mortgage Information Technology (HERMIT) system. Late payments will incur a penalty and interest on late payments.
FHA also said that monthly MIP “can only be added to the HECM balance when the monthly MIP is paid to FHA,” according to the document. “The payment of funds to the servicer, who will forward the funds to FHA, does not constitute payment to FHA.”
Monthly MIP is also not added to a HECM loan’s balance on the first day of the month “if the funds are remitted to FHA late,” the agency said. A lender can only add the monthly IP to a loan’s balance when the MIP itself is paid to FHA. Payment to the servicer is not the same as payment to FHA.
If funds are remitted to FHA late, then monthly MIP is not added to the loan balance on the first day of the month, the agency said.
“A mortgagee may only add the monthly MIP to the loan balance when MIP is paid to FHA,” FHA clarified. “The payment of funds to the servicer, who will forward the funds to FHA, does not constitute payment to FHA.”
Additionally, lenders will be charged penalties and/or interest if MIP is remitted late on a HECM loan.
“Any monthly MIP remitted to the FHA Commissioner more than five days after the due date incurs a penalty of four percent of the amount owed and accrues interest at a rate set in conformity with the Treasury Financial Manual,” the agency said. “Any late charge and interest owed may not be added to the outstanding loan balance and must be paid by the mortgagee.”
Additionally, a lender cannot file a HECM claim for insurance benefits while MIPs are outstanding.
Inability to make HECM borrower payments
FHA will “ensure that payments owed to HECM borrowers are made when a mortgagee is unable or unwilling to make these payments,” the agency said. Lenders that are unable to make borrower payments are encouraged to contact FHA as soon as possible in an effort to “reduce delays in borrowers’ receipt of payments.”
In terms of specific actions that a lender should take in the event they find they are unable to make borrower payments, email contact through the firstname.lastname@example.org address are encouraged as quickly as possible.
“FHA will ensure that any borrower payments that are not made by the mortgagee are paid to the borrower,” the agency reiterated. “FHA’s payment of any amounts due to the borrower does not alleviate the mortgagee’s default for failure to make the payments when due. FHA will require the mortgagee to take steps to cure its default.”
In situations where it falls on FHA to make borrower payments, the lender “must, within one business day of the date the borrower payment should have been made,” provide a series of critical information to FHA through the HERMIT system.
This includes FHA case number; payment plan type; disbursement type (specifying scheduled or unscheduled); payment amount and method (check or bank transfer); applicable banking information if using bank transfer; and mailing address.
“A mortgagee must provide the above-referenced information to the HERMIT system via the HERMIT Secure File Transfer Protocol (SFTP) Server in an Excel spreadsheet or Comma Separated Values (.csv) file,” FHA said.
Lenders are also required to send an email to a dedicated HERMIT servicing address and email@example.com to notify the agency that a file has been uploaded. Lenders “must not send the file directly through email,” FHA said, due to security concerns.
Background of the ML
FHA published ML 2023-15 in July after posting a draft version designed to gather industry feedback in May. The changes, FHA explained when posting the draft version, were being considered due to market conditions impacting the reverse mortgage industry while aiming to “improve market stability.”
“FHA’s ability to promptly comply with the obligation to provide Borrower payments upon a Mortgagee’s default in their Borrower payment obligation is an essential element to the marketability of the HECM program,” the draft ML stated. “In expanding FHA’s authority to investigate late payments to borrowers and obtain payment information, FHA is improving its ability to promptly comply with its statutory responsibility to provide payments to HECM borrowers upon a mortgagee’s default.”
The final version of the ML also addressed liquidity challenges facing the reverse mortgage industry.
“The HECM program is relatively small when compared to the number of forward mortgage transactions each year,” the ML said. “This small number of new originations annually results in a small market to support securitization of HECMs in the secondary market. Without the ability to securitize HECMs, there would not be sufficient liquidity in the market for the program to continue to function.”