The Federal Housing Administration (FHA) on Thursday published new Home Equity Conversion Mortgage (HECM) servicing guidance in response to industry feedback.
In Mortgagee Letter (ML) 2023-23, FHA has codified several core reverse mortgage program servicing changes after posting an initial draft ML on the Single Family Drafting Table at the beginning of November.
Core HECM updates in the ML
Nine core changes are featured in the new ML. These include allowing mortgage servicers to contact borrowers by phone to verify occupancy for the program’s required annual occupancy certification, as well as allowing outstanding homeowner’s association dues to be included in the calculation of a repayment plan for borrowers who are behind on their HECM financial obligations.
The new ML also expands the ability of mortgage servicers to work with borrowers who are behind on their property taxes or hazard insurance, “by an amount up to $5,000 without calling the mortgage due and payable.”
Mortgage servicers can now assign a HECM to the U.S. Department of Housing and Urban Development (HUD) after the servicer has “funded a cure for a borrower’s delinquent financial obligations, so long as the borrower has made all property charge payments for one year and all other assignment eligibility criteria are met.”
Additionally, the new guidance aligns post-due and payable appraisal requirements for all HECM loans, and modifies the maximum arrearage amount for lenders when they delay requesting approval to call a HECM loan “due and payable.”
The ML also expands and updates criteria for payment of the “cash for keys” program; and streamlines requirements for “executing alternatives to foreclosure and updating existing incentive payments for successful completion of loss mitigation options.”
Finally, the new ML provides a new incentive payment to mortgage servicers for completing these loss mitigation alternatives to accelerate the adoption of foreclosure alternatives, according to the document.
FHA perspective
These changes will further improve HECM program stability in light of industry challenges, according to FHA.
“Changing market conditions, such as rising interest rates and inflation, have increased costs to Mortgagees participating in the HECM program,” FHA explained. “FHA believes that by streamlining certain HECM requirements it can reduce the cost associated with participating in the HECM program and mitigate risk to the Mutual Mortgage Insurance Fund (MMIF).”
These policies will “simplify” HECM servicing requirements while incentivizing “actions that improve outcomes for all HECM program participants,” while protecting the MMI Fund, the ML explained.
“Additionally, these changes should yield better financial outcomes for current and prospective FHA-approved Mortgagees participating in this important program, while reducing costs paid by HUD in connection with Due and Payable servicing and foreclosure actions,” the ML reads.
The changes outlined in this guidance are necessary to improve HECM program stability, FHA said. The program is an important tool to “reaffirm its commitment to the future success of this important program and the senior citizen population it is designed to serve.”
Telegraphed changes, recent history
FHA Commissioner Julia Gordon alluded to these changes during her remarks at the National Reverse Mortgage Lenders Association (NRMLA) Annual Meeting and Expo in Nashville at the end of October. The changes indicate the priority HUD, FHA and the Biden administration have placed on strengthening the HECM program.
“The HECM program remains one of the cornerstone programs on the market to help seniors who want to stay in their own homes as they age,” Gordon said at the event. “These proposals benefit seniors with HECM mortgages as well as their families, and they also facilitate participation in the program by HECM lenders.”
Open Mortgage CEO Scott Gordon cited costs to close as one of the reasons the company elected to close its reverse mortgage division. Lower origination volumes combined with lower closing pull-through rates made the cost to close reverse mortgages too high, he said of the dynamics leading to the decision.
“The forward side will get used to current rates if they don’t get better, but the reverse side needs significantly lower rates to make deals workable again,” he said. “We can’t predict when that will happen, so we will be closing out the pipeline in December.”
