Following the release of Mortgagee Letter 2014-21, Federal Housing Administration (FHA) officials hosted a conference call briefing for the industry Tuesday, noting that “there’s clearly a lot of interest” on this topic, particularly the new seasoning requirements.
During the call, officials provided an overview of the Mortgagee Letter, which consolidates and revises policy requirements issued under two mortgagee letters from 2013. It also revises some of the requirements outlined in Mortgagee Letter 2014-11, issued earlier this year.
However, of particular concern for reverse mortgage professionals are the Mortgagee Letter’s seasoning requirements for existing non-HECM liens, a standard that had not yet been implemented for reverse mortgages.
“It’s a rule they put in place probably to stop some abuses, but it’s going to leave some people with [financial] shortfalls,” says Ed O’Connor, a certified reverse mortgage professional with FirstBank HECM Mortgage Division. “You’re hurting more people than you’re stopping.”
This rule came as a surprise to the industry, as it was not mentioned in prior letters, nor was there anything to suggest that this was a problem, O’Connor says.
And others agree.
“One surprise was the seasoning [requirements] that go into effect Dec. 15,” says Certified Reverse Mortgage Professional Beth Paterson, executive vice president of Reverse Mortgages SIDAC. “That’s totally new and different from even the financial assessment.”
New Seasoning Requirements
In regard to these seasoning requirements, mortgagees may only permit the payoff of existing non-HECM liens using HECM proceeds if the liens have been in place longer than 12 months or if they have resulted in less than $500 cash to the mortgagor, whether at closing or through cumulative draws, ML 2014-21 states.
The seasoning requirements are effective for all case numbers assigned on or after Dec. 15, 2014.
This guidance, and its timing, could make some prospective borrowers — who otherwise could have qualified — ineligible for a reverse mortgage, at least in the near term.
Consider the following scenario:
Recently, Paterson closed a reverse mortgage with one of her clients who needed cash to pay for home care services. The home care agency required payment immediately and would not wait for the borrower to close a reverse mortgage. Instead, the client took out a home equity line of credit (HELOC) to pay the agency until getting a reverse mortgage a month or two later.
“If we were not closed, but just in processing, it appears she would be grandfathered in because they, at least at this point, haven’t given a date the loans need to be closed by,” Paterson says. “If I were doing the application and the FHA case number was being ordered on or after Dec. 15, she could not get the reverse mortgage.”
Industry participants raised similar issues with FHA representatives, which the agency said it is working to address.
Industry-wide Impact
The seasoning requirements will likely impact many borrowers and prospective borrowers, and will also have widespread effects on the industry as a whole, originators say.
While there will be some borrowers impacted who have uncommon circumstances, still others may simply have decided to take one loan, and then another.
“I’m sure there are others who took a HELOC out within the last year and then decided to get a reverse mortgage,” Paterson says.
For lenders, the new seasoning requirements mean more legwork and more education outreach.
“From our perspective, we’re going to have to look at any files that we have in the pipeline and do follow-up calls. And if they were thinking about getting a reverse mortgage, we’ll have to say, ‘You need to be aware of these changes,’” Paterson says.
Reverse mortgage professionals will also need to shift their focus, educating prospective borrowers not only about the positive aspects of a reverse mortgage, but about the negative impact that a HELOC — used as an alternative — could have on borrowers.
“We’ll have to put a big push on getting a reverse mortgage instead of a HELOC,” Paterson says. “Because if you’re thinking about it in a 12-month time frame, that could have a big impact.”
And the timing involved in these seasoning requirements is critical, not only on the borrower’s end, but also for lenders, in terms of preparing for the Dec. 15 effective date.
“Few of us that are brokers had any clue [about these requirements]. This is a total surprise to us,” Paterson says, “and it goes into effect so soon that we don’t even have time to worry about it.”
Written by Emily Study
