HUD’s long-awaited changes to its Home Equity Conversion Mortgage (HECM) underwriting requirements have officially been implemented with FHA Case Number Assignments issued on and after April 27, 2015.
Due to an increasing number of defaults by HECM mortgagors for failure to pay taxes and insurance premiums subsequent to obtaining a HECM loan, HUD developed a comprehensive set of underwriting instructions and procedures for lenders to follow in analyzing a prospective HECM Borrower’s financial capacity and willingness to comply with mortgage provisions.
Lenders will now be required to complete a Financial Assessment Worksheet on all prospective HECM Borrowers prior to loan approval in accordance with instructions contained in Mortgagee Letters 2014-21 and 2014-22.
This Worksheet (which must be signed and dated by a DE Underwriter) will summarize the underwriter’s analysis of a HECM borrower(s) property charges (e.g. property taxes, insurance premiums, HOA fees, etc.), credit history, available assets, monthly maintenance & utility expenses, monthly effective income and other monthly expenses.
A monthly residual income estimate will then be calculated by the underwriter. In addition, a determination must be made as to whether or not a fully funded, partially funded or voluntary-funded life expectancy set-aside amount will be deemed necessary for payment of on-going property charges.
Sound complicated? Not really – seasoned underwriters should have no problems in completing the new HECM Financial Analysis Worksheet and there should be a quick learning curve for all involved in the origination of HECM loans.
Of course, the immediate reaction of some in the industry will be to complain about the additional paperwork and the increased length of time that it will take HECM Loan Officers to explain these new requirements to prospective HECM borrowers.
However, there is a huge upside for HUD in implementing these changes. Defaults on HECM loan transactions should decline to make this program less of a risk to the FHA insurance fund.
The HECM program is unique and FHA’s HECM product has been dominating the reverse mortgage market since its inception. The demographics for this program are extremely positive as more and more baby boomers are becoming eligible for this type of financing (Note: the age of the youngest borrower must be at least 62 years old) and it is becoming more accepted as a means to tap home equity by senior homeowners (just look at all of the TV commercials on this loan product).
This program also has social benefits as it provides our seniors with a viable “age-in-place” option for fixed-income retirees confronted with rising medical expenses, maintenance, and other property-related charges.
Looking “forward” – my prediction is that “reverse” mortgage applications will actually increase in the coming years despite these new underwriting requirements. For additional information on HUD’s HECM program, visit their website at www.hud.gov and type in “HECM Program” in the Search Box.