HUD/FHA published two Mortgagee Letters on November 10, 2014 which outline some rather substantial changes in their Home Equity Conversion Mortgage (HECM). Since FHA’s HECM (or reverse mortgage) program is by far the most popular reverse mortgage product currently being offered nationwide and, in fact, dominates this market – these changes should have a major impact on both the number of HECM loans that will be originated as well as the number participating lenders going forward.
Major underwriting and procedural changes are outlined in the 26 page Mortgagee Letter 2014-21 and an 87 page attachment (HECM Financial Assessment and Property Charge Guide) is part of Mortgagee Letter 2014-22. These documents can be obtained from the Mortgagee Letters page at the FHA.gov website.
Some of the most noteworthy changes include: lenders will now have to perform an in-depth financial assessment of the prospective HECM borrowers, there are seasoning requirements (i.e. 12 months) for paying off non-HECM liens as part of the HECM proceeds, there are revised initial disbursement limits and a life expectancy set-aside for payment of property taxes, hazard & any flood insurance premiums. Also, lenders that are currently originating HECM loans need to begin utilizing an updated HECM Checklist for Required Documents for Endorsement which is Attachment 1 to Ml 2014-22.
Most of the changes outlined in these two Mortgagee Letters are effective with case numbers assigned on or after March 2, 2015. But, some became effective for case numbers assigned on or after November 10, 2014. A complete listing of the policy requirements and effective dates is found on page #2 of Ml 2014-21.
HUD has indicated that these changes were deemed necessary in order to reduce defaults and claims on HECM loans. Surprisingly, in the past HUD has experienced many claims on HECM loans due to the borrowers’ failure to pay real estate taxes & insurance. Many of these changes are being implemented to address these concerns. However, many HECM lenders may find these new underwriting guidelines too onerous and will stop originating these loans.
Let’s hope that there will continue to be a HECM product readily available for seniors after these rules become effective as HECM loans do provide elderly homeowners with a sustainable age-in-place option.