HUD Issues New HECM Final Rule for 2017

by | Jan 25, 2017 | News Room, Reverse Mortgages

HECM Final Rule for 2017

HUD released a new final rule for Home Equity Conversion Mortgages (HECMs) Jan. 19 with an announcement in the Federal Register. The final rule has an effective date of Sept. 19. Within the rule, FHA says it is codifying policy previously implemented through mortgagee letters and is implementing statutory changes. The rule also provides new HECM origination and servicing policies as well as language clarifications in existing regulations. HUD says that all policies implemented by mortgagee letters are in effect until the Sept. 19 effective date of the final rule.

Following are codified policies and statutory changes for HECMs as well the new origination and servicing polices:

Rules Implemented and Codified Under Statutory Authority:

  • Financial Assessment and Property Charge Funding when LESAs are required:
    • For fixed-rate HECMs, a fully funded LESA is required.
    • For adjustable-rate HECMs, either partially funded or fully funded LESAs are allowed.
      • Partially funded LESAs will be disbursed semi-annually to borrowers to pay property charges.
      • Fully funded LESAs will be disbursed to the tax authority or insurance company for payment of property charges.
      • If the mortgagee does not require a fully funded LESA, a borrower with an adjustable- or fixed-rate HECM can choose a fully funded LESA.
  • Deferral of Due and Payable Status for Eligible Non-Borrowing Spouses:
    • Eligible non-borrowing spouses in properties with due-and-payable status qualify for a deferral period after the death of the last surviving borrower. Eligibility is contingent on the non-borrowing spouse meeting all FHA requirements for the HECM.
    • Eligible non-borrowing spouses are granted 30 days to cure loan defaults and reinstate deferral periods.
    • Principal limits on HECMs must be based on the age of the youngest borrower or the eligible non-borrowing spouse.
  • Disbursement Limits in the First 12 Months of the HECM
    • For fixed- and adjustable-rate HECMs, the disbursement limit in the first 12 months cannot exceed 60 percent of the principal limit or mandatory obligations plus an additional 10 percent of the principal limit.
    • The final rule allows FHA the flexibility to adjust this rule if the market requires it.
      • The 60-percent cap will never be lower than 50 percent, and the additional percentage will never be less than 10 percent.
  • Eliminating Future Draws on Fixed-Rate HECMs
    • Because fixed-rate HECMs require single lump-sum disbursements under FHA rules, additional or future draws are not allowed.
  • HECM for Purchase
    • Sellers may now pay fees required to be paid by the seller under state or local law as well as fees customarily paid by a seller where the property is located. Sellers also may purchase the home warranty policy.
    • The Federal Register may be opened for comment regarding other allowable interested party contributions.
  • Loan Origination Fees and Charges
    • Loan origination fee limits apply to originating, processing and closing the HECM.
  • Mortgage Insurance Premiums (MIPs)
    • Allowable initial and monthly MIP charges reflect the fact that HECMs are obligations of the Mutual Mortgage Insurance Fund and that a wider range of MIP charges are acceptable due to amendments to the National Housing Act.
    • No changes have been made to actual MIP charges.
  •  Seasoning
    • FHA has changed the requirements for use of HECM proceeds used to pay off non-HECM liens:
      • The 12-month requirement for seasoning begins at the HECM closing date rather than the date of the loan application.
      • HELOCs may be paid off at closing regardless of whether they meet seasoning requirements from the borrower’s funds, HECM funds or a combination as long as the draw from HECM funds doesn’t exceed the draw limits in the first 12 months of the HECM.

New Origination and Servicing Policies:

  • Disclosing HECM Program Options
    • Mortgagees must inform potential borrowers of all HECM products, features and options insured by FHA regardless of whether the mortgagee offers those products.
  • Locking-In Interest Rates
    • The mortgagee, with the borrower’s agreement, may lock in the expected average mortgage interest rate before the loan closing date or establish the expected average mortgage interest rate on the date of loan closing.
  •  Appraisal
    • For pending sales of property, the property must be appraised no later than 30 days after receipt of the request by an applicable party.
    • Properties must be appraised within 30 days of a foreclosure sale.
    • The Commissioner may approve other appraisers when a mortgagee is required to appraise the property.
  • Limiting Reimbursement of Property Charge Advances
    • Mortgagee insurance claim reimbursements are limited to two-thirds of the total payments for:
      • Taxes, ground rates and water rates;Special assessments noted on the application for insurance or which become liens after the insurance of the mortgage; and
      • Hazard insurance premiums on the mortgaged property not in excess of a reasonable rate.
  • Acquisition and Sale of Property
    • The Commissioner may lower the property sale requirement below 95 percent of the appraised value based on market conditions.
    • Closing costs may not be more than the greater of 11 percent of the sales price or a fixed dollar amount determined by the Commissioner.
  • Cash for Keys
    • The rule offers a financial incentive to prompt parties with legal authority to dispose of a property more quickly with a deed in lieu of foreclosure.
    • This incentive also applies when a bona fide tenant vacates the property before eviction by the mortgagee in foreclosure situations.
    • The Commissioner may increase the minimum amount of time a borrower or tenant has to vacate the property and to establish the amount of a Cash for Keys incentive.
  • Pay-Off of Debt Not Secured by the Property
    • HECM proceeds can be used to pay off debt not secured by the property as a mandatory obligation according to the Commissioner’s definition.
  • Property Charge Payments
    • The Commissioner may establish an incentive for borrowers to choose a LESA voluntarily.
    • The Commissioner also may provide more options for borrowers to allow the mortgagee to make property charge payments.

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