HUD Publishes New Guidelines Associated With HECM and Reverse Mortgage Risk

The U.S. Department of Housing and Urban Development (HUD) is publishing new guidance to manage risk associated with the Federal Housing Administration’s (FHA) reverse mortgage or Home Equity Conversion Mortgage (HECM) Program.  This is part of the Department’s continuing effort to reform, strengthen and protect FHA’s Mutual Mortgage Insurance (MMI) Fund.  Read FHA’s mortgagee letters. “The changes being announced will realign the HECM program with its original intent which will aid in the restoration of the MMI fund and help ensure the continued availability of this important program,” said Federal Housing Commissioner Carol Galante. “Our goal here is to make certain our reverse mortgage program is a financially sustainable option for seniors that will allow them to age in place in their own homes.” In recent years, FHA’s HECM portfolio experienced major changes in demographics and borrower preferences that added significant risks to the MMI fund. These changes include borrowers shifting from selecting adjustable rate mortgages with access to the line of credit or modified tenure/term payment options to selecting fixed rate mortgages where the borrower draws down all available funds at the time of closing. Younger borrowers with more indebtedness and stagnant home prices have also contributed to the added risk. FHA’s Fiscal Year 2012 Annual Report to Congress on the Financial Status of the MMI Fund reported substantial stress in the HECM program and the President’s FY 2013 Budget projected the economic value of the HECM portfolio to be negative while FHA’s forward loan portfolio showed improvement and a positive economic value. In response to these concerns, Congress passed the Reverse Mortgage Stabilization Act of 2013 authorizing the HUD Secretary to establish any additional or alternative requirements determined to be necessary to improve the fiscal safety and soundness of the program. FHA’s mortgagee letters articulate the policy changes intended to support the financial soundness of HECM program. In addition, FHA is providing approved lenders with a HECM Financial Assessment and Property Charge Guide which will help loan underwriters to implement the risk management reforms announced today which include: ►Changes to initial mortgage insurance premiums and principal limit factors; ►Restrictions on the amount of funds senior borrowers may draw down at closing and during the first twelve months following closing; ►Requiring a financial assessment for all HECM borrowers to ensure that they have the capacity and willingness to meet their financial obligations and the terms of the reverse mortgage; and ►Requiring borrowers to set aside a portion of the loan proceeds at closing (or withhold a portion of monthly loan disbursements) for the payment of property taxes and insurance based on the results of the Financial Assessment.