By Weiner Brodsky Kider
On January 19, 2017, HUD published in the Federal Register the Final HECM Rule, FHA: Strengthening the Home Equity Conversion Mortgage Program. The Final HECM Rule has an effective date of September 19, 2017, but it is unclear at this point if the new administration’s regulatory freeze memorandum, issued on January 20, 2017, will act to defer or delay this Final HECM Rule.
The primary purpose of the Final HECM Rule was to implement into FHA HECM regulations prior guidance issued by HUD under mortgagee letters authorized by the Reverse Mortgage Stabilization Act of 2013 and the Housing and Economic Recovery Act of 2008.
HUD received 241 comment letters in response to HUD’s Proposed HECM Rule, many by consumer advocates. HUD addresses most of these comments in the Preamble to its Final HECM Rule. HUD deferred making a final determination on a variety of issues including: (1) the change to the cap on interest rate adjustments for annually adjustable interest rate products and the imposition of a five percent cap on interest rate adjustments for monthly adjustable interest rate products; (2) post-closing property inspections; and (3) mortgagee’s option to file a claim when the loan balance reaches 98 percent of the Maximum Claim Amount, to name a few. HUD also declined to adopt language in the Proposed HECM Rule that HOA liens are subordinate to HECM liens.
The Final HECM Rule makes changes regarding a wide range of issues, and a few topics to note include: (1) allowing seller contributions in HECM for purchase; (2) loosening seasoning requirements for prior HELOCs; (3) treating the pay-off of non-home secured debts as part of a borrower’s mandatory obligations; (4) requiring the original mortgagee to request alternative contact information from the borrower; and (5) removing of mandatory due and payable appraisals.
In HECM for Purchase transactions, the Final Rule allows fees customarily paid by the seller to be included as an interested party contribution. However, HUD stated that issues surrounding the issuance of a counseling certificate prior to an application for a HECM loan would be addressed in future policy guidance rather than this Final HECM Rule.
The Final HECM Rule will not allow a borrower to take more than the initial disbursement limit as monthly payments during the first 12 months of a HECM loan, however, HUD, while incorporating seasoning requirements put into place under Mortgagee Letter 2014-21, has amended the seasoning requirements to add that the start date to measure seasoning will be the HECM loan’s closing date, and not the application date. Further, as before, the seasoning requirements do not prohibit the payment of cash to the borrower of $500 or less as part of the HECM loan. And, HUD will now also allow the payoff of a prior HELOC at the closing of a HECM loan, where the HELOC does not otherwise meet the seasoning requirements, either from borrower funds or pay off from the HECM or both, as long as the HECM funds used to pay off the HELOC do not exceed the Initial Disbursement Limit under the HECM.
Next, the Final Rule will allow the pay-off of debt not secured by the property, as to be provided in a definition by the Commissioner through Federal Register notice, as a mandatory obligation.
Further, the HECM rules have been revised to require an originating mortgagee to request an alternative contact person from the borrower that the mortgagee can contact in the event it cannot reach the borrower.
HECM rules also have been revised to remove the requirements that a HECM servicer obtain an appraisal upon a due and payable event. If a borrower or other interested party requests an appraisal, however, an appraisal must be obtained.
Although making some rule changes, the Final HECM Rule often defers to past mortgagee letters for guidance, or HUD simply takes into consideration the thoughts and concerns of the commenters for future guidance. Further, HUD reminded mortgagees that the model HECM loan documents provided must be adapted by the lenders to local and state requirements that preserve first lien status.
(Note: Weiner Brodsky Kider serves as outside counsel to NRMLA)