NRMLA Applauds FHA’s New Rules Regarding HECMs


Having completed its review of feedback from industry stakeholders, the U.S. Department of Housing and Urban Development (HUD) has released its Home Equity Conversion Mortgage (HECM) Financial Assessment and Property Charge Guide.

In addition, HUD has published a mortgagee letter that clarifies certain aspects of how the Federal Housing Administration's (FHA) HECM program will operate, moving forward. As per the letter, lenders must – starting on March 2, 2015 – consider a borrower's ‘willingness and capacity to timely meet his or her financial obligations and to comply with the mortgage requirements,’ before approving a reverse mortgage.

This financial assessment, according to HUD, ‘must take into consideration that some mortgagors seek a HECM due to financial difficulties, which may be reflected in the mortgagor's credit report and/or property charge payment history.’ As such, a lender ‘must also consider to what extent the proceeds of the HECM could provide a solution to any such financial difficulties.’

HUD has also clarified which documents are needed for reverse mortgage borrowers. This includes credit history documentation, income verification, asset verification, property charge verification, residual income analysis, documentation of extenuating circumstances or compensating factors, and calculations for life expectancy set-asides and residual income shortfall set-asides.

Part of the goal in having borrowers go through financial assessment and counseling is ‘to improve fiscal soundness and protect the viability of the HECM program,’ HUD states.

Last year, the FHA had to request a $1.7 billion Treasury draw – or ‘bailout’ – in order to keep reserves in its Mutual Mortgage Insurance Fund (MMIF) up to the mandated levels. The draw was necessary, FHA officials said, to compensate for losses in the HECM program, as well as a high rate of default among FHA borrowers. As a result of these losses, the agency's capital reserve ratio fell below the 2% threshold mandated under the Federal Credit Reform Act.

It was the first time in the government mortgage insurer's 80-year history that it required a bailout.

In order to avoid a second draw, the FHA has been raising certain fees in order to keep its reserves up to the mandated levels. In addition, it has tightened underwriting.

The additional measures announced this week are intended to curb further losses resulting from the HECM program.

‘These critical program changes will re-align the HECM program with its original intent, and thereby aid in the restoration of the MMIF and help ensure the continued availability of this important program,’ the mortgagee letter states.

In a statement, the National Reverse Mortgage Lenders Association (NRMLA), which played a huge role in lobbying for the changes, said it supports the FHA's new financial assessment rule for HECMs.

‘At NRMLA, we are always concerned about protecting those aging Americans who cannot afford to meet the responsibilities of reverse mortgage loans,’ says Peter Bell, president and CEO of NRMLA. ‘Financial assessment will help determine if the product is right for the potential borrower. By implementing this process, HUD is responsibly making the HECM a safer product.’

NRMLA points to a recent report from a team of researchers at Ohio State University (OSU) showing that utilizing credit criteria as part of a financial assessment of potential borrowers can reduce the likelihood of future default.

The OSU report finds that ‘lower credit scores increase the likelihood of default, suggesting that a financial assessment could help borrowers and lenders determine whether a HECM is the right fit for their situation.’

‘The research is a welcome addition to the growing body of studies in support of reverse mortgages, and importantly fills the void in data needed to fully evaluate industry-supported changes implemented by HUD in 2013,’ NRMLA says in its statement. ‘Supported by grants from both the MacArthur Foundation and HUD, the OSU research team followed the outcomes of 30,000 seniors who received counseling for a reverse mortgage through Clearpoint Counseling Agency. The resulting report is the first large-scale analysis of the future of the HECM program since the 2013 changes, previously not possible due to a lack of data.’

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