More HECM Changes Coming…

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More Changes for HECM on Horizon from HUD

looking-aheadIf you think the dust has finally settled in the wake of numerous HECM changes, think again. HUD announced their intention to codify recent program changes while also adding new consumer protections to the federally-insured Home Equity Conversion Mortgage program.

Sit down, take a few Tylenol along with a pot of coffee and settle in to read HUD’s proposed rule changes. Perhaps a better approach is a brief summary of the proposed rule changes presented here in the next few minutes.

First, HUD reiterates their first-year distribution limit as 60% of the principal limit or the total mandatory obligations plus 10%. What’s new is the forward commitment that the initial 12-month distribution cap is never to be less than 50% of the principal limit. Keep in mind that principal limit factors can be changed outside of the rule making process via a mortgagee letter as market conditions warrant.

Second: H4P changes. HECM for purchase borrowers must complete HECM counseling prior to signing a sales contract or…

Download a transcript of this episode here.

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9 comments

Walt Lydic May 23, 2016 at 4:29 am

Perhaps the most important of the updated changes was omitted from the podcast. The Super Lien changes which could affect not only condos but potentially PUD’s, over 55 communities and any property with a HOA.

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Ray Fry May 23, 2016 at 6:30 am

I’d like to see a consumer oriented change to the HECM program that limits the number of pages in the application to 100. The current number is now around 210 and I see proposed changes adding substantially to that amount. If FHA/HUD wants the consumer to understand the program, simplify the wording of the application.
The prospective borrower would also benefit if FHA/HUD could create a standard executive summary of the application for the borrower to sign instead of having them sign about 50 separate times. States and lenders with unique requirements could also create their executive summary for the borrowers to sign.

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The_Cynic May 23, 2016 at 1:47 pm

Ray,

Neither FHA nor HUD can control the number of pages in a HECM application. It is generally state requirements and law that give the docs their “weight.” Some states have “less weighty” docs. Like you, I live in California and trying them to cut down on anything is more than a chore.

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The_Cynic May 23, 2016 at 4:31 pm

Interest caps are worth exploring. When caps are lowered, borrowers are less at risk but note holders (investors) are at greater exposure of loss. It would seem that lenders will raise margins to compensate for the greater risk. That could mean and increase of around 2% from say 3% now to 5%. this could mean both lower principal limit factors due to a higher expected interest rate and also considerable more interest on the same UPB.

In clarifying who the parties to FHA insurance are, the following will be added to the codified regs: “MIP. FHA proposes to amend the definition of “MIP” in § 206.3 to replace the cross-cite
to 24 CFR 203.251(k) with the actual definition, such that ‘MIP’ means the mortgage insurance
premium paid by the mortgagee to the Commissioner in consideration of the contract of
insurance.” MIP and the related insurance contract have nothing to do with borrowers. It is a farce to say that FHA insurance makes a HECM nonrecorse.

Many are confused when it comes to MIP payment. It is not that mortgagees or servicers did not pay FHA the amounts each month but rather that when the insurance was terminated, the insurance stopped. Many do not understand that at assignment, the insurance is terminated and the loan is assigned to the uninsured pool of mortgages held by HUD. FHA is demanding that MIP continue to be paid until the loan terminates. Here is what is said: “FHA proposes to provide in § 206.103 that the payment of MIP shall be made to the Commissioner by the mortgagee in cash until the HECM is paid in full, foreclosed or a deed in lieu of foreclosure is recorded, or the property is otherwise sold, instead of until the contract of insurance is terminated.”

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Ron Johnson May 23, 2016 at 4:58 pm

Got to ask for a clarification if you do not mind. The last section of the review talks of the Annual Libor Cap 5 and seems very clear on the change of a max change of 1% per year and a lifetime cap of 5. Now for the Monthly Libor Cap 10? It will now have a lifetime cap of 5 instead of 10? And, no monthly cap, but does have a 1% per year max cap? So, thinking this through, a cap 10 will now be a Monthly Libor Cap 5 in reality, and it will move much faster when and if rates move, and currently start lower and lower overall cap (currently)? Just thinking this out?
Thanks so much for the updates and look forward to hearing more.

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The_Cynic May 25, 2016 at 11:45 am

Ron,

The change on interest rates is described on page 8 of the proposal as follows:

“For annual adjustable interest rate HECMs, this rule proposes to cap periodic interest rate increases and decreases at one percentage point and cap lifetime interest rate increases and decreases at five percentage points. For monthly adjustable interest rate HECMs, this rule proposes to cap lifetime increases or decreases to the interest rate at five percentage points.”

Where are you seeing that monthly adjustable rate HECMs would have an annual cap of 1%?

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Bob G May 23, 2016 at 6:44 pm

Not sure I understand what the requirement for counseling before a purchase contract is signed has to do with anything. What if the borrower at his purchased signing has not decided that a reverse mortgage is the right financing solution…or what if a reverse was not even a part of the thought process?

And, while they are at it, why no lender credits allowed for a purchase transaction as they are with a refinance?

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Dan Hultquist May 24, 2016 at 12:36 pm

Shannon, as always thanks for the update!

On pages 26 and 103 of the proposed rule changes, there is a significant change to the Expected Rate Lock options. FHA was very clear on their intent in ML 2006-22 – to protect what was quoted at the time of application signing AND allow for a limited float down if current expected rates benefit the client at the time of closing.

With this proposed change, it appears to me that the float down would no longer be available as the new guidance uses a formal lock agreement of both the expected rate and lender margin. If no lock is signed, only then will the expected rate at closing be used.

HUD wrote this section as if this change offers a consumer protection. I believe it does the opposite. It simply reduces HUD’s exposure to rate risk.

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The_Cynic May 25, 2016 at 11:37 am

Dan,

It seems to me that there is very little risk to anyone when the HECM is adjustable rate since the index will change to market within a year even with an annually adjusting HECM and sooner with a monthly adjusting. Of course, margins could be a problem but since leaving live pricing that has rarely been the problem it once was.

Where the problem could be problematic is fixed rate HECMs since there is no adjustment.

It would be much better if the interest rate would automatically adjust to the lower of the two rates.

Reply

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