Written by Fed Kamensky & Joel Schiffman, as originally published in The Reverse Review.

With winter ending, the snow melting, and love back in the air, there seems to be no better time for reviewing the HECM Mortgagee Letters released by HUD during the first quarter of 2011. Fortunately, with so many other regulatory changes impacting the industry, the volume of HECM-specific Mortgagee Letters issued by HUD remained manageable, with only two letters, ML 2011-01 and ML 2011-09, published during the first quarter.

Notwithstanding the foregoing, following the end of the quarter, and as this article went to press, HUD published ML 2011-16, a significant missive concerning the proper application of the non-recourse provisions in the HECM loan documents. Given the importance of that subject, we will review ML 2011-16 in a later article in this series.

Reflecting a degree of scrutiny and concern by HUD risk managers with the overall level of HECM loans in tax or insurance default status, which reached approximately 13,000 loans according to an August 2010 report by HUD's Office of Inspector General, the very first Mortgagee Letter published by HUD in 2011 provides important guidance to lenders and servicers on the handling of these delinquencies. ML 2011-09 deals with a more prosaic (if no less controversial) subject, namely the fee amount that can be charged for HECM counseling. Both Mortgagee Letters are important developments in the near-constant evolution of the HECM program, requiring the attention of industry participants in springtime, while the bees are buzzing, no less than any other time of the year.

ML 2011-01

On January 3, 2011, the FHA issued Mortgagee Letter 2011-01 (ML 11-01), providing guidance to FHA-approved lenders and servicers on how to handle HECM loans with delinquent property charges (i.e., real estate taxes, ground rents, flood and hazard insurance premiums, and special assessments). ML 11-01 applies to HECM loans where the borrower has failed to pay property charges or the lender has made a corporate advance of property charges on behalf of the borrower, or both. ML 11-01 also applies to HECM loans where HUD has previously granted a deferred due and payable status due to delinquent property charges.

According to ML 11-01, a loan is considered delinquent when the mortgagee receives notice of the mortgagor's failure to pay a property charge. At that point, the loan cannot be assigned to HUD pursuant to the assignment option under FHA insurance. HECM lenders must begin to work with the borrower to cure the delinquency as early as possible. Lenders must inform the borrower that the loan is delinquent within 30 days of the first missed payment for property charges. A lender may not submit a due and payable request to HUD until the lender exhausts all loss mitigation options. Available loss mitigation options include, but are not limited to:

1. Establishing a repayment plan (pursuant to a repayment schedule provided by ML 11-01); 2. Contacting a HUD-approved Housing Counseling Agency (HCA); and 3. Refinancing the delinquent HECM loan into a new HECM loan, if sufficient equity in the borrower’s home to satisfy the existing loan and outstanding property charges is available.

ML 11-01 requires HECM lenders to send a Property Charge Delinquency Letter, providing the borrower with 30 days to respond and cure the default. For loans delinquent as of January 3, 2011, lenders must send the letter by April 29, 2011. For loans that become delinquent after that date, lenders must send the letter as soon as the lender receives notice of a missed payment for property charges. ML 11-01 provides a model letter for use by HECM lenders. Although HUD allows lenders to vary the model letter to a certain extent, the letter must contain the substantive information provided in ML 11-01.

Mortgagees must offer borrowers a repayment plan for reimbursement of property charges advanced by the mortgagee. The due dates for repayment plans, depending on the amount of the advance, must be consistent with the time periods set forth below:

Corporate Amount Advanced                   Repayment Schedule $1 - $500                                                     Up to 3 months $501 - $1,000                                              Up to 6 months $1,001 - $5,000                                           Up to 12 months $5,001 or more                                            Up to 24 months

If the mortgagor provides evidence to the mortgagee that they are unable to repay the advance within the allotted repayment timeframe, mortgagees may, at their discretion, extend the repayment schedule up to 24 months, irrespective of the amount of the advance. HUD has not clarified the nature of the evidence necessary to show that the mortgagor is unable to repay within the specified timeframe, but leaves it to the mortgagee's discretion, so long as the documentation collected by the mortgagee clearly supports its decision.

Pursuant to HUD's publication of responses to frequently asked questions on March 30, 2011, HUD clarified that the advance amounts specified above should not include calculated interest on the amounts advanced, and that such repayment plans should be made available to pre-existing delinquencies, irrespective of the age or amount of such delinquency. Repayment plan agreements must also be signed by the borrower.

As of January 3, 2011, lenders must report all delinquent loans to HUD (including loans on a repayment plan and loans in a deferred due and payable status). Initially, lenders were required to submit an Excel file via email to HECMAdmin@hud.gov by February 7, 2011, pursuant to special formatting requirements provided in ML 11-01. Lenders are also required to provide HUD with notice of current delinquencies in a monthly Excel file or by manually updating HUD’s IACS system as delinquencies occur.

HECM lenders must send a due and payable request to HUD’s National Servicing Center if the borrower is unwilling to reimburse the lender for property charges, or if the lender exhausts all available loss mitigation options and the borrower is unable to cure the loan. ML 11-01 requires lenders to include documentation supporting their efforts to resolve the delinquency in the lender’s due and payable request. Lenders also must inform the borrower that he or she has 30 days to respond to the due and payable notice. ML 11-01 requires lenders to include certain information in the due and payable letter to the borrower, including all available options to cure the delinquency and avoid foreclosure.

ML 2011-09

On February 4, 2011, the FHA published Mortgagee Letter 2011-09 (ML 11-09), providing guidance to FHA-approved counseling agencies and HECM lenders on the amount and the waiver of a HECM counseling fee. ML 11-09 became effective March 7, 2011.

HUD previously indicated in Mortgagee Letter 2008-12 (ML 08-12) that a HECM fee of $125 per counseling session is considered reasonable. ML 11-09 overrides this provision of ML 08-12, authorizing counseling agencies to charge more than $125 per session. According to ML 11-09, HECM counseling agencies may establish a fee structure as long as the fee is reasonable and customary; does not exceed a level commensurate with the counseling services that are provided; and is not being charged to pay for the service that is already funded with HUD’s grants or other funds. The fee structure must be included in the counseling agency’s work plan and must be disclosed to the borrower during intake. In any event, a borrower may not be turned away because of an inability to pay a HECM counseling fee.

ML 11-09 also provides that HECM counseling agencies should not collect a HECM counseling fee at the time of the counseling session if the borrower’s income is below 200 percent of the Federal Poverty level. However, counseling agencies may charge such borrowers a HECM counseling fee at the time of loan closing provided the borrower has been advised during the counseling session of the amount of the fee. ML 11-09 also describes procedures for determining the borrower’s ability to pay a HECM counseling fee, including the documentation required for waiver of the fee.

According to ML 11-09, only the actual time spent on providing counseling to the borrower (in person or by telephone) may be recorded on the HECM Counseling Certificate. Time other than actual counseling (such as intake, putting together the information packet, and follow-up) may not be included on the HECM Counseling Certificate but can be included when determining the cost of HECM counseling.

Although ML 2011-01 and ML 2011-09 are not the last words we are likely to hear from HUD concerning property charge delinquencies or counseling, they do reflect important changes in the operation of the HECM program. Since both Mortgagee Letters are already effective, lenders, servicers and counselors should ensure that appropriate processes and procedures are in place to fully comply with these new directives.

This article provides only an overview of some of the federal and state laws and regulations that may affect reverse mortgage lending, marketing and finance matters. Although the practice of Weiner Brodsky Sidman Kider P.C. is national in scope, attorneys within our firm do not actively practice law in all jurisdictions, and these materials are not intended to and do not provide legal advice. Because of the generality of this article, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.