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

With the leaves changing colors and fall upon us, we once again provide an update on recent Mortgagee Letters issued by the U.S. Department of Housing and Urban Development (HUD) concerning the Home Equity Conversion Mortgage (HECM) program, including a significant policy change clarified by HUD in frequently asked questions on its website.

Some of these changes relate to counseling issues and provide more form than substance. However, a substantive policy change relating to short payoffs promises to have dramatic implications for non-borrower spouses and heirs who wish to retain the collateral property following death of the borrower.

Short Payoffs on HECM Loans In general, when a HECM loan becomes due and payable, the outstanding loan balance must be paid in full if the borrower or the borrower’s heirs or estate desire to retain ownership of the property. However, in certain limited circumstances, HECM regulations have always permitted the borrower or the borrower’s heirs or estate to utilize a short sale of the property. Specifically, if a HECM loan is due and payable, Section 206.125(c) of the HUD HECM regulations allow the borrower or the borrower’s heirs or estate to sell the property for 95 percent of its appraised value and extinguish the reverse mortgage by applying the net proceeds of the sale to the loan balance.

In July 2011, HUD issued updated HECM Servicing Frequently Asked Questions (FAQs), providing new guidance on repayment of HECM loans that become due and payable as a result of the death of the last surviving borrower. According to HUD’s FAQs, the borrower’s estate or heirs, including a non-borrowing spouse, may satisfy a HECM loan by paying the lesser of: (a) the loan balance, or (b) 95 percent of the current appraised value of the property. The fundamental change wrought by the FAQs is that no actual “sale” of the property is necessary to allow a short payoff. According to the FAQs, HUD considers any post-death conveyance by will or operation of law to the borrower’s heirs or estate (including a surviving spouse) to fall within the meaning of the term “sale.” According to the FAQs, the loan payoff must occur simultaneously with or immediately following the post-death conveyance.

The FAQs also remind lenders and servicers that the property must be appraised after the HECM loan becomes due and payable. According to Section 206.125(b) of the HUD HECM regulations, an appraisal must be obtained: (a) no later than 30 days after receiving notice that the loan is due and payable, (b) no later than 30 days after learning of the borrower’s death, or (c) upon the borrower’s request in connection with a pending sale. The property also must be appraised no later than 15 days before a foreclosure sale.

Stay of Existing HECM Foreclosure and Eviction Cases The HECM Servicing FAQs also address the model notice that HECM servicers must use to notify all related parties of the deceased borrower of HUD’s policy change, as articulated in the FAQs, allowing the loan to be satisfied by paying 95 percent of the current appraised value of the property. For this purpose, HUD separately provided HECM servicers with a model notice to be used for notifying the deceased borrower’s related parties.

HUD subsequently clarified in the HECM Servicing FAQs that HECM servicers are not required to conduct a search for the borrower’s heirs. HECM servicers are instructed to send the model notice to the property address, the borrower’s personal representative of executor, if any, and to any other heirs and known related parties that may be interested in the property.

In the FAQs, HUD also clarified that foreclosures and evictions must be stayed in order to send out the model notice in connection with those HECM loans where the due and payable status is based on the borrower’s death. HUD also clarified that the stay is required only if the loan potentially involves a non-borrowing spouse or other heir of the borrower that may be interested in retaining the property.

According to the FAQs, HECM servicers are granted an exception from the foreclosure timeframes established under HUD’s regulations for delays incurred as a result of sending the model notice and reviewing any responses from interested parties. The FAQs indicate that HUD will not curtail debenture interest (paid to HECM lenders as part of a claim for insurance benefits under the HECM program) if the servicer sends out the model notice and reviews responses from the interested parties within the required timeframe. The FAQs set a reasonable  timeframe for obtaining a response from the interested parties as 45 days from the servicer’s receipt of a notification that the notice has been received.

According to the FAQs, HECM servicers must exercise due diligence in sending the model notices and obtaining any responses prior to proceeding with foreclosure. HECM servicers must document their loan files with evidence of compliance with these requirements. HECM servicers must retain supporting documentation in the servicing file for purposes of post claim reviews, and must be able to demonstrate that the delay in the foreclosure  timeframe was related to sending the model notice and reviewing any responses from interested parties.

New Counseling Intermediaries Approved by HUD In general, HECM lenders are required to provide each borrower with a list of HECM counseling agencies, including no fewer than nine HUD-approved counseling agencies. More specifically, the list must include at least five counseling agencies within the local area, state or both of the borrower, with one of the local agencies located within a reasonable driving distance for the purpose of face-to-face counseling. The list also must include the following four national intermediaries: National Foundation for Credit Counseling (NFCC), Money Management International (MMI), National Council on the Aging (NCOA), and CredAbility.

On August 12, 2011, HUD issued Mortgagee Letter 2011-26 (ML 11-26), which requires HECM lenders to also provide borrowers with the names of counseling intermediaries that have been awarded HECM counseling grant funds by HUD. According to ML 11-26, the names of counseling intermediaries that must be provided to HECM applicants could potentially change each year. For 2011, the following three intermediaries have been added to the list: ClearPoint Financial Solutions, Neighborhood Reinvestment Corporation and Springboard.

According to ML 11-26, if the “referral date” is on or after May 1, 2011, the list of counseling agencies provided to the borrower must include the three additional intermediaries, for a total of seven intermediaries (i.e., the four national intermediaries listed above plus the three additional intermediaries receiving HECM grant funds set out in ML 11-26).

It should be noted that HUD originally announced the three additional intermediaries in April 2011 through informal guidance to HECM lenders. However, HUD’s formal guidance on this subject in ML 11-26 was not officially issued until August 12, 2011.

Revised HECM Counseling Requirements On August 26, 2011, HUD issued Mortgagee Letter 2011-31 (ML 11-31) revising HECM counseling requirements and providing an updated form of the HECM counseling certificate. The guidance and requirements in ML 11-31 become effective 30 days from the date of ML 11-31.

ML 11-31 requires non-borrowing spouses to obtain HECM counseling. Thus, the following parties will now be required to obtain HECM counseling and sign the HECM counseling certificate: (A) all property owners appearing on the title to the property (or their legal representative if the case involves lack of competency), and (B) the non-borrowing spouse. The provisions of ML 11-31 represent a change in HUD’s policy by requiring the non-borrowing spouse to attend HECM counseling and sign and date the HECM counseling certificate.

ML 11-31 also announced the following changes to the HECM counseling certificate (Form HUD-92902):

a.    name and signature line was added for the attorney-in-fact holding the power of attorney;

b.    the HECM Saver was added as one of the options that counselors will present to HECM applicants;

c.    Agency Tax Identification Number was replaced with Agency Housing Counseling System Identification number; and

d.    HECM for Purchase Certification by the homebuyer was added to the HECM counseling certificate.

According to ML 11-31, lenders should use the Case Number Assignment screen or the Insurance Application screen in FHA Connection to associate the HECM counseling certificate number with a new FHA case number. According to ML 11-31, existing case numbers may be transferred by one HECM lender to another without regard to the HECM counseling certificate expiration date.

Under HUD’s existing rules, HECM counseling certificates expire 180 days from the date of counseling. ML 11-31 indicates that FHA case numbers expire six months after the date of the last activity on FHA Connection. ML 11-31 reminds lenders to act expediently to obtain a new FHA case number because each case must be associated with a unique HECM counseling certificate which expires 180 days from the date of counseling.

HUD's new short payoff policy, ML 11-26 and ML 22-31 represent the latest developments in the HECM program HECM originators and servicers would be wise to 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.