Whether you are involved in reverse mortgage loan servicing, origination or any aspect in between, no doubt you understand and strongly believe in the benefits a reverse mortgage provides to our borrowers. I’m not sure, however, that the industry as a whole understands or appreciates the important role HUD serves with the HECM product. In this two-part piece, the detailed process and aspects of the HUD assignment process will be explored.
Those on the servicing side understand the importance of HUD insurance through its second mortgage and the twofold purpose it serves:
ONE || This second mortgage insures borrowers in the exceptionally unlikely and rare event a lender goes out of business, and
TWO || HUD provides insurance for servicers in the event a loan is not paid back in full. This remedy is essentially handled like any insurance claim, and like traditional insurance, there are different types of claims.
With traditional insurance (auto, home), the most common claims are made when something negative (accidents, injury) happens. I categorize these types of claims in the HECM insurance world as those that are filed for reasons of default. Examples would be when a loan is called due and payable or the loan has been satisfied in any way other than full payment to the lender. These are HUD Claim Type 21 (Foreclosure/Deed in Lieu) and Claim Type 23 (Mortgagor’s Short Sale) processes. Insurance companies also offer incentives for positive records (that is, spotless driving records with no accidents or injuries). In the HECM insurance world, these would include the Assignment to HUD or HUD Claim Type 22 process.
Let’s walk through the complicated territory servicers navigate when a loan reaches 98 percent of its Maximum Claim Amount (MCA), determined by the current loan balance as a percentage of the MCA. The MCA is determined at closing and is defined by HUD as “the lesser of a home’s appraised value or the maximum loan limit that can be insured by FHA.”
When a loan becomes eligible for assignment to HUD at 98 percent of MCA, it must meet certain criteria for
HUD to accept it, take over the servicing and then pay the claim to the lender. To ensure that a loan is ready for this assignment, this criterion is triple-checked well before the balance reaches 98 percent (typically this happens when it approaches 85 to 90 percent). Loans move (slowly) to MCA through the monthly accumulation of interest, mortgage insurance premiums and servicing fees. During this initial review, the servicer is seeking to confirm that the loan is in “active” status.
HUD will not accept a loan for assignment if it is in default or is due and payable. The review focuses on origination documents and ensures that there are no errors on the mortgage, that assignments (if applicable) are in place, and that the servicer has all of the documents required for submission to HUD. If anything is incorrect or out of place in the servicing file, we work aggressively to correct it. As a subservicer, Celink reaches out to its clients involved in the origination process. Rare cases arise when a client (or its subservicer) is unable to fix a document error, which makes the loan’s assignment to HUD impossible.
There may be other reviews of a loan, especially if work is required to complete or fix errors. In short, a final review process follows and this happens much closer to eligibility, around 96-97 percent of MCA. Loans can take years to move to this assignment process.
A majority of loans are paid off or will have moved to default/due and payable status before reaching HUD assignment eligibility. A loan that is eligible at 95 or 96 percent may not be eligible at 97.5 or 98 percent. Additionally, a loan that has lender/force-placed insurance (FPI) or delinquent property taxes is not eligible for assignment. This is true even when the FPI or delinquent property taxes do not create a default status on the loan.
Part II will focus on eligible loans for assignment to HUD and the process of assignment within HUD’s servicing software, HERMIT.
