Written by By Richard Wills, as originally published in The Reverse Review.

Maggie is a 70-year-old widow who lives in a $900,000 home in Virginia. She loves the home and the neighborhood. With the proceeds from her deceased husband’s insurance policy, Maggie paid off the mortgage on her home. She has always paid her bills in a timely manner but only has around $1,000 per month in excess and she does not have any other assets. She wants to travel more to see her children and grandchildren, but does not feel comfortable until she builds up an emergency savings fund.

Maggie was having trouble getting in and out of her bathtub and decided to get a home equity line of credit to have a walk-in tub installed. On December 20, 2014, she received a $50,000 line of credit with an initial draw of $20,000. She had the tub installed, paid off her consumer debt and placed $1,000 in a savings account.

In January, she met with her financial planner and he suggested that she get a reverse mortgage to supplement her monthly budget and to give her a line of credit to pay unexpected expenses. She loved the idea and gave you a call.

What a great day. It was as if someone created the perfect reverse mortgage client and dropped her at your door. The only problem is that because of a recent HUD mortgage letter, there was a change in the HECM program and Maggie is not eligible for a reverse mortgage.

You might say, “Richard, we thought you knew something about reverse mortgages. Financial Assessment does take effect until March 2, 2015. Besides, she should easily meet those standards.”

That is correct, but the reason she is not eligible is explained in a three-paragraph restrictive section found in HUD Mortgage Letter 2014-21, named “Seasoning Requirements for Non HECM Liens,” that takes effect on December 15, 2014.

I am writing this article late in November and it will not be published until sometime in December. My comments will be based upon the initial review of this section, without any interpretation or advice from HUD or the industry. As of November 24, 2014, FHA has acknowledged that they have received many questions and concerns about this section but also stated that at this time, they will not make any changes to the original Seasoning Requirement section. It then becomes imperative for members of the reverse mortgage community to make comments and requests to HUD/FHA and to NRMLA for guidelines on how this section will be applied.

The Seasoning Requirements could have a significant negative impact on HECM production, depending on how it is interpreted. My goal is to alert people in the reverse mortgage community about its existence, its possible effects and to encourage people to contact NRMLA and HUD with examples of how a strict interpretation will needlessly eliminate financially sound and honest borrowers.

The Seasoning Requirements section, in part, states, “Mortgagees may only permit the payoff of existing non-HECM liens using HECM proceeds if the liens have been in place longer for 12 months or resulted in less than $500 cash to the mortgagor… prior to the date of the initial HECM application.” It goes on to state that “mortgagees must review the HUD-1 from the transaction that resulted in a lien that is to be paid off using HECM proceeds, the payoff statement and, if applicable, the most recent HELOC statement or its equivalent, to ensure that the lien had either been in place for more than 12 months or that it resulted in less than $500 to the mortgagor.”

This section seems to eliminate anyone who within the last 12 months has agreed to a lien being placed on their property in excess of $500 cash to mortgagor to secure debt, even if it was obtained for a sound financial or personal reason (to upgrade home, make repairs for safety, pay for in-home care, pay bills, etc.). It would deny eligibility even if the lien that occurred within the last 12 months does not raise the mandatory obligations for the initial disbursement during the first 12 months over 60 percent of the principal limit.

This simply does not make sense. HUD uses the fiscal stability and the protection of the viability of the program as the reason for the change, yet it allows a person who may have no liens to be eligible and take up to 60 percent of the principal limit in the first 12 months, and it would eliminate a person who received and used a HELOC for more than $500 within the last 12 months but initially only needs 10 percent of available funds.

HUD needs to reconsider its no immediate change to this section stance. To properly serve financially sound people who want or need a HECM, HUD needs to revise this section to make it applicable only if the withdrawal within 12 months of application causes the mandatory obligations to exceed 60 percent and also to create exceptions if the money received was used for repairs to the home, for safety reasons, to pay off consumer debt or for some type of legitimate financial emergency.

There are some other issues that need to be resolved:

Is Sam eligible if he originally received a $50,000 HELOC in 2010, withdrew from it $10,000 to give to his granddaughter for college tuition in January 2015, and applies for a HECM in February 2015? I would argue that according to the language in the section, Sam would be eligible since the lien was placed on the home at the time he received the HELOC. But it is not inconceivable to have HUD argue that any draws that increase the amount due on an existing HELOC within 12 months of the HECM application amount to a “new lien” that occurred within 12 months for the purposes of this section.

Is Mary eligible if she opened a HELOC account for $20,000 in November 2014 but does not use it until January 2015, at which time she uses the proceeds to write a check for $2,000 payable to John Construction Company to pay for repairs to her bathroom? Mary then applies for a HECM in February 2015. The language in the Seasoning Requirements section specifies that the lien must result in less than $500 cash to the mortgagor. Is HUD just concerned with the actual cash that goes to the potential borrower prior to application? Are we saying that if the borrower does not receive more than $500 cash in hand then they would be eligible?

In summary, we will need guidelines from HUD. There are many gray areas that need explanation. What is important is that you know that this exists, that it will be effective very soon and that it will require you to collect more information from clients potentially affected by this rule. We need to work with NRMLA, HUD and our fellow reverse mortgage counterparts to limit the scope of this new regulation. Provide NRMLA and HUD with examples, comments and information that will show fiscally sound and honest borrowers who will be unfairly eliminated from this program for no rational reason. Interpreted in its broadest sense, it could have severe negative impact on the program. If we can limit the scope to individuals who get a HELOC within 12 months of an application, and receive more than $500 cash in hand (and have HUD in the future revise it to apply only to transactions that would increase the mandatory obligations over 60percent), then the negative effect of this regulation should be manageable and HUD should be able to achieve its goal of fiscal stability and continued viability of the program.

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