Reverse

Feature: Dear HUD…

Written by Jessica Guerin, as originally published in The Reverse Review.

In its continued efforts to strengthen the reverse mortgage program, HUD has released yet another round of suggested policy change. In May, the department published a 200-page proposal detailing numerous amendments to HECM guidelines—some much-needed, some rather benign and others quite impactful.

HUD encouraged interested parties to submit comments regarding the proposed revisions, and also posed a series of specific questions to help the department gain a better understanding of consumers’ needs. In all, it received 247 comments from industry participants, many of whom expressed their fervent objections to some of the most drastic changes and provided detailed insight into their perspectives as HECM advocates.

Despite their objections, many respondents also took the time to thank HUD for its devotion to the program and for giving the industry and its partners an opportunity to weigh in. The fact that the department seeks feedback from those invested in the success of the reverse mortgage space highlights its commitment to working collaboratively to improve the program for America’s seniors. The hope is that HUD will carefully consider the feedback and weigh it against any policy change.

 

A Cause for Applause

HUD’s latest proposal was lengthy and detailed, containing suggested revisions on everything from servicing to interest rates to mandatory set-asides.

Among some of the more well-received rules were:

-The requirement that lenders fully disclose all HECM loan features

-The institution of exceptions in worthy circumstances to initial disbursement limits

-An amendment to allow eligible non-borrowing spouses to remain on title

-The establishment of a “cash for keys” program as an option to prevent borrowers from undergoing a lengthy foreclosure process

The National Council on Aging was one of several commentators that commended HUD on some of its suggestions. Of the exceptions to initial disbursement limits, Amy Ford of NCOA wrote, “We appreciate the possible addition of some flexibility in the first-year draw limits, particularly when there is an urgent need that cannot wait for the second year. In our experience, this situation arises most often when a borrower, or occasionally a non-borrowing family member, is seriously ill and requires home care—including for Alzheimer’s and dementia. In such situations, the aim of the reverse mortgage is usually to pay for home care expenses and/or home modifications for accessibility, which will permit the homeowner to remain in the home as long as possible, even if that only means less than a year.”

Writing on behalf of the MBA, Stephen O’Connor, senior vice president of public policy and industry relations, applauded the department on its revision of non-borrowing spouse rights. “MBA supports FHA’s amendment to the full-title requirement to provide that non-borrowing spouses and non-borrowing owners may stay on the title to the property that serves as the security interest for the HECM, making them mortgagors. This proposed change would eliminate the burden on non-borrowing spouses or other heirs who were previously not allowed to remain on title, but were still required to establish their legal ownership of the property upon the death of the borrowing spouse.”

The AARP also weighed in with some positive feedback. “AARP has long advocated for a rule that would require mortgagees to inform potential borrowers of all HECM products available,” wrote David Certner, legislative counsel and legislative policy director. “We commend HUD for implementing this important provision.”

Rate Caps Raise Concerns

Other proposed rule changes were not so well received,mainly the institution of a cap on lifetime interest rate increases on all adjustable-rate HECMs to 5 percent, and the reduction of the cap on annual interest rate increases on HECM ARMs from 2 to 1 percent. This proposed change incited heated protests from numerous respondents who claimed that such a rule would force lenders to increase their fees, making the loan more expensive for consumers. They also pointed out that it would lead to higher margins, which would negatively impact the loan’s appeal on the secondary market. The ultimate impact, many assert, is to reduce loan access to potential HECM borrowers.

A statement submitted by Retirement Funding Solutions explained how the proposed caps could be problematic. “In order to keep the HECM loan attractive in the secondary market with a low rate and small cap, lenders would need to increase the initial margin in order to compensate for the low future cap increase,” the submission states. “This would then lead to lower principal limits for the borrower and a faster accrual of interest on the loan balance. This can lead to additional costs for borrowers who need to come to closing with funds in order to pay off their current mortgage or may not be able to get the HECM at all. A fast-growing loan balance can also lead to an increase in MMI payout due to HECM loans that exceed the value of the home at time of maturity.”

In its 30-page response to HUD’s proposal, NRMLA also cited secondary market concerns. “These proposed caps create significant liquidity and issuer risk in an already delicate HECM market,” the association wrote, referring to a recent poll of HMBS investors who nearly unanimously agreed that the appetite for the adjustable rate product under the proposed caps would be “greatly diminished, if not eliminated.”

The American Bankers Association also weighed in, asserting that the caps would diminish the value of the unfunded tails of HMBS pools. “By exposing the issuer to the proposed interest rate risk, the proposed rule could cause economic harm and solvency issues for the HECM issuers/servicers,” ABA SVP and Senior Counsel Joseph Pigg writes. “By putting the issuer/servicer in harm’s way with such interest rate risk, the proposed rule is also putting the end-consumer at risk as quality of servicing could be greatly diminished. At the end of every HMBS asset there is a consumer who could feel the impacts if the quality of servicing is diminished.”

 

A Problem for the H4P

Another oft-cited objection centered on rule changes that would hinder the already struggling HECM for Purchase program. A suggested amendment to the counseling requirement for this type of loan would mandate that prospective H4P borrowers complete counseling prior to signing a sales contract or putting down earnest money.

NRMLA asserts that such a policy is inconsistent with customary real estate practices. “Executing a purchase contract and providing an earnest money deposit are often the first steps in a home purchase transaction. Financing choices have not been made at this juncture,” the association wrote, adding that the rule would adversely impact H4P availability and options for seniors. NRMLA asks that HUD maintain its current policy, which requires counseling before the execution of a formal contract or the disbursement of funds.

NRMLA also went on to ask that HUD reconsider its current prohibition on seller concessions in an H4P transaction—which includes a ban on payments that are traditionally made by the seller on behalf of the buyer—asking that the department treat the program like all other FHA money purchase loans, which allow sellers and others to contribute.

The National Association of Home Builders echoed NRMLA’s comments. “NAHB strongly believes that the seller contribution rules for the HECM for Purchase program should be the same as those in the FHA forward market. This would mean a limit of up to 6 percent of the purchase price for seller contributions such as closing costs, appraisal fees, title search, escrow, loan origination fees and taxes.”

Mark Browning, president of New York-based lender HomeChex, objects to HUD’s mandate regarding the allocation of closing costs and prohibition on closing cost credits, citing their negative impact on the H4P program. “The existing rule inflates HECM costs and is averse to consumer interests. HECM Purchase rules should provide for normal, accepted and customary allocations of closing costs between seller and buyer,” he wrote.

A final objection concerns a proposal that requires a Certificate of Occupancy be obtained before a HECM loan application can be completed. In H4P transactions involving new construction or renovation, this can be problematic by forcing borrowers to wait until construction is completely finished to enter into a transaction, potentially losing the sale to those able to act faster. As the MBA pointed out, “This rule has the potential to restrict consumer access to newly built homes and places older consumers at a competitive disadvantage.”

Retirement Funding Solutions fervently stated its objection to the CO rule. “FHA is unnecessarily penalizing senior HECM buyers who want to purchase a home in a new community,” the lender wrote. “We strongly request that FHA eliminate this requirement and align policy with traditional forward FHA financing guidelines, which allow applicants to apply for a loan prior to the issuance of the CO and instead require that it be issued as a condition of closing.”

Super-Contentious Super Lien Rules

Proposed rules set to impact the use of HECMs for condominiums have also incited objections from the reverse community and its partners. HUD suggests a prohibition on HECMs for properties where condominium association and homeowners’ association fees could potentially form super liens.

NCOA’s Ford calls the prohibition “over-broad,” asserting that it could prevent homeowners in states that already have super lien laws from utilizing HECMs. “Non-payment of HOA/COA fees is already a condition of default for HECMs,” Ford pointed out.

Matt Neumeyer, president of Premier Reverse Mortgage, also stressed his objection. “While this change is only one sentence, it could have a drastic impact on the reverse mortgage industry. From my research there are 21 states (plus D.C.) that allow some form of super lien status for homeowners’ associations,” Neumeyer wrote. “Considering that seniors regularly choose communities that are part of an association, this change will have a massive impact.”

The Community Associations Institute submitted a response that put a number to just how many people could be impacted by this rule. “HUD’s proposal may have the unintentional effect of disqualifying more than 4,090,000 senior citizens living in condominiums in 22 jurisdictions with statutes granting limited priority to community association liens.” The institute asserts that female seniors, who constitute a significant portion of condo owners, would be specifically affected.

“CAI members respectfully but strongly urge that the proposal be withdrawn and re-proposed without language limiting the efficacy of state statutes granting limited priority to community association liens,” the institute wrote.

The Futility of Including Utilities

HUD has also proposed an amendment that would expand the definition of “property charges” to include utilities, so that failure to pay utility bills could result in a lien against the property.

Several respondents took issue with this rule, claiming that it was unfair to seniors, burdensome to servicers and unnecessary in furtherance of the goal to protect the MMI Fund. NRMLA points out that there is currently no method to monitor the payment of utilities, and that servicers would likely only become aware of missed payments after a lien has been filed. NCOA claims that lumping all utilities in the same definition as property charges would “lead to needless trauma for seniors and a great deal of additional work for servicers.”

The National Consumer Law Center outlined its objection, concluding that this rule would ultimately put a substantial number of seniors at risk of foreclosure.

“Older adults struggling to pay for necessary utility services may be eligible for various needs-based programs that would assist with the payment of utility-related charges or weatherization of the home,” the center pointed out. “Borrowers who fall behind on utility payments should have the opportunity to benefit from state or federal energy-assistance programs for which they are eligible.”

“Rather than make the payment of utilities a trigger for a due and payable event, servicers should be required to periodically remind borrowers that assistance programs may be available to help them pay their utilities, manage their budget and access other services that would enable them to meet their basic needs and remain in the home.”

A Thorough Review

In its lengthy proposal, HUD lists numerous proposed changes that exceed what we can cover here. You can view the proposal in its entirety at federalregister.gov, and review the 87 comments available to the public at regulations.gov.

Now that the two-month comment period has closed, HUD has the time-consuming task of reviewing the responses it has received. The agency will not estimate how long it will take to release a final ruling, but it does say that every comment will be thoroughly reviewed by its staff.

“We read all the comments received and evaluate the support, opposition and suggestions for changes that commenters recommend,” says HUD spokesperson Brian Sullivan. “It’s why we have a comment period. While we have a wonderful staff of dedicated, super-smart people here at HUD, we don’t pretend to know everything, which is precisely why the public’s comment is so necessary.”

Sullivan says the department is always open to amending its proposals and values the feedback it receives from those invested in the industry.

“Whenever HUD is engaged in rulemaking, we take the comments we receive very seriously, even in the face of strong opposition. I reflect back to a time when HUD was deeply engaged in changing the regulatory requirements under the Real Estate Settlement Procedures Act (RESPA). We knew these rule changes would impact the way millions of American families buy homes or refinance their mortgages, so we were extremely careful to strike the right balance. On one hand, you had the need to provide consumers meaningful disclosures so they could actually comparison shop for a mortgage. On the other hand, we had to be mindful that mortgage professionals would be held accountable for cost estimates that can legitimately change between the time of application and closing,” Sullivan says. “HUD’s initial proposal was based on a series of ‘roundtable discussions’ with real estate professionals and consumer groups. In the end, HUD’s final rule was different from the department’s initial proposal, reflecting valuable feedback from our stakeholders and other interested parties. This is just one example of the sort of open-minded approach that is baked into how rules are changed.”

Sullivan says industry advocates can expect the same sort of thoughtful review in this latest round of proposed HECM policy change. “Generally, an inherent part of the rulemaking process is to solicit feedback from the very consumers and industry stakeholders who will be impacted by these policy changes,” he says. “In short, good government requires that public policies be informed by the public!”

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