FHA proposes changes to HECM borrower payments if lender defaults

The proposed change would expand FHA default investigations when mortgagees fail to make required payments to borrowers

The Federal Housing Administration (FHA) announced on Thursday that it has posted a new draft Mortgagee Letter (ML) to its single-family “drafting table” which, if implemented, would revise the agency’s investigation requirements regarding whether a lender is unable or unwilling to make a borrower payment required under a Home Equity Conversion Mortgage (HECM).

The proposal would also require a lender who failed to make a required payment to a borrower to provide certain information to FHA, according to the draft ML.

The proposed changes are being considered due to market conditions impacting the reverse mortgage industry, the FHA said, and aim to “improve market stability” while reaffirming the agency’s commitment to the HECM program, according to the draft guidance.

“FHA’s ability to promptly comply with the obligation to provide Borrower payments upon a Mortgagee’s default in their Borrower payment obligation is an essential element to the marketability of the HECM program,” the draft ML states. “In expanding FHA’s authority to investigate late payments to borrowers and obtain payment information, FHA is improving its ability to promptly comply with its statutory responsibility to provide payments to HECM borrowers upon a mortgagee’s default.”

Increased confidence in the HECM program, the FHA said, is an essential element to the program’s marketability. The small market of the HECM program compared to traditional mortgage programs keeps the securitization utilization similarly low, and securitization in the secondary market is critical to the program’s viability, the FHA said.

“Without the ability to securitize HECMs, there would not be sufficient liquidity in the market for the program to continue to function,” the draft guidance states. “FHA’s ability to promptly make borrower payments in the event of a lender’s payment default is critical for consumer and market confidence in the program, which, as described above, impacts origination volume, securitization capacity, and market liquidity.”

Additionally, the ability to quickly make required payments to borrowers will reduce the costs for the FHA, the proposed ML explains.

“When a payment owed to a borrower is made after the required due date, the borrower is owed interest on that disbursement,” the FHA states. “FHA must make this interest payment to the borrower when a Mortgagee defaults on their borrower payment obligation. Making these disbursements as quickly as possible will reduce this interest that must be paid from the mutual mortgage insurance fund, reducing FHA’s costs in making the borrower payments.”

Ultimately, this is a change intended to strengthen HECM marketability and reduce costs to the Mutual Mortgage Insurance Fund (MMIF).

“Given current market conditions, FHA has determined these changes are necessary to improve the fiscal safety and soundness of the HECM program,” the proposed ML states.

The FHA requests that all interested stakeholders thoroughly review the draft ML and submit comments to the agency by June 12, 2023 via a worksheet available to download as an Excel file from the drafting table website.

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