FHA publishes mortgagee default guidance in new ML

The new ML comes after proposed guidance on the topic was announced in May

The Federal Housing Administration (FHA) this week published Mortgagee Letter (ML) 2023-15, which implements changes to the FHA for instances of anticipated or actual default of a lender’s payment obligations to borrowers of Home Equity Conversion Mortgage (HECM) loans.

The proposed guidance announced and posted to the FHA Single Family Drafting Table in May. The FHA has now codified the guidance after receiving feedback from industry members and other stakeholders. The comment period closed on June 12.

With the new provisions, the ML provides additional sources for the FHA to receive notice of a mortgagee’s anticipated or actual default on borrower payments; and requires mortgagees to provide the FHA with borrower payment information when the FHA determines the mortgagee is unable or unwilling to make the required borrower payments.

Terms of the ML are effective immediately.

The move is in recognition of recent market conditions that have impacted the forward and reverse mortgage industries, the agency said.

“To ensure that HECM Borrowers are provided with the payments due to them under the HECM loan documents, Section 255 of the National Housing Act makes FHA responsible for making any payments that are not paid timely to Borrowers due to the Mortgagee defaulting on their Borrower payment obligation,” the ML states. “Any payments made by FHA to HECM Borrowers for this reason are secured by the HECM second mortgage.”

The ability for the FHA to “promptly comply” with the obligation to provide payments to borrowers after a lender defaults is described as “an essential element to the marketability of the HECM program,” the ML states.

This change will allow improve the FHA’s ability to comply with the statutory responsibility and ensure that payments to borrowers are not interrupted if a lender defaults.

In addition, the FHA addresses market liquidity challenges and how consumer confidence has a direct impact on HECM securitization.

“The HECM program is relatively small when compared to the number of forward mortgage transactions each year,” the ML states. “This small number of new originations annually results in a small market to support securitization of HECMs in the secondary market. Without the ability to securitize HECMs, there would not be sufficient liquidity in the market for the program to continue to function.”

Addressing the payment issue in the wake of a lender default is critical to maintaining both consumer and market confidence in the HECM program, and can also reduce costs incurred by the FHA, the ML notes.

“When a payment owed to a Borrower is made after the required due date, the Borrower is owed interest on that disbursement,” the ML 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 (MMIF), reducing FHA’s costs in making the Borrower payments.”

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