National Standard Unclear When Handling HECM Refinances

An elderly couple inquires about refinancing their reverse mortgage. Their fees will be around $8,000 while their principal limit would increase by $10,000. But is it a good decision?

RMD set out to see whether there is a standard to guide reverse mortgage loan officers in determining whether it makes sense to refinance a HECM when the senior will only receive a small benefit.

However, after talking to several sources, it remains apparent that there is no clear guidance to determine whether it’s appropriate in all instances for a senior.

According to Washington, D.C. attorney Jim Milano, there is “not a net tangible benefit requirement, per se, under the FHA rule. It’s just that if you meet what they call ‘the Five Times Test,’ you don’t have to go to counseling again.” If a borrower does not pass the Five Times Test, Milano notes that, “It doesn’t mean they can’t do the loan. It just means they have to go back to counseling.”

However, Milano notes that there are at least twelve states with regulations on refinance or mortgage loan transactions that require a “net tangible benefit” to the borrower be met, and HECM refinances are subject to such state laws. In some states, the question of whether the loan is in the best interest of the senior is further complicated by statutory requirements making the broker the fiduciary. As such, loan officers should know the requirements of their states.

Peter Bell, President of NRMLA, points out that each lender has their own policy regarding HECM to HECM refinances. However, he notes that it is “a highly subjective manner and every case is different. At the very least, a loan originator should point out the details… to the prospective borrower and urge them to discuss this with a counselor or other trusted advisors.”

Write to Reva Minkoff

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