Questions Persist About Subordinate Liens Behind Reverse Mortgages

Despite a HUD Mortgagee Letter issued last month, ostensibly clarifying the agency’s policy on subordinate liens, reverse mortgage originators contend they were unclear about the acceptance of the practice. ML 2009-49 held that “no financing that results in a subordinate lien behind the HECM is permitted. If the homeowner does not qualify for a large enough reverse mortgage to pay off an existing loan, then that debt must be paid off or forgiven before the reverse mortgage closes.”

Sarah Hulbert, CEO, Senior Financial Corp., a brokerage based in Renton, Wash. says: “The [HUD] guidance appears to change its previous stance with regards to existing subordinate liens [although] HUD historically has always insured these loans.” As a result, Hulbert tells RMD: “One major lender is saying it’s [still] okay to re-subordinate and another huge lender says [the opposite].”

Meg Burns, director, Office of Single Family Program Development at HUD, says “there has been no change in policy. We know that some lenders are claiming that we previously permitted subordinates,” she acknowledges, “but we did not. We issued this guidance because we were concerned with that rumor circulating and wanted to clarify the policy – yet again.”

Multiple clarifications notwithstanding, one Florida originator says there was a time when “even thirds were permissible under certain hardship circumstances – especially if there was a payment moratorium on [that] third so the senior was not harmed. Then,” he says, “we were served ML 09-49, [followed by] ML 09-52, which says the exact opposite regarding trailing balances of refinanced loans.” Consequently, he goes on, lenders “must determine which part of this ‘battle of the Mortgagee Letters’ applies to HECMs, which part does not, and which part to question.”

[Two large reverse mortgage originators were asked to comment on this subject but did not do so prior to this posting.]

Neil J. Morse has been a communications professional working in the mortgage finance industry for more than a decade. He can be reached at [email protected]

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