The U.S. Department of Housing and Urban Development (HUD) on Friday announced that a proposed change to the Home Equity Conversion Mortgage (HECM) for Purchase (H4P) program has been modified to bar the practice of premium pricing, and it will only allow interested party contributions (IPCs) on H4P closing costs from property sellers, builders, real estate agents and developers.

After concerns were raised in the public comment period following the proposed H4P changes announced late last year — including from AARP — some planned updates will not be implemented, according to a statement from the Federal Housing Administration (FHA). A Mortgagee Letter (ML) detailing the particulars of the policy changes has been released in conjunction with a new entry in the Federal Register.

Changing course

In October, FHA published proposed guidance for the H4P program in the Federal Register. In certain circumstances, the program would allow for inclusion of “an ‘interested party contribution’ [of] up to six percent of the sales price,” according to the original plan. After concerns during the proposal’s comment period were brought to the attention of policymakers, however, HUD and FHA have decided to walk back some of these plans.

“FHA will move forward with its proposal that permits contributions by the property seller, real estate agent, builder, or developer to HECM for Purchase borrowers’ closing costs,” the update said. “However, at this time, FHA will not allow [lenders] and third-party originators (TPO) to make such IPCs, nor will it allow premium pricing to qualify as an eligible funding source to meet the borrower’s minimum required investment.”

The new guidance as published in the Federal Register and in a new ML “also restores FHA’s previous policy that discount points and interest rate buydowns are not allowable closing costs,” FHA explained.

The original effective date as announced last fall remains in effect, which will be April 29, 2024. ML 2024-06 details the particulars of the policy revisions, changes to particular regulations and added that the “model HECM fixed and adjustable rate mortgage payment plans and model Exhibit II – Schedule of Closing Costs have been modified to align with the provisions of this ML.”

Initial concerns

In a letter sent to FHA Commissioner Julia Gordon in December, David Certner, legislative counsel and legislative policy director in the government affairs division at AARP, explained why the group opposed the initially proposed changes to the H4P program.

“We oppose the permitting of mortgagee and third-party originator premium pricing credits to be used toward the down payment,” Certner wrote at the time. “Premium pricing credits are discretionary and can be used as a means to influence a borrower to engage in the transaction. These credits can lead to fair lending violations. In the forward market, there have been cases where lenders do not pass on the full amount of premium pricing credits to consumers, resulting in an enforcement order and penalty fines to the lender.”

Additionally, since HECMs are negatively amortizing, then accepting a higher interest rate in return for a closing credit “is a very costly tradeoff for a consumer, and even more costly for a reverse mortgage transaction since interest costs are added to the loan balance each month,” the letter stated.

While AARP supported IPCs on H4P loans from the seller, real estate agent, builder or developer, the group opposed “permitting mortgagees and third-party originators to contribute to closing costs. Historically, mortgage lenders and originators have been prohibited from contributing to closing costs to protect borrowers.”

Reactions to the changes

Steve Irwin, president of the National Reverse Mortgage Lenders Association (NRMLA), told RMD that the association is disappointed in some aspects of this decision.

“NRMLA, and its members, are disappointed that HUD has had to pull back on certain specific H4P features, which would have better aligned the product with the way things are done on the forward side of the mortgage business,” he said. “We also understand that we must ensure there is clarity for the consumer in how these product features work, and the [resulting] consumer impacts. NRMLA will devote itself to identifying any concerns regarding these features and work to resolve them.”

Reverse mortgage originator Chris Bruser with Mutual of Omaha Mortgage told RMD that he remains excited in general about the closing cost changes and builder incentives, but the discount point changes are discouraging as an industry professional who actively sources H4P business.

“I’m kind of a little bit disappointed in that,” he said. “It would be nice to be able to see that, especially here in Florida, where our closing and third-party costs are quite a bit higher. Any kind of extra help that our borrowers could obtain to lower their investment would be a welcome change.

“But I think at least allowing the credits to be there is a big step. Not allowing the discount points doesn’t necessarily seem like a game changer to me, though it would be nice to have that additional help. Still, I’ll take what we got.”

The National Consumer Law Center (NCLC) quickly lauded the development, according to an announcement issued by the organization.

“Reverse mortgage borrowers take on a complex financial product to reduce housing expenses and maintain stable shelter,” said Sarah Mancini, co-director of advocacy at NCLC. “HUD’s policy announcement today will remove the risk that these older homeowners will be up-charged on their interest rate in ways that would cost them more and eat up their home equity faster.”

The move will also stabilize housing for older Americans, according to Odette Williamson, a senior attorney with NCLC.

“HUD’s actions to strengthen the HECM program are extremely important steps toward increasing stable housing for older adults,” Williamson said. “We look forward to continuing to share information with the agency as it bolsters this crucial loan program.”