The purpose of this bulletin is to summarize the key changes to the HECM program in accordance with HUD’s Final HECM Rule. This bulletin summarizes the key changes affecting the origination of HECM loans. Additional guidance on how to implement and apply the below changes is forthcoming.

Implementation

The changes will take effect on all loans with a case number assignment date on or after September 19, 2017. The changes are not retroactive for loans with case numbers assigned prior to September 19, 2017. Existing loans will continue to operate under the existing regulations.

Summary of Origination Changes

Borrower vs Mortgagor

Borrower

The borrower is a mortgagor who is an original borrower under the HECM Loan Agreement and Note. The borrower must be a mortgagor and must be on title to the property which serves as collateral for the HECM.

Mortgagor

The mortgagor is each original mortgagor under a HECM mortgage and his or her heirs, executors, administrators, and assigns. The mortgagor is not required to be a borrower. A non-borrowing spouse is a mortgagor but is not a borrower. All mortgagors shall hold title to the entire property which is the security for the HECM loan. For purposes of this requirement, mortgagor includes a person with remainder or reversion interest.

All non-borrowing spouses and non-borrowing owners of the property that will continue to hold title to the property which serves as collateral for the HECM must sign the mortgage as mortgagors, evidencing their commitment of the property as security for the mortgage.

Reverse Mortgage Counseling

All borrowers, eligible or ineligible non-borrowing spouses, and any non-borrowing owner must receive counseling.

HECM for Purchase

The following seller contributions are now permissible on a HECM for Purchase loan:

• Fees required to be paid by a seller under state or local law
• Fees customarily paid by a seller in the subject property locality
• The purchase of a Home Warranty policy by the seller

Borrower Disbursements

The lender must ask the borrower about any costs or other obligations that the borrower has incurred to obtain the mortgage.

If the borrower requests that at least 25% of the principal limit amount be disbursed at closing to the borrower, the lender must make sufficient inquiry at closing to confirm that the borrower will not use any part of the amount disbursed for payments to or on behalf of an estate planning service firm.

A new disclosure will be required to accommodate this inquiry.

Interest Rate Locks

Mortgagees, with the agreement of the borrower, may simultaneously lock in the expected average mortgage interest rate and the borrower’s margin prior to the date of loan closing or simultaneously establish the expected average mortgage interest rate and the borrower’s margin on the date of loan closing.

HECM to HECM Refinances

In order to exercise the ability to waive counseling on any HECM to HECM Refinance transaction:

The case number must have been assigned on or after August 4, 2014 and the borrower and non-borrowing spouse, if applicable, must have both received counseling, OR
The case number must have been assigned prior to August 4, 2014 and there is no applicable non-borrowing spouse.

PLEASE NOTE: CA, MA, MN, NC, TN, TX, and VT require counseling on all HECM loans, therefore borrowers looking to refinance an existing HECM do not have the ability to waive the counseling requirement in these states.

Repair Set-asides

All repairs shall be set aside at 150% of the estimated cost of repairs, rather than 150% of a contractor’s bid and 200% of an appraiser’s bid.

Property Tax Amounts

Lenders shall use the actual amount of the current annual property taxes, or 1.04 time the prior year tax amount, if the current tax bill has not been released.

Hazard and Flood Insurance Coverage

The borrower shall insure all improvements on the property that serves as collateral for the HECM whether in existence at the time of origination or subsequently erected, against any hazards, casualties, and contingencies, including but not limited to fire and flood.

Eligibility for Additional HECM loans

Once a borrower has obtained a HECM loan, he/she is eligible to obtain a future insured HECM loan if the existing HECM is satisfied prior to or at closing of the new HECM, or the borrower provides legal documentation evidencing the release of the borrower’s financial obligations to satisfy the existing HECM (such as in cases of divorce, etc.).

Resources

For a redlined version of the HUD Final Rule click here.

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2017 HECM Changes

In a move that shocked the entire reverse mortgage industry, HUD released Mortgagee Letter ML 2017-12, which will have a huge impact on the reverse mortgage program. The Mortgagee Letter indicates that in order for FHA to continue to endorse the HECM loan program, changes were needed which would increase the upfront Mortgage Insurance Premium (MIP) for many, lower the annual MIP for all as well as reduce the amount borrowers will be able to receive under the program for all new Case Numbers assigned on or after October 2, 2017.The first change noted is to the initial MIP and the Annual MIP. For some borrowers, this change will be a big savings while for others, it will increase upfront closing costs. Borrowers who utilized more than 60% of their initial proceeds due to paying off existing mortgages or using a reverse mortgage to purchase a home prior to the change had to pay an initial premium of 2.5% of the maximum claim amount, which is the lesser of the property value, HUD lending limit (currently at $636,150) or purchase price (if applicable). The new upfront premium of 2.0% will represent a 0.50% savings to those borrowers. However, borrowers who utilized less than 60% of their initial proceeds prior to the change will see their initial upfront MIP increase from 0.50% to 2.0%. Borrowers who planned on setting up a line of credit or monthly payment will now see a higher upfront cost. The annual MIP will drop to 0.50% of the outstanding balance compared to the current 1.25%.

The second change that will have the largest impact on the HECM reverse mortgage program is a reduction to the amount of cash that borrowers will have access to. This was done by way of two changes. The biggest change was that HUD lowered the 5.0% floor to 3.0%, so any loan above 3.0% will now see a reduction in the amount of proceeds available with each rate increase. Additionally, HUD lowered the Principal Limit Factors for most borrowers, even at the floor.

Bottom line is that borrowers who plan on taking more than 60% of available proceeds will see a reduction in closing costs, but they will also see a reduction in available proceeds. Those taking less than 60% will see their initial upfront costs increase. All borrowers will see their annual MIP drop by 0.75% of the outstanding balance per year.

For those borrowers who wish to achieve the maximum available to them should consider starting their reverse mortgage right way. We always see a rush of applications prior to a major change like this one. As such, counseling agencies may become inundated with calls, so plan ahead and call today. In California, we have a 7 day cooling off period in which the lender cannot order a case number for 7 days after counseling has been completed (the 7 day period doesn’t include the day of counseling, so it is technically 8 days).

Beat the HECM changes. You can protect your current limit by getting a case number assigned prior to October 2nd. In order to obtain a case assignment, we need a fully signed application and counseling certificate returned to our office no later that September 29th.

The chart below shows a comparison of the old Principal Limit Factors (PLFs), the new PLFs, the percentage change in the PLF from the old to the new as well as an example of Principal Limit (PL) assuming a home value of $300,000 and interest rate of 5%. If you wish to manually calculate the difference in your own scenario, find your age, then use the % change and multiply it by your home value. That will represent how much less is available to you under the new program.

The post Oct. 2017 HUD to Lower Limits and Increase Costs appeared first on MLS Reverse Mortgage.