What the HECM : Reverse Mortgages Can Be Used to Buy a Home!

Sunday, 01 February 2009 00:00

Articles - Legal Updates

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One of the more exciting developments for the reverse mortgage industry stemming from the Housing and Economic Recovery Act of 2008 was its authorization of the Federal Housing Administration (“FHA”) to insure Home Equity Conversion Mortgages (or HECMs) for the purchase of homes (HECM for Purchase).  HECM for Purchase has been a long sought initiative of the National Reverse Mortgage Lenders Association (NRMLA) working collaboratively with FHA, for the principal reason that it facilitates the ability of seniors to downsize into homes that better suit their needs or to move from their existing residence to another geographical region to be close to family or others who can better provide the care and fellowship they desire.  



Although the road to HECM for Purchaser as been a long and not altogether easy one, in many ways, and as discussed in this article, the hard part may have just begun.  Implementing HECM for Purchase raises a number of issues not previously dealt with by reverse mortgage lenders and originators requiring new documents, policies, procedures and processes.  Although this may not be “entertaining” reading for the squeamish (after all, this article is written by lawyers), the goal of the HECM for Purchase program is a noble one, and the industry’s efforts will greatly benefit not only the seniors we serve, but also their loved ones.  



So, come along with us as we explore the guidance that has been provided by FHA as well as some of the problems and pitfalls on the road to implementing HECM for Purchase.



What is a HECM for Purchase?


The new HECM for Purchase program allows senior borrowers 62 years of age or older to purchase a home using the proceeds from an FHA-insured HECM reverse mortgage.  On October 20, 2008, the FHA issued Mortgagee Letter 2008-33 (ML 08-33) implementing amendments enacted by the Housing and Economic Recovery Act of 2008.  As is the case with many mortgagee letters outlining new HECM program terms, ML 08-33 raised almost as many questions as it answered.  The result is that FHA has further clarified ML 08-33 in its Frequently Asked Questions publication on its website (HECM for Purchase FAQ) and, as of the date this article was submitted for publication, HUD had informally indicated its intention to further clarify the program by issuing a new HECM for home purchase mortgagee letter in the near future.  



ML 08-33 defines a “HECM for Purchase” as a real estate purchase where title to the property is transferred to the HECM borrower, which the borrower will occupy as a principal residence, and, at the time of closing, the HECM first and second liens will be the only liens against the property.  The HECM for Purchase FAQ further clarifies that the HECM for Purchase program eliminates the need for a second closing, allowing the senior borrower to purchase a new principal residence and obtain a reverse mortgage as part of a single transaction.  



The new HECM for Purchase program became available for loans with FHA case numbers assigned on or after January 1, 2009.  Prior to January 1, 2009, FHA-approved mortgagees were allowed to take an application for a HECM for Purchase, however, they were not permitted to process or perform services that would result in a charge to a prospective borrower.  HUD permitted lenders to lock-in the expected average mortgage interest rate for HECM for Purchase applications taken prior to January 1, 2009.  However, HUD indicated in the HECM for Purchase FAQ that the maximum permitted interest rate lock period of 120 days begins to run on the day the FHA case number is assigned to the loan, i.e., on or after January 1, 2009.



Similar to traditional HECM refinance transactions, in HECM for Purchase transactions, lenders must calculate the maximum claim amount and the principal limit in accordance with HECM regulations.



Eligible Property Types 



Eligible property types for the new HECM for Purchase program include existing one-to-four unit properties where construction has been completed, the property has been approved for occupancy (a final Certificate of Occupancy, or its equivalent, has been issued), and the property is occupied by the borrower(s) as a principal residence.  Any construction loan financing for the property must be satisfied, the HECM liens must be in a first and second lien position, and no other liens against the property must exist at closing.



Certain types of properties are ineligible for FHA insurance under the HECM for Purchase program, including, among others: (i) cooperative units; (ii) newly constructed residences where a Certificate of Occupancy or its equivalent has not been issued by the appropriate local authority; (iii) existing manufactured homes built before June 15, 1976; and (iv) existing manufactured homes built after June 15, 1976 that fail to conform to the Manufactured Home Construction Safety Standards, as evidenced by affixed certification labels (e.g., data plate and HUD certification label) and/or lack a permanent foundation as required in HUD’s Permanent Foundations for Manufactured Housing Guide.



Further, lenders and originators are not permitted to take an application on a property that is under construction and not habitable.  HUD made clear in its HECM for Purchase FAQ that lenders and originators may only take an application once the Certificate of Occupancy or its equivalent has been issued.  This limitation promises to create headaches for senior purchasers and sellers on new construction by eliminating the ability of the purchaser to provide preliminary loan qualification to the seller and necessarily delaying closing for several weeks (to accommodate the processing and closing of the HECM for Purchase transaction) following the completion of construction.  



Title Requirements



HECM for Purchase can be used to satisfy outstanding payment obligations associated with a land contract, contract for deed or other similar installment purchasing arrangements.  However, lenders and originators need to ensure that the property which is the subject of the land contract will (A) be used as collateral for the HECM loan, and (B) will meet FHA’s title requirements (see discussion immediately below).



ML 08-33 noted that FHA’s title requirements, as provided in section 255(b)(4) of the National Housing Act and implemented in the HECM regulations at 24 C.F.R. § 206.45, provide, in part, that a HECM must be on real estate held (i) in fee simple, or (ii) on a leasehold under a lease for not less than 99 years which is renewable, or (iii) under a lease having a remaining period of not less than 50 years beyond the date of the 100th birthday of the youngest borrower.  



Notably, ML 08-33, on its face, does not appear to include a life estate as a permitted property interest.  ML 08-33 makes no reference to HUD’s previous regulatory guidance authorizing traditional HECM refinance transactions secured by an interest in the property that is a life estate (provided all remaindermen subject their interests to the lien of the HECM mortgage or deed of trust).  Accordingly, without further clarification from HUD, it is an open question whether a HECM for Purchase transaction, where the senior holds title as a life estate, is insurable by FHA. 



Monetary Investment Requirement 



 Senior borrowers must make a down payment sufficient to satisfy the difference between the HECM principal limit and the sales price for the purchased property, plus any HECM loan related fees that are not financed or otherwise offset by other allowable FHA funding sources.  As is the case with traditional HECM refinance transactions, seniors may continue to finance closing costs, or elect to pay them out of pocket.  The required monetary investment must come from an allowable funding source.  Seniors will either need to use cash on hand or cash from the sale of other assets for this down payment.  For example, a withdrawal from the senior borrower’s savings or retirement account would be an acceptable funding source.  



ML 08-33 further explained that seniors applying for a HECM for Purchase loan may not obtain a bridge loan (or so called “gap financing”) or employ other interim financing techniques to meet the down payment requirements and/or pay for closing costs in connection with HECM for Purchase transactions.  This restriction includes subordinate liens, personal loans, secured or non-secured loans from other assets (i.e., car, home equity line of credit, or investment property or second home), cash withdrawals from credit cards, seller financing and any other lending commitments that cannot be satisfied at closing.  



HUD expressly noted in its HECM for Purchase FAQ that seniors may not apply credit card cash advances towards the required monetary investment or closing costs.  Doing so would be in violation of FHA’s requirement that all outstanding obligations connected to the HECM transaction (whether for home purchase or refinance) be satisfied prior to or on the date of closing.



In addition, importantly, HUD indicated that gifts are not allowed as an acceptable source of funding.  HUD explained that prospective borrowers may only use their own money or money obtained from the sale of their own assets.  FHA also prohibits the use of loan discount points, interest rate buy downs, closing cost assistance, builder incentives, gifts or personal property given by the seller or any other party.  Seller concessions and seller financing are not permitted.  



Lenders and originators are required to verify the source of all funds prior to closing.  Senior borrower’s savings and checking accounts may be verified through a verification of deposit, along with the most recent bank statement.  Lenders must pay attention to large increases in accounts and recently opened accounts, and must obtain credible explanation of the source of those funds.  Such documentation must be provided in the FHA case binder.  HUD’s cautionary note in ML 08-33 warns that the failure to provide the necessary documentation may result in a notice of rejection and/or delay of endorsement.



HECM for Purchase Loan Documents
 


ML 08-33 and HUD’s HECM for Purchase FAQ do not provide detailed guidance concerning the loan documents that lenders should use with the HECM for Purchase program.  However, and generally, we note that HUD instructs lenders that originate HECM loans to utilize the model HECM loan documents published in the Appendices to the HUD HECM Handbook 4235.1 REV-1.  HUD originally developed the model HECM loan documents for use with traditional HECM refinance transactions.  HUD has not updated the model HECM documents and, in particular, they do not reflect applicable and changing state law requirements.  Accordingly, lenders should carefully review and appropriately revise their current HECM refinance documents prior to using them in HECM for Purchase transactions.  



For instance, the HECM for Purchase loan documents should reflect that seniors must occupy the property within 60 days from the date of closing.  In addition, HECM for Purchase loan documents must comply with any state-specific requirements for purchase-money transactions.  Some states’ laws impose requirements for purchase-money mortgage transactions, including special legends or language for purchase-money security instruments.  In this area, lenders may wish to consult with their counsel to ensure the loan documents comply with applicable state laws, particularly with regard to state law lien issues.  Note, also, that some states have specific reverse mortgage laws that define a reverse mortgage in a way that could be problematic and potentially conflict with HUD’s present regulatory guidance or even subject HECM for Purchase loans to state high cost loan limitations or, as may be the case in Texas, present difficult issues under homestead rights embodied in state constitutional law.  



In addition, ML 08-33 reiterates that lenders are responsible for determining whether a particular HECM loan is open or closed-end credit.



Enhanced Borrower Counseling



HUD requires approved HECM Counseling agencies to counsel senior borrowers interested in a HECM for Purchase loan on all topics covered in ML 08-33 and other HUD requirements and issuances.  Counseling for the HECM for Purchase program was to become available on January 1, 2009.  However, as of the date of publication, industry members have reported that many counseling agencies have not yet augmented their interview protocol to incorporate the topics covered in ML 08-33.  Counseling agencies are encouraged to ensure that seniors interested in HECM for Purchase receive counseling as required by ML 08-33.  



In its HECM for Purchase FAQ, HUD encourages all first-time homebuyers to meet with a reverse mortgage counselor that offers pre-purchase counseling to educate themselves on the responsibilities of becoming a homeowner.  Prior to signing a sales contract, FHA encourages a home inspection of all properties that will serve as collateral for HECM for Purchase transactions.  The inspection serves two purposes: (1) to determine the magnitude, if any, of repairs and/or rehabilitation the home may require, as well as (2) to help the buyer negotiate the purchase price in situations where the home requires repair or rehabilitation. 



HUD recently published a HECM for Purchase training presentation for HECM counselors (HECM for Purchase Presentation).  According to the Presentation, to help seniors avoid potential pitfalls, the HECM counselor must evaluate the senior borrower’s financial situation, including the availability of funds for the required monetary investment and whether the funds are from an allowable FHA source.  Counselors are also instructed to educate the senior borrowers about the home buying process and the obligations related to the HECM loan, including (i) real estate taxes and hazard insurance, (ii) homeowner association fees, and (iii) home maintenance costs.  



Closing a HECM for Purchase Transaction



(a)    Required Down Payment 



As noted above in this article, seniors must make a monetary investment sufficient to satisfy the difference between the HECM principal limit and the sales price for the property, plus any HECM fees that are not financed.  This down payment by the senior borrower, together with the proceeds from the HECM transaction, will provide the consideration for the purchased property.  



ML 08-33 states that senior borrowers may choose to make a larger down payment in order to retain a portion of the available HECM proceeds for future draws.  For example, the senior borrower may elect to provide more funds than those necessary to settle the transaction, thereby establishing, for example, a line of credit that can be drawn upon after closing as long as the borrower’s net principal limit remains available (and the borrower lives and continues to occupy the property as a principal residence).



Lenders originating HECM for Purchase loans need to be mindful of several important considerations in this area.  First, lenders may wish to consider informing the borrower of the borrower’s right to make a larger down payment.  Lenders may also wish to ascertain the borrower’s intent to reserve a portion of the available net principal limit for future draws.  In addition, lenders need to consider how the amount of money the borrower must produce to close the transaction will be determined prior to closing, and whether estimated amounts paid by the borrower to close the loan, that are over and above what is necessary to close, may need to be refunded to the borrower if the borrower does not wish to reserve loan proceeds for future draws.  Also note that, according to HUD’s FAQ, the title company (settlement agent) is responsible for disbursing the HECM for Purchase loan proceeds in accordance with applicable state laws.



(b)    Satisfaction of Prior Liens



In HECM for Purchase transactions, lenders are required to ensure that all outstanding or unpaid obligations incurred by the prospective borrower are satisfied at closing.  Importantly, HUD’s HECM for Purchase FAQ appears to prohibit subordination agreements subordinating all or part of the property’s indebtedness behind the first and second HECM for Purchase security instruments.  However, HUD’s prior guidance in Mortgagee Letter 2006-20 issued in connection with traditional HECM refinance transactions generally permitted existing liens to be subordinated to the first and second HECM liens, if certain requirements are met.  



Although this issue remains unclear, given the apparent negative treatment of subordination agreements in HUD’s HECM for Purchase FAQ, entering into a subordination agreement with the existing lien holder in connection with closing a HECM for Purchase transaction does not appear to be prudent, absent further guidance or clarification from HUD concerning this matter.



(c)    Cancellation of Transaction and Right of Rescission



As stated in HUD’s HECM for Purchase FAQ, the senior borrower may decide to cancel the purchase transaction at any time prior to the date of closing.  If the senior borrower decides to cancel the transaction, he or she must notify all parties in writing.  Where earnest money has been provided, HUD advises that the senior borrower should review the sales contract to determine if the earnest money is refundable. 



ML 08-33 also points out that purchase money mortgage transactions generally are not rescindable under the federal Truth-in-Lending Act (and Regulation Z).  However, ML 08-33 also states that HECM for Purchase lenders are strongly encouraged to consult with their counsel to assure compliance with all applicable federal and state laws, including the Truth-in-Lending Act, its implementing Regulation Z, and any applicable right of rescission thereunder.  In this regard, note that under a HECM loan, subsequent advances of credit after closing may not be so exempt unless a right of rescission is offered to the consumer at the outset of the transaction.  In addition, the characterization of loan proceeds as purchase money or non-purchase money may be relevant not only for purposes of determining whether to give the notice of right to cancel and when to give it, but also with respect to whether the lender has delayed its performance for the applicable 3-day rescission period.  This is an extremely complicated and technical area of law, which is best left to consumer compliance officers and counsel.  Lenders should consider providing seniors with a carefully tailored notice of right to rescind any non-purchase money proceeds of a HECM for Purchase loan. 



(d)    Required Repairs 



According to HUD’s HECM for Purchase Presentation, if the home to be purchased with the proceeds of the HECM loan requires repairs, the repairs must be completed by the seller prior to close.  These materials prepared for counseling community also provide that senior borrower cannot put any money into repairs before the senior borrower owns the home.  While the logic of not investing in repairs prior to the transfer of title makes sense, the direction in these materials that all repairs must be completed prior to close does present a conflict with HECM regulations and prior Mortgagee Letters issued by HUD concerning repair set asides.  HUD is encouraged to clarify the use of repair set-asides in HECM for Purchase transactions in order to resolve this conflict.  .



(e)    Delayed Borrower Occupancy Requirement



ML 08-33 provides that HECM senior borrowers must occupy the property within 60 days from the date of closing.  In addition, ML 08-33 requires lenders to ensure that the property, when used as collateral for the HECM, will serve as the principal residence of the HECM borrower.  



This delayed borrower occupancy requirement is further explained in HUD’s HECM for Purchase FAQ.  According to the FAQ, when purchasing a new principal residence, the HECM borrower has 60 days to occupy the home.  Unlike a traditional “forward” mortgage, there is an increased risk to FHA when the HECM borrower does not occupy the home.  Therefore, the HECM for Purchase FAQ states that, prior to closing, the HECM borrower and seller should agree to a date for physical occupancy of the property, and the lender should confirm occupancy prior to submission of the case binder to the local HUD Homeownership Center (HOC) for endorsement. 



To date, there appears to be no written guidance from HUD concerning specific means of verifying occupancy within the required 60-day period.  However, at least one HOC has provided informal guidance indicating that HUD will handle the 60-day occupancy requirement in a similar fashion as with traditional “forward” FHA-insured mortgages.  According to the HOC’s informal guidance, the borrower is expected to sign documentation acknowledging the requirement, and confirming their intention, to occupy the property within 60 days.  Such documentation should be included in the loan file.  



Anti-Flipping Provisions and Seasoning Requirements 



ML 08-33 added a caution for lenders to be vigilant to protect against mortgage fraud and property flipping, including the coercion of seniors to use a reverse mortgage for the purchase of distressed properties at prices in excess of fair market value.  
ML 08-33 instructs lenders to take steps to ensure that: (i) only current owners of record sell properties that will be financed; (ii) any resale of a property may not occur 90 or fewer days from the last sale; and (iii) for resales that occur between 91 and 180 days where the new sales price exceeds 100% of the previous sales price, FHA will require additional documentation validating the property’s value.



If a lender suspects a senior has become a victim to a property flipping scam, the Processing and Underwriting Division of the local HOC should be contacted. Complaints may be reported to HUD’s Inspector General Hotline at: HUD Office of Inspector General Hotline, GFI 451 7th Street, SW Washington, DC 20410 Toll free: 1 (800) 347-3735 TDD: (202) 708-2451.



NRMLA also is considering a set of Best Practices recommendations for NRMLA members to provide helpful and practical additional guidance about avoiding property flipping scams. 



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As with any new lending program, rolling out HECM for Purchase presents many challenges for reverse mortgage industry participants.  While HUD has provided some guidance, with additional guidance that may be forthcoming, there remain a number of practical and legal/regulatory hurdles originators and lenders will need to address.  This article has highlighted a few of those pitfalls and encourages originators and lenders to work with their risk mitigation experts and counsel to develop documentation, policies, procedures and processes that permit them to offer HECM for Purchase in a manner that furthers the FHA program, as well as the interests of the seniors we serve.    



Due to the generality of this article, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.



By Joel Schiffman and Fed Kamensky, of the law firm of Weiner Brodsky Sidman Kider, P.C.  The law firm serves as General Counsel to the National Reverse Mortgage Lenders Association and advisor to reverse mortgage lenders and industry participants throughout the nation.  The firm has offices in Washington, D.C., Newport Beach and Dallas.  Additional information can be found at www.wbsk.com or by telephone at 202.628.2000.  Messrs. Schiffman and Kamensky may be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it and This e-mail address is being protected from spambots. You need JavaScript enabled to view it .