HUD's Summer Julep Mortgagee Letter 2009-21 and HECM-to-HECM Refinances
Monday, 31 August 2009 16:00
Providing a little refreshing news to help us weather the dog-days of summer, the U.S. Department of Housing and Urban Development (HUD) recently issued its latest missive on Home Equity Conversion Mortgage (HECM) refinances, clarifying its application to HECMs that previously didn’t qualify. On June 30, 2009, the Federal Housing Administration (FHA) issued Mortgage Letter 2009-21 (ML 09-21) correcting and clarifying that certain HECMs that have been assigned to HUD are eligible for refinance in a so-called “HECM-to-HECM” refinance transaction. In this article, we explore the statutory underpinnings of the so-called “stream-line” HECM-to-HECM refinance transaction, how the program works, affording seniors substantial costs savings on mortgage insurance premiums, the technical changes instigated by ML 08-21 and its reigning successor, ML 09-21, and related state law issues. At the outset, the authors wish to thank FHA for keeping our minds from becoming too languid during these hottest, sultry days of the year, and, of course, for affording us the opportunity to share with you HUD’s “Mortgage Letter” tonic, rejuvenating as a julep, to combat the never-ending precession of the equinoxes.


The statutory genesis of “stream-lined” HECM-to-HECM refinance transactions have its origins in the American Homeownership and Economic Opportunity Act of 2000 (enacted on December 27, 2000, the “AHEOA”), reportedly the last piece of federal legislation signed by then President Bill Clinton. Section 201 of the AHEOA authorized the FHA to insure a HECM loan that refinances an existing FHA-insured HECM loans (i.e., a HECM-to-HECM” refinance). Applicable provisions of AHEOA permit waiver of independent HECM counseling under certain conditions and require mortgagees to provide seniors with an anti-churning disclosure, which informs the mortgagor of the total cost of the refinancing transaction and the new principal limit. Most importantly, the new law lowers the borrower’s costs for a HECM to HECM refinance transaction by providing a lower up-front mortgage insurance premium (MIP).


Section 201 of the AHEOA directed HUD to issue implementing regulations within 180 days of its enactment. HUD thereafter, on March 25, 2004, published its interim rule amending Title 24 CFR Part 206 by adding 24 CFR Part 206.53. The new interim rule implemented the HECM to HECM refinance insurance authority and mandated the form and substance of an “anti-churning disclosure.”. Unfortunately, the specific wording of the interim rule limited FHA’s refinance authority to “presently insured HECMs”, thereby, as discovered in retrospect, excluding HECMs that have already been assigned to HUD from being eligible for refinancing.


As a result, on September 4, 2008, the HUD issued regulations making a technical correction to the HECM regulations found in 24 Code of Federal Regulations (CFR) Part 206, extending FHA’s HECM refinance insurance authority and the benefit of a reduced initial mortgage insurance premium (MIP) to HECM loans that were previously assigned by the lender to HUD when the loan reached 98% of its maximum claim amount. HUD also issued HECM-to-HECM refinance guidelines in Mortgagee Letter 2004-18. In particular, ML 08-21 announced that HUD would insure all HECMs that are originated for the purpose of refinancing an assigned loan that is not in a due and payable status for reasons that cannot be corrected, such as death of the last mortgagor or conveyance of title by all mortgagors, but closed on or after October 6, 2008, the effective date of the rule. HUD’s latest HECM Mortgage Letter, ML 2009-21, corrects, clarifies and replaces ML 04-18, and became effective on its publication date, June 30, 2009.


Reduced Mortgage Insurance Premium


Under ML 2009-21, and as previously provided, FHA will collect a reduced up-front MIP of two (2%) percent of the increase in the maximum claim amount (i.e., the difference between the maximum claim amount for the HECM-to-HECM refinance and the maximum claim amount for the existing HECM being refinanced). However, HUD clarifies in this latest mortgage letter that:
“[A] senior borrower may obtain a reduced up front MIP only in a HECM-to-HECM refinancing secured by the same home that serves as collateral for HECM loan being refinanced. Thus, for instance, seniors that currently have a HECM loan cannot obtain a reduced upfront MIP by replacing their current HECM (and home) with a new HECM for Purchase for a new home.”


Anti-Churning Disclosure Requirements (Timing of Delivery Depends upon TILA Classification of Loans as Open or Closed End Credit)


With ML 09-21, HUD revised and published a new form HUD-92901 “Home Equity Conversion Mortgage (HECM) Anti-Churning Disclosure.” The prospective senior borrower (or mortgagor) must sign the Anti-Churning Disclosure and the lender-mortgagee must include the Disclosure in the FHA case binder.


The Anti-Churning Disclosure is designed to help illustrate whether the HECM refinance will provide a tangible benefit to the mortgagor, and requires the mortgagee to provide the mortgagor its best estimate of: (i) the total cost of the refinancing to the mortgagor; and (ii) the increase in the mortgagor’s principal limit, as measured by the estimated initial principal limit on the HECM refinance less the current principal limit on the existing HECM. The “current principal limit” is the remaining loan amount the mortgagor could withdraw from the existing HECM.


As part of a HECM-to-HECM refinance transaction, the mortgagee must provide a best estimate of funds available to the mortgagor minus any closing costs and other fees. For HECM-to-HECM refinance transactions that are open end credit, as defined under the federal Truth-in-Lending Act (TILA), the mortgagee must provide the prospective senior borrower with the Anti-Churning Disclosure form concurrently with the RESPA-required Good Faith Estimate (GFE), as specified under RESPA’s Regulation X, 24 C.F.R. 3500.7.


For HECM-to-HECM refinance transactions that are closed end credit, as defined under the federal Truth-in-Lending Act (TILA), mortgagees must provide the prospective senior borrower with the Anti-Churning Disclosure concurrently with such other disclosure forms that can be provided in lieu of the GFE under HUD’s RESPA regulations at 24 C.F.R. 3500.7(h), i.e., Important Terms disclosures required under TILA and Regulation Z, section 226.5b, in connection with open end credit secured by a consumer’s dwelling.


Housing Counseling Requirements


As a cornerstone of the HECM Program, applicable regulations require HECM mortgagors to receive counseling from an independent third party entity.


However, for HECM refinance transactions, mortgagors can waive and opt out of the HECM counseling requirement provided all three of the following conditions are met: (i) the mortgagor has received the required HECM Anti-Churning Disclosure form; (ii) the increase in the mortgagor’s principal limit exceeds the total cost of the HECM refinance by an amount equal to five (5) times the cost of the transaction (Block #1 on Anti-Churning Disclosure Form); and (iii) the time between the closing on the existing HECM and the application for refinancing does not exceed five years.
If a prospective senior HECM borrower opts out of HECM counseling, the mortgagee must estimate the increase in the mortgagor’s principal limit and include that estimate in the FHA case binder in order to document that the senior meets the conditions for waiver of counseling. An exhibit attached to ML 09-21 illustrates how to calculate the total cost of HECM refinance. The exhibit also illustrates how to determine whether the counseling is waiveable.


Information Provided to Mortgagees Originating HECM–to–HECM Refinance Loans


In order to provide the required Anti-Churning Disclosure on a HECM- to-HECM refinance, the originating mortgagee must contact the current HECM Servicer and obtain the following information: (i) the maximum claim amount for the existing HECM; (ii) the current principal limit of the existing HECM, and (iii) the payoff amount for the existing HECM.


For HECMs that have not been assigned to HUD, the originating mortgagee can obtain the name of the servicing mortgage through FHA Connection, HUD’s online system for approved mortgagees, at the Case Number Assignment screen. Additional contact information for servicing mortgagees is available in FHA Connection under the Approval List screen or at HUD’s website http://www.hud.gov/offices/hsg/sfh/hecm/hecmservlist.pdf.


For HECMs that have been assigned to HUD, the name of HUD’s contract servicer, C&L Service Corp./Morris-Griffin Corp.’s (CLS-MGC) is displayed in FHA Connection at the case number assignment screen.


After obtaining required information from the servicing mortgagee, the originating mortgagee must then input this information into the Home Equity Conversion Mortgage Calculation Software and complete the Anti-Churning Disclosure Form.


Payoff of Existing HECM Loan


A critical element of any refinance transaction is payoff of the existing loan. On a HECM- to -HEMC refinance, the Servicing mortgagee is responsible to payoff the existing HECM. For non-assigned loans, the servicing mortgagee is responsible for: (i) ensuring all outstanding advances are properly recorded prior to paying off the existing HECM; (ii) terminating the existing HECM from HUD’s Insurance Accounting Collection System (IACS); (iii) ensuring that the first mortgage is released; and (iv) notifying CLS-MGC to release HUD’s second mortgage of record. This is only possible by providing documentation that the first mortgage has been paid in full or a copy of the lien release that was sent for recording.


For assigned loans, CLS-MGC is responsible for: (i) ensuring all outstanding advances are properly recorded prior to paying off the existing HECM; (ii) terminating the existing HECM from the Single Family Mortgage Asset Recovery Technology (SMART) system; and (iii) ensuring both the first and second mortgages are released within seven (7) business days after the receipt and processing of the full payoff amount for the loan.


FHA Connection will reject prior HECM case numbers if the loan status is “terminated” or “due and payable.”


State Law Issues


In addition to FHA requirements for HECM-to-HECM refinance transactions, lenders and other mortgage originators should consider how state residential mortgage loan rules could apply to the transaction. Among other things, the mortgage lending laws of several states require a lender to demonstrate a “net tangible benefit” to the borrower in a mortgage loan transaction. Many states’ net tangible benefit laws apply only to so-called “high cost” or “covered” loans (such as when the APR and/or points and fees in connection with the loan exceed certain thresholds). However, reverse mortgages are exempt from most (but not all) such state “high cost” home loan laws.


In any event, approximately one dozen states’ net tangible benefit requirements apply more broadly beyond the “high cost” context, and also apply to reverse mortgage transactions. When a reverse mortgage is used to refinance and pay off a “forward” mortgage, thus eliminating the requirement that the senior continue to carry a monthly mortgage payment obligation of loan principal and interest, more often than not, a “net tangible benefit” to the borrower can be established. However, in a HECM-to-HECM refinance transaction, the borrower already enjoys the benefit of not being required to make monthly mortgage payments and therefore additional advantages may be required to establish a bona fide “net tangible benefit” to the borrower.
As we’ve discussed, HECM-to-HECM refinances can afford seniors an affordable means of converting a larger portion of the equity they have built-up over years of homeownership. That is particularly true now, due to higher FHA loan limits. As this hot, torrid summer of FHA’s $625,500 nationwide loan limit winds down (which currently is available only through year-end), HUD’s clarification of the rules surrounding HECM- to -HECM refinances, and our sharing these tidbits with you, like a mint julep, could hardly be more timely.


By Jim Milano and Joel Schiffman, 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. and Newport Beach. Additional information can be found at www.wbsk.com or by telephone at 202.628.2000. Messrs. Milano and Schiffman can be reached at
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, respectively.


This article provides only an overview of some of the federal and state laws and regulations that may affect reverse mortgage lending and finance matters. Although the practice of Weiner Brodsky Sidman Kider P.C. is national in scope, attorneys within our firm do not actively practice law in all jurisdictions, and these materials are not intended to and do not provide legal advice. Because of 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.
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