A Year For the Record Books
Sunday, 30 November 2008 16:00
As consumers of information, we are all accustomed to seeing year-end reviews on a whole range of subjects each December. As this tumultuous year within the financial sector draws to a close, it is no different. Even though the reverse mortgage industry has weathered the storm quite well, there have nonetheless been many significant changes, as best highlighted in our year-end review of 2008 Mortgagee Letters issued by Federal Housing Administration (FHA) concerning its Home Equity Conversion Mortgage (or HECM) program. 


HECMs are the FHA-insured reverse mortgage loan program. HECM loans are authorized by Section 255 of the National Housing Act (or NHA), and are primarily governed by the rules and regulations of the FHA, including, in no small measure, Mortgagee Letters. As this article went to press, FHA had issued 9 letters in calendar year 2008 concerning its HECM program, a record number reflecting the record pace of change within our industry. 


ML 2008 – 08


Starting with a bang in March 2008, FHA published ML 2008-08, which clarified the ability of FHA-approved mortgagees to offer fixed interest rate HECM loans to senior applicants. While FHA- approved mortgagees have always been permitted to originate fixed interest rate HECM loans, lack of clarity concerning a lender’s ability to structure a HECM loan that mitigated interest rate risk (or the risk of a mismatch between the lender’s cost of funds and the fixed note rate for advances occurring in the future) resulted in very few of these loans having been originated. 


ML 2008-08, while providing long-awaited guidance for lenders to encourage the offering of fixed-rate HECMs, has been a mixed blessing, providing some clarification but failing to address a number of critical issues. Importantly, ML 2008-08 clarified that fixed rate HECMs may be structured as open-end or closed-end credit and authorized lenders originating fixed rate HECMs to make the necessary and appropriate modifications to the loan documents to conform to ML 2008-08 and ensure compliance with FHA’s requirements and applicable laws. Per ML 2008-08, lenders must also ensure their fixed rate HECM loan documents (i.e., the HECM first and second notes and the HECM Loan Agreement) clearly indicate whether the loan is structured as open of closed-end credit.


Pursuant to ML 2008-08, lenders must be able to offer all of the standard HECM payment plans (i.e., the term, tenure, line of credit, and modified term or tenure plans) to senior borrowers obtaining a fixed rate HECM. Unfortunately, FHA did not expressly provide that lenders may charge different fixed interest rates based upon the borrower’s choice of payment plan. In addition, senior borrowers must be able to change payment plan options during the term of the fixed rate HECM, as long as the borrower’s net principal limit remains available. The monthly servicing fee on a fixed rate HECM may not exceed $30 and the charge for a payment plan change is limited to $20. 


Finally, ML 2008-08 mandated that the expected average mortgage interest rate used to calculate the senior applicant’s Principal Limit must be the same as the HECM note rate of interest. The expected average interest rate and the note rate must be set simultaneously. Note, also, that although FHA-approved mortgagees are permitted to lock the mortgage interest rate on fixed rate HECM transactions, FHA rules and guidance in other mortgagee letters prohibit lenders from charging a fee for locking the interest rate.


Despite the guidance provided in ML 2008-08, there remain a number of challenges for lenders offering fixed-rate HECMs. Some of the issues include the treatment under a fixed rate HECM of unused funds remaining from a repair set aside set up at closing and the treatment of funds that may become available to the borrower after the closing of a fixed rate HECM due to the growth in the net principal limit. Lenders offering, or interested in offering, fixed-rate HECMs should consult with their legal counsel to evaluate these issues.

ML 2008-12


ML 2008-12 is another, in a long line of mortgagee letters, that address counseling. A senior attending a counseling session with a HUD-approved counselor is a pre-requisite to the final application for a HECM loan. Thus, counselors serve a “gatekeeper” function for the reverse mortgage industry, and mandatory HECM counseling must occur prior to the “point of sale” of a HECM loan.


Among other things, ML 2008-12 implemented rules published by HUD in September of 2007 as a revision of HUD’s broader rules on counseling. The rule provided that counseling agencies may charge a fee to a prospective borrower as long as the fee is reasonable and customary, and does not create a financial hardship for the borrower. ML 2008-12 makes clear that counseling agencies must inform borrowers of the fee structure prior to counseling, and that a borrower cannot be turned away due to the borrower’s inability to pay for counseling. HUD determined that a reasonable fee for counseling cannot exceed $125, but that the fee must be not be excessive and must be commensurate with the services actually performed. Payments for counseling must be disclosed in the 800 series on the HUD-1.


ML 2008-24


In the first mortgagee letter issued to provide guidance on new requirements applicable to HECM loans and FHA-approved mortgagees under the Housing and Economic Recovery Act of 2008 (or HERA), ML 2008-24 addressed the prohibition against the selling of other financial or insurance products in connection with a HECM loan. ML 2008-24 also implemented
the requirement under the HERA that all parties participating in the origination of a HECM be approved by HUD.


Sparked by a hearing on reverse mortgages by the Senate Subcommittee on Aging in December 2007, highlighting the plight of seniors sold non-suitable annuity products after procuring a reverse mortgage, HERA added new Section 255(n)(1) to the NHA, which provides a broad prohibition on cross sales of other financial or insurance products to HECM borrowers. Specifically, a HECM originator or any other party that participates in the origination of an FHA-insured HECM shall: (1) not participate in, or be associated with, or employ any party that participates in or is associated with, any other financial or insurance activity; or (2) demonstrate to HUD that the mortgagee or other party maintains, or will maintain, firewalls and other safeguards designed to ensure that (i) individuals participating in the origination of a HECM have no involvement with, or incentive to provide the mortgagor with, any other financial or insurance product; and (ii) the mortgagor shall not be required, directly or indirectly, as a condition of obtaining a HECM, to purchase any other financial or insurance product.


ML 2008-24 announced that FHA will issue regulations concerning this cross-sell prohibition, and will seek comments from the public, including consumer groups, industry participants and other interested parties through appropriate administrative means. The purpose of such comments is to assist the FHA in determining what requirements may already be in existence to address consumer protections under Section 255(n)(1). For example, ML 2008-24 noted there may be state requirements in existence that already govern insurance products.


ML 2008-24 also advised that in the interim, until the FHA issues more definitive guidance, mortgagees: (1) must not condition a HECM on the purchase of any other financial or insurance products, and (2) should strive to establish, consistent with the HERA, firewalls and other safeguards to ensure there is no undue pressure or appearance of pressure for a mortgagor to purchase another product of the originator or the originator’s company. 


Note that the HERA also added a new provision on anti-tying. The new Section 255(o) of the NHA provides that a senior borrower may not be required to purchase insurance, an annuity, or other similar products in order to obtain a HECM loan. This restriction does not apply to certain types of insurance normally required with a HECM loan, such as title insurance, flood insurance and homeowners’ or casualty insurance.


The HERA also added Section 255(n)(2) to the NHA, requiring all parties that participate in the origination of FHA-insured HECMs to be approved by HUD. This requirement effectively eliminated the so called “HECM Advisor” program under which a non-FHA-approved entity could provide certain limited services to a borrower in connection with a HECM loan in return for a limited broker fee. 


According to ML 2008-24, beginning with FHA case numbers assigned on or after October 1, 2008, only FHA-approved mortgagees may participate in and be compensated for the origination of FHA-insured HECM loans. ML 2008-24 explained that the origination of a HECM loan must be performed by FHA approved entities including: (1) a FHA-approved loan correspondent and sponsor; (2) a FHA approved mortgagee through its retail channel; or (3) a FHA-approved mortgagee working with another FHA-approved mortgagee. 


Note that FHA’s earlier Mortgagee Letter (ML 2008-14, which is not separately discussed in this article), provided guidance on how a non-FHA-approved entity (i.e., a “HECM Advisor”) could participate, and be compensated, in connection with the origination of HECM loans. In ML 2008-24, the FHA rescinded ML 2008-14, effective October 1, 2008. HECM Advisor programs, previously common within the industry, are no longer permitted.


ML 2008-28


Next, on September 29, 2008, the FHA issued ML 2008-28, addressing the prohibition on lender-paid HECM counseling. The HERA amended counseling requirements for prospective HECM loan applicants to promote the independence of the counseling function by prohibiting any party involved in the origination of a HECM from directly or indirectly paying for or providing funding to the counseling agency. Through ML 2008-28, the FHA formally implemented this prohibition. 


Lenders can no longer pay HUD-approved counseling agencies, directly or indirectly, for counseling services through either a lump-sum payment or on a case-by-case basis. ML 2008-28 reiterated that prospective HECM borrowers must receive adequate counseling from an independent third party that is not either directly or indirectly associated or compensated by a party involved in (1) originating or servicing the HECM, (2) funding the HECM loan, or (3) the sale of annuities, investments, long-term care insurance, or any other type of financial or insurance product.


ML 2008-28 also provided examples of prohibited indirect lender funding of counseling, including a lender funneling payment for HECM counseling through a nonprofit, foundation, association or any other entity or organization that is a branch of, affiliated with or associated with the lender.


ML 2008-33


On October 20, 2008, the FHA issued ML 2008-33, implementing amendments to the National Housing Act mandated by HERA and authorizing HECM for Purchase transactions. The new HECM for Purchase program will be available for HECMs with FHA case numbers assigned on or after January 1, 2009. 
ML 2008-33 clarifies that 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. Seniors will either need to use cash on hand or cash from the sale of other assets for this down payment. As is the case with HECM refinance transactions, seniors may continue to finance closing costs, or elect to pay them out of pocket. 


As explained in ML 2008-33, seniors obtaining a HECM for Purchase 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, cash withdrawals from credit cards, seller financing and any other lending commitments that cannot be satisfied at closing. Lenders are required to verify the source of all funds prior to closing.


ML 2008-33 also points out that purchase money mortgage transactions generally are not rescindable under the federal Truth-in-Lending Act (and Regulation Z). However, lenders are strongly encouraged to consult with their counsel to assure compliance with applicable Federal or State laws. 


ML 2008-33 did not provide specific guidance concerning the loan documents for the HECM for Purchase program. However, lenders should consider reviewing their standard HECM documents prior to using them in HECM for Purchase transactions. For instance, the loan documents should reflect that seniors must occupy the property within 60 days from the date of closing, and also must comply with any state-specific requirements for purchase-money transactions.


Similar to a traditional HECM, a HECM for Purchase must be secured by real estate held in fee simple, or on a leasehold under a lease for not less than 99 years which is renewable, or under a lease having a remaining period of not less than 50 years beyond the date of the 100th birthday of the youngest mortgagor. 


Certain property types are ineligible for FHA insurance under the HECM for Purchase program, including (i) co-ops; (ii) newly constructed properties where a certificate of occupancy or its equivalent has not been issued; (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. 


Lenders are required to ensure that any construction loan financing for the property is satisfied and the HECM liens will be in first and second lien positions, and no other liens against the property will exist at closing.


Finally, ML 2008-33 added a caution to lenders that they 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 2008-33 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.


ML 2008-34


ML 2008-34 announced new limits on the origination fee FHA-approved mortgagees may assess on HECMs. Specifically, for HECMs where the case number is assigned on or after November 6, 2008, the maximum origination fee is set at the greater of $2,500 or an amount equal to 2% of the maximum claim amount of the mortgage, up to a maximum claim amount of $200,000, plus 1% of any portion of the maximum claim amount that is greater than $200,000, with a maximum origination fee “cap” of $6,000.


ML 2008-35


As a companion to ML 2008-34, and welcomed with open arms by the industry, ML 2008-35 announced a single national loan limit for all FHA-insured HECM loans. The loan limit under the HECM program is relevant in determining the “maximum claim amount,” which is the lesser of the appraised value of the property or the maximum dollar amount assigned by HUD. In accordance with ML 2008-35, effective for all HECM loans insured by the FHA on or after November 6, 2008, the single national mortgage dollar limit is set at $417,000.


The National Housing Act permits mortgage limits for all areas of Alaska, Guam, Hawaii and the Virgin Islands to exceed the FHA mortgage limits by up to 150%. The new HECM national mortgage limit of $417,000 effectively raises the mortgage limit in all of these areas except (1) Hilo, Hawaii; (2) Honolulu, Hawaii; (3) Kappa, Hawaii; and (4) Kahului-Wailuku, Hawaii. For these exceptions, ML 2008-35 provides that they will continue to have the “old” FHA mortgage limits, which, are higher than $417,000.


Note that starting January 1, 2009, loan limits in Alaska, Hawaii, Guam and the Virgin Islands may exceed the national mortgage dollar limit of $417,000 up to the lesser of 115 % of the area median price, or $625,500. (See ML 2008-36.)


ML 2008-38 

Finally, ML 2008-38, issued on December 5th, clarified the borrower’s recourse for repayment of a HECM loan. In a nutshell, ML 2008-38 defined that non-recourse, in application to a HECM loan, means simply that if the borrower (or estate) does not pay the full mortgage balance when due, the mortgagee’s remedy is limited to foreclosure and the borrower will not be personally liable for any deficiency resulting from the foreclosure. Non-recourse does not mean that the borrower, or the borrower’s estate, if it chooses to pay-off the HECM obligation, may do so by paying the lesser of the fair market value of the property or the full indebtedness.


If the borrower or the borrower’s heirs or estate do not wish to keep the property, they may sell the property for the lesser of the full mortgage balance or 95% of the property’s appraised value. ML 2008-38 explained that the sale of the property should be an arm’s length transaction. An arm’s length transaction is characterized in ML 2008-38 as meeting the following requirements: (1) the absence of a relation between the buyer and seller; (2) a selling price and other conditions that would prevail in an open market environment; (3) transaction costs paid by the seller that are considered both reasonable and customary for the market in which the property is located; and (4) the adherence to ethical standards of conduct by all parties involved in the HECM short sale transaction, including the borrowers (or the estate), mortgagees and appraisers.


If the number and complexity of the mortgagee letters issued by FHA is a measure of change within our industry, there is no doubt that 2008 has been an historic year. HECM originators and lenders are encouraged to work with their internal teams and appropriate subject matter experts to ensure that these changes are both fully understood and any necessary modifications to systems, processes, policies and procedures implemented. 


As an industry, it is our collective responsibility to ensure that the seniors we serve are provided a positive experience and afforded all of the benefits and consumer protection features mandated by FHA under the HECM program. 


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.

By Joel Schiffman and Fed Kamensky, of the law firm of Weiner Brodsky Sidman Kider PC. The law firm serves as General Counsel of the National Reverse Mortgage Lenders Association and as counsel and advisor to reverse mortgage lenders and other industry participants throughout the nation. The law firm has offices in Washington, DC, Newport Beach and Houston. Additional information may be found at www.wbsk.com or by telephone at 202.628.2000. Messrs. Schiffman and Kamensky may be reached at
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