HUD Gives HECM Model Forms a Makeover: A Review of Mortgagee Letter 2010-07
Monday, 29 March 2010 10:19
HUD Gives HECM Model Forms a Makeover: A Review of Mortgagee Letter 2010-07
Those involved with reverse mortgages for any length of time certainly appreciate that the Department of Housing and Urban Development (HUD) does not revise its loan documents for the Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM) frequently. In fact, a few leap years have come and gone since 1997, when the last major changes to HECM loan documents were announced. So it is with a sense of jubilation, and a dose of trepidation, that we greet Mortgage Letter 2010-07, published on March 1, 2010, which heralds some material changes to the HECM Loan Agreement and certain ancillary documents. Similar to the first time you look in the mirror after a new hairdo, reviewing revised HECM loan documentation can be a little scary. But with familiarity, even a lousy haircut can grow on you. In the best figurative sense, we trust the same can occur with the newly revised HECM loan documents. To facilitate that process, in this article we provide a short primer on HUD's HECM loan documentation and examine, in some detail, the revisions occasioned by ML 10-07.
HECM Model Documents
As noted in HUD Handbook 4235.1 REV-1 (HECM Handbook), lenders originating HECM loans must utilize the model HECM loan documents (i.e., the HECM first and second security instruments, the HECM first and second Notes and the HECM Loan Agreement) as published in the Appendices to the HUD HECM Handbook. The HECM Handbook was issued in 1994 and, ever since that time, these model HECM loan documents have not been replaced. Notwithstanding the foregoing, HUD has provided several updates to the model HECM loan documents through various Mortgagee Letters issued over the years, including the last major revisions, announced on April 24, 1997, in Mortgagee Letter 1997-15 (ML 97-15). ML 97-15 included several changes to the model forms for the HECM security instruments, HECM Notes and the HECM Loan Agreement. According to HUD's instructions in the HECM Handbook, lenders must ensure that the HECM loan documents comply with all applicable HUD requirements that, of course, would include ensuring that the loan documents incorporate the changes announced in ML 97-15 and, all other Mortgagee Letters, including ML 10-07. In addition, HUD also instructs lenders to ensure that the loan documents comply with applicable state and local requirements. This includes state laws that must be followed to create a recordable and enforceable security instrument and to ensure that the lender has an enforceable contract.
A HECM loan is, by definition, a “non-recourse” transaction. HUD clarified the meaning of the term “non-recourse” in Mortgagee Letter 2008-38 (ML 08-38), issued on December 5, 2008. According to ML 08-38, if the borrower (or the borrower’s estate or heirs) does not re-pay the balance of the HECM loan in full when it becomes due (or sell the property for at least 95% of the appraised value), the lender’s remedy is limited to foreclosure and neither the borrower or the borrower's estate will be personally liable for any deficiency resulting from the foreclosure.
Because a HECM loan is “non-recourse,” the HECM lender may look only to the collateral property for repayment of the loan balance. Thus, it is of critical importance for a HECM lender to ensure that its HECM loan documents will be sufficient to provide the lender with an enforceable contract secured by a good and valid lien in the jurisdiction where the property is located.
Documents Revised By ML 10-07
The changes announced in ML 10-07 affect primarily the model Home Equity Conversion Mortgage Loan Agreement (HECM Loan Agreement), the HECM Loan Agreement Exhibits, and the Residential Application for Reverse Mortgages (Fannie Mae Form 1009). These changes improve the disclosure of loan terms to the borrower and render the documents more compatible for use in HECM for purchase transactions. In addition, ML 10-07 prohibits the use of the Uniform Residential Loan Application (Freddie Mac Form 65/Fannie Mae Form 1003) with HECM loans and confirms that HECM lenders must use the HUD/VA Addendum to Uniform Residential Loan Application (Form 92900-A) with all HECM loans. However, as was the case with ML 97-15, the changes announced in ML 10-07 provide an update of applicable model forms, rather than a complete do-over.
ML 10-07 does not address the HECM security instruments or HECM Notes. However, HUD's guidance has always been that it is the lender's responsibility to ensure compliance with state laws for validity and enforceability of the HECM security instruments and the HECM Notes, even if such laws are not expressly reflected in HUD's written guidance. For instance, HECM lenders must ensure that their state-specific HECM security instruments securing a HECM loan contain the language that may be required in the state in order to obtain lien priority protection of future advances made under the HECM Loan Agreement. In this area, lenders may wish to consult with their counsel to ensure their HECM loan documents comply with applicable state laws.
The HECM Loan Agreement
The revised HECM Loan Agreement published in ML 10-07 contains several updates and modifications. ML 10-07 states that the model HECM Loan Agreement (originally published as Appendix 7 to the HECM Handbook) is revised with respect to the definition of the term "Maximum Claim Amount." The definition of Maximum Claim Amount is provided in Section 1.4 of the HECM Loan Agreement. As revised, Maximum Claim Amount is defined as the lesser of (i) appraised value of the property, (ii) the sales price of the property, or (iii) the national maximum loan limit established under section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act for a single-family residence. By referencing the sales price of the property in the definition of Maximum Claim Amount, the revised HECM Loan Agreement is now more compatible with the HECM for Home Purchase program.
A sample of the revised HECM Loan Agreement is available as an attachment to ML 10-07. A review of the revised HECM Loan Agreement reveals several additional changes that are not expressly referenced in the text of ML 10-07. For instance, the title of the HECM Loan Agreement is revised by inserting the word "Mortgage", as follows: "Home Equity Conversion Mortgage Loan Agreement." The revised HECM Loan Agreement attached to ML 10-07 also amended the definition of Principal Limit. However, the revision of the Principal Limit definition appears to clarify, rather than change, how the HECM Principal Limit should be calculated. As revised, the definition of Principal Limit in Section 1.7 of the model HECM Loan Agreement provides:
Principal Limit means the amount indicated on the attached payment plan (Exhibit 1) when this Loan Agreement is executed, and increases each month for the life of the loan at a rate equal to one-twelfth of the sum of the mortgage interest rate and one-half of one percent. The Principal Limit is calculated by multiplying the Maximum Claim Amount by a factor supplied by the Secretary, which is based on the age of the youngest Borrower and the Expected Average Mortgage Interest Rate.
The changes in the sample HECM Loan Agreement attached to ML 10-07 also include a revised definition of the HECM origination fee, which incorporates the $6,000 "cap" on the HECM origination fee into Section 2.2.1 of the revised HECM Loan Agreement. ML 10-07 also revised Section 2.8.3 of the HECM Loan Agreement to provide that the fee for changing HECM payment plans is twenty ($20) dollars, rather than "an amount determined by the Secretary," as was previously provided in the HECM Loan Agreement. In addition, the revised HECM Loan Agreement provides, in Section 6.4, that HECM lenders must comply with the Fair Housing Act, which prohibits discrimination on the basis of race, color, religion, sex, handicap familial status, or national origin.
Please note, also, that although the HECM Loan Agreement generally is not a state-specific document, the HECM Loan Agreement may require special adaptation in several states. For instance, in Texas, the HECM Loan Agreement should contain several state-specific provisions. In fact, HUD previously published separate Mortgagee Letters providing guidance concerning the HECM Loan Agreement for use in Texas. As noted above, lenders may wish to consult with their counsel to ensure their HECM loan documents comply with applicable state laws, such as, for instance, provisions concerning reverse mortgages in the Texas State Constitution.
HECM Loan Agreement Exhibits
ML 10-07 revised Exhibit 1 to the HECM Loan Agreement, the Payment Plan. The revisions to the Payment Plan include a disclosure of the type of the payment plan option selection of the borrower. Specifically, the lender must indicate at loan origination whether the borrower has selected a Tenure, Term, Line of Credit, Modified Tenure or Modified Term payment plan option.
The Payment Plan is also revised to include the following disclosures: (i) a disclosure of the expected average mortgage interest rate, (ii) a disclosure of the initial mortgage interest (accrual) rate, and (iii) the margin used to originate the loan. In addition, the Payment Plan requires a disclosure of whether the expected average mortgage interest rate was locked. As a reminder, with HECM loans, the expected rate is used to determine payments to the borrower and is fixed throughout the life of the loan.
With regard to HECM for Purchase loans, the revised Payment Plan requires the lender to enter on Line 3 the amount of any debts to be paid off at closing, including existing liens on the property, delinquent Federal debts and amount disbursed, by the closing agent, to the seller of the property involved in a HECM for Purchase loan. The revised HECM Payment Plan and instructions are available as an attachment to ML 10-07.
ML 10-07 also revised the heading of Exhibit 2 to the HECM Loan Agreement to read: “Schedule of Liens/HECM for Purchase Disbursements to Seller.” The heading “Schedule of Closing Costs” remains unchanged. ML 10-07 instructs lenders to itemize each closing cost item and the amount charged under the “Schedule of Closing Costs” section of Exhibit 2.
ML 10-07 did not change The HECM Repair Rider (Exhibit 3 to the HECM Loan Agreement) yet the mortgagee letter does indicate that lenders may attach an addendum to the Repair Rider to spell out the repairs in clear and complete terms.
Residential Loan Application for Reverse Mortgages
As noted above, ML 10-07 announced several revisions to Fannie Mae form 1009, Residential Loan Application for Reverse Mortgages. Specifically, Section I of the Fannie Mae Form 1009 has been revised to include data fields for the following types of mortgages and terms: (a) HECM for Purchase, (b) Sales Contract Price, (c) Land Installment Contract Price, (d) Borrower’s Investment, (e) Purpose of Loan, (f) Index Type, and (g) Loan Origination Fee. Section II of the Fannie Mae Form 1009 has been revised to include the following property ownership information: (a) Irrevocable Trust, and (b) Revocable Trust.
In addition, ML 10-07 revised Section IV of the Fannie Mae Form 1009 to provide examples of liens against the property that the borrower must list on the application. Examples of such liens include federal or state real estate liens, judgment liens, mechanics liens and second mortgages. ML 10-07 also updated the "Declarations" section of the application by adding items "i" through "k." Specifically, ML 10-07 added the following declarations:
i. Were you required to bring money to closing? If yes, did you borrow the money?
j. Do you intend to use the reverse mortgage to purchase or invest in financial products such as insurance, mutual funds or annuities? If yes, provide name of financial product and cost to purchase or invest below: Example: long-term care insurance $10,000.
k. Do you have an existing FHA insured loan? If “yes” provide property address, account number, name of creditor, amount of mortgages and liens, and unpaid loan balance below.
Finally, ML 10-07 updated Section VIII of the of the Fannie Mae Form 1009 that contains information to be collected by the loan originator for government monitoring purposes.
Other Guidance in ML 10-07
As noted above, ML 10-07 expressly clarified that HECM lenders may not use the Freddie Mac Form 65/Fannie Mae Form 1003, Uniform Residential Loan Application, for HECM loan transactions. In addition, ML 10-07 clarified that the HECM lenders must continue to complete the HUD/VA Addendum to Uniform Residential Loan Application, Form 92900-A, for every HECM loan transaction.
Samples of Revised Documents
ML 10-07 provides lenders with samples of the revised model HECM Loan Agreement and Exhibits, which are included as attachments to ML 10-07. ML 10-07 and its attachments are available on HUD's web site located at http://www.hud.gov. Lenders can download the revised Fannie Mae Form 1009 from the Fannie Mae web site available at https://www.efanniemae.com/sf/formsdocs/forms/index.jsp.
Although we might have longed for more dramatic revisions to our beloved HECM model forms, the changes wrought by ML 10-07 provide seniors with clearer disclosure of HECM loan terms and render the loan agreement, and its exhibits, more friendly for use in HECM for purchase transactions. While these changes are mandatory and must be incorporated into HECM loan documents for all HECM case numbers assigned on or after August 1, 2010, HUD has indicated that lenders may begin utilizing the revised model forms anytime prior to that date.
This article provides only an overview of some of the federal and state laws and regulations that may affect reverse mortgage lending, marketing 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.
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 can be reached at
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