The Federal Housing Administration (FHA) on Thursday published a new draft version of a Mortgagee Letter (ML) containing a second series of proposed changes to the Home Equity Conversion Mortgage (HECM) program to the Single Family Drafting Table. This is the second HECM-specific proposal posted within a single week.

The latest draft ML contains proposed changes focused on Reverse Mortgage assignment eligibility. Stakeholder feedback is due by Dec. 11.

Assignment eligibility

The current policy offers reverse mortgage lenders the option of assigning a HECM loan to the U.S. Department of Housing and Urban Development (HUD) under a series of specific conditions, including if a loan’s due and payable status has been deferred.

“FHA is proposing to allow assignment of the HECM when its due and payable status is based on the death of all borrowers and non-borrowing spouses,” FHA said in an announcement. “HECMs that are due and payable are not eligible for assignment to the Secretary unless there is a non-borrowing spouse in a deferral period.”

If enacted, the new policy will expand assignment eligibility to include “HECMs that are due and payable resulting from the death of all borrowers and non-borrowing spouses,” FHA explained.

This also means that reverse mortgage servicers will no longer “have responsibility for servicing these loans and can receive claim payments upon assignment of these mortgages,” the ML said.

Reverse mortgage market conditions

As was the case with the previous draft HECM ML, FHA is exploring these changes in response to the market volatility in the reverse mortgage space.

“Due to many changing market conditions, including rising interest rates and inflation, the costs for HECM [lenders] to continue covering advances to HECM borrowers have increased,” FHA said.

“Additionally, HECM [lenders] are also facing rising costs associated with the recovery of the value of the property securing the HECM following the death of all borrowers and eligible non-borrowing spouses (NBS), which must occur before the [lender can] file a claim for FHA mortgage insurance benefits.”

The goal of this change is to “help reduce the costs of participation in the HECM program and will also serve to reduce risk to the MMI Fund.” FHA cited its authority under the Reverse Mortgage Stabilization Act passed in 2014 to implement this policy after stakeholder feedback.

Administration support for the HECM program

HUD Secretary Marcia Fudge continued to promote the HECM program’s utility for seniors in comments announcing the proposed policy.

“At HUD, Home Equity Conversion Mortgages (HECM) are one of our most impactful tools to support seniors,” Fudge said in a statement. “I am pleased that our FHA team is expanding the availability of this program so everyone can age in place with dignity.”

FHA Commissioner Julia Gordon also commented on different actions taken by HUD throughout 2023 to further strengthen the HECM program during a time of stress.

“Today’s proposal is the latest in the series of measures we’ve taken throughout this year to facilitate greater liquidity and stability in the HECM market,” Gordon said. “Preserving HECM as an option for seniors who have financial needs but want to age in place is a high priority for FHA.”

Industry response, recent history

National Reverse Mortgage Lenders Association (NRMLA) President Steve Irwin expressed appreciation for HUD’s attention to HECM program issues.

“NRMLA appreciates HUD posting this latest draft Mortgagee Letter to the Drafting Table, as well as having the opportunity to comment on HUD’s work in mitigating liquidity risk,” he said in an interview. “While our servicing committee is reviewing the draft ML for comment, we understand the efforts being made to address these liquidity concerns, which are also greatly appreciated.”

Last week, FHA published another proposed ML aimed at HECM servicing, including guidance that, if enacted, will give reverse mortgage servicers the ability to verify property occupancy by phone. This will help ease the process of contacting seniors for their required annual occupancy check.

Other proposals in the previous draft ML include expanding “the ability of mortgage servicers to work with borrowers who are behind on their property tax or hazard insurance by an amount up to $5,000 without calling the mortgage due and payable,” as well as allowing servicers “to assign a HECM to HUD after the servicer has funded a cure for a borrower’s delinquent financial obligations.”

FHA will also release its Annual Report to Congress this month. It will offer insight into the performance of the HECM book of business inside the Mutual Mortgage Insurance (MMI) Fund.

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