The Home Equity Conversion Mortgage (HECM) program is prone to changes based on market conditions, industry feedback and macroeconomic realities, but it’s uncommon for the industry to get firsthand information regarding what went into these types of program changes. However, reverse mortgage professionals got that opportunity last week at the National Reverse Mortgage Lenders Association (NRMLA) Western Regional Meeting.
Kasey Watson, senior policy advisor of the HECM program in the Office of Single-Family Asset Management at the U.S. Department of Housing and Urban Development (HUD) was joined by Jenny Fingerlin, acting program director of the servicing branch in HUD’s National Servicing Center to offer insight on why recent program changes were implemented.
Expediting HECM assignment claims
The Federal Housing Administration (FHA) published Mortgagee Letter (ML) 2023-10 in May that was designed to expedite the processing of assignment claims for HECM loans. It also allows for earlier submission of preliminary title approval with fewer documents.
Watson said that while there have been no servicing policy changes recently, this change was designed to increase the level of flexibility that industry professionals have when processing claims.
“We’re trying to streamline the process for getting a loan that’s being serviced in accordance with FHA policy to get it through the claim filing process itself,” Watson said. “We’ve really spent a lot of time working with all of our industry partners, with Ginnie Mae and with our new loan servicing contractor, to really work and narrow this down to what the documents are that we need to have at the time of assignment, and what documents are that can be continued to be stored during the normal course of servicing.”
There was limited documentation identified as “excess,” Watson said, and reducing the maximum claim amount for reporting a loan for future assignment from 97.5% to 97% can make a notable difference in terms of the timeline for processing.
“The way we’ve restructured things allows for that submission to happen […] usually a couple of months earlier,” she said. “The review and preliminary title approval is issued upon the submission of that request, not waiting until the loan balance reaches 98%. So approval is much earlier in the process, and then the mortgagee has the option [to] send that original note mortgage to the secretary once that preliminary title approval happens even if the loan balance hasn’t reached 98%, but they don’t have to. And that way the claim can be paid even prior to receipt of those original documents.”
Flexibility was top of mind when making the change, Watson said.
“This is trying to add additional flexibility, but also make changes that we were able to make through procedural and process improvements, as opposed to having to change any of the risks or any of the loans that FHA is taking assignment of,” she said.
The LIBOR transition
The reverse mortgage industry’s move away from the London Interbank Offered Rate (LIBOR) has been disruptive, but Mortgagee Letter 2023-09, published in May, included the FHA’s final rule shifting from the LIBOR index for adjustable-rate mortgages (ARMs) on the traditional and HECM sides].
Following the publication of the final rule, the ML implemented the spread-adjusted Secured Overnight Financing Rate (SOFR) as an approved index.
“This of course, was important in the terms of the existing HECM mortgages,” Watson said. “The mortgage did provide us with flexibility that if the interest rate became unavailable, the secretary can name a new replacement rate. And so that put us, in HECM, in a little bit better position than some other types of loans had to deal with. But it’s still a course [where] we’re all hoping for smooth waters in the next little bit, but we shall see.”
Watson also mentioned a recently-proposed draft ML that, if implemented, would revise the HUD’s investigation requirements regarding whether a lender is unable or unwilling to make a borrower payment required under a HECM. The proposal would also require a lender who failed to make a required payment to a borrower to provide certain information to the FHA.
Watson also noted the importance of industry feedback, and that the drafting table is likely to remain a source of proposed policy updates and changes.
“It’s something, certainly, that we do expect to continue doing,” she said. “And you can probably see our commitment to that with the current mortgagee letter that is on the drafting table.”
Regarding the draft ML, Watson said its primary purpose is to ensure as little impact to a reverse mortgage borrower as possible when accessing loan proceeds, should something negatively impact a lender’s ability to provide them.
“We are statutorily required to ensure that borrowers get their payments under their HECMs,” Watson said. “If something catastrophic were to ever happen — and thankfully it never has, we’ve never had to take [such steps] — but it’s something FHA wants to be prepared and ready to be able to make those steps to make sure those borrowers feel as little impact as possible.”
Watson cited an instance where a local bank in New Orleans became concerned about its ability to make payments in the aftermath of Hurricane Katrina.
“It ended up they were able to, but they were worried and so they were being proactive during that time,” she said. “And in that scenario, we were not able to proactively take those steps, and then on the day after the missed payment, [get to a point] where we can make all of their borrower payments and then work with them to resolve the issue. That’s what this change would allow us to do.”
