As published in Scotsman Guide's Residential Edition, November 2008.
The Housing and Economic Recovery Act of 2008 affects the mortgage industry in many ways. In its Federal Housing Administration (FHA) Modernization Act, changes are set forth for the FHA's Home Equity Conversion Mortgage (HECM). The act includes improvements, protections and changes that will affect reverse-mortgage borrowers and originators.
At press time, the U.S. Department of Housing and Urban Development (HUD) has not issued mortgagee letters to announce implementation dates for all the changes (current info). Based on the bill's provisions, however, here is a glimpse of what mortgage originators should know.
First, along with the conventional- and FHA-loan-limit increases, the housing bill increases lending limits for HECMs. The new national loan limit is $417,000. As of press time, the FHA targeted a Nov. 1 implementation date.
With increased lending limits, eligible borrowers (ages 62 and older) with higher home values could access more money. This is especially good news, considering there has been less money available for jumbo, proprietary reverse-mortgage products.
Another change affects reverse-mortgage costs. Industry partners, including AARP and the National Reverse Mortgage Lenders Association, worked out a compromise to lower origination fees, which is now part of the new rules.
The previous rules allowed as much as 2 percent of the lending limit as an origination fee. For example, if the lending limit was $362,790, the origination fee could be as much as $7,255.80.
The new rules have a formula of 2 percent of the first $200,000 of the lower of the new lending limit or the home value, then 1 percent on amounts more than $200,000. The maximum origination fee is capped at $6,000.
Other important changes to the HECM program include:
HECMs for home purchases: Previously, reverse mortgages could only be used as refinance loans. The housing bill now allows HECMs for principal-residence purchases.
HECMs for co-ops: The act adds co-ops to allowable property types for HECMs.
Easing of rules for manufactured homes in condo developments and overhaul of rules for condo-development approval process.
There also are changes in how reverse mortgages are marketed. Previously, a non-FHA-approved broker or lender could receive a portion of the origination fees as an adviser. They were paid in exchange for assisting an FHA-approved reverse-mortgage company and educating a potential reverse-mortgage borrower. Effective this past Oct. 1, the HECM-adviser program is prohibited.
If you were working as an adviser, you now must either become FHA-approved or work for a FHA-approved company.
Finally, there is an important safeguard issue of which mortgage originators must be aware concerning cross-selling financial products. Congress and HUD have become aware of financial abuse in the sale of inappropriate annuities and financial instruments that were not in the best interests of borrowers. Based on the housing bill's language and to remedy this situation, HUD will develop rules and regulations to curb the use of reverse mortgages as a facilitating agent for abuse.
If you want to be a reverse-mortgage originator, it is critical that you stay on top of these changes. Get involved with industry organizations and align yourself with companies that do things right.
Philip E. Lipp is president of Allwest Mortgage in Los Angeles and has been in the mortgage business with his wife, Ilene, for 25 years. He participated
in the Los Angeles Mayor's Office's Predatory Lending Initiative to inform seniors. He also is a founding director and past president of the California Association of Mortgage Brokers. For questions about reverse mortgages, call (818) 752-0999 or e-mail firstname.lastname@example.org.