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HUD’s proposed rule changes could put a damper on reverse-mortgage volume


The government rolled out proposed new regulations on reverse mortgages last week that could reduce volumes by $1.9 billion annually in the dominant Federal Housing Administration (FHA) program.

The U.S. Department of Housing and Urban Development (HUD) wants to write into the rules a requirement that borrowers get mandatory counseling and also compel originators to disclose all loan features. HUD also is proposing caps on interest-rate increases on adjustable-rate mortgages and wants to require lenders to pay mortgage insurance premiums until the reverse mortgage is either paid off or the property is transferred through a deed or foreclosure.

HUD also wants to create a “cash for keys” program, which would encourage borrowers or their heirs to exit the property gracefully through a deed arrangement with the lender rather than forcing a prolonged foreclosure proceeding. Some of these changes have already been put in place by guidance letter, and this will codify them. 

Almost all reverse mortgages are backed by the government through the FHA's Home Equity Conversion Mortgage (HECM) program. Borrowers 62 or older are eligible for an HECM loan. With a reverse mortgage, borrower uses the value of his or her home to take out a line of credit or a lump sum. The borrower is charged fees and also interest on the drawn amounts. The loans typically don’t have to be paid off until the borrower dies.

Reverse mortgages account for a tiny fraction of the overall mortgage industry, roughly 1 percent of all single-family originations. In evaluating the costs, HUD analysts estimated that endorsement volumes could fall by $1.9 billion annually, which would represent a reduction of 11.8 percent of all HECM origination volume in 2015. HECM endorsements totaled $16.1 billion in 2015, according to FHA figures.

The changes also were expected to reduce foreclosures from tax and insurance defaults, and reduce the costs for borrowers who use an HECM loan to purchase a new home. 

Muted reaction

So far the proposed changes haven’t drawn much reaction from the mortgage industry.

Reverse mortgage specialist Melinda Hipp, a branch manager for VanDyk Mortgage in San Antonio, said the mandatory disclosures of the loan terms and other consumer protections were progressive steps.

“The problem is that there have been some issues with some lenders who are doing some unethical lending,” Hipp said. “That will be overcome by making sure there is disclosure of all available HECM program options. Some people don’t know they are being taken advantage of.”

Hipp wasn’t sure, however, how the proposed changes would reduce HECM endorsement volumes.

“I don’t see my business suffering from anything in here, but I do feel like we all need to have further clarification,” Hipp said.

Peter Bell, president and chief executive officer of the National Reverse Mortgage Lenders Association, said the changes were intended to put the HECM program on a more solid footing. He said HUD sought input from several sources, including lenders and investors. The agency is allowing 60 days for comments. 

“Now we must all digest what has been proposed, project the potential impact and provide thoughtful comments back to HUD for its further consideration,” Bell said. “We welcome this opportunity.”


 

Questions? Contact at (425) 984-6017 or victorw@scotsmanguide.com.

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