As the mortgage industry slowly begins its rebound, lenders are vying for share in a heavily competitive home purchase market. This means, in part, that lenders are increasingly likely to offer expanded product mixes.
With about half of all U.S. homeowners entering their 60s or 70s, one of the options is sure to be the Home Equity Conversion Mortgage (HECM), the reverse mortgage program from the Federal Housing Administration (FHA). HECMs enable homeowners to draw on a portion of their home equity and use it for maintenance, repairs or general living expenses.
“HECMs already account for 90% of all reverse mortgages. But with the FHA guarantee comes a number of conditions and requirements.”
Although reverse mortgages have been marketed heavily in past cycles, the popularity of the HECM comes from the fact that it’s fairly flexible and, more importantly, insured by the FHA. Just as some would consider the FHA purchase mortgage the “workhorse” of the Great Recession period, the HECM could well become a workhorse loan in a competitive market for an aging population of homeowners.
In fact, HECMs already account for 90% of all reverse mortgages. But with the FHA guarantee comes a number of conditions and requirements. Mortgage lenders succeed, in no small part, by staying compliant and understanding the requirements and risks of the loans they make.
As origination volume increases, product offerings expand and the temptation to quickly ramp up sales of different mortgage types grows, lenders and the originators who work with them should be clear in their understanding of the FHA’s specific requirements for a HECM. This goes beyond the rules governing the origination process and includes a number of requirements in the closing and settlement phases of the transaction that differ from those of other reverse or purchase mortgages.
The U.S. Department of Housing and Urban Development (HUD) has set forth a number of clear requirements on the origination side of a HECM. The borrower must be at least 62 years old. They must live in the home that is backing the mortgage, stay current on taxes and insurance, and maintain the property.
There are other elements to a HECM, however, that may not be so clear. Taking out this type of loan, for example, can sometimes negatively affect the borrower’s ability to qualify for Medicaid or Supplemental Security Income. And just as with a conventional purchase mortgage, a HECM borrower must pay off the loan should they choose to sell the home.
Additionally, criminals have been known to target reverse mortgage borrowers and lenders with an ever-evolving array of scams and fraud attempts. Lenders and closing companies need to be on the lookout for new schemes and they should proactively educate their HECM borrowers.
Most lenders that choose to offer HECM products are aware of these requirements and risks. But not every HECM provider is clear on the HUD requirement of preclosing counseling for the borrower.
This is mandated to ensure the borrower is clear about the responsibilities and risks that could apply to their HECM loan. The loan will not be approved without proof of counseling.
Additionally, the counseling may only be performed by HUD-certified counselors. Mortgage lenders seeking to produce greater HECM volume would be wise to work with third-party service providers (such as closing companies or notaries) that are familiar with HUD’s requirements. Service providers should also have ample experience and might even employ specially designated HECM experts. If these companies don’t directly employ trained HECM counselors, they should have close-knit partnerships with these professionals.
In addition to HUD’s requirements for HECM lenders and borrowers, there are practical ramifications when lenders fail to thoroughly vet their potential partners — especially if they intend to lean on the expertise of these partners. Notaries, for example, can play a key role in the HECM closing.
Simple errors are frequently seen from notaries who are not trained or experienced with the requirements and details of closing a reverse mortgage. These mistakes often include an inadequately signed HUD addendum; a failure to procure the HECM counseling certificate; or failing to obtain documents that are not collected at closing, such as a death certificate if one of the homeowners on the title has died.
The vetting and selection process for choosing a HECM partner is important for the mortgage lender seeking to enter this market. Robust and updated procedures should be put in place and monitored. The partner should be in lockstep with the lender, especially on matters of closing procedures and fraud prevention.
Continuous training and consistently documented oversight are also advisable — especially considering that reverse mortgages tend to receive extensive scrutiny from compliance agencies due to the potential for fraud and the vulnerability of the typical HECM borrower. The HECM is not a typical mortgage, so lenders, originators and service providers should be extremely transparent and proactive with education and explanations.
Because of the increased potential for error or omission, HECM-trained notaries are usually held to a higher standard than the notaries who perform conventional purchase closings. From a lender perspective, having an experienced HECM partner can also mean a smoother borrower experience. HECM-trained closing experts can usually better explain the nuances of the closing and are prepared to take the small, extra steps that can accompany this type of transaction.
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Expect to hear a lot more about HECMs in the coming months and years. Executed properly, this loan program could prove to be a significant revenue stream at a time when lenders are battling for market share. For lenders willing to go the extra mile to ensure a smooth experience for the borrower, HECMs may, in fact, prove to be a true competitive advantage. ●