After much anticipation and speculation, the Department of Housing and Urban Development (HUD) has released a multitude of changes to the HECM program. “These changes to reverse mortgages will protect consumers,” according to Carol Galante, Federal Housing Administration (FHA) Commissioner and Assistant Secretary for Housing.
The following is a summary of the changes that were announced by Mortgagee Letters 2013-27 and 2013-28:
Initial Disbursement Limits (Effective September 30, 2013)
The new Mortgagee Letter sets limits on the amount of reverse mortgage proceeds that can be taken at closing or during the first 12-month disbursement period after the loan closes.
Single Disbursement Lump Sum Option (Effective September 30, 2013)
The intial disbursement at closing or 12 months following close is limited to 60% of the principal limit. If there are mandatory obligations, such as existing mortgages or tax liens, the initial disbursment is limited to 60% plus 10% of the principal limit.
If a borrower chooses a line of credit or monthly payment, it will be up to the servicer to make sure that they do not exceed the of allowable limits in the 12 months.
This option is available for both fixed and adjustable rates.
Changes to Mortgage Insurance Premiums (MIP) and Principal Limit Factors (PLF) (Effective September 30, 2013)
The existing upfront MIP pricing options that were available under the Saver and Standard program have been replaced. HUD will now charge an initial MIP of 0.50 percent (0.50%), of the Maximum Claim Amount (MCA) when a borrower’s initial disbursement at closing or during the initial 12 month period after closing is 60% or less of the Principal Limit.
HUD will charge 2.50 percent (2.50%) of the MCA when a borrower’s intial draw is greater than 60% of the Principal Limit.
The new Principal Limit factors will result in roughly 15% less available proceeds than the current Standard product. To view the new PLFs click here.
Financial Assessment (Effective January 13, 2014)
The purpose of financial assessment is to evaluate the borrowers willingness and capacity to meet their financial obligations, and their ability to comply with the mortgage requirements. This came about because of an increasing number of tax and insurance defaults by HECM borrowers. It is the responsiblity of the borrower to maintain their property taxes and insurance.
Key components of underwriting a HECM includes a credit history analysis, a cash flow/ residual income analysis, analyzing compensating factors and extenuating circumstances. The good thing is that unlike many other companies that only offer reverse mortgages, MLS Reverse Mortgage has been offering both forward and reverse mortgages, which makes us extremely familiar with credit and income analysis, which will allow us to simplify the process for our borrowers.
Set-Asides (Effective January 13, 2014)
If a borrower is deemed to be a potential default risk based on the underwriting results of the financial assessment, the lender is authorized to create a Lifetime Expectancy Set-Aside (LE Set-Aside) to pay for future tax and insurance charges. The amount of the LE Set-Aside will be based on the life expectancy of the yourgest borrower. If the borrower outlives the amount set-aside, they will be required to continue making tax and insurance payments using their own means.
The full Mortgagee Letters are available by clicking here.