By Jim Milano
With total loan production expected to continue to trend downward, “forward” mortgage companies may wish to look to other mortgage products to make up lost or declining loan production. One such product is a reverse mortgage. Reverse mortgages are not new and have been around as a government sponsored program since that late 1980’s (with private, conventional programs in existence as early as the 1960’s).
We use the term “forward” mortgage to denote a difference between conventional, GSE eligible, and FHA-insured 203(b) single family loans on the one hand, and reverse mortgages, on the other. “Forward” mortgage companies have in place a great deal of infrastructure and operating assets that could easily support expanding into reverse mortgages; however, reverse mortgage marketing and originations have differences that should be understood as a formerly “forward” mortgage only originator enters the reverse mortgage business.
State Mortgage Licensing
In addition to office space and branches, one area in which a “forward” mortgage company may have current assets in place, that easily could be deployed to start up reverse mortgage operations, are state mortgage licenses. With a few exceptions, a separate state mortgage license is not needed at the company, branch or loan officer level in order to originate reverse mortgages. The exceptions include North Carolina and Tennessee, where separate company approvals are required to originate reverse mortgages, and in Massachusetts, where lenders must submit their reverse mortgage programs to the Divisions of Banks for approval before making reverse mortgages there.
Reverse mortgages are federally-related mortgage loans, and the Real Estate Settlement Procedures Act (RESPA), including RESPA Section 8 for unearned fees and kickbacks applies. However, reverse mortgages are exempt from the changes made by TRID ,and GFE’s and HUD-1’s are still used with reverse mortgages. Therefore, forward mortgage companies will need access to a reverse mortgage LOS and document provider. There are several providers in the market.
As discussed below, most reverse mortgages offered on the market are structured as open-end credit as defined under the Truth in Lending Act (TILA). While certain RESPA disclosures do not apply to open-end credit, FHA rules require that a HUD-1 be contained in the case binder for each Home Equity Conversion Mortgage (or HECM) loan. – Thus, due to revised RESPA rules that went into effect in early 2010 (and that have been carried forward by the CFPB), lenders must use GFE’s and HUD-1s on all FHA-insured HECMs.
While TRID does not apply to reverse mortgages, TILA disclosures are still required for reverse mortgages. In addition to the general disclosures required, depending upon how the loan is structured, either for open-end credit or closed-end credit, reverse mortgages also require reverse mortgage-specific disclosures under TILA, the Total Annual Loan Cost, or TALC disclosures.
Today, approximately 80-85% of reverse mortgages are originated and structured as open-end credit. With such loans, HELOC-like TILA Important Terms disclosures are required, in addition to the reverse mortgage-specific TALC disclosures.
Approximately 99% of reverse mortgages originated today are the FHA-insured Home Equity Conversion Mortgage (or HECM) loan, where the borrower must be 62 years of age or older and own and have some equity in the home. If one will be in the reverse mortgage business today, they will be in the FHA lending business. FHA’s predominance in the reverse mortgage space was not always the case and may change in the years to come. Prior to the mortgage meltdown, approximately 15% of reverse mortgages originated on a dollar volume basis were conventional proprietary loans. Those conventional loans served primarily a higher value home and “jumbo” market; however, several companies began to offer such loans again in 2012 in many states and that non-FHA-insured market continues to show promise for growth.
To make HECM loans as a FHA-mortgagee, a mortgagee must obtain separate approval from the HUD to do so, and must have its own HECM-approved DE underwriter. HECMs require a lighter version of underwriting than that required for 203(b) single-family FHA-insured loans, called “Financial Assessment.” However, HECMs cannot be underwritten using FHA’s TOTAL Scorecard, and thus must be manually underwritten.
If a mortgagee does not have a HECM-approved DE underwriter, it could enter into a FHA Principal-Agent relationship with another FHA-approved mortgagee that does have HECM underwriting approval, with the other mortgagee acting as Agent and underwriting the HECM loans for the Principal.
Alternatively, even an otherwise “full eagle” FHA-approved forward mortgagee could act as a TPO, sponsored by another approved mortgagee, and broker HECMs to another HECM approved mortgagee.
Marketing / Sales / Processing
Marketing reverse mortgages is different from marketing forward mortgages. For instance, in low interest rate environments, forward mortgage volumes can spike and such refinances can feel to some to be a commoditized type product or process. Reverse mortgages, on the other hand, typically have a much longer origination time line. A senior typically does not wake up one morning and decide, spontaneously, to go out and obtain a reverse mortgage. A consumer’s decision process to obtain a reverse mortgage can span over months or even years. In this sense, the decision to obtain a reverse mortgage can be a “lifetime” decision in that, typically, when a senior decides to obtain a reverse mortgage, they are deciding to “age in place” and remain in their home for a long period of time, perhaps for the rest of their life.
Because marketing reverse mortgages can be different, most forward mortgage lenders entering the reverse mortgage space have their loan officers focus either on reverse mortgage or forward mortgage loans, but not both. Most forward mortgage lenders use separate processors for reverse mortgages; however, separately-focused loan officers can work out of the same licensed offices, and some forward mortgage loan officers that are already licensed can be trained to originate reverse mortgages. In this way, a forward mortgage company in all likelihood has many assets (offices, licenses, and to some extent, loan officers) that can be more easily deployed to start a reverse mortgage business.
FHA has just changed the HECM rules, and those changes will go into effect on September 19, 2017. Any one getting into the reverse mortgage business will want to familiarize themselves with HECM rules, including these new rule changes.
Further, when entering the reverse mortgage business, a company will need a separate LOS. These are several reverse mortgage LOS providers and at least one that specializes in catering to forward mortgage companies entering the reverse mortgage business.
With total forward mortgage loan production expected to continue a trend downward, “forward” mortgage companies should to look reverse mortgages as an additional opportunity to make up any declining loan production by utilizing operational mortgage lending assets already in place.
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On January 19, 2017, HUD published in the Federal Register the Final HECM Rule, FHA: Strengthening the Home Equity Conversion Mortgage Program. The Final HECM Rule has an effective date of September 19, 2017. The primary purpose of the Final HECM Rule was to implement into FHA HECM regulations prior guidance issued by HUD under mortgagee letters authorized by the Reverse Mortgage Stabilization Act of 2013 and the Housing and Economic Recovery Act of 2008.
The Final HECM Rule makes changes regarding a wide range of issues, and a few topics to note include: (1) allowing seller contributions in HECM for purchase; (2) loosening seasoning requirements for prior HELOCs; (3) treating the pay-off of non-home-secured debts as part of a borrower’s mandatory obligations; (4) requiring the original mortgagee to request alternative contact information from the borrower; and (5) removing of mandatory due and payable appraisals.
In HECM for purchase transactions, the Final Rule allows fees customarily paid by the seller to be included as an interested party contribution. However, HUD stated that issues surrounding the issuance of a counseling certificate prior to an application for a HECM loan would be addressed in future policy guidance rather than this Final HECM Rule.
The Final HECM Rule will not allow a borrower to take more than the initial disbursement limit as monthly payments during the first 12 months of a HECM loan; however, HUD, while incorporating seasoning requirements put into place under Mortgagee Letter 2014-21, has amended the seasoning requirements to add that the start date to measure seasoning will be the HECM loan’s closing date and not the application date. Further, as before, the seasoning requirements do not prohibit the payment of cash to the borrower of $500 or less as part of the HECM loan. HUD will now also allow the payoff of a prior HELOC at the closing of a HECM loan, where the HELOC does not otherwise meet the seasoning requirements, either from borrower funds or pay off from the HECM or both, as long as the HECM funds used to pay off the HELOC do not exceed the Initial Disbursement Limit under the HECM.
Next, the Final Rule will allow the pay-off of debt not secured by the property, as to be provided in a definition by the Commissioner through Federal Register notice, as a mandatory obligation.
Further, the HECM rules have been revised to require an originating mortgagee to request an alternative contact person from the borrower that the mortgagee can contact in the event it cannot reach the borrower.
HECM rules also have been revised to remove the requirements that a HECM servicer obtain an appraisal upon a due and payable event. If a borrower or other interested party requests an appraisal, however, an appraisal must be obtained.
Although making some rule changes, the Final HECM Rule often defers to past mortgagee letters for guidance, or HUD simply takes into consideration the thoughts and concerns of the commenters for future guidance. HUD reminded mortgagees that the model HECM loan documents provided must be adapted by the lenders to local and state requirements that preserve first lien status.
HUD also recently issued Mortgagee Letter 2017-11 indicating that the Final Rule’s servicing requirements will take effect for all case numbers assigned on or after September 19, 2017. The Mortgagee Letter also provided new guidance regarding Default for Unpaid Property Charges, the Sale of Property Securing a Due and Payable HECM, and HERMIT System Updates.
James M. Milano is a partner with the law firm at Weiner Brodsky Kider PC, based in Washington, D.C. Jim represents and advises mortgage and finance companies on issues such as: (i) responding to federal and state regulatory audits and enforcement actions; (ii) state regulatory approvals; (iii) lending and servicing programs; (iii) (iv) state laws and regulations concerning loan disclosures, allowable fees, servicing and prohibited practices; (v) federal laws and regulations including, but not limited to, TILA, RESPA, ECOA, FDCPA, HMDA, FCRA, and GLBA (privacy); and (vi) implementation of the Dodd-Frank Act and CFPB regulations.