In response to a public comment submitted on its previous proposal, HUD has issued a supplemental notice regarding proposed changes to the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) reverse mortgage program.
The supplemental notice only addresses a suggested change regarding the lender’s option to file a claim when the loan balance reaches 98 percent of the maximum claim amount.
“On June 23, 2016, a public commenter (HUD-2016-0052-0010) brought to HUD’s attention a suggested change to the HECM program’s policy that grants the mortgagee the option to assign a HECM loan to FHA if the outstanding loan balance is equal to or greater than 98 percent of the maximum claim amount,” the supplement states.
In some cases, a mortgagee may decline to file a claim in this scenario if the property value has risen rapidly and the loan has an above-market rate.
The comment referenced (HUD-2016-0052-0010) was from Robert Van Order, chair of the Department of Finance at George Washington University.
“I have been looking at analysis of the FHA HECM program, and I have found an embedded option that may not be well-understood. The option belongs to the lender, who for the most part is a GNMA servicer. It comes about because, while the lender is required to buy loans out of the pool when the ‘trigger point’ for the loan balance (98 percent of the original property value) is reached, the lender does not have to make a claim against FHA. It can choose to keep the best loans and make claims for the worst ones. This gives the lender a put option,” Van Order wrote.
Van Order added that there most likely will be a claim if the loan balance exceeds property value, but there need not if property value has risen rapidly and the loan has an above-market rate. For adjustable rate HECMs, this is a credit spread option in the following sense.
“Even if the credit spread at origination is market-based and correct, the same spread will be above or below market later on, depending on how house price evolves, and the issuer will tend to retain the HECM, rather than make a claim if the current market-required spread on the loan is below the origination spread. For fixed rate HECMs, the option is also on interest rate changes, which makes the option more valuable,” Van Order wrote.
Van Order suggested that HUD require that an assignment claim be made when the loans reach 98 percent of the maximum claim amount. HUD now seeks public comment on the feasibility of this proposal.
“A possible fix is to require that a claim be made when loans are taken out of pools, so that FHA gets the future upside as well as downside from the loans. I suspect that was the original intention of the program,” Van Order wrote.
If HUD decides to implement this proposal, HUD would amend § 206.107(a) to require the mortgagee to assign the mortgage to the commissioner if the mortgage balance is equal to or greater than 98 percent of the maximum claim amount, or the mortgagor has requested a payment which exceeds the difference between the maximum claim amount and the mortgage balance.
By proposing the change to the assignment option, HUD would not alter the other proposed changes to § 206.107(a).
“The criteria for assigning a HECM loan to the commissioner in § 206.107(a) would remain, thereby still precluding the mortgagee from assigning the HECM loan if the loan or the mortgagee’s servicing of the loan does not meet the criteria,” the supplement adds. “Therefore, the proposal would require the mortgagee to assign the mortgage to the commissioner at the given threshold unless the loan or the mortgagee's servicing of the loan does not meet the assignment criteria.”
Comments are due Sept. 12.