FHA Loan Expert Blog

October 20, 2008
MORTGAGEE LETTER 2008-33
TO:    ALL APPROVED MORTGAGEES
          ALL HUD-APPROVED HOUSING COUNSELING AGENCIES
SUBJECT: Home Equity Conversion Mortgage (HECM) for Purchase Program
 The Housing and Economic Recovery Act of 2008 (HERA) provides HECM mortgagors with the opportunity to purchase a new principal residence with HECM loan proceeds.  Section 2122(a)(9) of HERA amends section 255 of the National Housing Act to authorize the Department of Housing and Urban Development (HUD) to insure HECMs used for the purchase of a 1- to 4-family dwelling unit.   Accordingly, eligible mortgagors now have the opportunity to purchase a principal residence with HECM loan proceeds.  HECM for purchase transactions, for which the FHA case number is assigned on or after January 1, 2009, must satisfy existing program requirements and the provisions of this Mortgagee Letter.

 The Federal Housing Administration (FHA) defines “HECM for Purchase” as a real estate purchase where title to the property is transferred to the HECM mortgagor, which the mortgagor will occupy as a principal residence, and, at the time of closing, the HECM first and second liens will be the only liens against the property.  HECM mortgagors must occupy the property within 60 days from the date of closing.  Lenders are required to ensure all outstanding or unpaid obligations incurred by the prospective mortgagor, in connection with the HECM transaction, are satisfied at closing. 

Eligible Property Types

 Only properties where construction is completed, as defined in Mortgagee Letter 2007-06, are eligible for FHA insurance under the HECM for Purchase program.  Loan proceeds may be used to satisfy outstanding payment obligations associated with a land contract, contract for deed or other similar purchasing arrangements that will ensure the property, which will be used as collateral for the HECM, meets FHA’s title requirements.  Those requirements, as provided in section 255(b)(4) of the National Housing Act and implemented in the HECM regulations at 24 CFR 206.45, provide, in part, that the HECM must be on real estate held in fee simple, or on a leasehold under a lease for not less than 99 years which is renewable, or under a lease having a remaining period of not less than 50 years beyond the date of the 100th birthday of the youngest mortgagor.  
Ineligible Property Types

 The following property types are ineligible for FHA insurance under the HECM for Purchase program:

• Cooperative units; 
• Newly constructed principal residence where a Certificate of Occupancy or its equivalent has not been issued by the appropriate local authority;
• Boarding houses;
• Bed and breakfast establishments;
• Existing manufactured homes built before June 15, 1976; and
• Existing manufactured homes built after June 15, 1976 that fail to conform to the Manufactured Home Construction Safety Standards, as evidenced by affixed certification labels (e.g. data plate and HUD certification label) and/or lack a permanent foundation as required in HUD’s Permanent Foundations for Manufactured Housing Guide.

Property Flipping

Prospective mortgagors should be alert to efforts to coerce them into obtaining a reverse mortgage as part of a purchase contractual obligation, or purchasing a distressed home in need of substantial repairs but being sold at or above market rate.

 As such, HECM lenders must take steps to ensure that: a) only current owners of record may sell properties that will be financed using FHA-insured mortgages; b) any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and c) for resales that occur between 91 and 180 days where the new sales price exceeds 100% of the previous sales price, FHA will require additional documentation validating the property’s value.  Lenders providing HECM financing for purchase transactions must comply with guidance provided in Mortgagee Letter 2006-14.
 
Refinancing and Existing Upfront Mortgage Insurance Premium (MIP)

 The HECM refinance authority is only applicable when the property that serves as collateral for FHA-insurance remains the same.  Therefore, existing HECM mortgagors who participate in a HECM for Purchase transaction are ineligible for a reduction of the upfront MIP and lenders must enter the transaction into FHA Connection as a new HECM.

Monetary Investment

 Consistent with existing policy, the maximum claim amount and principal limit will continue to be calculated in accordance HECM regulations at 24 CFR 206.3, HUD Handbook 4235.1 REV-1, and applicable MLs.  At closing, HECM mortgagors must provide a monetary investment which will be applied to satisfy the difference between the HECM principal limit and the sales price for the property, plus any HECM loan related fees that are not financed or offset by other allowable FHA funding sources.
HECM mortgagors may choose to provide a larger investment amount in order to retain a portion of the available HECM proceeds for future draws.
Required Investment Examples

Example #1 Example #2 Example #3
Appraised Value/MCA*$300,000
Sales price                      $300,000 Appraised Value/MCA*$300,000
Sales price                     $325,000 Appraised Value/MCA*$300,000
Sales price                      $280,000
Principal Limit**           $199,500 Principal Limit**          $199,500 Principal Limit**           $199,500
Minus Loan Fees             $ 15,500 Minus Loan Fees            $  15,500 Minus Loan Fees             $  15,500
Avail. HECM proceeds  $184,000 Avail. HECM proceeds  $184,000 Avail. HECM proceeds   $184,000
Req. Investment              $116,000 Req. Investment              $141,000 Req. Investment                $ 96,000
* Appraised Value/MCA is defined as the maximum claim amount and is used to determine the principal limit which is the lesser of the appraised value or the FHA national mortgage limit.  The principal limit is the maximum amount available to the HECM mortgagor.
** Assumes the age of the youngest HECM mortgagor is 67 and a principal limit factor of .665 for a 5% expected average mortgage interest rate. 

In each example above, loan fees are deducted from the principal limit of the HECM.  However, it is not required that loan fees be deducted from HECM proceeds.  The mortgagor may pay loan fees as part of the required monetary investment and use all HECM proceeds toward the purchase transaction.

Funding Sources

HECM mortgagors must use cash on hand or cash from the sale or liquidation of the mortgagor’s assets for the required monetary investment.
  
Verification of Funding Sources

Lenders will be required to verify the source of all funds prior to closing.  A verification of deposit, along with the most recent bank statement, may be used to verify savings and checking accounts.  If there is a large increase in an account, or the account was opened recently, the lender must obtain a credible explanation of the source of those funds.  Such documentation must be provided in the FHA case binder.  Failure to provide the necessary documentation may result in a notice of rejection and delay of endorsement. 

Gap Financing

 Consistent with existing regulatory requirements at 24 CFR 206.32(a), HECM mortgagors may not obtain a bridge loan (also known as “gap financing”) or engage in other interim financing methods to meet the monetary investment requirement or payment of closing costs needed to complete the purchase transaction.  This restriction includes subordinate liens, personal loans, cash withdrawals from credit cards, seller financing and any other lending commitment that cannot be satisfied at closing. 
 

Gap Financing Example

A prospective HECM mortgagor completes the required reverse mortgage counseling and receives an estimate stating the required monetary investment could be $25,000.  The prospective HECM mortgagor has $20,000 in liquid assets but is short the remaining $5,000.  The prospective HECM mortgagor cannot take $5,000 from a credit card or obtain interim financing in order to deposit the money into their banking account in anticipation of being required to bring this amount to closing.  However, the prospective HECM mortgagor may obtain the $5,000 from an allowable FHA funding source. 

Enhanced Counseling

 HUD-approved housing counseling agencies that have been approved to provide reverse mortgage counseling, must counsel those who anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.

Right of Rescission

 The three-day right of rescission period is not applicable to HECM for Purchase transactions.  Therefore, all initial advances may be disbursed on the day of closing by the settlement agent.  However, FHA encourages lenders to seek their counsel’s opinion to assure compliance with Federal or State laws.

Closing Guidance

 Lenders are required to ensure the property, when used as collateral for the HECM, meets the following property requirements:

• Will serve as the principal residence of the HECM mortgagor.
• Construction is complete and a certificate of occupancy or its equivalent has been issued.
• Any construction loan financing for the property, which will serve as the collateral for the HECM loan, is satisfied and the HECM liens will be in a first and second lien position and, at the time of closing, no other liens against the property exist.

 Consistent with existing lending practices, lenders are responsible for determining whether a particular HECM loan is open or closed-end credit.  In accordance with 24 CFR 206.43, lenders must comply with the regulatory disclosure requirements.

Data Entry

 Instructions on how to enter HECM for Purchase transactions into FHA Connection and Insurance Accounting Collection System will be provided in a separate instruction.
 

Information Collection Requirements

The information collection requirements contained in this Mortgagee Letter were approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520).  Approval of HECM Program is covered by OMB control number
2502-0524, with disclosures requirements being covered by OMB control numbers 2502-0265 and 2502-0059.  An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a valid control number.

 If you have questions regarding this Mortgagee Letter, please call FHA’s Resource Center at
1-800-CALL-FHA (1-800-225-5342).  Persons with hearing or speech impairments may access this number via TDD/TTY by calling 1-877-TDD-2HUD (1-877-833-2483).

       Sincerely,
       Brian D. Montgomery
       Assistant Secretary for Housing-
          Federal Housing Commissioner

Expanding American Homeownership Act of 2007

As ordered reported by the House Committee on Financial Services on May 3, 2007

SUMMARY H.R. 1852 would amend the National Housing Act to authorize the Federal Housing Administration (FHA) to implement a new pricing structure for the mortgage guarantees itoffers. This legislation also would remove the statutory limitation on the number of reversemortgages that FHA can insure and would make other changes to the Home Equity Conversion Mortgage (HECM) program. In addition, this legislation would authorize the appropriation of funds to provide certain borrowers with financial counseling and to establish a new affordable housing fund.

Enacting H.R. 1852 would increase direct spending by allowing the Department of Housingand Urban Development (HUD) to sell certain properties at below-market prices without an appropriation of funds to offset any forgone sales proceeds. That provision would modifythe cost of some previous and outstanding loan guarantees. As a result, CBO estimates that enacting H.R. 1852 would increase direct spending by $16 million in 2007.

CBO also estimates that implementing H.R. 1852 would result in a net increase in offsettingcollections (a credit against discretionary spending) of $313 million in 2008 and $628 millionover the 2008-2012 period, assuming that appropriation laws necessary to implement the FHA programs and the Mortgage-Backed Securities (MBS) program of the Government National Mortgage Association (GNMA) are enacted.

H.R. 1852 contains no intergovernmental or private-sector mandates as defined in theUnfunded Mandates Reform Act (UMRA) and would impose no costs on state, local, ortribal governments.

Amendments to the HECM Loan Insurance Program. HECM loans are considered to be“reverse mortgages” because they enable homeowners who are at least 62 years of age towithdraw some of the equity in their homes in the formof monthly payments, in a lump sum,or through a line of credit. Under current law, FHA is permitted to guarantee up to acumulative total of 275,000 such loans, although this limitation has been waived throughfiscal year 2007. This cap has already been reached this year; consequently, the program will be inactive beginning in 2008 unless the cap is amended.

Loan size is tied to loan limits that vary by geographic region, and such loans cannot be used to purchase another home. In addition, the origination fee charged by lenders is calculatedas a percentage of the home’s value.

Enacting this legislation would remove the statutory limitation on the number of loans thatcould be guaranteed, set a single nationwide limit on the dollar amount of a HECM loan thatwould be tied to the conforming loan amount, limit the origination fee to 2 percent of theloan amount (subject to a minimum allowable amount), and allow borrowers to use HECMloans to purchase a new home. (Conforming loans have terms and conditions that follow the guidelines set forth by the Government Sponsored Enterprises (GSEs); the conforming loanamount is $417,000.)

Implementation of the HECM program, like all of FHA’s insurance programs, is contingenton the enactment of appropriation laws that provide annual loan commitment authority.Thus, the estimated budgetary impact of this proposal is considered to be discretionary, andit is tied to the demand for HECM loans and the estimated subsidy cost of the loan guarantees. Because, under credit reform procedures, guarantees of HECM loans are estimated to have negative subsidies (that is, they earn money for the government), CBOestimates that implementing those amendments would increase offsetting collections byabout $2.1 billion over the 2008-2012 period.

Demand for HECM Loans. According to the National Reverse Mortgage Lenders Association (NRMLA) and other industry experts, the HECM program has risen inpopularity in recent years. As more consumers are becoming aware of the product, morehouseholds are becoming eligible for the program (currently over 17 million households haveowners who are age 65 or older, according to census data), and more seniors view theproduct as an alternative approach to financing home-improvement projects, medical costs,and other needs. In addition, sources in the mortgage industry have observed an increasingdemand among seniors for new housing within senior communities. The number of HECMloans insured by FHA more than doubled from 2003 to 2006 (18,000 loans were insured in 2003, compared with 76,000 loans in 2006). Furthermore, based on the number of HECMloans insured as of April 2006, that volume could reach over 100,000 loans by the end offiscal year 2007.

Based on information from FHA, NRMLA, and other industry experts, CBO estimates thatsetting a single nationwide loan limit and permitting borrowers to use HECM loans topurchase a new home would result in a product that would be more attractive to borrowersand more easily marketed by lenders, resulting in increased demand for HECM loans. Onthe other hand, the limit on the origination fee could result in a programthat is less profitablefor certain lenders, causing some to end or limit their participation in the program. A lowerorigination fee, however, could increase the program’s attractiveness to some borrowers, assuming lenders do not increase interest rates significantly to compensate for lower origination fees.

Currently, the market for FHA’s HECM loans appears to be very robust, and under this bill,FHA would probably insure more than 100,000 loans annually over the next several years.Also, GNMA’s recent decision to begin securitizing HECM loans could result in increased activity by lenders, as investors in the secondary mortgage market begin to invest inmortgage-backed securities that include this product. Whether the number of guaranteescould exceed 100,000 loans on a continued basis each year would depend on FHA’s ability to administer and manage the program in an efficient manner and on the market’s responseto this bill, especially the change in the origination fee. Based on information from FHA,CBO estimates that the agency could insure about 110,000 loans (with a face value of about$27 billion) in 2008. In subsequent years, we estimate that demand would increase at theestimated rates for appreciation in housing prices—about 2 percent to 4 percent a year

Raising Loan Limits for the Single-Family Program. Section 3 would raise FHA’s loan limit—the dollar amount of a mortgage that FHA can insure—for its single-family program from 87 percent of the conforming loan amount to 100 percent of the conforming loan limit in certain geographic regions where the cost of housing is very high. Effectively, this wouldbe a change from insuring loans of $362,790 today to insuring loans of up to $417,000 incertain parts of the country. In less expensive markets, the limit would be raised from48 percent to 65 percent of the conforming loan limit, or a change from loan guarantees of up to $200,160 to loan guarantees of up to $271,050 under the bill.

CBO estimates that implementing this provision would increase loan volume by about8 percent a year—about $4 billion annually in additional loan guarantees—over the next fiveyears. This increase would stem mostly from increasing the limit in the less expensivehousing markets. Despite this estimated increase in loan volume, CBO estimates that noadditional offsetting collections would be realized because we expect the subsidy rate for thesingle-family program to be zero over the next five years. However, because most FHAsingle-family loan guarantees are included in GNMA’s MBS program, CBO estimates that raising the loan limit would result in additional offsetting collections to GNMA of about$45 million over the 2008-2012 period. As mentioned earlier, GNMA requires appropriationaction to establish its dollar limitation for the securities program, so those savings would beoffsets to discretionary spending.

Limit on Increases in Fees for Mortgage Insurance. Currently, FHA has the authority toadjust fees for its mortgage insurance programs through administrative action. Section 30would prohibit FHA from increasing fees unless the increase is required to maintain theestimated credit subsidy for the program at zero, but not less than zero. According to theAdministration, annual fees for new loan guarantees for the apartment development and refinance programs will increase by about 16 basis points beginning in 2008. CBO estimates that those fee increases would affect about $2.6 billion in loan guarantees in 2008 and over$3 billion in loan guarantees annually in subsequent years. Furthermore, we estimate that those fee increases would increase offsetting collections for this program by $192 million over the 2008-2012 period. Thus, prohibiting those fee increases would result in a loss of$192 million in discretionary offsetting collections over the next five years.

Risk-based Pricing and Flexible Downpayment Requirements. Currently, FHA’s single-family loan guarantee program has a flat premium structure under which all borrowers paythe same up-front and annual fees, regardless of the borrower’s individual risk of default.According to the FHA, the up-front fee in 2008 is expected to increase from 1.5 percent to1.66 percent and the annual fee will rise from 0.5 percent to 0.55 percent. Furthermore, theAdministration estimates that those fee increases will result in a subsidy rate of zero for thesingle-family program for 2008.

Under this legislation, FHA would have the authority to match the fees it charges with the borrowers’ risk of default or the risk associated with a particular loan product, and to offerguarantees for loans with little or no downpayment. For certain borrowers and types of loanproducts, the up-front fee could be as high as 3 percent and the annual fee could be as highas 0.75 percent. CBO estimates that implementing this risk-based pricing proposal wouldresult in a weighted subsidy rate that is about zero. Because the subsidy rate for 2008 isestimated to be zero under current law, CBO expects that FHA would charge rates underH.R. 1852 that would produce a similar result.