Home Equity Conversion Mortgage Policy Changes
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August saw two official policy letters issued by [tag]HUD[/tag] related to Home Equity Conversion Mortgages ([tag]HECM[/tag]) - the most popular type of [tag]reverse mortgage[/tag].
The first, Mortgagee Letter 2006-20 (issued 8/16/06), addresses how subordinate liens, state and local court-ordered judgments and judgement liens are to be handled in HECM transactions:
This Mortgagee Letter clarifies and reiterates that under the [tag]Home Equity Conversion Mortgage[/tag] (HECM) Program the Federal Housing Administration (FHA) permits existing liens to be subordinated to the first and second HECM liens. This Mortgagee Letter also provides [tag]FHA[/tag] guidance on the processing of HECM loan applications when a prospective HECM borrower is a person against whom a state or local court-ordered money judgment has been entered and remains unpaid.
One interesting point reiterated in the letter is that [tag]HELOC[/tag] or other type of [tag]home equity[/tag] borrowing is possible even after a HECM loan is issued:
Once a HECM loan is endorsed, however, the HECM mortgagor is not restricted from seeking a home equity loan, or engaging in another type of real estate financing transaction which would require an additional lien to be subordinated to the HECM first and second liens.
Of course, given the way reverse mortgages work over time - increasing debt/decreasing equity - finding a willing home equity lender may be a practical challenge. Still, some interesting options might be possible for high-value homeowners with plenty of equity even with an outstanding HECM.
The second policy letter, Mortgagee Letter 2006-22 extends the expected interest rate “lock-in” period from 60 to 120 days. This provides HECM applicants protection against rising interest rates during the loan processing period.
Effective immediately, the Federal Housing Administration (FHA) is extending the expected interest rate lock-in provision for HECMs to 120 days (from 60 days). The expected interest rate is used to calculate the principal limit for HECMs and is established based upon the date in which the initial loan application is signed by the borrower. FHA will grant an automatic 60-day extension for all HECM loans currently in process but not yet closed. The provisions within this Mortgagee Letter will be consistent with average processing times and current practices being used by the reverse mortgage industry.
The full text of these Mortgagee Letters is availble by clicking on the links shown above.
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