FHA Loan

If you’re a federal department you likely do not want to incite the attention of a powerful lobby. For the future education of government bureaucrats he’s why: It took HUD less than a week to back down after facing a lawsuit from one of the most important groups in Washington, the American Association of Retired People.

The dispute began in the waning weeks of the Bush Administration. Until this point it had been plainly understood when an individual with a reverse mortgage — or a Home Equity Conversion Mortgage (HEMC) as HUD calls them — moved, sold or passed away that the loan could be entirely paid off by giving title to the lender. Neither the lender nor HUD had any right to go after the borrower’s estate, spouse, children or heirs to make up any loan losses.

Big Claims Against Spouses & Heirs

But in late 2008 HUD came out with a new ideas.

“The HECM is a “non-recourse loan,” said HUD. “This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or value of the property, whichever is less; and no assets other than the home must be used to repay the debt.”

“Some program participants mistakenly infer from this language that a borrower (or the borrower’s estate) could pay off the loan balance of a HECM for the lesser of the mortgage balance or the appraised value of the property while retaining ownership of the home. This is not correct and is not the intended meaning of the quoted provision. Non-recourse means simply that if the borrower (or estate) does not pay the balance when due, the mortgagee’s remedy is limited to foreclosure and the borrower will not be personally liable for any deficiency resulting from the foreclosure.”

Get it?

Under HUD Mortgagee Letter 8-38 a spouse or heir who wanted to keep the property had to pay all that was owed to the lender, not just property’s appraised value. In other words, HUD would not pay lender claims if the family wanted to keep the property. Since a reverse mortgage is a negatively amortizing loan, in time the size of the mortgage debt would likely pass the value of the home — especially during the past few years as home values have generally fallen.

According to AARP, “HUD rules in place since 1989 clearly state that a borrower or heirs would never owe more than the home was worth at the time of repayment. But at the end 2008, HUD abruptly changed the policy and said that an heir — including a surviving spouse who was not named on the mortgage — must pay the full mortgage balance to keep the home, even it if exceeds the value of the property. This does not just violate HUD rules; it violates existing contracts between reverse mortgage borrowers and lenders, and negates a key purpose for which borrowers had been paying insurance premiums.”

Caught, HUD retreated with a new mortgage letter published April 5th:

“On December 5, 2008,” said HUD, “the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter (ML) 2008-38 to provide clarification to mortgagees regarding the requirements for repayment and termination of a Home Equity Conversion Mortgage loan. HUD’s intent in issuing ML 2008-38 was to supplement and explain provisions contained in the regulations at 24 CFR §206.125 and HUD Handbook 4235.1 (Home Equity Conversion Mortgages). Since there has been some uncertainty regarding the guidance in that ML, HUD is rescinding ML 2008-38, effective as of the date of this ML.”

In other words, let’s go back to the old understanding, a key reason to get a reverse mortgage.

And no, there was no uncertainty. No clarification was needed. HUD, under the Bush Administration, tried to gut the FHA reverse mortgage system through the back door and got caught. It tried to change the contracts HUD had with existing reverse mortgage borrowers even though borrowers had not agreed to any revisions.

Congratulations to AARP for protecting its members and their families.

This entry was posted
on Tuesday, April 12th, 2011 at 10:28 am and is filed under .
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With the end of the FHA short refi program plainly in view, it might be useful to take a look at who wins and who loses.

As explained earlier, the program allowed underwater borrowers to refinance provided the lender is willing to take at least 10 percent of the principal.

This sounds as though the lender is taking a beating, and no doubt that’s true. Equally true is that the program could have helped many lenders.

To understand why let’s take a look at the housing market. The Federal Housing Finance Agency home prices in November were 14.9 percent below their April 2007 peak and roughly the same as values in August 2004.

Home Values

The catch is that home values have not fallen equally. From November 2009 through November 2010 home values fell by an average of 11.2 percent in the Mountain states — Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona, New Mexico.

At the same time, home prices fell just 1.2 percent in Oklahoma, Arkansas, Texas, Louisiana — the South Central area.

So, if you’re a lender you might want to ask what’s better: To take a 10 percent loss or to take the vastly larger loss that might result if the property is foreclosed or the owner’s walk away.

For lenders there’s no good answer. Neither option is especially attractive.

The FHA loan guidelines for the short refi program might actually work for lenders in local areas which have seen extreme price drops — think of the foreclosure centers in Florida, California, Nevada, Arizona and Ohio. Not work great, not produce a massive profit or more reasons for executive bonuses, but work in the sense that things could be worse.

FHA Risk

Truth is, the FHA short refi program is a woeful idea because it exposes the FHA to great risk. Had lenders been smart, they would have dumped a ton of weak properties by allowing owners to refi with an FHA mortgage. In that way, if prices continue to decline or the owners walk off, it’s the FHA’s problem.

But lenders didn’t go for the FHA refinance plan. Instead, they essentially boycotted the short-refi effort. Only 44 of the loans have been made to this point in a nation with 310 million people.

FHA Commission David H. Stevens says the “FHA is well aware of the potential for moral hazard in principal reduction. That is why we carefully designed the guidelines of the FHA Short Refinance Option to discourage borrowers from purposefully becoming delinquent on their loan, otherwise known as strategically defaulting, solely to receive a principal writedown. To this end, borrowers are required to be current on their existing loan to be eligible to refinance into a FHA-insured mortgage.”

But the problem is not strategic defaults — another way to say that people will simply walk away from their loans. The problem is that only a microscopic number of lenders have any interest.

“Principal writedowns,” says Stevens, “can be difficult to implement due to the multiple entities that must be coordinated, including investors, servicers, originators, and the borrower. Despite this difficulty, they have been shown to be an attractive option that can be both more sustainable for the borrower and fair for the investor.”

Well, no. The short refi program has been shown to be attractive only 44 times. That’s it. Let it go.

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on Wednesday, March 9th, 2011 at 12:44 am and is filed under .
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