Breaking News: New HUD Mortgagee Letter Released on Refinancing Existing HECMs

Breaking News: A new HUD Mortgagee Letter was released on Tuesday, HUD Mortgagee Letter 2009-21.  The letter covers the HECM refinancing of existing loans.  Some important points:

- A technical correction to 73 FR 51596 and the 24 Code of Federal Regulations (CFR) Part 206 stating that the FHA will insure all loans that we originated for the purpose of reginancing an assigned loan that is not in a due and payable status for reasons that cannot be corrected, but closed on or after October 6, 1008.

- A mandatory “anti-churning disclosure” requirement as a consumer protection measure for all refinanced HECM.s. The Anti-Churning disclosure form must be signed by the mortgagor and be included in the FHA case binder.  The form, designed to ensure that the HECM refinance will benefit the mortgagor, requires that the mortgagee provide the mortgagor with its best estimate of the total cost of refinancing to the mortgagor and the increase in the mortgagor’s principal limit as measured by the estimated initial principal limit on the HECM refinance less the current principal limit on the existing HECM. The mortgagee must also provide the mortgagor with the best estimate of funds available to the mortgagor minus any closing costs/fees.

- For HECM loans that are closed-end lines of credit, the Anti-Churining Disclosure Form must be issued concurrently with the Good Faith Estimate.  For HECM loans that are open-end lines of credit, it must be issued with the other disclosure forms provided in lieu of a GFE.

- Mortgagors in a HECM refinance can waive/opt-out of counseling if they have received the HECM Anti-Churning Disclosure form, if the increase in the mortgagor’s principal limit exceeds the total cost of the HECM refinance by an amount equal to 5 times the cost of the transaction and if the time between the closing of the existing HECM and the application for refinancing is five years or less.

- The mortgagee letter also contains detailed instructions for servicers regarding how to treat the loan.

The complete HUD Mortgagee Letter 2009-21 can be found here.

 

New Cross Selling Restrictions Hurt Lenders and Borrowers?

Senator McCaskill in DC

Senator McCaskill in DC

At first, I was inclined to be in favor of the new “cross selling” restrictions. However, after learning more about them, I have changed my view.

One of the most popular and well-publicized examples of reverse mortgage fraud comes from lenders selling a senior a reverse mortgage, then convincing them to use the proceeds to buy an annuity or long term care insurance.  This practice is known as “cross selling.” The annuity could perform poorly, the money could be invested for the gain of the broker, or the terms of the insurance could be highly unfavorable.  And in many of these cases, seniors could be taken advantage of.

Hence the new series of “cross selling” restrictions that are passing through state legislatures and the federal government.  The federal government’s restriction, in the McCaskill amendment to the Housing & Economic Recovery Act of 2008, is arguably the most stringent one. The amendment states that the mortgagee “shall not participate in, be associated with, or employ any party that participates in or is associated with any other financial or insurance activity;”  This language  can be extended to include tellers and savings accounts, let alone all insurance products and 401(k)s. There is an “or,” however, which states that the mortgagee can do the above if they prove to the Secretary that the mortgagee maintains firewalls and safeguards to ensure that the originator has no incentives to provide the mortgagor with any other financial product and that the mortgagor does not need to purchase any other product as a condition of the reverse mortgage. This means that, provided that it can be proven adequately that safeguards are present, other financial products may be able to be sold by mortgagee.

The principle of the law is correct. Clearly it is important to protect seniors from fraud.  Cross selling can prove disadvantageous for seniors, especially when the mortgagee is being compensated for the other products–something the senior may or may not be aware of.

However, there are other instances where cross selling may be advantageous.  A senior may wish to place the money in a savings account or open up a credit card with the bank behind their reverse mortgage.  They may decide to purchase a long term care insurance plan. These products can be favorable, and seniors should be able to purchase them.

The current law means that reverse mortgage lenders can only discuss a reverse mortgage with their client. If the client asks them about other options, they are not permitted to answer.  Many seniors have long-term relationships with their banks or financial advisors.  These seniors should not be forced to go to a variety of sources, leaving the person whom they trust and have a long-standing relationship with, just because they are considering a reverse mortgage.  Such a policy has a potential to cause more harm than good.

Seniors have the right to evaluate all their options.  Hopefully HUD’s interpretation of the McCaskill ammendment will still enable seniors to discuss alternatives to a reverse mortgage with their financial advisors and/or discuss options for what to do with the money, if they wish to do so.  Cross selling could be prevented by a more narrow law.  But the McCaskill ammendment takes it too far.