www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 May 29, 1990 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER Mortgagee Letter 90-17 TO: ALL APPROVED MORTGAGEES ATTENTION: Participating HECM Lenders SUBJECT: Home Equity Conversion Mortgage (HECM) Insurance Program Changes and Amendments to HUD Handbook 4235.1 The following Mortgagee Letter provides both changes and updates to the guidelines contained in HUD Handbook 4235.1 and to the HECM mortgage documents, along with information about compliance with Regulation Z (Truth-in-Lending Act) and state laws. Any changes or amendments to the procedures contained in the handbook are simply corrections to errors and omissions to the handbook, and are, therefore, effective immediately. 1. HANDBOOK CHANGES/UPDATES A. Setting the Interest Rates In setting the mortgage interest rate and the expected average mortgage interest rate for adjustable rate loans, the lender should use the appropriate indices in effect on the date of closing. Therefore, when setting the mortgage rate on a reverse ARM, the lender should use the one year Treasury rate in effect at the time of closing. When setting the expected rate, the lender should use the ten year Treasury rate in effect at closing. This should clarify Paragraph 7-3A of the handbook with regard to setting these rates. The handbook, however, does not instruct the lender as to how to determine the rates on reverse ARMs for the purpose of estimating the borrower's principal limit before closing. The lender should use the indices in effect at the time the application is signed by the borrower, in order to provide the borrower with an estimate of his or her principal limit and to allow the Field Office to verify that the correct indices are being used when the borrower's application is being approved. It is important to remember that setting the rates during the application period is only for the purpose of making estimates. The lender must still recalculate the principal limit at closing using the indices in effect at closing. _____________________________________________________________________ 2 B Rounding Interest Rates The handbook does not presently contain any instructions regarding the Department's policy on rounding the mortgage interest rate and the expected average mortgage interest rate. The Department does not require that the lender round either rate. Therefore, the lender may round both rates, only one rate, or none of the rates. However, if the lender chooses to round either rate, the rate must be rounded to the nearest one-eighth (1/8) of a percentage point (i.e. the nearest 1/8th either up or down) and must be rounded throughout the life of the loan. Whether or not a lender decides to round the rates may depend on the preference of the secondary market investor. Lenders are encouraged to check with their investors to determine if rounding will be required. If the mortgage interest rate is rounded, the lender should refer to the footnotes of Appendices 5 and 6 for instructions on appropriate changes to the mortgage instruments. C. Changing the Rates on Reverse ARMs The handbook's instructions on the post-endorsement changes to the interest rate on reverse ARMs are contained on pages 2-3 of Appendix 5. These instructions require the change date to be 12 to 18 months after the closing date on an annually adjusted reverse ARM. In order to allow the procedures for reverse ARMs to parallel the procedures for forward ARMS, contained in Mortgagee Letter 89-24, as much as possible, the program regulations at 206.21(b)(1) substitute the closing date on a reverse mortgage for the due date of the first payment on a forward mortgage. For monthly adjustable reverse ARMS, the change date may not be earlier than one month after the closing date nor later than six months after the closing date. It is the intention of the Department to adhere to the instructions regarding all HUD insured ARMs in Mortgagee Letter 89-24, where applicable to the program. D. Protective Covenants in Condominium Projects, Subdivisions and PUDs Section 4-4 of the handbook concerning eligible properties does not discuss the permissibility of protective covenants in HUD approved housing communities for the elderly. However, the Department's new regulations (54 FR 3290) concerning the acceptability of protective covenants in HUD approved condominium projects, subdivisions and planned unit developments (PUDs), _____________________________________________________________________ 3 required by the Fair Housing Amendments Act of 1988, are applicable for this program. The regulations essentially ban protective covenants based on familial status, but contain certain exemptions. These exemptions allow "retirement" communities to be HUD approved under two sets of circumstances. The housing in the community: 1. Must be intended for, and solely occupied by, persons 62 years of age of older; or 2. Must be intended and operated for occupancy by at least one person 55 years of age or older per unit, and provide significant facilities and services specifically designed to meet the physical or social needs of older persons, or if it is not practicable to provide significant facilities and services designed to meet the physical or social needs of older persons, the housing facility should be necessary to provide important housing opportunities for older persons. Lenders should refer to these regulations before submitting a project for approval . E. Defining Two, Three and Four Unit Properties Paragraph 4-4A of the handbook states that only one unit properties are eligible in the program. This restriction is imposed by the statute authorizing the program. The classification of the property as a one, two, three or four unit property occurs when the property is appraised. In defining the number of units on a property, the appraiser focuses on the viability of each unit as an independent, self-supporting unit. Characteristics such as separate kitchen and bathroom facilities, private entrances and separate legal addresses are all considered in this determination. Whether or not two residences share the same property or simply share a common wall is also a consideration. Therefore, it is important that lenders not rely on the assumptions of the homeowner when advising the homeowner of his or her eligibility for the program. The final decision is made by the appraiser. _____________________________________________________________________ 4 F. Collection of Monthly MIP Chapter 8 of the handbook failed to detail the remittance requirements for uninsured mortgages. Because all loans are insured retroactively from the date of closing, monthly mortgage insurance premium (MIP) will begin to accrue on the outstanding balance from the day after closing. Any delays in endorsing the mortgage will not relieve the lender of MIP remittance requirements. If a mortgage is rejected for insurance, a refund of any premium paid will be processed by the Department. If the lender delays the disbursement of funds to allow the borrower to exercise the right of rescission, monthly MIP will not begin to accrue until the day after funding. In cases where the funding date differs from the closing date, the lender should substitute the funding date for the closing date when remitting the MIP. 2. MORTGAGE DOCUMENTS A. Right of Rescission Subsection 2.5.5 of the Home Equity Conversion Loan Agreement (Appendix 9 to HUD Handbook 4235.1) provides that monthly payments be paid to a borrower "on the first business day of the month beginning with the first month after closing." For some loans which are closed on the last three business days of a month, the borrower's right of rescission for three business days provided by Regulation Z (12 CFR 226.15) may extend beyond the first business day of the first month after closing. In these cases, Subsection 2.5.5 must be amended to change "first month after closing" to "second month after closing." Because this change may cause hardship on a borrower who expected a monthly payment soon after closing, a lender should clearly explain the consequences of this change if it is made. The lender should offer to revise the payment plan, with a resulting reduction in the borrower's monthly payments, at or before closing to provide for a cash disbursement to the borrower as soon as the borrower's right of rescission expires. The disbursement of funds and the accrual of interest are governed by the loan agreement and the note. Article 2.2.4 of the loan agreement provides that loan advances may not be made before the expiration of the borrower's right of rescission. Paragraph 2 of the note provides that interest will be added to the unpaid principal at the end of the month. Principal is defined as the _____________________________________________________________________ 5 sum of the loan advances, at Article 1.6 of the loan agreement. Therefore, lenders are prohibited from charging interest on funds held available for the borrower during the three day rescission period required by Regulation Z ( 12 CFR 226.15). Interest must begin to accrue on the day after the disbursement is made, and it must be added to the balance on the last day of the month. B. Maturity Date Where state law requires that the mortgage documents provide a maturity date, the introductory paragraphs of the first and second mortgage, and paragraph 2 of the first and second note may be amended to include a maturity date that is 50 years beyond the borrower's 100th birthday. All other grounds for acceleration, at paragraph 9 of the notes, must be retained. C. Maximum Mortgage Amount Where state law requires that a maximum mortgage amount be stated, the instructions at footnote 3 to the first and second mortgage should be changed so that the amount recorded is "equal to or greater than 150 percent of the maximum claim amount" instead of property value. Generally, the property value and the maximum claim amount will be the same because the maximum claim amount is the lesser of the appraised value or the maximum mortgage amount under Section 203(b) of the National Housing Act. However, where the property is valued far above the maximum claim amount, and where the recording tax is based on the mortgage amount, the borrower may be assessed an unusually high tax in relation to the actual loan amount without any corresponding benefit. D. First and Second Mortgage Footnotes The substitute Deed of Trust language in footnote 2 is intended to replace the first three sentences of the mortgage form, instead of the first two sentences as indicated. E. Second Mortgage The fifth sentence in footnote 2 of the second mortgage must be revised to read: "The beneficiary is the Secretary of Housing and Urban Development, and whose address is 451 Seventh Street, S.W., Washington, DC 20410 ("Lender")." _____________________________________________________________________ 6 Paragraph 12(a) of the model second mortgage form must be revised as follows: (1) heading must read "Second Lien States,"(2) at the end of the fourth line, insert "or second" after the phrase "secured by the first," and (3) in the tenth line "first lien status" must be replaced with "second lien status." In paragraph 15 of the model second mortgage form, the word "Second" must be inserted before the word "Note." F. Acceleration for Non-insurance Lenders are authorized, but not required, to add the following provision as Paragraph 9(e) to the first mortgage/deed of trust. (e) Mortgage Not Insured. Borrower agrees that should this Security Instrument and the note secured thereby not be eligible for insurance under the National Housing Act within __________________ from the date hereof, Lender may, at its option, require immediate payment in full of all sums secured by this Security Instrument. A written statement of any authorized agent of the Secretary dated subsequent to _________________from the date hereof, declining to insure this Security Instrument and the note secured thereby, shall be deemed conclusive proof of such ineligibility. Notwithstanding the foregoing, this option may not be exercised by Lender when the unavailability of insurance is solely due to Lender's failure to remit a mortgage insurance premium to the Secretary. Any period may be inserted in the blanks, expressed either in numbers of days or months, which is not shorter than 60 days and not longer than eight months. Lenders are cautioned that this clause should not be used to abuse innocent borrowers. G. Foreclosure Procedure The first sentence of the illustrative language at paragraph 20 of the first and second mortgage is corrected to read as follows: If Lender requires immediate payment in full under paragraph 9, Lender may invoke the power of sale and any other remedies permitted by applicable law. Lender shall be entitled to collect all expenses incurred in pursuing the remedies provided in this paragraph 20, including, but not limited to, reasonable attorney's fees and costs of title evidence. _____________________________________________________________________ 7 H. Deficiency Judgments The fourth sentence regarding deficiency Judgments in footnote 8 to the first and second mortgage is deleted because a reverse mortgage borrower has no personal liability for payment of the mortgage balance. Also, in the third sentence of footnote 8, the word "mortgage" should read "property." I. Condominium and Planned Unit Development (PUD) Riders The model condominium and PUD riders for single family mortgages published at 54 FR 27596, June 29, 1989, may be adopted for use in the HECM program by changing certain language in paragraph A of the appropriate rider. The second half of the first sentence in paragraph A must read as follows: ... and against the hazards Lender and the Secretary require, including fire and other hazards included within the term "extended coverage" and loss by flood, to the extent required by the Secretary, then: (i) Lender waives the provision in Paragraph 2 of the Security Instrument for the payment of the premium for hazard insurance on the Property, and (ii) Borrower's obligation under paragraph 3 of this Security Instrument to maintain hazard insurance on the Property is deemed satisfied to the extent that the required coverage is provided by the Owners' Association policy.... 3. REGULATION Z COMPLIANCE A. Disclosures Because a HUD insured reverse mortgage permits the borrower to use a line of credit, the mortgage is deemed to be "open-end credit" under the Truth-in-Lending Act's Regulation Z (12 CFR 226) as amended by 54 FR 24670 (June 9, 1989). These amendments became mandatory on November 7, 1989. Lenders should note that the sample disclosures contained in Appendices 16 and 17 in the handbook do not comply with the amended Regulation Z, and were intended for use during the interim period before the new Regulation Z became mandatory. Lenders seeking guidance in complying with Regulation Z should contact the Federal Reserve Board, Division of Consumer and Community Affairs, at (202) 452-3667 or 452-2412. B. Right of Rescission Refer to Section A under MORTGAGE DOCUMENTS in this letter for information on the right of rescission. _____________________________________________________________________ 8 4. STATE LAWS The most significant obstacle for many lenders in the program has been the existence of state laws that prevent or in some way restrict the use and form of reverse mortgages. Although many situations are unique, there are some steps that lenders can take short of changing or repealing the laws. First, some state laws do not apply to Federally insured loans. The exemption clauses are often not found next to the reverse mortgage language in the statute, and require some research to locate. Second, traditional interpretations of lending laws may not be appropriate for this program. Lenders should seek guidance for the appropriate interpretation of a state law from the state's Attorney General's office. Finally, state laws do not always apply to the activities of certain financial institutions. Distinctions between state and Federally chartered institutions and between banks, savings and loan associations and mortgage companies are important in interpreting the applicability of different laws. If you have any questions concerning this letter, please contact your local HUD Field Office or the Single Family Development Division in HUD Headquarters at (202) 708-2676. Very sincerely yours, Austin Fitts Assistant Secretary for Housing-Federal Housing Commissioner