Will lenders add to reverse mortgage requirements?by Peter Miller
HUD is also telling reverse mortgage lenders they can add additional requirements above the FHA standard to help reduce program claims…or are they?
The FHA insured reverse mortgage product–what HUD calls an HECM or a Home Equity Conversion Mortgage–has been plagued with foreclosure claims. This is an interesting problem given that reverse mortgages have no required monthly costs for principal or interest. Mortgage rates are not an issue, however, some borrowers have not been paying their taxes or insurance and that’s where the foreclosure claims arise.
To protect the program, HUD has introduced the “HECM Saver” program, a reverse mortgage with a much smaller upfront cost and a lower loan-to-value ratio. It’s also raised the annual mortgage insurance premium and outlined new guidance detailing how lenders should deal with borrowers facing foreclosure.
A recent letter from Acting FHA Commissioner Carol Galante said the following, “As we begin this process, I want to reiterate that HUD’s HECM criteria represent the mandatory baseline requirements for approval of a HECM. HUD does not prohibit the inclusion of additional financial capacity and credit assessment criteria and processes in the origination and approval of HECM transactions. Such criteria or processes, however, may not violate FHA statutes and regulations, or other applicable law, such as Fair Housing/Fair Lending laws, the Equal Credit Opportunity Act, Regulation B, etc.”
Why do lenders have to go above and beyond FHA requirements?
If it is true that additional loan criteria above FHA minimums “may not” violate FHA rules and regulations, then is it also true that additional loan criteria “may” lead to allegations of illegality?
Why is it that lenders should be allowed to increase loan requirements above FHA standards when such increases can be seen as discriminatory? After all, the FHA provides 100 percent insurance for lenders. There’s no additional risk to the lender if it merely sticks with FHA guidelines.
What’s remarkable about Galante’s statements are that HUD has been investigating allegations that 22 lenders discriminated by requiring additional qualifications from FHA borrowers, qualifications not required by HUD.
“The investigations,” said HUD, “are in response to 22 complaints the National Community Reinvestment Coalition (NCRC) filed with HUD alleging that the loan activities of the mortgage originators showed that their home lending practices deny FHA- insured loans to African Americans and Latinos with credit scores as high as 640. Federal Housing Administration (FHA) guidelines allow mortgages to borrowers with credit scores above 580, provided the borrowers have down payments equaling 3.5 percent of the loan amount, or above 500, provided the borrowers have down payments equaling 10 percent of the loan amount.”
It’s hard to imagine how any lender can read the Galante letter and think they can now ask borrowers to meet additional standards.
“For lenders to deny responsible home seekers this source of credit, without regard for their capacity to repay the loans, would raise serious fair housing concerns and, if proven, undermine our nation’s recovery efforts,” said HUD Assistant Secretary for Fair Housing and Equal Opportunity John Trasviña last December. “HUD will take appropriate action against any lender found to be engaging in discriminatory practices.”
It all comes back to home prices
Declining home prices increase the likelihood of claims against the reverse mortgage program when a borrower sells, moves or dies. Until home values rise, the HECM program will remain deeply troubled–and perhaps unsustainable. This may be why several major lenders have dropped the program during the past year.