forward on reverse
“Some borrowers’ heirs may be in for a rude surprise when they learn that HUD is administering a key provision of the HECM program in a way that differs from what loan officers or counselors may have told them.”
continued from page 13
Incomplete non-recourse protection for a full price? Moreover, we must keep in mind that HECM borrowers who are relying on ML-0838 description of the non-recourse limit are paying their full mortgage insurance premiums (MIPs), but are not getting the full nonrecourse protection for their heirs that HUD assumed when calculating the HECM MIP. Below is the key section from the HUD document that describes the HECM model used by HUD to calculate payment amounts and MIP charges during the program’s design. It clearly never anticipated that HECM borrowers or their heirs would be liable for repayments exceeding home values. To the contrary, the MIP was calculated on the assumption that they would NOT be responsible for such repayments. In other words, the HECM MIP was calculated to fit HUD Handbook 4235.1 (and subsequent REV-1) definition. So, HECM borrowers have been paying for this protection but not getting it. Here is the key section from the HECM model document: “The debt is non-recourse, which means that if the borrower is unable to repay the loan when due, the lender looks only to the value of the mortgaged property for repayment and not to any other assets of the borrower or the borrower’s estate.” (Taken from “The FHA Home Equity Conversion Mortgage Insurance Demonstration: A Model to Calculate Borrower Payments and Insurance Risk,” HUD Office of Policy Development and Research, October 1990, Part II-A, page 3. HUD User # HUD-005802*s)
to pay the full loan balance in breach of the contractual obligation it assumed when it structured the program’s MIPs as we have established above. Enter senior advocate colossus, AARP. In a major national report released on Dec. 7, 2007 (“Reverse Mortgages: Niche Product or Mainstream Solution?” pages.111-112), AARP asked HUD to stop the above practice and harmonize its HECM non-recourse practice with its stated policy in paragraph 1-3C of the HECM Handbook. Here is what AARP said in the report (contrast it with assertions in the HUD feedback we are looking at):
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The final assertions in the feedback that ML-08-38 “… is appropriate and consistent with historical policy” and “the definition of non-recourse is just as we said it was—so that doesn’t represent a change” strain credulity again because we have every right to expect the best from our federal civil servants. In other words, if ML-08-38 is not a new rule, why issue it in the first place? Why the conditional recasting of non-recourse? The fact is … ML-08-38 is a clumsy policy response to a specific policy recommendation from AARP. For years, HUD was violating its own non-recourse policy in practice. That is, it was forcing heirs who want to keep the family homestead
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Furthermore, in deciding whether to pay loan balance or market value, the operative phrase in paragraph 1-3C of the HECM Handbook is “… whichever is less.” When there is a crossover event at loan termination, market value is always less. It follows that if the borrower’s heirs/estate wants to reclaim the property, a legitimate need in some HECM loan termination cases, they will (and should) pay market value because it is an option for which the borrower has paid a very steep price.
“As a result, many consumers may have been misinformed about this key defining characteristic of the HECM loan [emphasis added]. HUD should resolve the discrepancy between its stated non-recourse policy and its practice by conforming its practice It quoted paragraph 1-3C verbatim to the definition in the HECM handbook.” and continued … What is clear from the above statement “As actually administered by HUD, however, is that AARP’s understanding of HECM the non-recourse provision only applies to non-recourse policy is in line with Fannie the estate if it sells the home. If the estate Mae’s, with NRMLA’s, with industry particdoes not do so, it must repay the full amount ipants,’ and with the public’s understandof the loan balance, even if it exceeds the ing of the policy. Equally clear is that AARP value of the home. But HUD has never found the inconsistency in HUD’s stated announced that its non-recourse practice dif- HECM non-recourse policy and actual fers from the policy in its HECM program practice sufficiently troubling to recomhandbook or that new regulations or policy mend the harmonization of practice with letters have altered the handbook’s noncontinued on page 17 recourse policy.
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