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Financial Services Law Insights and Observations

HUD Policy Revisions Address Emerging HECM Risks

HUD Reverse Mortgages FHA Mortgagee Letters


On June 18, HUD issued Mortgagee Letter 2014-11, which amends the HECM reverse mortgage program to limit the insurability of fixed interest rate reverse mortgages. The letter explains that HUD has identified new emerging risks in connection with certain fixed interest rate HECM strategies that are being introduced in the market. Specifically, HUD is concerned about (i) a new option that “strongly encourages the mortgagor to take the maximum amount available during the first twelve-month disbursement period and to take the remaining amount shortly after the expiration of the first twelve-month disbursement period whether they need it or not;” and (ii) a second option that “emphasizes mortgagor options for future draws at the fixed interest rate set at origination.” As a result, under the new policy, FHA will only insure fixed interest rate reverse mortgages where the mortgage limits the mortgagor to: (i) a single, full draw to be made at loan closing; and (ii) does not provide for future draws by the mortgagor under any circumstances. In addition, FHA will only insure adjustable interest rate reverse mortgages where the payment plan option is either: (i) tenure; (ii) term; (iii) line of credit; (iv) modified tenure; or (v) modified term. The letter details numerous additional related policy changes, describes changes to HECM loan document forms required to implement the policy changes, and updates instructions for entering in FHA Connection a fixed interest rate HECM with a single disbursement lump sum payment option.

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