Reverse Mortgage Lending

There are currently two types of reverse products offered by lenders: the Federal Housing Administration's (FHA's) Home Equity Conversion (HECM) program; and a lender's own proprietary reverse loan product.

While these products have become increasing popular, the complexity of these loans has slowed the development of a secondary market for reverse products. Also, servicing of reverse loans often requires lenders to develop new systems other than those used for managing forward mortgages.

Several states are considering or have enacted laws that relate to the offering of reverse loans. To review state laws, MBA offers, as service to its members a state legislative tracking tool. To access the State Legislative Database, visit its log-in page by clicking here.

Most recently, the Housing and Economic Recovery Act of 2008 (HERA) enacted several provisions that relate specifically to FHA's HECM loans. Among the major HECM-related provisions in HERA are:

  • HECM loans are limited to the GSE loan limit, which is currently $417,000 for a one-unit single-family property;
  • HERA authorizes the use of a HECM loan to purchase a primary residence;
  • Mortgages for co-operatives are authorized to be insured under the HECM program;
  • New limits are placed on HECM origination fees. They are capped at 2.0 percent of the maximum claim amount of the mortgage, up to a maximum claim amount of $200,000 plus 1 percent of any portion of the maximum claim amount that is greater than $200,000, unless adjusted thereafter based on an analysis of: costs to mortgagors and the impact on the reverse mortgage market. Future increases will be tied to increases in the Consumer Price Index in increments of $500;
  • Prohibits HECM lenders from being associated with any other "financial or insurance activity" unless they prove to HUD they maintain appropriate firewalls to ensure originators do not have an incentive to sell other products;
  • Prohibits a lender or any other party from conditioning the HECM on purchase of other financial or insurance products, except hazard and other peril insurance and title insurance or other products that are customary and normal as determined by HUD; and
  • The mortgage must be executed by a mortgagor who received adequate counseling from an independent third party who is not compensated by or associated with a party connected to the transaction.
The new HERA law also requires two new studies of the HECM program: 1) The HUD Secretary will conduct study to determine appropriate consumer protections and underwriting standards to ensure that purchase of any additional products by a consumer is appropriate for the consumer; and, 2) the Government Accountability Office (GAO) will conduct a study regarding HECM insurance premiums.

An important link lenders may wish to note is HUD's HECM homepage for lenders, which includes the HECM Manual, an index of HEMC-related mortgagee letters, software information, appraiser guidance and instructions for endorsement.