www.hudclips.org HUD Mortgagee Letter 97-15 U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER April 24, 1997 MORTGAGEE LETTER 97-15 TO: ALL APPROVED MORTGAGEES SUBJECT: Home Equity Conversion Mortgage (HECM) Insurance Program - Implementation of Final Rule and Other Information The purpose of this Mortgagee Letter is to advise lenders about changes resulting from the Final Rule that was published on September 17, 1996. Changes in that Final Rule were effective October 17, 1996, with the exception of the change in definition of "principal limit", which is effective on May 1, 1997. Copies of the Final Rule and subsequent, related Federal Register publications are attached to this Mortgagee Letter as Attachments 1, 2, and 3. 1. "PRINCIPAL LIMIT" DEFINITION The definition of "principal limit" in the regulations, 24 CFR 206.3, has been revised for all HECM loans executed on or after May 1, 1997. The new definition provides that, after the first month, "the principal limit increases each month thereafter at a rate equal to one-twelfth of the mortgage interest rate in effect at that time, plus one-twelfth of one-half percent per annum . . ." For HECM loans executed prior to May 1, 1997, the principal limit definition remains as stated in the original loan documents. Specifically, the principal limit on loans executed prior to May 1, 1997 will continue to increase each month at a rate equal to one-twelfth of the expected average mortgage interest rate, plus one-twelfth of one-half percent per annum. This new definition is found in Attachment 3, the Federal Register publication from March 19, 1997, which corrected the revised definition in previous publications. 2. MONTHLY PAYMENT CALCULATIONS The new definition of principal limit does not change the way that monthly payment calculations are made. The instructions in Chapter 5 of HUD Handbook 4235.1 REV-1 regarding calculation of monthly payment amounts are unchanged by the implementation of this final rule. Furthermore, the monthly payment formula shown in Appendix 22 of HUD Handbook 4235.1 REV-1 is also unchanged by this final rule. For monthly payment calculations (as well as servicing fee set-aside calculations) the expected average mortgage rate is still to be used in the formulas as the interest rate projection into the future. Although the monthly payment and set-aside formulas remain unchanged, the rule does affect the inputs required in the HECMOD calculation software (see below). 3. HECM CALCULATION SOFTWARE (Version 6.3) The new HUD HECM worksheet software used to calculate the loan payments to the borrower is Version 6.3. This software will be used for mortgages executed on or after May 1, 1997. The major change between Version 6.3 and the previous edition is that the HECMOD module which is used to modify an existing payment plan now reflects the new definition of principal limit. The new version of HECMOD can be used edition is that the HECMOD module which is used to modify an existing payment plan now to modify the payment plans of all HECM loans, regardless of the date of execution. The user of HECMOD 6.3 is now required to enter the principal limit as of the effective date of the payment plan modification using the definition of principal limit that applies to that loan. For example, if the borrower were seeking a modification effective on May 31, 1997 the servicer of the loan would enter the principal limit as of May 31, 1997. Regardless of which regime governs the growth, the loan servicer enters the current principal limit figure manually into the HECMOD input screen. Program participants can obtain a copy of the HECM worksheet diskette at a cost of $5.00 per copy by contacting HUD User (800) 245-2691 or (301) 251-5154. Local HUD offices may also copy the software and distribute it to the HECM mortgagees in their area, if resources are available. 4. FEE FOR CHANGE IN PAYMENT OPTION The fee for a change in payment option is presently $20.00. Although the Final Rule revised the payment provisions in 24 CFR 206.26, the Secretary has not authorized a change to the $20.00 fee. 5. CHANGES TO LEGAL DOCUMENTS Changes have been made to the following legal documents: Model Mortgage form Fixed Rate Note Adjustable Rate Note Second Mortgage Fixed Rate Second Note Adjustable Rate Second Note Home Equity Conversion Loan Agreement Notice to Borrower Attachment 4 lists the changes in detail and includes some miscellaneous changes, as well as those resulting from the recent Final Rule. 6. LIFE ESTATE PROVISIONS Regulatory changes permit mortgages to be insured and remain in force even if no eligible mortgagor has any interest in the property greater than a life estate. If an eligible mortgagor holds only a life estate when the mortgage is executed, all holders of any future interest in the property (remainder or reversion) will also be required to execute the mortgage to ensure that the mortgage is secured by a fee simple interest. A holder of a future interest does not execute the note or loan agreement and does not have the rights to loan proceeds of other mortgagors. The regulatory changes also permit a mortgagor who held a fee simple title when the mortgage was executed to subsequently convey his or her interest in the property, as long as a life estate is retained. These changes to 24 CFR 206.27(c) and 206.35 were published in the Final Rule in Attachment 1. 7. PREPAYMENT (24 CFR 206.209) The prepayment section of the regulations was revised to eliminate the former requirements that a borrower prepay only on the first of the month (if a monthly payment mortgage) or with two weeks notice to the lender (if a pure line of credit), with the lender otherwise being able to collect extra interest to cover the remainder of the month after the prepayment date, or for two extra weeks. The revised section now permits the borrower to prepay "at any time, regardless of any limitations stated in the mortgage." Revised language for legal documents is in Attachment 4. 8. TRUSTEE IN SECOND DEED OF TRUST Where allowed by state law and acceptable to the HUD official responsible for single family programs in the appropriate HUD Field Office, a generic description of a trustee under a second deed of trust may be used, rather than naming a specific HUD individual. The following generic description of a trustee in a second deed of trust is acceptable: Senior Official with responsibility for Single Family Mortgage Insurance Programs in the Department of Housing and Urban Development Field Office with jurisdiction over the Property described below, or a designee of that Official. This language refines provisions previously provided in Mortgagee Letter 95-54 . 9. TITLE INSURANCE POLICY This letter clarifies that the intent of the title insurance language in paragraph 6-11(I)(2) in Handbook 4235.1 was to advise that HUD did not require title insurance coverage of 150 percent of the maximum claim amount (MCA) but, in fact, required a minimum of 100 percent of the MCA. The sentence, therefore, would state that "Notwithstanding this larger amount for the purpose of recordation, HUD only requires that the title insurance policy obtained be at least equal to the maximum claim amount, NOT 150 percent of that amount." 10. DOCUMENTATION REQUIRED TO BE SUBMITTED BY DIRECT ENDORSEMENT LENDERS FOR ENDORSEMENT Attachment 5 lists documents that must be submitted by DE lenders to receive insurance endorsement for HECMs. Note that this is the same list as attached to a Mortgagee Letter recently issued or soon to be issued on "Single Family Loan Production - Credit Policy Issues." Originals of the second note and recorded second mortgage should be sent to and retained by the appropriate HUD Field Office, Asset Management Branch Please note that Appendices 3A and 4A, the Underwriter's and Mortgagee's certifications attached to Mortgagee Letter 95-54 , are not required to be submitted to HUD in DE cases. 11. CORRECTION TO REGULATION CITATION IN FINAL RULE Two references in Item 14 of the Final Rule from September 17, 1996 (Attachment 1, p. 49033) about the addition of a new paragraph (e), should correctly refer to Sec. 206.45, rather than 206.47. 12. FUTURE MORTGAGEE LETTER Additional guidance related to HECM loans is planned for a subsequent mortgagee letter. Sincerely yours, Nicolas P. Retsinas Assistant Secretary for Housing- Federal Housing Commissioner Attachments: Final rule - September 17, 1996 Final rule correction and delay of effective date - December 26, 1996 Final rule correction - March 19, 1997 Changes to HECM legal documents Documents required for HECM Direct Endorsement cases (coding in process; will be posted as soon as possible)