www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 November 13, 1995 Mortgagee Letter 95-54 TO: ALL APPROVED MORTGAGEES SUBJECT: Home Equity Conversion Mortgage (HECM) Insurance Program - Implementation of Direct Endorsement Program and New Disclosure Requirements on Reverse Mortgages to Consumers The Department is pleased to announce that effective November 17, 1995, Home Equity Conversion Mortgages (HECM) are eligible for the Direct Endorsement (DE) program. Any HECM loan for which a conditional commitment has not been issued is eligible for DE. This Mortgagee Letter will provide guidance on implementing the DE program for HECMs and cover other items related to the HECM program. Note that the Department will not be able to insure any HECMs under the DE program until legislation is enacted that reauthorizes the Department's authority to insure. Because we cannot predict when this will occur, mortgagees may experience delays in obtaining insurance after cases are submitted for insurance. The HECM program, commonly referred to as the Reverse Mortgage program, is designed to enable elderly homeowners to convert the equity in their homes to monthly streams of income and/or lines of credit.Detailed program information and underwriting requirements are contained in HUD Handbook 4235.1 REV-1, Home Equity Conversion Mortgages, dated November 18, 1994. Some of the basic program requirements that are applicable to a HECM are: 1. The borrower must be at least 62 years of age; 2. The HECM must be a first mortgage; 3. The borrower must receive counseling from a HUD- approved housing counseling agency; 4. The property must be the borrower's principal residence; and 5. The property must be one residential unit. The Department issued Interim Rule FR-2958-I-01 on August 16, 1995, (60 F.R. 42754) which, in addition to expediting the processing of HECMs by permitting use of the Direct Endorsement program, implemented the statutory disclosure amendments in Section 334 of the Cranston-Gonzalez National Affordable Housing Act of 1990 by requiring compliance with the Federal Reserve Board's new disclosure regulations for reverse mortgages which became effective on October 1, 1995. The Interim Rule also included many other technical and clarifying changes to improve and streamline the program based on the first five years of the HECM demonstration. I. MORTGAGEE APPROVALS FOR HECM DIRECT ENDORSEMENT Under the Single Family Direct Endorsement (DE) program, the mortgagee underwrites and closes the mortgage loan without prior HUD review or approval. If the mortgagee is a loan correspondent, the underwriting is performed by the mortgagee's sponsor who must qualify for DE processing for HECMs. Mortgagees must be authorized by HUD to participate in the DE program as required by HUD Handbook 4000.4 REV-1 Single Family Direct Endorsement Program, most recently amended by CHG-2 dated July 13, 1994, except as noted below. Mortgagees without DE approval and with no experience processing HECMs or who have processed fewer than 50 HECMs that were insured prior to September 15, 1995, must submit an application as provided in the Handbook 4000.4 REV-1 and indicate whether they are seeking approval for all programs or for HECMs only. If seeking HECMs DE approval only, the mortgagee must demonstrate two (2) years of experience in origination of SF mortgages, or have a principal officer with a minimum of two (2) years managerial experience in the origination of SF mortgages. The basic eligibility requirement for the DE underwriter is that they must demonstrate recent underwriting experience in property appraisals.Experience in mortgage credit analysis is not required. If the DE underwriter has closed 50 HECMs, the mortgagee may request a waiver of the preclosing review requirement from the local office. Mortgagees with or without regular DE approval, who have not closed at least 50 HECMs that were insured prior to September 15, 1995, must submit five (5) HECM test cases to the local HUD office for pre-closing review prior to endorsement for insurance.If the underwriting processing of these 5 HECMs is satisfactory, the mortgagee is given unconditional authority by HUD to participate in the DE program for HECMs. The pre-closing review period may be extended if the test cases do not demonstrate acceptable performance. After a mortgagee has completed the required test cases and received unconditional HECM DE approval from one local HUD office, unconditional unconditional DE will be granted for all HUD-approved branch offices of the mortgagee. Experienced mortgagees who have closed at least 50 HECMs that were insured prior to September 15, 1995, are automatically eligible for HECMs DE only and a pre- closing review period for HECM cases is not required. A HECM DE approval letter will be sent to each mortgagee in this category based on the Department's record of the HECM loans insured. Mortgagees will not have to contact local HUD offices for approvals. II. PROCESSING HECM CASES UNDER THE DIRECT ENDORSEMENT PROGRAM In general, processing of Direct Endorsement cases should follow Handbook 4000.4 REV-1 except where inconsistent with the requirements of the HECM program. For example, paragraphs 1-2E requiring complete disbursement of the loan at closing and 1-11 permitting payment of discount points would not apply. In addition to the usual documentation and certifications that must be submitted to the local HUD office within 60days after closing of the loan, the mortgagee must submit additional documents that are required for the HECM program, such as the certificate of counseling, the title insurance commitment, and the election of the assignment or shared premium options as required by the HECM Handbook 4235.1 REV-1. The integrity of the DE program depends heavily on the accuracy of the required underwriter and mortgagee certifications. (Appendixes 3 and 4 of Handbook 4000.4 REV-1.) Because of the special features of the HECM program we have prepared the attached certifications labelled Appendix 3A and Appendix 4A which should be substituted for Appendixes 3 and 4. Once the HECM insurance authority is reauthorized, mortgagees may continue to request commitments from local HUD offices instead of using the DE procedure. Once mortgagees have had sufficient time to apply for DE approval and familiarize themselves with the DE procedure, we expect to announce an end to the use of HUD-issued commitments. III. FORM HUD 54111-A, REQUEST FOR INSURANCE ENDORSEMENT FOR HECM UNDER THE DIRECT ENDORSEMENT PROGRAM Attached is an interim form HUD-54111-A, Request for Insurance Endorsement for HECM Under the Direct Endorsement Program, to be used to record mortgage data. Mortgagees will prepare and submit the interim form HUD-54111-A to the local HUD office as follows: (1) When the appraisal is submitted; and (2) When the mortgage endorsement information is submitted. Until further notice, the appraiser will submit the appraisal to the mortgagee instead of directly to the local office. This temporary step is necessary to ensure proper sequencing of data electronically transmitted to the HECM accounting system maintained by the Computer DataSystem, Inc. (Note comments below regarding use of CLAS.) The HUD-54111-A is undergoing departmental clearance and mortgagees will be advised when it is approved. Mortgagees are to use the form on an interim basis until it becomes final. IV. CHUMS LENDER ACCESS SYSTEM (CLAS) Mortgagees having the capability to access CLAS will be unable to electronically submit endorsement data to HUD via CLAS until the new HECM Insurance Endorsement Screens are released. The local HUD office will key the endorsement data in CHUMs from the interim HUD Form 54111-A, Request for Insurance Endorsement for HECM Under the Direct Endorsement Program, submitted in the mortgagee's endorsement package. Once the new HECM endorsement screen(s) are available in CLAS, mortgagees will request insurance endorsement of the case under the Direct Endorsement program. The local HUD office will also key the preliminary data submitted on the interim HUD Form 54111-A until the CLAS enhancements occur. Mortgagees will continue requesting the FHA Case Number and appraiser assignment (if desired) for a HECM case through CLAS. V. STATUTORY DISCLOSURE AMENDMENTS HECM mortgagees must comply with new disclosure requirements for reverse mortgages in the Federal Reserve Board's Truth in Lending regulation (Regulation Z), published on March 24, 1995 (60 F.R. 15463) and effective on October 1, 1995. Compliance with Regulation Z will constitute compliance with the requirements in Section 255(e)(4) of the National Housing Act and HECM Handbook 4235.1 REV-1, Paragraph 4-7L, for disclosure of projections of loan balances and other information. VI. HECM CALCULATION SOFTWARE Version 6.2 of the HUD HECM worksheet software used to calculate loan payments to the borrower was released effective October 1, 1995. Version 6.1 is obsolete. The major differences between the new HECM worksheet Version 6.2 and the old Version 6.1 are the following: (1) Version 6.2 calculates Total Annual Loan Cost Rates based on new Truth in Lending (Regulation Z) requirements from the Federal Reserve Board, (2) all printed reports produced by Version 6.2 will now show the borrower's name (many HECM lenders and counselors had requested this change); (3) users will now have the option of viewing output reports on the video screen prior to printing; and (4) minor technical changes were made to the way that the software was rounding the net principal limit. -5- The Department did not request nor receive approval from the Federal Reserve Board for the HUD HECM software. While we included disclosures in the software solely as a convenience for mortgagees, HUD does not represent or warrant that the software meets Regulation Z requirements in general or for a particular case. Mortgagees must decide whether they wish to use the HUD HECM software for disclosure purposes. Mortgagees and other program participants may obtain a copy of the HECM Worksheet Version 6.2 software at a cost of $5.00 from HUD User (call toll free to order at 800-245-2691 or (301) 251-5154, if calling from the Washington, DC area) or from the local HUD Office. Mortgagees who want to integrate the HECM software into their loan origination systems may obtain the source code for Version 6.2 at a cost of $15.00 from HUD User. VII. OTHER AMENDMENTS UNDER FR-2958-I-01 INTERIM RULE Mortgagees are encouraged to become familiar with this rule as parts of it will have some impact on its administration of the HECM program. Although not included in this Mortgagee Letter, the rule implements a number of significant technical changes in the HECM program that either (1) clarify aspects of program operations; (2) eliminate small discrepancies between the HECM and Direct Endorsement regulations; (3) reflect changes in other laws that occurred since publication of the HECM regulations; and (4) reflect changes in wording to eliminate possibility of confusion in meaning. Mortgagees' and HUD staff should modify HECM program guides and operating procedures as appropriate to reflect these changes. VIII. REVISED LEGAL DOCUMENTS Mortgagees are reminded that the 1994 revision of HUD Handbook 4235.1 included revisions to the model forms for mortgages and notes and the loan agreement. All mortgagees have had adequate time to procure supplies of revised legal documents. The revised documents must be used for all HECM loans closed on or after October 1, 1995. IX. REVISED MORTGAGE FORM INSTRUCTIONS Instructions attached to the Model Second Mortgage Form in the HECM Handbook 4235.1 REV-1 indicate that the trustee under a second deed of trust should be the HUD Field Office Manager or his designee. Because HUD no longer has Field Office Managers, the trustee instead should be the senior Housing official in the relevant Field Office, or that official's designee. A listing of the senior Housing officials for each category of Field Offices was published in the Federal Register on December 6, 1994 at 59 FR 62739. Mortgagees should contact the Field Office for specific guidance on naming a trustee in the second deed of trust. If you have any questions concerning the HECM DE process or the program in general, please contact your local HUD office. Sincerely yours, Nicolas P. Retsinas Assistant Secretary for Housing- Federal Housing Commissioner UNDERWRITER CERTIFICATION (HECM) The underwriter executing form HUD-92900-A has personally reviewed the appraisal report, the Uniform Residential Loan Application and form HUD-92900-A on behalf of the mortgagee and certifies that the mortgage complies with HUD underwriting requirements applicable to Home Equity Conversion Mortgages as contained in all outstanding HUD handbooks and Mortgagee Letters, and is in compliance with the applicable regulations described below. The mortgage loan is eligible for mortgage insurance under the Direct Endorsement program. This underwriter certification is in addition to any certifications required of the mortgagee, mortgagor or both on form HUD-92900-A. (1) Each mortgagor is at least 62 years old as required by 24 CFR 206.33. (2) The mortgagor, or all of the mortgagors collectively if there are multiple mortgagors, hold title to the entire property as required by 24 CFR 206.35. (3) Each mortgagor has provided the mortgagee with a certificate of counseling as required by 24 CFR 206.41. (4) The property includes a dwelling designed principally as a one-family residence. (5) Each mortgagor will occupy the dwelling as a principal residence as required by 24 CFR 206.39. (6) Each mortgagor has a general credit standing that is satisfactory as required by 24 CFR 206.37 by meeting the requirements of Chapter 4 of Handbook 4235.1 REV-1, including any modifications of Chapter 4. (7) The property meets building standards of the Secretary as required by 24 CFR 206.47, or will meet the building standards after repairs that will be completed before closing or as prohibited in 24 CFR 206.47. (8) For a condominium unit only, the property is in a project that has been approved by the Secretary as required by 24 CFR 206.51. APPENDIX 4A MORTGAGEE CERTIFICATION (HECM) The mortgagee certifies that the authorized representative for the mortgagee executing form HUD-92900-A has personally reviewed the mortgage documents and the application for insurance endorsement and that the mortgage is eligible for mortgage insurance under HUD's Direct Endorsement program. The mortgagee has submitted all appropriate documents, properly executed, as required for the HECM program under all outstanding HUD handbooks and Mortgagee Letters. This mortgagee certification is in addition to any certifications required of the mortgagee, the mortgagor, or both on forms HUD-92800 or HUD-92900-A. The mortgagee certifies to the following additional matters: (1) The mortgagor has executed a note, second note to the Secretary, mortgage, second mortgage to the Secretary, and a loan agreement. The mortgagee has executed a loan agreement. All of these documents contain the provisions required by the Secretary. (2) The payment plan attached to the loan agreement provides for monthly payments, a line of credit, or both in amounts calculated in accordance with the requirements of the Secretary. (3) The mortgage is a first lien and the second mortgage given to the Secretary is a second lien. (4) The mortgage is on real estate held in fee simple or on a leasehold under a lease for not less than 99 years which is renewable, or under lease which otherwise meets the requirements of 24 CFR 206.45. (5) If the mortgaged property is in a flood plain, the mortgage meets the flood insurance requirements of 24 CFR 206.45. (6) If the property requires repair after closing to meet building standards of the Secretary, a repair rider to the mortgage has been executed and the requirements of 24 CFR 206.47 will be complied with by the mortgagee. .