CHAPTER 1. GENERAL INFORMATION
1-1 LEGISLATIVE HISTORY. The Housing and Community Development Act of
1987 (P.L. 100-242, 2/5/88) established a Federal mortgage insurance
program, Section 255 of the National Housing Act, to insure home
equity conversion mortgages. The program is administered by the
Department of Housing and Urban Development (HUD). Pursuant to the
1987 Act, the Department was authorized to insure 2,500 HECMs. These
2,500 reservations of insurance authority were allocated among the 10
HUD Regions in proportion to each Region's share of the nation's
elderly homeowners. The Regional Offices of Housing then distributed
the reservations among lender applicants using a random drawing
method. The Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508,
11/5/90) increased the Department's insurance authority to 25,000
mortgages; accordingly, the reservation system was terminated, and all
Federal Housing Administration (FHA) approved lenders are now eligible
to participate in the HECM program.
1-2 PURPOSE OF THE PROGRAM. The program insures what are commonly
referred to as reverse mortgages, and is designed to enable elderly
homeowners to convert the equity in their homes to monthly streams of
income and/or lines of credit.
1-3 CHARACTERISTICS OF THE MORTGAGE.
A. Loan proceeds in a home equity conversion mortgage (HECM) or
"reverse mortgage" are paid out according to a payment plan
selected by the borrower.
B.Unlike a traditional "forward" residential mortgage, which is
repaid in periodic payments, a reverse mortgage is repaid in one
payment, after the death of the borrower, or when the borrower no
longer occupies the property as a principal residence.
C.The HECM is a "non-recourse" loan. This means that the HECM
borrower (or his or her estate) will never owe more than the loan
balance or the value of the property, whichever is less; and no
assets other than the home must be used to repay the debt.
D.The HECM has neither a fixed maturity date nor a fixed mortgage
amount.
E.If the lender is unable to make payments to the borrower, HUD
will assume responsibility for making payments until the lender
is able to resume. If the lender will not be able to make any
future payments, HUD will make payments for the remainder of the
mortgage.
F.The mortgage proceeds paid by the lender and/or HUD will be
secured by first and second mortgages on the property. These
liens will allow the lender and HUD to recover any losses up to
the value of the property when the borrower dies, or no longer
maintains the property as a principal residence.
G.Eligibility Requirements (See Chapters 3 and 4).
1) Eligible borrowers are persons 62 years of age or older.
2)Eligible properties are one unit dwellings, including units
in condominiums.
3)Eligible borrowers should own their homes free and clear or
with liens not exceeding the principal limit. (See
Paragraph 4-2E. for instructions regarding existing liens
that may be paid off or subordinated.)
1-4 PRINCIPAL LIMIT. The amount that the borrower can receive from a
reverse mortgage is determined by calculating the principal limit.
The figure increases monthly and represents the maximum payment that a
borrower may receive (See Chapter 5).
A.The principal limit at origination is based on the age of the
youngest borrower, the expected average mortgage interest rate,
and the maximum claim amount.
1)Expected Average Mortgage Interest Rate ("expected rate").
The expected rate is fixed throughout the life of the loan
and is used to determine payments to the borrower. For a
fixed rate loan, the expected rate is the fixed interest
rate. For an adjustable rate loan, the expected rate is the
sum of the lender's margin and the U.S. Treasury Securities
rate adjusted to a constant maturity of ten years.
2)Maximum Claim Amount. The maximum claim amount is the
lesser of the appraised value of the property or the maximum
mortgage amount for a one-family residence that HUD will
insure in an area under Section 203(b)(2) of the National
Housing Act. The maximum claim amount is established when
the Conditional Commitment is issued and represents the
maximum amount that HUD will pay on a claim for insurance
benefits.
B.The principal limit increases each month by one-twelfth of the
sum of the expected rate and the annual mortgage insurance
premium (MIP) rate of 0.5%.
C.Except in limited circumstances, the borrower will be unable to
receive additional payments once the outstanding balance equals
the principal limit.
1-5 PAYMENT PLAN. The borrower has the choice of receiving the mortgage
proceeds through five basic payment plans (See Chapter 5):
A.Tenure. Under this payment plan, the borrower will receive equal
monthly payments from the lender for as long as the borrower
lives and continues to occupy the property as a principal
residence.
B.Term. Under this payment plan, the borrower will receive equal
monthly payments from the lender for a fixed period of months
selected by the borrower.
C.Line of Credit. Under this payment plan, the borrower will
receive the mortgage proceeds in unscheduled payments or in
installments, at times and in amounts of the borrower's choosing,
until the line of credit is exhausted.
D.Modified Tenure. Under this payment plan, the borrower may
combine a line of credit with monthly payments for life, or for
as long as the borrower continues to live in the home as a
principal residence. In exchange for reduced monthly payments,
the borrower will set aside a specified amount of money for a
line of credit, on which he or she can draw until the line of
credit is exhausted.
E.Modified Term. Under this payment plan, the borrower may combine
a line of credit with monthly payments for a fixed period of
months selected by the borrower. In exchange for reduced monthly
payments, the borrower will set aside a specified amount of money
for a line of credit, on which he or she can draw until the line
of credit is exhausted.
1-6CHANGING THE PAYMENT PLAN. The borrower will be able to change the
type of payment plan throughout the life of the loan (See Chapter 5
and HUD Handbook 4330.1).
A.The borrower may change the term of payments, may receive an
unscheduled payment, may suspend payments, may establish or
terminate a line of credit, or may receive the entire net
principal limit (i.e., the difference between the current
principal limit and the outstanding balance) in a lump sum
payment.
B.With all payment plans, the lender must be able to make lump sum
payments up to the net principal limit at the borrower's request.
1-7SHARED APPRECIATION. A shared appreciation mortgage, where the
borrower promises to pay the lender a percentage of the appreciation
in the value of the property, in addition to the outstanding balance,
when the mortgage is due and payable, is also available with all five
payment plans (See Chapter 5).
A.Under this type of mortgage, the borrower may have the benefit of
a lower interest rate and, therefore, higher monthly or line of
credit payments.
B.A lender that offers shared appreciation mortgages must also
offer comparable mortgages without shared appreciation.
C.With shared appreciation mortgages, the lender can only choose
the shared premium insurance option (See Paragraph 1-11 for
insurance options).
1-8INTEREST RATE. Interest may accrue at a fixed or adjustable rate, as
negotiated between the borrower and the lender.
A.For adjustable rate mortgages:
1)The mortgage interest rate is set at the U.S. Treasury
Securities rate adjusted to a constant maturity of one year,
plus a margin which is the same as the margin used to
determine the expected average mortgage interest rate.
2)The lender must offer a rate that adjusts annually (with a
2% annual cap and a 5% lifetime cap), but may also offer a
rate that adjusts monthly (with only a lifetime cap
established by the lender).
B.Interest will accrue daily and be added to the outstanding
balance monthly.
C.The borrower will not be able to change from a fixed to an
adjustable rate and vice versa after closing.
1-9 COUNSELING. The borrower is required to receive counseling before the
HECM application is processed. Counseling will be provided by
HUD-approved housing counseling agencies and will focus on the
different types of home equity conversion mortgages available, the
suitability of a home equity conversion mortgage for the borrower, and
the alternatives to a home equity conversion mortgage. Refer to
Chapter 2 for counseling procedures and requirements.
1-10 MORTGAGE INSURANCE PREMIUM (MIP). The borrower will be charged
mortgage insurance premiums to reduce the risk of loss in the event
that the outstanding balance, including accrued interest, MIP, and
fees, exceeds the value of the property at the time that the mortgage
is due and payable. HUD will select an agent to collect MIP (see
Chapter 7).
A.Types of mortgage insurance premiums:
1)A one-time non-refundable initial MIP equal to 2% of the
maximum claim amount will be assessed at closing. It may be
paid in cash by the borrower or may be added to the
outstanding balance. It must be remitted by the lender to
HUD before the loan can be endorsed.
2)A monthly MIP equal to one-twelfth (1/12) of the annual rate
of 0.5% of the outstanding balance will be assessed
throughout the life of the loan. The MIP will be added to
the outstanding balance and remitted to HUD monthly by the
lender.
B.Remittance Requirements. Both the initial and monthly MIP will
be paid electronically. The lender, therefore, will be required
to:
1)Establish an Pre-Authorized Debit (PAD) account for the
purpose of remitting MIP payments to HUD. Refer to Appendix
23 for procedures to establish a PAD account.
2)Use a personal computer (PC), modem, and printer which are
compatible with the equipment used by an agent selected by
HUD to collect the MIP. Refer to Chapter 7 and Appendix 23
for details concerning equipment requirements.
1-11 INSURANCE OPTIONS. At the time the loan is closed, the lender will
choose between two insurance options.
A.Assignment (See Chapter 8). The lender will have the right to
assign the mortgage to HUD when the outstanding balance is equal
to or greater than 98% of the maximum claim amount, or when a
request for a line of credit draw will cause the outstanding
balance to equal or exceed 98% of the maximum claim amount. The
lender will be able to receive insurance benefits at that time.
B.Shared Premium (See HUD Handbook 4330.1). The lender holds the
loan for its entire term and retains a portion of the monthly
MIP. If the outstanding balance exceeds the property value at
the time that the mortgage is due and payable, the lender
receives insurance benefits up to the maximum claim amount and
compensates for any losses with retained MIP.
1-12SERVICING. The lender is permitted to charge the borrower a servicing
fee if this cost has not already been priced into the borrower's
mortgage interest rate.
A.If the lender chooses to assess a servicing fee, the fee is
established at closing as a monthly figure and the amount
necessary to pay this fee throughout the life of the loan is
calculated and set aside from the principal limit at closing (see
Paragraph 5-7B. for calculations).
B.The servicing fee that may be charged on fixed rate or annually
adjustable loans may not exceed thirty dollars ($30.00) per
month. The servicing fee that may be charged on monthly
adjustable loans is uncapped.
C.The lender adds this fee to the borrower's outstanding balance
monthly, and cannot assess any other fees to cover the costs of
servicing.
1-13RECOVERY OF MORTGAGE PROCEEDS. The borrower may occupy the
property until the mortgage becomes due and payable. A mortgage
will become due and payable when the borrower dies, the property
is no longer the borrower's principal residence, the borrower
does not occupy the property for 12 consecutive months for health
reasons, or the borrower violates the mortgage covenants.
A.When the mortgage becomes due and payable, the property will
normally be sold by the borrower or the borrower's estate to pay
off the outstanding balance on the mortgage.
B.Since a HECM is a non-recourse loan, the lender's recovery from
the borrower will be limited to the value of the home. There
will be no deficiency judgment taken against the borrower or the
estate because there is no personal liability for payment of the
loan balance.
C.When the proceeds from the sale of the property are insufficient
to pay off the outstanding balance, the lender will file a claim
for the difference between the proceeds from the sale of the
property and the outstanding balance, up to the maximum claim
amount. For further instructions with respect to filing a claim,
lenders may contact the Single Family Claims Support Service
Center at 703/235-9102.
1-14 DIRECT ENDORSEMENT AND COINSURANCE. Due to the mortgage lending
industry's unfamiliarity with the program and the unusual nature of
the program, lenders will not be able to process applications for
these mortgages through the Direct Endorsement or Coinsurance
Programs.
1-15 CHUMS LENDER ACCESS SYSTEM (CLAS). Lenders may utilize the CLAS
system during the processing of their HECM cases. CLAS provides an
electronic means of communicating with HUD on FHA mortgage
applications. Lenders now have a choice of vendors; the United
Communications Group [an affiliate of the Mortgage Bankers
Association] offers CLAS through their ECHO network (800/929-4824),
and Fannie Mae offers CLAS through their MORNET system (800/752-6440).
The following are brief descriptions of each request type in the CHUMS
lender Access System (CLAS version 7.0A) that is available for use in
processing a HECM loan:
A.Receiving/Assignment. This request allows the lender to request
a case number and appraisal assignment for a property. CLAS
Receiving and Assignment requests use interactive CHUMS screens
and require HUD intervention.
B.Case Status. This request allows lenders to obtain a copy of the
Case Status screen. The lender can also request a list of
existing cases by address, borrower name, or borrower social
security number. The requests are processed without HUD
intervention.
C.MIC Case Status. This request provides the lender with MIC and
MIP information (i.e., endorsement date, MIP amount due, MIP
amount received). This type of request can be made by case
number only, and can be processed without HUD intervention.
D.Reports. The lender can order specialized CLAS reports. These
reports include endorsement, MIP and pipeline reports. The
reports are processed without HUD intervention. The reports will
be generated twice a week and returned to the lender.
E.Compliance Inspectors. The lender may have a compliance
inspector assigned after a case number has been issued. Requests
will only be accepted if an inspector has not already been
assigned to the case. These requests are processed without HUD
intervention.
F.Duplicate MICs. The lender may request a duplicate MIC through
CLAS. If the case number is on the system, the duplicate MIC
will automatically be inserted into the local HUD office print
queue. If the case has been archived, a restore of that case
will be automatically triggered. When the case is restored, the
duplicate will automatically be inserted into the print queue.
It is the local HUD office's responsibility to print and mail the
duplicate MIC to the lender. The return address on the duplicate
MIC will be that of the lender who requested the duplicate. The
duplicate MIC will display the message "DUPLICATE VIA CLAS".
Only requests for duplicate MICs will be accepted. Original MICs
cannot be printed through this feature.
G.Case Cancellation. The lender may cancel a case number through
CLAS. Requests are processed without HUD intervention.
1-16BASIC PROGRAM OUTLINE. The following is a brief description of
the processing of a reverse mortgage. The chapters of the
handbook are generally arranged in this order.
A.The borrower receives counseling from a HUD-approved housing
counseling agency. The borrower need not have contacted a lender
to receive counseling.
B.The lender submits an application for valuation analysis of the
property to the local HUD office, and if the property is
approved, a conditional commitment is issued on the property.
C.Borrower eligibility is determined by verifying the age of the
borrower and reviewing title evidence and the existing
indebtedness on the property, if any. A firm commitment is
issued.
D.For the purpose of estimating the borrower's principal limit
before closing, the lender uses the indices in effect at the time
the application is signed by the borrower. Based on this figure,
the borrower chooses a payment plan.
E.On the date of closing, the expected rate, and the mortgage
interest rate for adjustable rate HECMs, are set. The loan is
closed and the lender chooses the assignment or shared premium
option for recapturing the mortgage proceeds. The lender must
also remit the initial MIP electronically to the agent.
F.Disbursement of loan proceeds to the borrower may begin.
G.When the case binder is complete, the lender submits it to the
local HUD office and a Mortgage Insurance Certificate is issued,
endorsing the mortgage for insurance. HUD signs the Loan
Agreement.
H.The lender adds the monthly MIP to the outstanding balance and
remits the premium to HUD. The monthly MIP accrues daily on the
outstanding balance on the loan at a rate equivalent to an annual
rate of one half of one percent. Lenders who have chosen the
shared premium option will retain a portion of the monthly
premium.
I.When the indebtedness on the mortgage equals 98% of the maximum
claim amount, or if a request for a line of credit draw will
cause the outstanding balance to equal or exceed 98% of the
maximum claim amount, and any time thereafter:
1)Lenders that have chosen the assignment option may assign
the mortgage to HUD and receive a payment on a claim not
greater than the maximum claim amount.
2)Lenders that have chosen the shared premium option will not
have the option of assigning the mortgage to HUD.
J.When the mortgage becomes due and payable,
1) The borrower or his or her estate will pay:
a.An amount equal to the lesser of the mortgage balance
or the sales proceeds, if the property is sold by the
borrower or his or her estate for at least 95% of the
fair market value of the property.
b.The outstanding balance will include an amount equal to
the lender's share of any appreciation in the
property's value, if the mortgage has a shared
appreciation agreement.
2)Otherwise, the lender will recapture the mortgage proceeds
from the acquisition and sale of the property.
K.If the proceeds from the sale of the property are not sufficient
to pay the outstanding balance, lenders that have chosen the
assignment option but have not assigned the mortgage and lenders
that have chosen the shared premium option may submit a claim for
insurance benefits up to the maximum claim amount.
| HECM Guidelines |
| Home Equity Conversion Mortgages |
The HECM FHA insured reverse mortgage can be used
by senior homeowners age 62 and older to convert the
equity in their home into monthly streams of income
and/or a line of credit to be repaid when they no
longer occupy the home. The loan, commonly known
as HECM, is funded by a lending institution such as a
mortgage lender, bank, credit union or savings and
loan association. To assist the homeowner in making
an informed decision of whether this program meets
their needs, they are required to receive consumer
education and counseling by a HUD-approved HECM
counselor.
by senior homeowners age 62 and older to convert the
equity in their home into monthly streams of income
and/or a line of credit to be repaid when they no
longer occupy the home. The loan, commonly known
as HECM, is funded by a lending institution such as a
mortgage lender, bank, credit union or savings and
loan association. To assist the homeowner in making
an informed decision of whether this program meets
their needs, they are required to receive consumer
education and counseling by a HUD-approved HECM
counselor.
