hecm_mortgage_credit

CHAPTER 4. MORTGAGE CREDIT ANALYSIS

4-1 PURPOSE. This chapter explains the procedures for completing and
processing the borrower's application and for qualifying the borrower.

4-2 BASIC UNDERWRITING ISSUES. The underwriting of a HECM differs from
standard underwriting procedures in the following ways:

A.The borrower will not be required to pay closing costs in cash at
closing, although he or she has the option to do so.

1)With the exception of the origination fee (see Section B
below), the borrower is allowed to finance 100% of the
closing costs.

2)All expenses that require payment at closing may be added to
the outstanding balance. As a result, any future payments
of the mortgage proceeds will be calculated from the net
principal limit, as described in Chapter 5.

3)The lender may require that the borrower pay in cash for
services performed by third parties related to the
processing of the borrower's application (e.g. credit
report, appraisal, title commitment, etc.). The borrower
may request to be reimbursed for these expenses at closing,
and have these costs added to the outstanding balance on the
mortgage.

B.The lender will be permitted to charge an origination fee agreed
upon between the borrower and the lender. This fee will cover
expenses incurred in the processing and underwriting of the
borrower's loan. However, the borrower will only be permitted to
finance (i.e. add to the outstanding balance at or after closing)
an origination fee of no greater than eighteen hundred dollars
($1,800.00). That amount, along with the fee charged for
administering the Repair Rider (See Chapter 3, Paragraph 3-5B),
can be added to the outstanding balance. Any portion of the
origination fee that exceeds the financed amount must be paid in
cash by the borrower at closing. A Verification of Deposit must
be submitted as part of the required mortgage credit
documentation for any portion of the loan origination fee that
will be paid in cash.

C.The lender will not be permitted to charge discount points.

D.The options for adjustable rate mortgages (ARMs) differ from
standard FHA-insured ARMs.

1)If the lender chooses to offer an ARM, it must offer an ARM
that limits changes in the interest rate to a maximum of two
percent (2%) per year and five percent (5%) over the life of
the loan. The interest rate may be adjusted only once per
year.

2)The lender may also offer an interest rate that is adjusted
monthly. Under this option, the lender must establish a
lifetime cap on rate adjustments, but is unrestricted in
which cap is chosen.

E.The property need not be debt-free for the borrower to be
eligible.

1)The indebtedness on an existing lien must be satisfied at
closing or subordinated to the HECM mortgages.

2)If the borrower chooses to satisfy an existing lien, its
total indebtedness must not be greater than the borrower's
net principal limit at closing, unless the borrower has
other financial resources from which to draw in order to
satisfy the lien.

F.Instead of calculating a monthly principal and interest payment,
a principal limit must be calculated to determine the payments
that a borrower may receive. This method is explained in Chapter
5.

G.The borrower will not be required to establish an escrow account
for the purpose of collecting annual payments for property taxes
and hazard insurance. However, the borrower has the option of
requiring that the lender pay taxes and hazard insurance premiums
by withholding the necessary amounts from the borrower's payments
or by withdrawing the required amounts from the borrower's line
of credit. The funds to make these payments are added to the
outstanding balance when the payments are actually made (see
Paragraph 8-9).

4-3 MORTGAGE CREDIT ELIGIBILITY REQUIREMENTS. A borrower must be rejected
for any of the following reasons:

A.Delinquent Federal debts. If the borrower is presently
delinquent on any Federal debt (e.g., VA-guaranteed mortgage, HUD
Section 312 Rehabilitation loan or Title I loan, Federal student
loan, Small Business Administration loan, delinquent Federal
taxes, etc.) or has a lien, including taxes, placed against his
or her property for a debt owed to the United States, the
borrower is not eligible until the delinquent account is brought
current, paid or otherwise satisfied, or a satisfactory repayment
plan is made between the borrower and the Federal agency owed and
is verified in writing.

B.Suspensions and debarments. A borrower suspended, debarred, or
otherwise excluded from participation in the Department's
programs is not eligible for a HECM. The lender must examine
HUD's "Limited Denial of Participation (LDP) List" and the
government-wide General Services Administration's (GSA) "List of
parties Excluded from Federal Procurement or Nonprocurement
Programs." If the name of any party to the transaction appears on
either list, the application is not eligible for mortgage
insurance.

C.Credit Alert Interactive Voice Response System (CAIVRS). Lenders
must screen all borrowers using CAIVRS. If CAIVRS indicates the
borrower is presently delinquent or has had a claim paid within
the previous three years on a loan made or insured by HUD on his
or her behalf, the borrower is not eligible. Exceptions to this
policy may be granted under the following situations:

1)Assumptions. If the borrower sold the property, with or
without a release of liability, to a mortgagor who
subsequently defaulted and it can be established that the
loan was not in default at the time of assumption, the
borrower is eligible.

2)Divorce. A borrower may be eligible if the divorce decree
or legal separation agreement awarded the property and
responsibility for payment to the former spouse. However,
if a claim was paid on a mortgage in default at the time of
the divorce, the borrower is not eligible.

3)Bankruptcy. When the property was included in a bankruptcy
that was caused by circumstances beyond the borrower's
control (such as the death of the principal wage earner;
loss of employment due to factory closings,
reductions-in-force, or serious long-term uninsured
illness), the borrower may be eligible.

If the lender has reason to believe the CAIVRS message is
erroneous or must establish the date of claim payment, it must
contact the local HUD office for instructions or documentation to
support the borrower's eligibility. The local HUD Office can
provide information regarding when the three-year waiting period
has passed or that the social security number in CAIVRS is an
error.

4-4TITLE EVIDENCE. The lender must submit a title insurance commitment
at least equal to the maximum claim amount with the borrower's
application to HUD. If the local HUD office has determined that title
insurance cannot be obtained at reasonable rates, an alternative may
be substituted. However, in order to avoid incurring unnecessary
expenses, the lender must review the following borrower eligibility
requirements before ordering a title insurance commitment to be paid
for by the borrower:

A.The borrower's age. All borrowers must be at least 62 years old
when they sign the Uniform Residential Loan Application (URLA)
and the HUD/VA Addendum (Form HUD 92900-A). The lender should
request evidence of the ages of all borrowers, and accept all
reasonable forms of evidence.

B.The borrower's Federal credit record. The borrower cannot have a
delinquent or defaulted Federal debt that cannot be satisfied at
closing. Payment of an insurance claim by HUD on a previously
insured mortgage does not automatically preclude the borrower
from qualifying for a reverse mortgage if valid extenuating
circumstances caused the foreclosure (see Paragraph 4-3).

C.The borrower's principal residence. The property must be the
principal residence of each borrower, as defined in Paragraph
4-7A. of this chapter. Married spouses or other co-borrowers may
be living apart because one of them is temporarily or permanently
in a health care facility; however at least one borrower must be
living in the home in order for the HECM loan to close.

If, after a review of these requirements, the lender finds that the
borrower is not eligible, the borrower should be notified of his or
her ineligibility, and the application process must cease. The lender
cannot charge the borrower for any services performed after this
determination.

4-5 HOME EQUITY CONVERSION MORTGAGES FOR PROPERTY HELD IN TRUST. HUD
will
insure HECMs on property held in the name of an inter vivos trust,
also known as a living trust. In general, a living trust is created
during the lifetime of a person [as opposed to a testamentary trust
which is created by the person's will after his/her death]. A living
trust is created when the owner of property conveys his/her property
to a trust for his or her own benefit or for that of a third party
[the beneficiaries]. The trust holds legal title and the beneficiary
holds equitable title. The person may name him/herself as the
beneficiary. The trustee is under a fiduciary responsibility to hold
and manage the trust assets for the beneficiary. The trustee's
responsibilities are set out in a trust agreement.

Property held in a land trust is eligible for a HECM if the
requirements for a living trust are met. Property held in a living
trust is eligible for a HECM if the trust, and the borrowers, meet the
following requirements:

A.Conditions for Origination in the Name of a Living Trust.

1)All beneficiaries of the trust must be eligible HECM
borrowers at the time of origination and until the mortgage
is released [i.e. borrower/beneficiary must occupy the
property as a principal residence and new beneficiaries may
not be added to the trust]. Contingent beneficiaries, that
receive no benefit from the trust nor have any control over
the trust assets until the beneficiary is deceased, need not
be eligible HECM borrowers.

2)The trustee must sign the mortgage, and the mortgage must be
signed by each borrower/beneficiary if necessary to create a
valid first mortgage. The borrower/beneficiary must sign
the Note and Loan Agreement. The lender may require the
signature of the trustee on the Note or the signature of the
borrower/beneficiary on the mortgage.

3)The trust shall not be a party to the Loan Agreement. The
borrower/beneficiary may issue instructions to the lender to
permit the trustee to exercise one or more rights stated in
the Loan Agreement on behalf of the beneficiary; i.e. the
right to receive loan advances or to request changes in the
payment plan.

4)The lender must be satisfied that the trust is valid and
enforceable, that it provides the lender with a reasonable
means to assure that it is notified of any subsequent change
of occupancy or transfer of beneficial interest, and ensures
that each borrower/beneficiary has the legal right to occupy
the property for the remainder of his or her life.

B.Transfer of the Property Into or From a Trust.

1)The borrower under an insured HECM may transfer the property
to a living trust without causing the mortgage to become due
and payable if the lender finds that the trust meets all
requirements that would have applied if the trust owned the
property at closing. The lender may require the trust to
formally assume the borrower's obligation to repay the debt
as stated in the Note if considered advisable to avoid
difficulty in enforcement of the Note and mortgage.

2)If the trust is terminated, or the property is otherwise
transferred from an eligible trust holding the property, the
mortgage will not become due and payable, provided that one
or more of the original borrowers who signed the Note and
Loan Agreement continue to occupy the property as a
principal residence and continue to retain title to the
property in fee simple or on a leasehold interest as set
forth in 24 CFR Section 206.45(a).

4-6 POWER OF ATTORNEY AND CONSERVATORSHIP GUIDELINES. The following
guidelines apply to all phases of HECM loan processing:

A.Mortgage Loan Application.

1)   Borrowers with legal competency:

a.All borrowers must sign mortgage loan application.

b.Mortgage loan application may be executed on behalf of
a borrower by an "agent" or "attorney in fact" holding
a durable power of attorney specifically designed to
survive incapacity and avoid the need for court
proceedings.

2)   Borrowers lacking legal competency:

a.Incompetent borrower may not sign the mortgage loan
application.

b.Court-appointed conservator or guardian may
execute any necessary documents, including the mortgage loan
application. The lender must provide evidence that the
conservator or guardian has authority to obligate the
borrower.

c.A person holding a durable power of attorney
specifically designed to survive incapacity and avoid
the need for court proceedings, may execute any
necessary documents, including the mortgage loan
application.

     (1)To be valid, a durable power of
attorney must be prepared when the "principal" is competent to
understand the nature and significance of the
instrument.

     (2)The durable power of attorney
must comply with State laws regarding signatures, notarization,
witnesses, and recordation.

B.Closing Documents. Power of attorney (durable or otherwise) may
be used for closing documents. Any power of attorney must comply
with State law and allow for the Note to be legally enforced in
that jurisdiction.

C.Counseling Session. For borrowers lacking legal competency, the
counseling session may be conducted with a person holding a power
of attorney, or with a court-appointed conservator or guardian.

4-7REQUIRED MORTGAGE CREDIT DOCUMENTATION. After performing a
preliminary eligibility review of the borrower, the lender must submit
the following documents to the local HUD office for Mortgage Credit
Analysis:

A.Uniform Residential Loan Application (URLA) and HUD/VA Addendum
(Form HUD 92900-A). This application must be completed according
to the instructions contained in Appendix 15. At the time that
the lender completes the borrower's application, it must do the
following:

1)Participate in a face-to-face interview with the borrower in
which the information on the application is verified by the
borrower. Exceptions to this requirement are as follows:

a.A face-to-face interview is not required if the
property is at least 50 or more miles from the
mortgagee's nearest office, and a face-to-face
counseling session was conducted. Under these
circumstances, the mortgagee may interview the borrower
by telephone, and must certify as to the date and
person(s) with whom they spoke. The mortgagee must
elicit as complete a picture of the borrower as if a
face-to-face interview were conducted.

b.If the borrower lacks legal competency and the loan
application is being executed by a person holding a
durable power of attorney, or by a court-appointed
conservator, the face-to-face interview must be
conducted with the person holding the power of attorney
or conservator. If the borrower is legally competent
and the loan application is being executed by an agent
or attorney in fact, then the face-to-face interview
may be conducted with the agent, but every effort
should be made on the part of the mortgagee to
interview the borrower as well. (Geographical limit of
50 miles also applies here).

c.If married spouses, or other co-borrowers,
are living apart because one of them is temporarily or permanently
in a health care facility, a face-to-face interview is
only required with the borrower who is still living in
the home.

2)Provide to the borrower blank copies of the first
mortgage, first note and Loan Agreement, if it has not already done
so, and explain the principal provisions of those documents,
including a disclosure of servicing fees, if any are to be
charged.

3)Provide to the borrower a copy of Notice to the
Borrower (Appendix 14), which explains the procedures that the
borrower should follow in case of chronically late payments
or non-payment by the lender. This disclosure must also
explain that the borrower's liability is limited to the
value of the property at the time the mortgage is due and
payable.

4)Explain to the borrower the consequences of placing
junior liens on the property.

5)The lender must provide the borrower with a
certification for the borrower's signature stating that he or she received
copies of the security instruments and the Notice to the
Borrower, and that the lender explained the principal
provisions of the documents. This document must accompany
the application in the mortgage credit package.

B.Credit report for each borrower. A merged in-file report,
containing the information currently available from three
consumer credit information repositories will fulfill this
requirement.

1)The lender's review of the report should be limited
to the Public Record Information section, in order to determine
whether or not the borrower is delinquent or in default on
any Federal debts.

2)Any borrower that is presently delinquent or in
default on any Federal debt owed to the United States is ineligible for
a HECM until the debt is brought current, paid or otherwise
satisfied, or satisfactory repayment arrangements have been
made between the borrower and the Federal agency to which
the debt is owed and is verified in writing. Additionally,
any borrower with a judgment lien against his or her
property for a debt owed to the United States is not
eligible for a HECM until the judgment is paid or otherwise
satisfied.

C.Credit Alert Interactive Voice Response System (CAIVRS). In
order to demonstrate evidence of pre-screening, a separate
written statement signed by the lender must be prepared
containing the authorization code from CAIVRS (see Paragraph
4-3).

D.Title evidence. A title insurance commitment at least equal to
the maximum claim amount, showing that the mortgage will be a
first lien of record when it is recorded, must be submitted.
Other title evidence is acceptable only if the local HUD office
determines that title insurance is not available at reasonable
rates.

E.Certificate of counseling. The counseling agency will provide a
certificate (Appendix 16) attesting to the borrower's attendance
at a counseling session. The counseling session may be attended
by a person holding a power of attorney or by a conservator. See
Paragraph 4-6C.

F.Identification of the borrower. Each borrower must provide
picture identification, evidence of his or her age, and evidence
of his or her social security number. A photocopy of the picture
identification, and of the documents evidencing social security
number and age must be included in the application package.

1)Picture identification may be a photocopy of the driver's
license, passport, job or trade union identification card,
or similar official documentation. If photographic
identification is not available, the lender must provide a
satisfactory explanation as to why the borrower cannot
provide it and what documents the lender examined to
establish the identity of the borrower.

2)Social security number documentation must be provided for
all borrowers on all transactions. While the actual social
security card is not required, the social security number
can be obtained from another source such as the driver's
license, pay stub or bank statement. The only exception to
the social security number requirement is for individuals
not required to obtain a social security number, such as
employees of the World Bank or foreign employees of
embassies. If a borrower contends he or she is not required
to obtain a social security number, he or she must execute a
certification that a social security number has not been
issued.

G.Good Faith Estimate of Settlement Costs. The lender must provide
an estimate of settlement costs to the borrower no more than
three (3) days after the loan application is provided to the
borrower, and a copy of the estimate signed by the borrower
should be submitted.

H.Verification of Deposit. Must be submitted for any portion of
the loan origination fee that will be paid in cash.

I.Truth-in-Lending Act Disclosure Statement. The lender should
comply with requirements in Regulation Z for Open End Credit.

J.ARM Disclosure Statement. For adjustable rate mortgages, the
lender must provide the borrower with a disclosure statement in
compliance with Regulation Z (12 CFR 226). This statement must
be provided to the borrower with the loan application and signed
by all borrowers.

K.Shared Appreciation Disclosure Statement. If this is applicable,
besides disclosing the terms of the shared appreciation mortgage,
the lender must disclose to the borrower the principal limit,
interest rate and monthly payments for a comparable mortgage
offered by the lender without shared appreciation. The
calculations for a shared appreciation mortgage are explained in
Chapter 5.

L.Loan Cost Disclosure Statement. Lenders are required by Section
255 of the National Housing Act to disclose total loan costs for
a HECM expressed as an average annual percentage rate for at
least two loan terms and two house appreciation rates. Total
loan costs include closing cost, interest, mortgage insurance
premiums, and servicing fees. In order to satisfy this
requirement, lenders must use the HECM spreadsheet software (see
Paragraph 5-2) which has been designed to provide this
information.

4-8 MORTGAGE CREDIT ANALYSIS. HUD Mortgage Credit analysis can only be
performed by a HUD staff examiner and should comprise the following:

A.Borrower's application. Refer to Appendix 15 to ensure that the
URLA and Form HUD 92900-A were completed correctly. The review
should include a check of the following:

1)The youngest borrower must be 62 years of age or older by
the date the application is signed. The "Age" block in
SECTION III must reflect the borrower's current age.

2)The subject property should be listed as the borrower's
address, and "Primary Residence" must be checked in SECTION
II.

a.The subject property must be the borrower's
principal residence, which is defined as the dwelling where the
borrower maintains his or her permanent place of abode
and typically spends the majority of the calendar year.
A person may have only one principal residence at any
one time.

b.The property will be considered to be
the principal residence of any borrower who is temporarily or
permanently in a health care institution as long as the
property is the principal residence of at least one
other borrower who is not in a health care institution.

3)The principal limit in the "Amount" block in SECTION I
should be verified to ensure that it was calculated
properly.

a.The lender's calculations should be checked
against the procedures outlined in Chapter 5 for determining the
principal limit.

b.The expected average mortgage interest rate
used by the lender in calculating the borrower's principal limit
should be the fixed interest rate or, for an ARM, the
U.S. Treasury Securities Rate adjusted to a constant
maturity of ten years plus the margin used by the
lender in determining the borrower's adjustable rate.
The rates used should be those that are in effect on
the date that the application is signed.

4)Liabilities from existing liens on the property, delinquent
Federal debts, repairs to be completed, and the initial MIP
(SECTION VII. Blocks b., d., and n.) should be verified.

5)SECTION IX. must have original signatures to certify to the
information on the application.

6)The Mortgage Credit Examiner must complete the entire
worksheet in Appendix 18 using the information on the URLA
and Addendum. The number of children should be entered
regardless of whether or not they are dependent.
Information from the worksheet will be entered into CHUMS.

B.Borrower's credit. Review the borrower's credit report to check
for any claims or defaults on debts owed to the Federal
government, and any existing debts on the property.

1)Generally unsecured debts other than delinquent Federal
debts, regardless of their status (e.g. delinquent credit
card accounts), should not impact negatively on the
borrower's eligibility.

2)Any delinquent Federal debts or liens on the property must
not be in excess of the borrower's net principal limit,
unless the borrower has a separate source of funds from
which to draw. Liens must be removed or subordinated at
closing. Conditions should be placed on the Firm Commitment
to ensure that this requirement is met.

3)If HUD has previously paid an insurance claim for
an insured mortgage on a property owned by the borrower, the borrower
is not ineligible for the program if extenuating
circumstances caused the foreclosure to occur. However, if
extenuating circumstances did not exist, the borrower is
ineligible for a reverse mortgage (see Paragraph 4-3).

C.CAIVRS Authorization Code. Review the statement signed by the
lender containing the CAIVRS Authorization Code. If the CAIVRS
finding indicates that a claim or default against the borrower
exists, the local HUD office must notify the lender to have the
borrower correct or explain the finding (see Paragraph 4-3).

D.Title evidence. Review the title insurance commitment (or other
evidence acceptable to the local HUD office) to ensure that it is
at least equal to the maximum claim amount and that the borrower
is able to pay off any existing liens at closing.

1)The title evidence should meet the standards required for
standard FHA-insured mortgages (24 CFR 203.387 and 203.389
or 234.285).

2)The title insurance commitment must show that the insured
first mortgage will be a first lien of record when recorded.

3)Special exceptions limiting title insurance due to the
unusual characteristics of a reverse mortgage are not
acceptable. For example, the following exceptions are not
acceptable:

a.The lack of a stated mortgage term.

b.Negative amortization.

c.Shared appreciation.

d.Compound interest.

4)Where a maximum mortgage amount is stated in the mortgage,
the title commitment may contain an exception for loan
advances made in excess of that amount.

5)Title insurance is required only for the mortgage to be
insured, and not for the second mortgage held by HUD.

E.Certificate of counseling. The certificate from a HUD-approved
counseling agency must comply with the model in Appendix 16 and
should state that the borrower has received counseling.

F.Identification of the borrower. Copy of a picture identification
card, verification of the borrower's Social Security number, and
evidence of the borrower's age should be submitted unless
conditions for exceptions exist (see Paragraph 4-7F., above).

G.Good Faith Estimate of Settlement Costs. The copy of the signed
estimate must be reviewed to verify that the estimate of closing
costs is the same as the estimate on the URLA, SECTION VII. Block
f.

H.Truth-in-Lending Act Disclosure Statement. The lender must
submit copies of any disclosure statements required by Regulation
Z for Open End Credit.

I.ARM Disclosure Statement - If the borrower has chosen an
adjustable interest rate, the lender must submit a disclosure
signed by the borrower that complies with Regulation Z (12 CFR
226).

1)The disclosure statement must include the one-year Treasury
rate (index) in effect when the borrower signed the
application, and the margin that the lender is using to
determine the initial interest rate.

2)Increases of more than one percent to the index, and any
increases in the margin after the issuance of the Firm
Commitment will require reprocessing of the commitment
before the loan can be endorsed.

J.Shared Appreciation Disclosure Statement. If this is applicable,
a copy of the statement provided to the borrower, disclosing
characteristics of the shared appreciation mortgage and the other
options available to the borrower must be signed by the borrower
and submitted by the lender.

K.Certification of receipt of closing documents. A certification
signed by the borrower must be submitted stating that he or she
received copies of the first mortgage, first note, the Loan
Agreement, Loan Cost Disclosure Statement, and a Notice to the
Borrower explaining the procedures to follow in case of
non-payment or late payments by the lender (Appendix 14), and
that the lender explained the principal provisions of the
documents.

4-9FIRM COMMITMENT. If the borrower is eligible, the Mortgage Credit
Branch will issue a Form HUD 92900.4, Firm Commitment, with a term of
90 days or the remaining term on the Conditional Commitment, whichever
is longer.

A.Because of the unusual nature of these mortgages, much of the
Form HUD 92900.4 will be left blank and should be disregarded.

B.The name of the lender and the borrower, and the property address
will appear on the Form HUD 92900.4.

C.The Form HUD 92900.4 will show the issue date and the expiration
date of the firm commitment, along with the property value and
closing costs, in the spaces identified for this information.

D.The following information will appear in the blank remarks
section of the Form HUD 92900.4:

1)   Principal Limit

2)   Initial MIP

3)   Conditions of the Firm Commitment

E.The local HUD office must delete Line (c) of the Lender's
Certificate at the top of the Form HUD 92900.4. This line refers
to disbursement procedures with a forward mortgage and does not
apply to reverse mortgages.

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.