Purchase Reverse Mortgage Update
Michael Branson (CEO - ARMC) 1/9/09 9:44pm
The Housing and Economic Recovery Act of 2008 was signed into law by President Bush on July 30, 2008. Of the sweeping provisions and changes contained within the legislation, one of the long awaited changes was the Home Equity Conversion Mortgage (HECM or “Heck-um”) for purchases. The provisions of the Act contained so many changes for HUD to implement that HUD was not able to implement all the changes at the same time, and was forced to stagger the implementation of the changes.
On October 20, 2008, HUD announced in their Mortgagee Letter 2008-33 that the HECM for Purchase program would be available on January 1, 2009 (http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/2008ml.cfm). The Mortgagee Letter brought quite a bit of anticipation to seniors as the examples contained therein showed that the eligibility was to be based on the property’s appraised value rather than HUD’s normal formula of appraised value or sales price, whichever is less.
Senior borrowers began looking for properties which could possibly appraise for more than the sales price. Foreclosures, short sales, sellers in distress all represented opportunities for seniors who were looking for ways to get into homes with the least possible down payments and still utilize the HECM program.
There was a twist to this whole deal that HUD may not have thought about. It probably became apparent when they started getting lender and borrower inquiries and that was: “What happens when these enterprising borrowers find such a good deal on a home that the down payment requirement is eliminated entirely or the calculations actually allow for money back to the borrower?!”
As far-fetched as that may sound, we started seeing that exact set of circumstances. Borrowers stating that they had found a home with 5 or more comparable sales supporting values of two to two and a half times the amount for which they were going to purchase the home. In one case, the borrowers found a home with valid comparable sales indicating a value of $400,000 on a golf course for which they had an agreement to purchase at $195,000.
Using the HECM calculator, at the age of the younger borrower of 78, the net proceeds to the borrowers is approximately $281,572. Well now here’s something HUD surely never planned for when they put out Mortgagee Letter 2008-33. Their third example shows a borrower coming in with less down payment if the property appraises for $20,000 more than the sales price but what happens when the calculator shows that the borrowers are eligible for almost $84,000 MORE than the purchase price?
So it didn’t take long for more calculating borrowers to start looking for these kinds of deals and we received all kinds of questions. We had borrowers who wanted to “stop living together even though they were not separating so that they could each get their own HECM purchase on their own individual house.
HUD put anti “flipping” provisions in the Mortgagee letter to try to curb the situations of investors selling to seniors who could not maintain properties requiring excessive repairs, but with the many “unique” scenarios that were being proposed, HUD indicated to the lending community and to the National Reverse Mortgage Lenders Association that they needed to further clarify and that they would soon be issuing a clarification on the program.
This communication about the required clarification came out in December and it was thought that the clarification would be released before the end of the year to meet the January 1st release date, but as of January 9, 2009, HUD has not released the final guidelines.
Without the clarification, no lender will try to originate the loan based on what they think HUD will do with the program. During normal credit cycles in the mortgage industry, we have a category of loans sold in the secondary market known as “scratch and dent” mortgages.
These are loans that can be performing or non-performing loans that a lender will sell, with a large discount (depending on the issues with the loan, the discount could be minimal all the way to a sale that amounts to pennies on the dollar) to an investor who is willing to service the loan or, in the case of a non-performing loan, foreclose on the property and recoup their investment upon sale.
To my knowledge, there is no market, even when there is not the current credit crunch environment, for non-insurable reverse mortgage HECM loans. For this reason, no lender is going to jump out and begin originating the loans until HUD has completely clarified how the purchases will work,
So for the time being, if you have been waiting for the Purchase HECM program, hang in there. HUD has so much on its plate right now but since the implementation date was supposed to be January 1, 2009, they should clarify the program any day now. Conventional wisdom at this time is that they will opt for the more traditional method of determining eligibility by using the appraised value or sales price, whichever is lower, and then running the calculator on that number.
For those of us working with seniors looking to utilize this program for purchasing, we can only hope that HUD can find the proper safeguards to allow the more lenient calculations as outlined in Mortgagee Letter 2008-33!
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