Wednesday, December 2, 2015

A Newer and Specialized Version of the FICO Score

A newer and specialized version of the FICO score advertises analysis of both traditional and non-traditional credit sources to arrive at a credit score. In late 2011, Fair Isaac Corporation partnered with Core Logic, a data analysis company, to create a new type of credit report which takes into account both traditional and nontraditional credit sources. 

This new CoreScore considers an individual’s rental payment history, evictions, child support judgments, applications for payday loans and payment history on utility and cellphone bills when setting the score.

First, the use of nontraditional credit is not allowed by any of these entities to enhance the traditional credit history of a borrower with an otherwise poor payment record. Nontraditional credit is allowed as an alternative to a “thin” credit file, not a bad credit file. [Fannie Mae Single Family/2013 Selling Guide, Part B3-5.4-01; Freddie Mac Single Family Seller/Servicer Guide Chapter 37.4(a)(2); HUD Handbook 4155.1 Chapter 1.C.5.d]

Tuesday, December 1, 2015

Reverse Mortgage The Story of Everything

HECM loans are first lien mortgages which provide future payments to a homeowner based on the accumulated equity in the homeowner’s property. 


To be eligible for insurance under the FHA’s HECM program, a mortgage must have been originated by an FHA-approved lender, or by a loan broker doing business with an FHA-approved lender. [12 USC §1715z-20(d)(1)]
HECM loans may not have prepayment penalties. Further, HECM loans are nonrecourse, and the loan documents must state this. The sale or foreclosure of the property is the only recourse the lender has to collect on the debt. A lender cannot go after the personal assets of the borrower or their heirs. [12 USC §1715z-20(d)(7); HUD Handbook 4235.1 Rev-1 Chapter 1-3.C]

Interest rates

A HECM loan may have either a fixed or adjustable interest rate. Interest accrues daily and is added to the outstanding balance monthly. [HUD Mortgagee Letter 2014-21; 24 CFR §206.21(a)-(b)]
If the borrower chooses an adjustable interest rate, the lender must offer the borrower a rate that adjusts annually, with a 2% periodic adjustment cap and a 5% lifetime cap. At the lender’s discretion, the lender may also offer the borrower an adjustable interest rate that adjusts monthly, with a lifetime cap set by the lender, and no periodic adjustment cap. The two acceptable indexes for the latter type of adjustable rate mortgage (ARM) are the one-month Constant Maturity Treasury (CMT) and the one-month London Interbank Offered Rate (LIBOR). [24 CFR §206.21(b)]

Payments

A borrower who takes out a HECM loan as a traditional reverse mortgage must choose at loan origination a payment option for the reverse mortgage proceeds.

Fixed rate HECM and the single lump disbursement

For HECM loans with case numbers assigned on or after June 25, 2014, the only payment option available on fixed-rate HECM loans is the single disbursement lump sum option. No future draws may be made by the borrower. [HUD Mortgagee Letter 2014-21]
A borrower who opts for the single disbursement lump sum option will only receive one payment at loan closing. This payment is not to exceed the greater of:
  •  60% of the principal limit; or
  •  the borrower’s mandatory obligations, plus 10% of the principal limit. [HUD Mortgagee Letter 2014-21]
Editor’s note — The definition of mandatory obligation was amended in November of 2014. It is reviewed later in the module.

Adjustable rate HECM and payment options

For adjustable rate HECM loans, only the following options are available:
  •  the term payment option;
  •  the tenure payment option;
  •  the line of credit payment option;
  •  the modified tenure; or
  •  the modified term. [HUD Mortgagee Letter 2014-21]
A borrower who receives term payments receives equal monthly payments for a fixed period of time. The fixed time period is set by the borrower. [12 USC §1715z-20(d)(9)(B); 24 CFR §206.19(a)]
With tenure payments, the borrower receives money from the lender in equal monthly payments until the borrower dies or sells the property. [12 USC §1715z-20(d)(9)(D); 24 CFR §206.19(b)]
A borrower who receives the reverse mortgage money through a line of credit may choose when and how much money to withdraw from their line of credit until they reach their principal limit. [12 USC §1715z-20(d)(9)(A); 24 CFR §206.19(c)]
Under a modified tenure, the borrower receives equal monthly payments from the lender until the death of the borrower or the sale of the property. The borrower also has the freedom to withdraw money from the reverse mortgage as with a line of credit. [12 USC §1715z-20(d)(9)(E)]
Under a modified term, the borrower receives equal monthly payments and may also take money out through their line of credit, for a set period of time. [12 USC §1715z-20(d)(9)(C)]
As long as the mortgage balance is less than the principal limit, a borrower with an adjustable rate HECM loan may request a change from any payment option to another, or a payment of any amount (not to exceed the difference between the principal limit and the sum of the mortgage balance and any set-asides for repairs or servicing charges). A mortgage will continue to bear interest at the adjustable interest rate as agreed between the lender and the borrower at loan origination. [24 CFR §206.26(a); 24 CFR §206.26(c)]
The lender can charge a fee for changing the payment option. HUD’s website currently sets this fee at $20. [24 CFR §206.26(d)]
Other than the initial payment, no minimum draw or payment is required. The lender cannot compel the borrower to use the HECM loan proceeds or require a borrower to draw a certain amount at any time. [24 CFR §206.25(g); HUD Mortgagee Letter 2014-10]
If the borrower has chosen a term or tenure payment option, the lender is required to make monthly payments to the borrower by mail or electronically on the first business day of the month. If the borrower has a line of credit and makes a request for a payment, the lender must make the payment within five business days of the receipt of the request.
If the lender fails to make the payments within the respective timeframes, the lender is to pay a late charge to the borrower for the late payment. The late charge is to be 10% of the entire amount that should have been paid to the borrower for that month or as a result of that request. For each additional day that the borrower does not receive payment, the lender is required to pay interest at the mortgage interest rate on the late payment. In no event shall the total late charge exceed $500. Any late charge shall be paid from the lender's funds and shall not be added to the mortgage balance. [24 CFR §206.25(f)]
The lender may collect a fixed monthly charge for servicing activities if the amount of the charge was disclosed to the borrower at the time the lender provided the borrower with a loan application. The servicing fee is set aside from the principal limit amount. [24 CFR §206.207(b)]
Monthly servicing fees are capped at:
  • $30 for fixed rate HECMs and annually adjustable rate HECMs; and
  • $35 for monthly adjustable rate HECMs.

Disbursement limits

One of the most important changes made in September of 2013 was the establishment of disbursement limits.
For the fixed rate HECM single disbursement lump sum payment option, the initial disbursement limit sets the total amount which may be paid to the HECM borrower, as previously indicated. This amount is called the borrower’s advance. [HUD Mortgagee Letter 2014-21]
For adjustable rate HECM payment options, HECM guidelines now restrict the maximum loan amount which may be disbursed during the initial 12 months of the loan to the greater of:
  •  60% of the principal limit; or
  • the borrower’s mandatory obligations, plus 10% of the principal limit. [HUD Mortgagee Letter 2014-21]
The first 12-month disbursement period begins on the day of loan closing and ends on the day before the anniversary of loan closing. For example, the first 12-month disbursement period for a loan closing on December 9, 2013 ends on December 8, 2014.
If the first anniversary of the loan closing falls on a federal holiday, Saturday or Sunday, the first 12-month disbursement period will end on the next business day. For example, the first 12-month disbursement period for a loan closing on January 2, 2014 has an anniversary date of January 1, 2015, a federal holiday. Thus, the first 12-month disbursement period ends on January 2, 2015. [HUD Mortgagee Letter 2014-21]
As indicated in the criteria above, if the mandatory obligation amount is greater than 50% of the principal limit, borrowers may have an additional 10% of the principal limit disbursed to them. However, the HECM program now charges a higher up-front mortgage insurance premium if:
  • under a single disbursement lump sum payment option, the initial disbursement is greater than 60% of the principal limit; or
  •  under all other payment options, the total amount disbursed during the first 12-month disbursement period is greater than 60% of the principal limit.
Thus, when the mandatory obligation is an amount greater than 50% of the principal limit, borrowers are required to notify the lender of their intention to use some or all of the additional 10% principal limit available to them. This notification allows the lender to calculate the correct mortgage insurance premium due to the FHA.
For adjustable rate HECM loans, the lender is required to determine and track the disbursement limits during the first 12-month disbursement period. This tracking ensures the borrower is not able to draw out more than the set limit. After the first 12-month disbursement period, there is no further restriction on the borrower’s ability to request a disbursement of their HECM loan proceeds, according to the payment option they have chosen.
These limits provide an important protection for borrowers. A 2012 study completed by the Consumer Financial Protection Bureau (CFPB) indicated a high percentage of reverse mortgage borrowers were simply using the line of credit payment option to yank out 100% of their principal limit at loan closing. Others depleted their HECM loans shortly after closing, leaving them vulnerable to default on the HECM loan when they were not able to make tax and insurance payments, as required.
However, HUD found that lenders were incentivizing borrowers to pull out the maximum amount allowable in the 12-month initial period, then the remainder shortly after the end of the 12-month period. These activities effectively worked around the default protections HUD attempted to build into the HECM program in 2013. HUD issued a reminder to lenders that they were required to provide all options available to a borrower under the HECM program. Lenders are not able to simply highlight one option to the exclusion of others. Lenders are also prohibited from requiring certain draws as a condition of making the loan. [HUD Mortgagee Letters 2014-10 and 2014-11]
Additionally, the limits on initial disbursements (or disbursements within the first 12-month disbursement period) make HECM borrowers less attractive targets for scammers, who relied on the low barriers to the loan program to extract their ill-gotten gains from vulnerable seniors.

The mandatory obligation

The mandatory obligation definition was added by the September 2013 and amended in November 2014. The mandatory obligation impacts the initial disbursements allowed. The mandatory obligation is comprised of the fees incurred in connection with a HECM origination. These fees are paid at closing, or arranged, at closing, to be paid during the first 12-month disbursement period.
For HECM borrowers who choose the fixed rate HECM loan and its single disbursement lump sum payment option, the mandatory obligation is used to determine the amount of the lump sum payment. For HECM borrowers who choose the adjustable rate HECM loan under any of the other payment options, the mandatory obligation sets the payment limit during the first 12-month disbursement period.
For all HECM loans, the mandatory obligation includes the:
  • initial MIP;
  • loan origination fee;
  • HECM counseling fee;
  • reasonable and customary amounts, but not more than the amount actually paid by the mortgagee for any of the following items:
    • recording fees and recording taxes, or other charges incident to the recordation of the insured mortgage;
    • a credit report;
    •  a survey, if required by the mortgagee or the mortgagor;
    • a title examination;
    • the mortgagee’s title insurance; and
    • fees paid to an appraiser for the initial appraisal of the property;
  •  property tax, flood and hazard insurance payments required to be paid at closing;
  •  customary fees and charges for warranties, inspections, surveys or engineer certifications;
  •  actual insurance premiums charged for property tax and flood and hazard insurance payments scheduled for payment from the property charge life expectancy (LE) set-aside (discussed later in the module) or from HECM proceeds within the first 12-month disbursement period;
  •  delinquent federal debt; and
  •  other charges as authorized by HUD. [HUD Mortgagee Letter 2014-21]
For traditional and refinance HECM loans, the mandatory obligation also includes the:
  •  any repair set-asides;
  • any repair administration fee;
  • allowable amounts used to discharge any existing liens on the property;
  • funds to pay contractors who performed repairs as a condition of closing, in accordance with standard FHA requirements for repairs required by appraiser. [HUD Mortgagee Letter 2014-21]
For purchase HECM loans, the mandatory obligation also includes the:
  • fees and charges for real estate purchase contracts; and
  • the amount of the principal that is advanced towards the purchase price of the subject property. [HUD Mortgagee Letter 2014-21]

Disbursement limit calculations and examples

The items which are to be included in the initial disbursement limit or the first 12-month disbursement limit are:
  • the amount of the mandatory obligations;
  • the disbursement to the borrower made at closing; and
  • (for the first 12-month disbursement limit on adjustable interest rate HECMs, only) the remaining amount of the disbursement not taken by the borrower, but available during the first 12-month disbursement
These examples demonstrate the application of the new policy limiting disbursements at loan closing and/or during the first 12-month disbursement period. [HUD Mortgagee Letter 2014-21]
Recall that the fixed rate HECM initial lump sum disbursement, or disbursement for an adjustable rate HECM during the initial 12 months of the loan for other payment options, is limited to:
  •  60% of the principal limit; or
  • the borrower’s mandatory obligations, plus 10% of the principal limit. [HUD Mortgagee Letter 2014-21]
Example 1: Mandatory obligations of 60% or less of the principal limit
Principal limit: $100,000
Mandatory obligations: 
$40,000
Repair set-aside: $0
60% of the principal limit: $60,000
Initial disbursement limit amount: $60,000, includes $40,000 in mandatory obligations and $20,000 to borrower

The borrower can draw the $20,000 exceeding mandatory obligations and any set-aside at loan closing or during the first 12-month disbursement period.

Note: On the single disbursement lump sum payment option, the borrower is limited to a single draw at loan closing for the $20,000, in excess of the mandatory obligations and any set-aside.
Example 2: Mandatory obligations in excess of 60% of the principal limit
Principal limit: $100,000
Mandatory obligations: $65,000
Repair set-aside: $0
10% of principal limit: $10,000
60% of the principal limit: $60,000
Initial disbursement limit amount: $75,000, includes $65,000 in mandatory obligations and $10,000 to borrower

The borrower can draw the $10,000 exceeding mandatory obligations and any set-aside at loan closing or during the first 12-month disbursement period.
Note: On the single disbursement lump sum payment option, the borrower is limited to a single draw at loan closing for the $10,000, in excess of the mandatory obligations and any set-aside.
Example 3: Mandatory obligations of 60% or less of the principal limit
Principal limit: $200,000
Mandatory obligations: $17,000
Repair set-aside: $33,000
60% of the principal limit: $120,000
Initial disbursement limit amount: $120,000, includes $17,000 in mandatory obligations, $33,000 set-aside and $70,000 to borrower

The borrower can draw the $70,000 exceeding mandatory obligations and any set-aside at loan closing or during the first 12-month disbursement period.

Note: On the single disbursement lump sum payment option, the borrower is limited to a single draw at loan closing for the $70,000, in excess of the mandatory obligations and any set-aside.
Example 4: Mandatory obligations in excess of 60% of the principal limit
Principal limit: $200,000
Mandatory obligations: $140,000
Repair set-aside: $13,000
10% of the principal limit: $20,000
60% of the principal limit: $120,000
Initial disbursement limit amount: $160,000, includes $140,000 mandatory obligations, $13,000 repair set-aside and $7,000 to borrower

The borrower can draw the $7,000 exceeding mandatory obligations and the set-aside at loan closing or during the first 12-month disbursement period.

Note: On the single disbursement lump sum payment option, the borrower is limited to a single draw at loan closing for the $7,000, in excess of the mandatory obligations and any set-asides.
Prohibited use of the initial disbursement
HECM regulations forbid the initial disbursement to be used to pay or otherwise compensate an estate planning service. If the borrower draws out at least 25% of the principal limit amount at closing, the lender must confirm that none of that amount will be used to pay an estate planning service. [24 CFR §206.32(b); 24 CFR §206.43(b)]
An estate planning service is an entity, other than the lender or HECM loan counselor, that charges a fee for counseling the borrower about HECM loans, or a fee contingent on the borrower obtaining a HECM loan. [24 CFR §206.3]
HUD specifically placed this restriction against estate planning services, since these services provide essentially the same service as the required housing counselor, but charge more. Some borrowers are led to believe that estate planning services are a required part of the reverse mortgage process; they are not. In addition, many estate planning services charge the borrower for referring the borrower to a reverse mortgage lender.
Borrower obligations
A reverse mortgage doesn’t require a borrower to make regular monthly payments, but a borrower does have other obligations to fulfill. To remain in good standing on a reverse mortgage, the borrower or surviving eligible non-borrowing spouse must:
  • keep the property as their principal residence;
  •  maintain hazard insurance on the property in an amount acceptable to HUD and the lender;
  •  keep the property free of liens, unless such liens are subordinate to the reverse mortgage;
  •  keep the property in good repair; and
  •  pay property taxes, hazard insurance, ground rents and assessments in a timely manner. [24 CFR §206.27(b)]
The borrower’s failure to meet all of these requirements constitutes a default on the reverse mortgage.
Editor’s note — Initially, HUD had planned on implementing the new financial assessment rules on January 13, 2014, but postponed implementation. All the highlight content below contains the rules as previously published, for an idea of the extent and intent of financial assessment. [HUD Mortgagee Letter 2013-45]
If the lender determines the borrower does not have the capacity to pay for property taxes, hazard insurance and flood insurance premiums from their existing income, the lender may mandate a set-aside from the principal limit to pay for these items, called the lifetime expectancy set-aside (LE set-aside). [HUD Mortgagee Letter 2014-21]
The LE set-aside is calculated based on the current property taxes and hazard and flood insurance premiums, and the estimated life expectancy of the youngest borrower. When the LE set-aside has been depleted, the borrower is responsible for making the payments. If the borrower does not make the payments, the lender is required to make payments on behalf of the borrower, and add the cost of the payments to the principal balance of the HECM loan.
Two LE set-aside options exist:
  • a fully-funded LE set-aside on either fixed rate or adjustable rate HECMs; and
  • a partially-funded LE set-aside on an adjustable rate HECM.
The underwriter determines which set aside is required when the LE set-aside is mandatory.
The borrower may not cancel a mandatory LE set-aside.
All other property charges are still the responsibility of the borrower.
A borrower who has the capacity to pay the property taxes, hazard insurance and flood insurance premiums may voluntarily elect to have an LE set-aside, elect to have the lender pay the property charges or choose to pay for all property charges independently. If they voluntarily elect to have payments made from their disbursements, they may not later cancel the election.
A borrower who takes out a fixed-rate HECM with a case number assigned on or after June 25, 2014 is no longer able to elect for the lender to make payments on their behalf, as no further disbursements are provided to the borrower beyond the lump-sum initial draw. [HUD Mortgagee Letter 2014-21]
However, even if this election is made, the responsibility reverts back to the borrower once the mortgage balance has met the principal limit. [24 CFR §206.205(b)]
The lender must complete an annual analysis of LE set-asides, and notify the borrower within 15 days of the annual analysis if the LE set-aside is exhausted or there is an insufficient balance to pay property charges for the next year.
The lender is then to provide 30 days’ written notice to the borrower and HUD of a property charge due once a set-aside is depleted. The lender’s notice must also contain a recommendation that the borrower speak to a HUD-approved housing counselor about property charge payments. [HUD Mortgagee Letter 2014-21]
Note that this election is NOT the same as an escrow account! The payments are set aside from the principal limit, and made and added to the borrower’s loan balance at the time the payments are due. The lender may not hold the payment in a separate account in trust for the borrower. Thus, there is no interest payment made to the borrower on any of the amounts paid by the lender under this agreement, as there is in a traditional mortgage with an interest-bearing escrow account. [24 CFR §206.205(e)]