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The HELOC to HECM Dilemma

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New Rule May Require Seasoning of New HELOCs

reverse mortgage newsWith the recent release of HUD’s Financial Assessment guidelines our focus was primarily centered on the new requirements future borrowers will have to walk through to qualify for a federally-insured reverse mortgage or Home Equity Conversion Mortgage. The scope of this long anticipated policy overshadowed one key requirement: the seasoning of existing non-HECM liens to be paid off. This pivotal requirement will go into effect for loans with case numbers issued on or after December 15th of this year. What is a typical non HECM lien? How about the common home equity line of credit or HELOC. That’s correct, if your prospective borrower has recently taken out a HELOC they may have to wait before they can qualify for a reverse mortgage.

Let’s examine this more closely. Mortgagee Letter 2014-21 specifies that…

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Editor in Chief: HECMWorld.com
 
As a prominent commentator and Editor in Chief at HECMWorld.com, Shannon Hicks has played a pivotal role in reshaping the conversation around reverse mortgages. His unique perspectives and deep understanding of the industry have not only educated countless readers but has also contributed to introducing practical strategies utilizing housing wealth with a reverse mortgage.
 
Shannon’s journey into the world of reverse mortgages began in 2002 as an originator and his prior work in the financial services industry. Shannon has been covering reverse mortgage news stories since 2008 when he launched the podcast HECMWorld Weekly. Later, in 2010 he began producing the weekly video series The Industry Leader Update and Friday’s Food for Thought.
 
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13 Comments

  1. What was our Trade Association’s *NRMLA) role in this process?

  2. Now rushing to take apps from 4 clients prior to Dec. 15th. What will we do after? It’s good for me in short term as it’s pushing a few to ACT now. After Dec. 15th, I feel it will adversely affect 25% or more of potential applicants. Add the affect of the F.A.T. and we could have a 50% affect in an already “way down” industry. DOUBLE OUCH!

    Are we sure about the HELOC and if they’ve used $500 or more within the last year, or took it out within the past year, they are disqualified?

    Mike Johnson

  3. Does this New Improved seasoning requirement mean any home purchase utilizing any form or amount of financing is ineligible for a hecm for the first year?
    We had this seasoning requirement for refinances in place for a few years until HUD came to their senses and rescinded it. Now it’s back!

    • hecmvet,

      Absolutely not. Quoting from my comment:

      “What is important is that when one mortgage simply pays off another mortgage and less than $500 goes to the borrower, the latest mortgage does not come into play but the prior mortgage does. Again if that prior mortgage is at least one year old, the non-HECM mortgage can be paid off through HECM closing.”

      • WHAT? You are the master of obfuscation!
        If a person buys a house and borrows $500 or more they must wait one year BEFORE they are eligible for a HECM, if I am interpreting correctly the broad catch all “seasoning requirement”…..I can’t follow whatever logic you are employing to respond to my comment. You are not completely aware of the chronology of the exchanges of comments or you would not be directing my attention to your response to Shannon.
        Please re-word your response to me or move on to some other subject.
        thank you

        • hecmvet,

          I take off my hat to the doctor of obfuscation. It seems you were not on the phone call with HUD on November 18, 2014. In that phone call a full explanation was made.

          If you sincerely want to understand the concept, I suggest you get a copy of the telephone conference call cited above and focus on the area of paying off non-HECM liens. HUD made it clear that it will not penalize mortgage refinancing as long as the borrower does not obtain more than $500 in total proceeds for anything not paying a lien against the proposed collateral through the refinance.

  4. Shannon,

    I am not sure why a HECM would have been taken if the sole borrower were going into a living facility which sounds like it is not eligible for a HECM. Perhaps there was no expectation of the borrower staying in the facility for more than a year or there is a spouse who will reside in the home but all of that is irrelevant. This is a hugely emotion situation but it is looking at how the borrower is using the HELOC funds which is not within the scope of Mortgagee Letter 2014-21.

    What is important is that when one mortgage simply pays off another mortgage and less than $500 goes to the borrower, the latest mortgage does not come into play but the prior mortgage does. Again if that prior mortgage is at least one year old, the non-HECM mortgage can be paid off through closing.

    • Cynic, what sort of “leap of logic” are you employing here? Are you creating your own theoretical set of circumstances to “enhance” your sense of understanding?
      People seldom enter into helocs to “pay off some other mortgage” but rather to drive themselves further into debt…tongue in cheek here. ha ha. Let’s all agree to use the same set of circumstances for purposes of our exchanges rather than change them arbitrarily and them answer our own questions.
      Please

      • hecmvet,

        It seems you have not worked with many who are not seniors in figuring out how to lower relatively high mortgage monthly payment mortgages with relatively low balances due (in other words the mortgage is almost paid in full). Many older middle age individuals do not want a fifteen year or longer obligation. They also want the option of a very flexible mortgage that will allow them to pay less than their current monthly mortgage payment (or freely borrow to make a portion or all of a required payment) or borrow more when they need it. In that sense it is a cash flow basket which they can repay at any time at their convenience until other loan terms kick in ten or so years down the road.

  5. My first question stands, unanswered. “What was NRMLA’s role in this process? This question is, in many ways more important to us long term, than the seasoning requirement. I look forward to an election of new officers for the top spots in our beloved trade association.
    May the best man win!

    • hecmvet,

      Do you know anything about NRMLA and its slate of officers? Except for the office of president/CEO and the offices of various vice presidents which are reserved for NRMLA staff, all other officers generally change annually including the office of the treasurer, and the secretary who are currently both board members. Board members change with some frequency and currently include two co-chairs and two vice co-chairs.

      It seems you are mistaken about NRMLA. It is an organization for lenders including TPOs. You as an originator have no voice in its operations except to the extent you are permitted to do so.

      HUD has no accountability to NRMLA. What NRMLA gets is by the mercy of HUD. If HUD did not include NRMLA’s input into some decision, it did not include NRMLA. To imply that NRMLA should know HUD’s every move is to expect the irrational. For its size and budget, NRMLA is effective.

      To find out what went on between HUD and NRMLA regarding the items contained in Mortgagee Letter 2014-21, I suggest you call Peter Bell, Marty Bell, or Steve Irwin. Or talk to board members you may know. The answer to your question would yield some insight into how HUD is currently dealing with NRMLA (which treatment is subject to change).

  6. Shannon, this really blindsided me about the seasoning requirement. This is unbelievable inasmuch on a regular forward FHA loan, this is NOT a requirement so I question why it has become a requirement on a HECM? This will definitely disqualify many of the HECM borrowers who may end up in foreclosure IF they have to wait a year to obtain a HECM to payoff underlying debt. Many seniors took out a HELOC to subsidize their expenses, only to find that they could not afford the extra payments so now want to do a reverse mortgage to eliminate their payments on mortgages. This is really unfair and a definite deviation from the original intent of Reverse Mortgages. Pretty sad as it will really affect the Senior’s who really need the Reverse mortgage.

    • Joyce,

      Here is one abuse it is designed to prevent.

      Say a senior has a gross principal limit of $300,000 with total mandatory obligations of $186,000 but wants to pay off some very expensive credit cards and personal lines of credit with balances totaling $60,000. Well, we all know the borrower could borrow $30,000 in proceeds at HECM closing to pay down that debt but is there a way to plan so that all $60,000 is paid off?

      What if before the HECM originates, the prospect gets a HELOC with a $60,000 line of credit and pays off the all of the personal debt. Immediately the senior applies for a HECM. Now there are mandatory obligations totaling $246,000 and without this new restriction, the borrower has made it possible to effectively defeat the first year disbursements limitation by $60,000 since the borrower would no doubt elect to get the additional 10% proceeds made available in that first year due to the fact that the borrower would already be liable for the 2.5% upfront MIP.

      I hope that illustration helps.

      Some who have considered this abuse ask if the amount which would be required to be paid off because it was taken within the prohibited one year period did not result in the borrower having to incur the 2.5% upfront MIP, why is it being considered? In other words if the mandatory obligations without the HELOC in the illustratiadon above were just $50,000, total mandatory obligations with the HELOC ($110,000) would not exceed 50% of the original principal limit ($150,000). So why consider that debt ineligible for payoff through HECM initial funding?


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