The Federal Housing Administration (FHA) this week announced a new policy proposal for the Home Equity Conversion Mortgage (HECM) program that updates how bond interest rates on HECM loans are managed.
The draft Mortgagee Letter (ML) “proposes updates to HUD's bond interest payment calculations for HECM claims and establishes a process to retroactively adjust bond interest calculations for claims filed against HECMs that became due on or after September 19, 2017,” FHA said in announcing the proposal.
Bond interest refers to the percentage of income investors receive when they lend money through a bond. These proposals build on several changes the FHA made to the HECM program on January 19, 2017, which went into effect later that year.
In the final rule, titled “Enhancing the Home Equity Conversion Mortgage Program,” FHA codified several significant changes to the HECM program previously issued by HUD under the Housing Economic Recovery Act of 2008 (HERA) and the Reverse Mortgage Stabilization Act of 2013.
The final rule also made additional regulatory changes to the HECM reverse mortgage program, including revised origination and servicing policies.
“This final rule [provided] The FHA explained that “for HECMs approved after January 23, 2004, if a claim is paid in cash, the bond interest rate for purposes of calculating the claim amount shall be the monthly average yield of U.S. Treasury bills adjusted to a constant 10-year period in the month in which the mortgage default occurs.”
However, the U.S. Department of Housing and Urban Development (HUD) did not fully implement this.
“HUD reaffirms its commitment to the future success of the HECM program and the senior population it serves and has determined that changes to the bond interest payment methodology are necessary to maintain long-term program stability,” the release added.
The recommendation has three important provisions: a regulatory amendment to change the bond interest calculation “including using the default date as the date to determine the bond interest rate for loans that become due” after the publication of the proposed ML, adding a bond interest rate section to the HECM portion of the Single Family 4000.1 Handbook, and establishing a bond interest rate adjustment process.
This process allows HECM holders “to request adjustments on mortgages that became due after September 19, 2017 and for which claims were submitted before the effective date of the Final ML if the insurance claim was paid in cash,” the FHA explained.
The draft ML also states that certain changes made in January to the structure of bond interest rates in the Home Equity Reverse Mortgage Information Technology (HERMIT) system “created financial hardship for mortgage borrowers with a significant number of loans that were already in default at the time,” the FHA said.
With this change, bond interest on all HECM claims filed after January 2024 and paid in cash will be “payable at the interest rate in effect as of the month in which the mortgage payment falls due,” the draft ML states.
“FHA subsequently determined that the system change was inconsistent with regulations requiring bond interest to be calculated based on the average monthly yield of Treasury bonds adjusted to the 10-year fixed maturity (CMT) rate during the month in which the mortgage default occurred.”
These changes are intended to “reaffirm” FHA's commitment to the HECM program and its long-term stability, ML explained.
Stakeholders are instructed to provide feedback on the proposal until July 29. Feedback can be viewed on the Single Family Drafting Table, which also includes forms and instructions for submitting comments.