FHA finalizes new servicing incentives for reverse mortgages

The Federal Housing Administration has released a final version of proposed measures aimed at improving reverse mortgage servicing, including new incentives.

The FHA is implementing some changes for its Home Equity Conversion Mortgage program immediately, with others becoming effective March 25, 2024.

The new incentives and other measures, such as giving servicers the option to use verbal verifications in annual occupancy checks, are aimed at counteracting strains from rate volatility that have been hurdles to broader industry involvement in this market.

The lending downturn has spurred more traditional players to originate or broker reverse mortgages but the pool of companies that handle servicing operations has been more limited.

"These changes … should make continued participation in the program more likely for existing HECM mortgagees and potentially entice other FHA mortgagees to participate," the administration said in early November, when it first announced a draft of its policy changes.

The original draft came as scrutiny of procedures of the business intensified, with the inspector general for the Department of Housing and Urban Development announcing an investigation into how another HUD entity, Ginnie Mae, handled HECM servicing seized in a bankruptcy.

Both Ginnie Mae and FHA have been taking multiple steps to improve servicing conditions for reverse mortgages.

As part of the measures finalized Thursday, FHA confirmed it will provide $5,000 to $7,500 for certain completed "cash for keys" foreclosure alternatives and cover some expenses up to certain limits. These incentives will become effective on March 25 of next year.

Actions that FHA will pay $5,000 to $7,500 include a deed in lieu, in which the borrower returns the property to the mortgage company without a formal sale and the servicer often agrees to forgive any outstanding debt. Other actions the FHA will incentivize include a short sale, which is a deed-in-lieu alternative that's more transactional.

The FHA will cover probate costs up to $5,000 with proof required for expenses higher than $500.

An accepted cash for keys offer must include a home that's in "broom swept" condition. All appliances or fixtures that are part of the house must be intact.

People who use the new verbal option to verify the occupancy of reverse mortgage borrowers and spouses who live in the home will still need to sign documents and maintain an audio file. 

The occupancy verification responsibility extends to spouses unnamed on the loan.

Verbal occupancy checks must include warning with specific language about the penalties for false claims and perjury must be read in verbal occupancy verifications. An employee of the mortgage company must sign and date a written document about the verification that includes the names and phone numbers of respondents.

This occupancy certification option is effective immediately.

Other finalized policy changes pertain to the process when assigning a loan to HUD after a borrower cures, aim to produce more alignment in appraisal requirements and allow optional inclusion of homeowner association dues in property-charge repayment plans. 

The new options related to assignments and HOA dues are effective immediately. The appraisal changes take effect March 25, 2024.