FHA Proposes Updates to Roll Back Mortgage Bond Rates
The Federal Housing Administration (FHA) this week published a new proposed policy for the Home Equity Conversion Mortgage (HECM) program, which would update the way bond interest rates work for HECM loans.
The draft mortgage letter (ML) “proposes updates to HUD’s calculations for bond interest payment for HECM claims and establishes a process for retroactively adjusting the bond interest calculation for claims filed on HECMs that are due became law on or after September 19. 2017,” FHA said in an announcement of the proposal.
Bond yield refers to the percentage of return an investor would receive for borrowing money through a bond. These proposals build on several changes FHA made to the HECM program on January 19, 2017, which became effective later that year.
In a final rule entitled “Strengthening the Home Equity Conversion Mortgage Program,” FHA codified several significant changes to the HECM program previously issued by HUD under the Housing and Economic Recovery Act (HERA) of 2008 and the Reverse Mortgage Stabilization Act of 2013. .
The final rule also made additional regulatory changes to the HECM reverse mortgage loan program, including modified origination and servicing policies.
‘This last line [provided] that, for HECMs authorized after January 23, 2004, if an insurance claim is paid in cash, the bond interest rate for purposes of calculating the claim will be the monthly average U.S. Treasury yield adjusted to a constant ten-year maturity, for the month in which the mortgage default occurred,” FHA explained.
But the U.S. Department of Housing and Urban Development (HUD) never fully implemented this.
“To reaffirm its commitment to the future success of the HECM program and the senior population for which it is designed, HUD has determined that changes in the methodology for bond interest payments are necessary to ensure the long-term stability of the program to maintain,” the announcement said.
There are three key provisions in this recommendation: a regulatory change that changes the calculation of interest on bonds “including the use of the date of default as the date for determining the interest on bonds that become due” after publication of the report. 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.
That process would allow HECM holders to “request an adjustment for mortgages that came due on or after September 19, 2017 and filed a claim before the effective date of the final ML, if an insurance claim was paid in cash.” FHA explained.
The draft ML also states that certain changes made in January to the Home Equity Reverse Mortgage Information Technology (HERMIT) system regarding the way bond interest rates work have caused a “financial hardship for mortgage holders who have hold significant numbers of loans that were already in default at the time they defaulted.” that time,” FHA said.
That change ensured that bond interest on all HECM claims filed and paid in cash beginning in January 2024 “would be paid at the rate in effect as of the month in which the mortgage became due,” according to the draft ML . .
“FHA has since determined that system changes were inconsistent with regulations requiring bond interest to be calculated based on the monthly average yield, for the month in which the mortgage default occurred” on Treasury bonds adjusted to the 10-year constant maturity Treasury rate (CMT).
These changes are intended to “reaffirm” FHA’s commitment to the HECM program as well as its long-term stability, the ML said.
Stakeholders are instructed to provide feedback on the proposal until July 29. It is available to view on the Single-family drawing tableas well as the forms and instructions for submitting comments.
