HUD publishes several changes to reverse mortgage handbook section

The U.S. Department of Housing and Urban Development (HUD) on Monday published a new version of its Single Family Housing Handbook 4000.1, which includes numerous updates to its guidance for the Home Equity Conversion Mortgage (HECM) program overseen by the Federal Housing Administration (FHA).

“Today’s update clarifies instructions, adds new guidance, and incorporates previously published Mortgagee Letters (ML) in Sections I, II, III, and IV as well as Appendix 7.0,” HUD explained in an informational notice about the updates.

While there are dozens of changes published throughout the full document, Section II B that encompasses guidance for the HECM program received numerous updates on several different topics. These include refreshed guidance on applications and disclosures, HECM eligibility, property acceptability and underwriting, closing requirements, and program details for HECM for Purchase (H4P) and reverse mortgage applicability to condominiums.

These updates follow a long-awaited overhaul of the HECM sections of the handbook published in late 2023.

Document processing, second appraisals

HUD specifies in the “initial document processing” portion of the HECM Handbook that a lender can request cancellation of a HECM case number through FHA Connection (FHAC), a computer system that provides lenders with secure access to HUD computer systems for origination, servicing and other administrative tasks.

Without additional action by the lender, case numbers in FHAC without an appraisal logged in the system are automatically canceled after six months. For cases without a logged appraisal, they are subject to automatic cancellation “for one year from the appraisal effective date,” according to a revision.

HUD has also added new language to the section about potential second appraisals for the original mortgagee, incorporating language that describes “a potential violation of fair housing laws or professional standards related to nondiscrimination” as one such reason for initiating a second appraisal. This reflects recent statements by HUD describing the application of new appraisal bias protections for the HECM program.

There are also several small updates to the language governing flood insurance on properties that interact with the HECM program, including language allowing a “mortgagee [to] review the [Private Flood Insurance (PFI)] policy to determine if it meets FHA requirements or rely on the insurance agent or carrier to separately provide the PFI Policy Compliance Aid language.”

The changes also include the addition of accessory dwelling units (ADUs) to the definitions of eligible properties.

“A single family residential one-unit property with a single ADU remains a one-unit property,” the guidance states. “For any single family residential property with two or more units, a separate additional dwelling unit must be considered as an additional unit.”

Property eligibility, HECM for Purchase

In a section about property eligibility, HUD has added new language stating that if a “property has a water source that includes a mechanical chlorinator or is served by springs, lakes, rivers, or sand-point or artesian wells, the property is not eligible for FHA mortgage insurance.”

An extensive update was published to general reconsideration of value (ROV) requirements. This includes updates to the information that must be submitted with a request from the underwriter, the appraiser response needing to be logged into FHAC, the ability for a borrower to request an ROV and mechanisms that lenders must have to allow for it.

In a section governing the processes of a financial assessment, certain definitions have been updated, including those for “effective income” (i.e., “income that may be used to evaluate a Borrower for a HECM”) and “tax return,” which specifies requirements for U.S. territories that do not require the filing of federal income taxes, such as Puerto Rico, Guam, the Virgin Islands, the Commonwealth of the Northern Mariana Islands and American Samoa.

There are also newly added definitions for what constitutes “foreign income.” These specify that a prospective HECM borrower can qualify based on income received from outside the U.S., if the borrower “has received this income for the previous two years and it is reasonably likely to continue,” so long as required documentation is provided.

The update also includes changes to a section about appraisals in presidentially declared major disaster areas. This explains that damage inspections may be completed by “any FHA Roster Appraiser in good standing with geographic competence in the affected market.” If the lender uses a different appraiser than the one that conducted the original property inspection, “the Appraiser performing the damage inspection must be provided with a complete copy of the original appraisal.”

The section on the H4P program adds ADUs to its unit definitions, as well as the addition of “premium pricing” to a section about “unacceptable monetary investment funding sources.”

The handbook also incorporates recently announced updates to interested party contributions, which exclude mortgagees and third-party originators (TPOs), news that earned a mixed reception from industry professionals.