FHA Proposes New Rules for Reverse Mortgage Interest Rates

The Federal Housing Administration (FHA) has introduced a new proposal aimed at updating the interest rates for debentures in the Home Equity Conversion Mortgage (HECM) program. This move is intended to create a fairer system while recognizing the financial difficulties faced by lenders.

The proposed changes, detailed in a draft Mortgagee Letter (ML), aim to adjust how debenture interest rates are calculated for HECM loans. The updates would apply retroactively to claims filed for HECMs that became due and payable on or after September 19, 2017.

Debenture interest is the return investors receive for lending money through debentures. The proposed changes build on previous adjustments made by FHA to the HECM program on January 19, 2017, as part of the “Strengthening the Home Equity Conversion Mortgage Program” final rule. These adjustments were originally based on the Housing and Economic Recovery Act of 2008 and the Reverse Mortgage Stabilization Act of 2013.

According to the final rule, for HECMs endorsed after January 23, 2004, if an insurance claim was paid in cash, the debenture interest rate should be the monthly average yield on U.S. Treasury Securities, adjusted to a 10-year maturity, for the month in which the mortgage defaulted. However, the U.S. Department of Housing and Urban Development (HUD) did not fully implement these provisions.

“To support the long-term success of the HECM program and serve senior citizens effectively, HUD has determined that updating the debenture interest payment method is necessary,” FHA stated.

The proposal includes three main changes:

1. Regulation Change: Revises how the debenture interest rate is calculated, using the default date to set the rate for loans due and payable after the new rule is published.

2. Handbook Update: Adds a section on debenture interest rates to the HECM section of the Single Family 4000.1 Handbook.

3. Adjustment Process: Introduces a process for adjusting debenture interest rates on mortgages that became due and payable after September 19, 2017, if a cash insurance claim was filed before the final ML takes effect.

In January, updates to the Home Equity Reverse Mortgage Information Technology (HERMIT) system caused financial strain for lenders with many defaulted loans. The updates set the debenture interest rate for all HECM claims filed from January 2024 onwards, and paid in cash, to the rate in effect when the mortgage became due.

FHA identified that these system updates did not align with regulations requiring the debenture interest to be based on the monthly average yield of Treasurys adjusted to a 10-year maturity for the month of the mortgage default. The proposed changes are meant to reaffirm FHA’s commitment to the HECM program and its stability.

The proposal is open for stakeholder feedback until July 29. The draft and instructions for submitting comments are available on the Single Family Drafting Table.

These updates aim to ensure a fairer and more stable HECM program, benefiting both lenders and senior citizens.