What COVID Home Equity Repayment Plan Means For Lenders

The Federal Housing Administration recently issued Mortgagee Letter 2022-23, establishing a new COVID-19 Home Equity Conversion Mortgage Property Charge Repayment Plan.[1]

The COVID-19 HECM Property Charge Repayment Plan would aid HECM borrowers in covering costs associated with standard property charges. As a condition of their loan, HECM borrowers are required to pay property charges such as property taxes, insurance and homeowner association fees related to their mortgaged property.

In the event HECM borrowers are unable to pay their property charges, mortgage servicers must advance funds to cover such charges — commonly referred to as "corporate advances." When a mortgagee advances its own funds to pay a borrower's property charges, the mortgagee must call the loan due and payable per regulations established by the U.S. Department of Housing and Urban Development.

Accordingly, a property charge repayment plan serves as a loss mitigation mechanism to prevent borrower default in such circumstances.

Prior to the establishment of the COVID-19 HECM Property Charge Repayment Plan, defaults associated with HECM property charges were handled pursuant to Mortgagee Letter 2015-11,[2] which was later amended by Mortgagee Letter 2016-07.[3]

Similar to Mortgagee Letter 2022-23, Mortgagee Letter 2015-11, issued in April 2015, stated that a borrower was in default if borrower funds were insufficient to cover necessary property charges. As such, the mortgage would become due and payable, potentially resulting in foreclosure.

To avoid foreclosure, Mortgagee Letter 2015-11 provided various loss mitigation options related to defaults due to unpaid property charges, including a repayment plan. Specifically, Mortgagee Letter 2015-11 allowed the option of refinancing the defaulted HECM into a new HECM, an extension of the foreclosure timeframes established by HUD, and a repayment plan to repay mortgagee advances of property charges, among other loss mitigation options.

Mortgagee Letter 2015-11 provided detailed guidance to servicers related to a repayment plan. Namely, Mortgagee Letter 2015-11 provided guidance on the repayment plan eligibility determinations and the calculation of a repayment plan.

That letter also noted that if a borrower defaulted on the repayment plan, servicers may reevaluate the borrower for a recalculated repayment plan if the arrearage, the amount owed, was less than $5,000. However, if an outstanding arrearage was greater than $5,000 the borrower could be offered other loss mitigation options.

Mortgage Letter 2016-07, issued in March 2016, expanded the loss mitigation options for HECM borrowers as a result of property charges defaults. Mortgage Letter 2016-07 provided a "de minimis exception" allowing servicers to delay submitting a due and payable request for loans with a total arrearage less than $2,000.

The de minimis exception required servicers to confirm that they contacted the borrower, the borrower expressed a willingness to repay the arrearage, and the borrower was attempting to make such payments.

Mortgage Letter 2016-07 also allowed servicers to cure a borrower's taxes and/or insurance defaults so long as the costs were not passed along to the HUD and the borrower agreed not to seek an assignment of the loan for at least three years. Moreover, Mortgage Letter 2016-07 extended the HECM loss mitigation protections to HECM loans that were in foreclosure prior to the issuance of Mortgagee Letter 2015-11.

Likewise, Mortgage Letter 2022-23 continued to expand protections for HECM borrowers associated with property charges defaults. In particular, Mortgagee Letter 2022-23, and its establishment of the COVID-19 HECM Property Charge Repayment Plan, is the latest in COVID-19 related-protections for HECM borrowers.

Considering the financial impact of COVID-19, and in particular the impact of COVID-19 on HECM borrowers — generally, senior homeowners over the age of 62 — the COVID-19 HECM Property Charge Repayment Plan would allow HECM borrowers to enter into a repayment plan to repay corporate advances for property charge defaults that took place even prior to the pandemic.

According to the FHA, the "additional time to repay delinquent property charges will increase the likelihood that affected borrowers will be able to cure property charge delinquencies and avoid foreclosure."

In order to qualify for the COVID-19 HECM Property Charge Repayment Plan, borrowers must have applied for Homeowner Assistance Funds relief. The HAF relief received, if any, combined with the borrower's ability to repay must cover the full amount of property charges advanced by the servicer. Borrowers must also indicate COVID-19 impact, and mortgage servicers must document the borrower's attestation, including verbal attestations.

Borrowers are allowed up to 60 months to repay their property charges under the COVID-19 HECM Property Charge Repayment Plan. The FHA also notes that the 60-month maximum is not limited by any time a borrower is on a standard HECM repayment plan, as provided under Mortgagee Letters 2015-11 and 2016-07.

In fact, borrowers currently on a standard HECM repayment plan may also qualify for the COVID-19 HECM Property Charge Repayment Plan. The FHA goes further to state that a borrower may qualify for a COVID-19 HECM Property Charge Repayment Plan "even if they have been unsuccessful on a prior repayment plan, the total outstanding arrearage is greater than $5,000, or both."

As noted above, under Mortgagee Letter 2015-11, borrowers were generally considered for repayment plan if the outstanding arrearage was less than $5,000.

The provisions of the mortgagee letter went into effect on Dec. 15, 2022, and mortgage servicers may offer COVID-19 HECM Property Charge Repayment Plans no later than one year following the end of the COVID-19 National Emergency.

Of noted importance, the COVID-19 National Emergency was last continued on Feb. 18, 2022, and remains in effect until May 11, unless it is prematurely terminated or extended within 90 days of the anniversary date.

Specifically, Title 50 of the U.S. Code, Section 1622, provides:

Any national emergency declared by the President … and not otherwise previously terminated, shall terminate on the anniversary of the declaration of that emergency if, within the ninety-day period prior to each anniversary date, the President does not publish in the Federal Register and transmit to the Congress a notice stating that such emergency is to continue in effect after such anniversary.

Accordingly, HECM borrowers may take advantage of the loss mitigation option through April 2024.

Overall, the protections offered to HECM borrowers noted above balances the FHA's goal of protecting its insurance interests while helping HECM borrowers maintain possession of their homes.

Indeed, mortgage servicers are equally invested in the balance of both goals. Accordingly, we recommend servicers review their policies and procedures to ensure compliance with these protections established by the FHA. We also recommend servicers continue to monitor additional protections for HECM borrowers established by FHA in the future.

Republished with permission. This article, "What COVID Home Equity Repayment Plan Means For Lenders" was published by Law360 on March 9, 2023.

[1] U.S. Department of Housing and Urban Development, COVID-19 Home Equity Conversion Mortgage (HECM) Property Charge Repayment Plan (2022), https://www.hud.gov/sites/dfiles/OCHCO/documents/2022-23hsgml.pdf.

[2] U.S. Department of Housing and Urban Development, Loss Mitigation Guidance for Home Equity Conversion Mortgages (HECMs) in Default Due to Unpaid Property Charges (2015), https://www.hud.gov/sites/documents/15-11ml.pdf.

[3] U.S. Department of Housing and Urban Development, Expanded Permissive Loss Mitigation for Home Equity Conversion Mortgages (HECMs) and Mortgagee's Optional Extension to Submitting a Due and Payable Request (2016), https://www.hud.gov/sites/documents/16-07ml.pdf.