[Federal Register Volume 80, Number 82 (Wednesday, April 29, 2015)]
[Notices]
[Pages 23808-23814]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-10019]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-5735-N-05]


Home Equity Conversion Mortgage (HECM) Program: Mortgagee 
Optional Election Assignment for Home Equity Conversion Mortgages 
(HECMs) With FHA Case Numbers Assigned Prior to August 4, 2014--
Response to Comments

AGENCY: Office of the Assistant Secretary for Housing-Federal Housing 
Commissioner, HUD.

ACTION: Notice; response to comments.

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SUMMARY: On February 6, 2015, at 80 FR 6743, the Federal Housing 
Administration (FHA) published a notice to solicit public comment on 
the alternative path to claim payment--the Mortgagee Optional Election 
Assignment--for certain HECMs announced in Mortgagee Letter 2015-03. 
The public comment period on the February 6, 2015, notice closed on 
March 9, 2015. FHA received 7 public comments on the notice. In this 
notice, FHA responds to questions and comments raised by commenters.

FOR FURTHER INFORMATION CONTACT: Ivery Himes, Director, Office of 
Single Family Asset Management, Office of Housing, Department of 
Housing and Urban Development, 451 7th Street SW., Room 9172, 
Washington, DC 20410; telephone number 202-708-1672 (this is not a 
toll-free number). Persons with hearing or speech impairments may 
access this number by calling the Federal Relay Service at 800-877-8339 
(this is a toll-free number).

SUPPLEMENTARY INFORMATION:

I. Background

    FHA has a statutory obligation to ensure the fiscal soundness of 
the FHA insurance funds. FHA also has the ability, pursuant to the 
Reverse Mortgage Stabilization Act of 2013 (Pub. L. 113-29), to 
establish, by notice or mortgagee letter, any additional or alternative 
requirements that the Secretary, in the Secretary's discretion, 
determines are necessary to improve the fiscal safety and soundness of 
the HECM program, which requirements shall take effect upon issuance.
    Pursuant to this authority, FHA established Mortgagee Letter 2015-
03 on January 29, 2015, for immediate effect. In Mortgagee Letter 2015-
03, FHA set out the Mortgagee Optional Election (MOE) Assignment path 
to claim payment for existing HECMs with FHA Case Numbers issued prior 
to August 4, 2014. FHA alerted mortgagees

[[Page 23809]]

that aside from the present procedures for either the sale of the home 
or foreclosure of the HECM in accordance with the mortgage insurance 
contract terms as originally endorsed, or the MOE Assignment 
alternative, no other path to claim payment exists for HECMs with FHA 
Case Numbers issued prior to August 4, 2014.

II. Discussion of the Public Comments Received on the February 6, 2015, 
Notice

    On February 6, 2015, at 80 FR 6743, FHA published a notice in the 
Federal Register to solicit public comment on the HECM program changes 
announced in Mortgagee Letter 2015-03. FHA received 7 public comments 
on the notice. Comments were submitted by a HECM servicer, a national 
reverse mortgage association, legal aid and advocacy organizations, and 
other interested parties. In general, some commenters applaud and 
support FHA's efforts to preserve the integrity of the insurance funds 
in order to ensure the continued viability of the HECM program, while 
providing protections to Non-Borrowing Spouses of deceased HECM 
borrowers. However, commenters seek clarification on many policy and 
systems issues, and ask FHA to consider alternative options. In this 
notice, FHA takes the opportunity to respond to the public comments and 
provide clarifications to facilitate implementation.

A. Technical Comments and Clarifications Necessary for Implementation

    Comment: Extend the implementation period and foreclosure timeframe 
or institute a moratorium until FHA has addressed industry comments and 
provided systems support for the policy changes.
    HUD Response: HUD does not believe that a delay in implementation 
is needed or advisable at this time, nor is there a need for any 
moratorium. System changes are in progress and will be available before 
June 1, 2015, which is the date that assignments made pursuant to 
Mortgagee Letter 2015-03 will begin to be accepted by HUD. 
Additionally, HUD believes that any further delay in implementation has 
the potential to negatively impact Non-Borrowing Spouses because 
interest will continue to accrue during such delays, resulting in an 
increase in the outstanding principal balances and the potential for 
such balances to exceed the amount permissible in connection with MOE 
Assignments.
    Comment: Clarification needed regarding notification to HUD. 
Commenter questions whether the notification to HUD is only required if 
the mortgagee is opting to utilize the MOE Assignment, or the mortgagee 
must notify HUD of their election or non-election of the MOE Assignment 
in all instances when the HECM has been called due and payable as a 
result of the death of the last remaining borrower.
    HUD Response: The mortgagee must notify the Secretary in HERMIT: 
(1) When it elects to proceed to foreclosure instead of utilizing the 
MOE Assignment made available by Mortgagee Letter 2015-03; (2) when it 
elects to utilize the MOE Assignment made available by the mortgagee 
letter; and (3) when, after it elects to proceed with the MOE 
Assignment, it determines that a HECM or a surviving Non-Borrowing 
Spouse is ineligible.
    Comment: Clarification needed regarding the availability of 
extensions and the process for obtaining them. Commenter questions 
whether or not HUD will offer extensions of additional time beyond the 
90 days from the HECM borrower's death in order for the Non-Borrowing 
Spouse to obtain good, marketable title to the property, or otherwise 
establish a right to occupy the property. If so, commenter asks HUD to 
clarify how a servicer requests an extension, and suggests that HERMIT 
is the appropriate manner to request an extension.
    HUD Response: HUD would like to confirm that Mortgagee Letter 2015-
03 does not require a surviving Non-Borrowing Spouse to obtain legal 
title to the mortgaged property in order to qualify as an Eligible 
Surviving Non-Borrowing Spouse. A surviving Non-Borrowing Spouse must 
obtain either legal title to the mortgaged property or some other legal 
right to remain within 90 days of the death of the last surviving 
borrower. Where a surviving Non-Borrowing Spouse is unable to obtain 
legal title, the surviving Non-Borrowing Spouse must be able to 
establish some other legal right to remain in the mortgaged property. 
Any extensions to any of the timeframes stated in Mortgagee Letter 
2015-03 are at the sole discretion of the Secretary. Any extension 
request must be made in writing, before the expiration of the initial 
timeframe, and must show good cause.
    Comment: Clarification needed regarding the effect of extensions on 
curtailment. Commenter asks HUD to clarify whether or not an extension, 
provided that HUD allows for extensions in order to afford a Non-
Borrowing Spouse an extension of time to obtain good, marketable title 
to the property, will cause curtailment to a mortgage insurance claim.
    HUD Response: HUD would like to again confirm that Mortgagee Letter 
2015-03 does not require a surviving Non-Borrowing Spouse to obtain 
legal title to the mortgaged property in order to qualify as an 
Eligible Surviving Non-Borrowing Spouse. A surviving Non-Borrowing 
Spouse must obtain either legal title to the mortgaged property or some 
other legal right to remain within 90 days of the death of the last 
surviving borrower. Where a surviving Non-Borrowing Spouse is unable to 
obtain legal title, the surviving Non-Borrowing Spouse must be able to 
establish some other legal right to remain in the mortgaged property.
    Additionally, Mortgagee Letter 2015-03 implements an alternative 
Due Date for HECMs eligible under Mortgagee Letter 2015-03. Any 
extensions to any of the timeframes stated in Mortgagee Letter 2015-03 
are at the sole discretion of the Secretary. Any extension request must 
be made in writing, before the expiration of the initial timeframe, and 
must show good cause. Where an extension request is received and 
granted in writing, it will operate in the same manner as approved 
extensions currently operate.
    Comment: Clarification needed regarding who is responsible for the 
costs of any title searches. Commenter asks HUD to clarify who is 
responsible for the cost of the title search to verify good, marketable 
title has been obtained by the Non-Borrowing Spouse. Commenter asks 
whether or not this expense can be charged to the loan and thus be 
reimbursed to the mortgagee through the claims process. Commenter 
asserts that HERMIT will not allow an assignment of a loan to HUD that 
contains post due and payable expenses.
    HUD Response: HUD appreciates the opportunity to provide this 
clarification. HECM proceeds are not available after the death of the 
last surviving borrower. As such, HECM proceeds may not be used to 
cover any additional expense that may be incurred during the MOE 
Assignment process. Any costs or expenses must be paid outside of the 
HECM loan and will not be reimbursed in HUD claims.
    Mortgagee Letter 2015-03 does not place any restrictions or 
requirements on the source of funds to pay for any additional expenses 
that may be incurred. Similarly, Mortgagee Letter 2015-03 places no 
restrictions or requirements on the manner in which an outstanding loan 
balance may be brought into compliance with the Principal Limit Test.

[[Page 23810]]

    Comment: Documentation of a common law marriage should be 
established by the Non-Borrowing Spouse through a letter from legal 
counsel or an affidavit of the Non-Borrowing Spouse, and the servicing 
mortgagee should be able to rely on that documentation.
    HUD Response: HUD appreciates the comment; however, HUD has 
determined not to make changes to the documentation requirements of 
Mortgagee Letter 2015-03. Mortgagee Letter 2015-03 requires the 
mortgagee to provide either a Marriage Certificate, a legal opinion 
certifying the validity of the marriage, or other evidence sufficient 
to establish the legal validity of the marriage. An affidavit from a 
Non-Borrowing Spouse is sufficient evidence of cohabitation or other 
purely factual circumstances but is not sufficient to demonstrate the 
legal effect of that cohabitation or those other circumstances to 
create a common law marriage under applicable law. Where an affidavit 
is used, a mortgagee would also need to provide documentation that 
applicable state law recognizes common law marriage and that the facts 
recited in the affidavit sufficiently establish a valid marriage 
meeting all of the requirements of Mortgagee Letter 2015-03. Again, 
Mortgagee Letter 2015-03 places no restrictions on the source of funds 
used to obtain any requisite legal opinion.
    Comment: Clarification needed regarding the availability of the 95% 
payoff to a Non-Borrowing Spouse on title to the property at the time 
of the death of the borrower. Commenter notes that the Eligible 
Surviving Non-Borrowing Spouse may elect to satisfy the HECM loan and 
retain the property for the lesser of the unpaid principal balance of 
the loan or 95% of the property's appraised value, and asks whether or 
not that 95% payoff is available to the Non-Borrowing Spouse even if 
the Non-Borrowing Spouse is on title to the property at the time of the 
death of the borrower.
    HUD Response: HUD confirms that, as provided in Mortgagee Letter 
2015-03, any heir including a Non-Borrowing Spouse who is on title to 
the property may satisfy the HECM and retain the property for the 
lesser of the outstanding loan balance or 95% of the property's 
appraised value. In the case of purchases financed in part by a new 
HECM, 24 CFR 206.53 will apply.
    Comment: Clarification needed regarding whether or not HUD will 
provide mortgagees an extension to the time period in which they must 
make and notify HUD of the MOE Assignment election.
    HUD Response: HUD appreciates the opportunity to provide certain 
clarifications through this Federal Register notice. As a result, HUD 
is providing mortgagees with an extension following the publication of 
this notice of the timeframe in which mortgagees must notify HUD of 
their election where the borrower had already died as of the date of 
publication of this notice. Thus, mortgagees must make their election 
within the later of 120 days of the issuance of Mortgagee Letter 2015-
03 or 30 days after the servicer receives notice of the last surviving 
borrower's death. Any additional extension to this timeframe is at the 
sole discretion of HUD. Any additional extension request must be made 
in writing, before the expiration of the initial timeframe or within 
ten days of the mortgagee's discovery of the surviving Non-Borrowing 
Spouse, and must show good cause. The good cause shown for any such 
request must include a cogent explanation of why the surviving Non-
Borrowing Spouse was not discovered sooner and could not have been 
discovered sooner with the exercise of reasonable diligence.
    Comment: Clarification needed regarding how loan documents could be 
modified when the person(s) who executed those documents are deceased. 
Commenters note that the person(s) who executed the loan documents 
would be deceased and it is unclear how such a loan contract could be 
modified after a party to the contract is deceased. One commenter 
requests that HUD not use the term ``modification'' since it has a 
precise legal meaning. Commenters request clarification from HUD as to 
how the loan documents may be modified and documented, and seek other 
options to achieve HUD's intention in this section, suggesting the 
possibility of a loan assumption or tolling agreement. Finally, the 
commenter asks, where the requirements may result in additional third 
party expenses, whether those expenses may be reimbursable through 
either the assignment claim or other claim type if it is determined 
that the loan is not eligible for a MOE Assignment.
    HUD Response: HUD would like to confirm that Mortgagee Letter 2015-
03 does not require a mortgagee to modify the loan documents. However, 
as stated in Mortgagee Letter 2015-03, in order to perfect an 
assignment claim, a mortgagee must be able to certify that it is, in 
fact, assigning a valid, legally enforceable first lien. The mortgagee 
must take whatever steps it deems necessary to ensure that its 
certification is truthful, which may or may not include modifying the 
loan documents, depending on the circumstances and on state law. Once 
again, Mortgagee Letter 2015-03 places no restrictions on the source of 
funds used to obtain any requisite documentation or to fulfill any 
requisite conditions.
    Comment: Clarification needed regarding the timing of the HERMIT 
system upgrades.
    HUD Response: The HERMIT release to accommodate the requirements of 
Mortgagee Letter 2015-03 will occur prior to the June 1, 2015, date 
indicated in the mortgagee letter.
    Comment: Clarification needed regarding whether the HERMIT system 
upgrades will include functionality to accept a MOE Assignment of the 
case if the last remaining borrower passes away prior to the case 
reaching 98% of the Maximum Claim Amount (MCA).
    HUD Response: The HERMIT system updates will include functionality 
necessary to accept a MOE Assignment of the case if the last remaining 
borrower passes away prior to the case reaching 98% of the MCA. Any 
assignment under the MOE Assignment must be initiated within 90 days 
from the MOE Assignment election or within 180 days of the publication 
date of Mortgagee Letter 2015-03, whichever is later.
    Comment: Clarification needed regarding whether or not MOE 
Assignments can be made when the unpaid principal balance exceeds 100% 
of the MCA.
    HUD Response: HUD would like to confirm that, as stated in 
Mortgagee Letter 2015-03, in order for a HECM to be eligible for a MOE 
Assignment, the outstanding loan balance may not exceed the MCA. A HECM 
with an outstanding loan balance greater than the MCA may become 
eligible, provided that the outstanding loan balance at the time of 
assignment does not exceed the MCA and all other conditions and 
requirements for a MOE Assignment are met.
    Comment: FHA's servicing contractor, NOVAD, should be equipped and 
trained to approve requests for assignment quickly when the MOE 
Assignment election is utilized, as servicers are only given 90 days to 
determine eligibility, gather additional documents, potentially modify 
the loan, and assign the claim to HUD.
    HUD Response: HUD appreciates the comment. HUD's loan servicing 
contractor is receiving the necessary information in order to review 
assignment requests pursuant to Mortgagee Letter 2015-03. This review 
will include an examination of the applicable timeframes, the 
initiation

[[Page 23811]]

process, and all required documentation.
    Comment: Clarification needed regarding the calculation of the 
current principal limit for the Non-Borrowing Spouse. Commenters ask 
whether or not the calculation of the current principal limit for the 
Non-Borrowing Spouse should include the calculated growth to the 
principal limit and seek clarification as to how mortgagees should 
apply funds in cases where a payment may be used to reduce the unpaid 
principal balance. Commenters seek examples of such ``pay down'' 
scenarios and the specific transaction code in HERMIT that should be 
used.
    HUD Response: As stated in Mortgagee Letter 2015-03, there are two 
different tests that are applicable and only one of the tests must be 
satisfied in order for a HECM to be eligible for a MOE Assignment. The 
two tests are the Factor Test and the Principal Limit Test. The Factor 
Test compares what the principal limit factor (PLF) \1\ would have been 
at origination had the Eligible Surviving Non-Borrowing Spouse been a 
borrower. If the Eligible Surviving Non-Borrowing Spouse's PLF would 
have been greater than or equal to the deceased borrower's PLF at 
origination, the test is satisfied. The Factor Test does not take into 
consideration the growth of the principal limit.
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    \1\ Principal Limit Factor tables are available here: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm.
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    The Principal Limit Test does take into account the calculated 
growth. The growth must be calculated by using what the PLF, in 
addition to the initial principal limit, would have been had the 
Eligible Surviving Non-Borrowing Spouse been a borrower at origination. 
In order to satisfy the Principal Limit Test, the outstanding loan 
balance must be equal to or less than what the principal limit would 
have been for the Eligible Surviving Non-Borrowing Spouse at the time 
the loan became due and payable due to the death of the last surviving 
borrower. Mortgagee Letter 2015-03 does not place restrictions or 
requirements on the source of funds that may be used to bring the 
outstanding loan balance in compliance with the Principal Limit Test. 
Additionally, Mortgagee Letter 2015-03 places no restrictions or 
requirements on the manner in which an outstanding loan balance may be 
brought into compliance with the Principal Limit Test. There will, 
however, be no new transaction codes in HERMIT.
    Comment: Clarification needed regarding whether or not a mortgagee 
may pay down the balance of a HECM loan in order to allow a Non-
Borrowing Spouse to meet the Principal Limit Test. Commenter notes that 
under current practice, HUD will not accept a 98% Assignment if the 
mortgagee has paid taxes or insurance on behalf of the borrower, and 
seeks clarification regarding whether these restrictions will apply 
under Mortgagee Letter 2015-03. Commenter asks HUD to confirm whether 
or not they will accept MOE Assignments when (1) the mortgagee has 
contributed amounts toward the PLF Pay Down; (2) the mortgagee has 
contributed amounts to satisfy taxes, insurance, Home Owners 
Association fees and condominium assessments due and paid at any time 
prior to completing a MOE Assignment; and (3) the mortgagee has 
contributed amounts to satisfy attorney fees, court costs, appraisal 
fees, inspection fees, etc., incurred by the mortgagee prior to 
completing the MOE Assignment.
    HUD Response: Mortgagee Letter 2015-03 does not place restrictions 
or requirements on the source of funds that may be used to bring the 
outstanding loan balance in compliance with the Principal Limit Test. 
Additionally, Mortgagee Letter 2015-03 places no restrictions or 
requirements on the manner in which an outstanding loan balance may be 
brought into compliance with the Principal Limit Test. The mortgagee 
letter does, however, require that the outstanding loan balance be less 
than the MCA and that either the Factor Test or Principal Limit Test is 
satisfied.
    Comment: Because all states generally have a statute of limitations 
for mortgage foreclosures or collecting or realizing on a mortgage 
loan, the use of a document by a mortgagee with a Non-Borrowing Spouse, 
such as a tolling agreement, should be a qualifying attribute for the 
Non-Borrowing Spouse to make a HECM loan eligible for a MOE Assignment.
    HUD Response: In order to perfect a MOE Assignment claim, a 
mortgagee must be able to certify that it is, in fact, assigning a 
valid, legally enforceable first lien that will remain valid and 
legally enforceable throughout the lifetime of the Eligible Surviving 
Non-Borrowing Spouse. The mortgagee must take whatever steps it deems 
necessary under the laws of the jurisdiction in which the property is 
situated to ensure that its certification is truthful, which may 
include obtaining a tolling agreement.
    Comment: Clarification needed regarding meaning of ``judicially 
resolved''. Commenter asks if the judgment must be entered in the 
mortgagee's favor, or if a dismissal with prejudice would be 
sufficient. Commenter also requests clarity regarding whether HUD is 
requiring or expecting that the Non-Borrowing Spouse will sign a 
release or waiver for these instances.
    HUD Response: HUD appreciates the opportunity to address this 
concern. Mortgagee Letter 2015-03 requires a mortgagee to provide 
documentation that supports an affirmation that no allegations that 
would invalidate the HECM mortgage exist or if there were such 
allegations, evidence of their judicial resolution in favor of the 
mortgagee. A dismissal with prejudice would suffice for evidence of a 
judicial resolution in favor of the mortgagee. A judicially approved 
settlement of all claims against the mortgagee would also suffice. 
Mortgagee Letter 2015-03 does not require a surviving Non-Borrowing 
Spouse to sign a release or a waiver. However, a mortgagee is required 
to certify that it is, in fact, assigning a valid, legally enforceable 
first lien. The mortgagee must take whatever steps it deems necessary 
to ensure that its certification is truthful.
    Comment: Clarification needed regarding reinstatement of a MOE 
Assignment Deferral Period.
    HUD Response: Where an obligation under the terms of the mortgage 
has not been met prior to completion of a MOE Assignment, the MOE 
Assignment Deferral Period ceases and the HECM is not eligible for a 
MOE Assignment unless and until the MOE Assignment Deferral Period is 
reinstated. Thus, where a missed obligation is subsequently cured, the 
MOE Assignment Deferral Period may be reinstated and the MOE Assignment 
process may proceed.
    Comment: HUD should provide examples of the required certifications 
and other timeframes.
    HUD Response: HUD confirms that model language for the required 
certifications was provided in the text of Mortgagee Letter 2015-03 and 
remains valid for use in connection with a MOE Assignment.
    Comment: Clarification needed regarding First Legal Due Date.
    (a) Commenter seeks clarification as to whether or not a 
mortgagee's reporting requirements of the election to take a MOE 
Assignment extend all of the current HECM servicing reporting timelines 
that impact claim curtailment, including but not limited to undertaking 
and reporting first legal action or ordering a due and payable 
appraisal. Commenter also requests that these adjusted timelines be 
automatically captured in HERMIT, thus avoiding an auto-curtailment in 
HERMIT which

[[Page 23812]]

would further necessitate retrieving the curtailment on a supplemental 
claim.
    Commenter asks HUD to clarify that that the ``Due Date'' for 
purposes of payment of claim means the date when a mortgagee notifies 
HUD under Mortgagee Letter 2015-03 that it has determined not to 
utilize the MOE Assignment, or, if applicable, that it has elected the 
MOE Assignment but then determined that the mortgage is not eligible 
for assignment because all established conditions and requirements for 
the MOE Assignment are not met, and that this timeline applies to all 
curtailable events.
    HUD Response: The Due Date for purposes of payment of claim means 
the date when a mortgagee notifies HUD that it has determined not to 
utilize the MOE Assignment, or, if applicable, that it has elected the 
MOE Assignment but then determined that the mortgage is not eligible 
for assignment because all established conditions and requirements for 
the MOE Assignment are not met. All subsequent required timeframes are 
determined in relation to this Due Date. HUD would like to reiterate 
mortgagees that any election made pursuant to Mortgagee Letter 2015-03 
must be made within the later of 120 days of the issuance of Mortgagee 
Letter 2015-03 or 30 days after the servicer receives notice of the 
last surviving borrower's death. As such, where a mortgagee does not 
elect to utilize the MOE Assignment, and instead elects to proceed in 
accordance with the HECM documents, the Due Date may not exceed the 
later of 120 days of the issuance of Mortgagee Letter 2015-03 or 30 
days after the servicer receives notice of the last surviving 
borrower's death, as provided in that mortgagee letter.
    (b) Commenter asks HUD to clarify that, following the election of 
the MOE Assignment and the assessment and determination that a Non-
Borrowing Spouse is ineligible for a MOE Assignment Deferral Period, 
the timeline for First Legal Action is automatically extended, in 
addition to any additional time that may be allowed by the Secretary, 
beyond this automatically extended time period. Commenter requests that 
HUD clarify the manner in which a servicing mortgagee should update 
HERMIT with this information to avoid a claim being automatically 
curtailed to the date six months from the death of the last surviving 
borrower. Commenter also requests that HUD clarify which dates should 
be provided for the date the servicing mortgagee notified HUD of the 
death (Block 29) and the expiration of the extension (Block 19) in such 
cases in order to avoid curtailment.
    HUD Response: Under Mortgagee Letter 2015-03, where a mortgagee 
elects the MOE Assignment and subsequently determines that either the 
HECM or the surviving Non-Borrowing Spouse is not eligible for a MOE 
Assignment, the Due Date for claim purposes is considered to be the 
date that such a determination was made. All subsequently required 
timeframes, including the timeframes regarding First Legal Action, are 
determined in relation to the Due Date.
    The User Assistance Test (UAT) for the HERMIT changes will occur in 
Spring 2015, as the scheduled release date is targeted for April 25, 
2015. The process expected to be in effect at that time is as follows: 
To change the ``Due Date'' in HERMIT, the User will access the 
``Contact Tab'' and un-check the ``Eligible NBS'' box, causing the Due 
& Payable without HUD Approval Timeline to be created, with a reason of 
``Death''. The loan status will be updated to ``Due & Payable'' and the 
date the box is un-checked will become the new ``Due Date''.
    (c) Commenter requests clarification regarding the time period for 
commencement of First Legal Action for loans which previously had 
extensions but are now under the time periods provided in Mortgagee 
Letter 2015-03. Commenter notes that there are many cases that have 
been on a Non-Borrowing Spouse extension and questions whether First 
Legal Action for these loans restarts as of Mortgagee Letter 2015-03. 
When must First Legal Action be completed to avoid interest 
curtailment?
    HUD Response: As provided in Mortgagee Letter 2015-03, all 
extensions provided by FHA Info 14-34 have expired. No further 
extensions are permissible under FHA Info 14-34. Mortgagees must 
proceed in accordance with the timeframes established in Mortgagee 
Letter 2015-03.
    Comment: Clarification needed regarding whether or not a HECM loan 
will be eligible for a MOE Assignment Deferral Period if the Non-
Borrowing Spouse files for bankruptcy protection. Commenter also seeks 
clarification as to whether the MOE Assignment eligibility will be 
delayed until after the bankruptcy petition or procedure is dismissed 
(similar to the requirement to complete First Legal Action in 24 CFR 
206.125(d)(2)) or whether a Non-Borrowing Spouse that files for 
bankruptcy is ineligible for the MOE Assignment unless the bankruptcy 
is dismissed within the stated guidelines.
    HUD Response: HUD would like to clarify that the outstanding loan 
balance of a HECM is not a debt owed by a non-borrower. Only a borrower 
is obligated to satisfy a HECM. Further, a HECM is a non-recourse loan 
and as such, no borrower, or borrower's estate, is personally liable 
for any amounts that may exceed the proceeds received from the 
subsequent sale of the mortgaged property. Further, any amount that may 
be required to bring the outstanding loan balance of a HECM in 
compliance with the Principal Limit Test, in order to be eligible for a 
MOE Assignment, is similarly not a debt owed by a non-borrower. Thus, 
any such amount cannot be included as a debt owed by a Non-Borrowing 
Spouse filing for bankruptcy. To the extent a mortgagee believes that 
the automatic stay provision may apply, the mortgagee may take whatever 
steps it deems necessary to ensure that communication with the Non-
Borrowing Spouse would not violate the automatic stay. Regardless, a 
mortgagee must make its election within the later of 120 days of the 
issuance of Mortgagee Letter 2015-03 or 30 days after the servicer 
receives notice of the last surviving borrower's death, whichever is 
later. As also stated in Mortgagee Letter 2015-03, any extension to 
this timeframe is at the sole discretion of HUD.
    Comment: FHA should consider initiation of the assignment to occur 
when the loan is uploaded for selection in HERMIT.
    HUD Response: HUD considers assignment initiated when a complete 
assignment request is uploaded in HERMIT. A complete assignment request 
includes all of the required documents identified in Mortgagee Letter 
2015-03.

B. Additional Options and Other Comments

    Comment: Voluntary nature of the MOE Assignment is problematic. 
Commenters note that the MOE Assignment election is left to the 
discretion of the mortgagee, and mortgagees are unlikely to select that 
option. One commenter specifically notes that the lack of guidance and 
clarity, coupled with the fact that lenders must indemnify HUD for any 
errors, make lenders unlikely to exercise the MOE Assignment option.
    HUD Response: As stated in Mortgagee Letter 2015-03, HUD cannot 
interfere with the private contractual rights retained by the 
mortgagees. Further, as the mortgagee is the party to the contract of 
insurance, it is solely within the discretion of the mortgagee whether 
to elect to amend its contract of mortgage insurance under the MOE 
Assignment or to proceed in accordance with the loan documents as 
endorsed.

[[Page 23813]]

Currently, for any claim for insurance benefits filed by a mortgagee, 
mortgagees are subject to unwinding of a filed claim where the 
conditions for that claim have not been met. This typical requirement 
is extended to the MOE Assignment just as it would be on an ordinary 
assignment or claim.
    Comment: MOE Assignment is not an adequate alternative to 
foreclosure and HUD should provide alternative relief. Commenters state 
that by requiring the Non-Borrowing Spouse to meet the Principal Limit 
Test in order to qualify for assignment of the loan, HUD is putting 
forth an option that the majority of surviving Non-Borrowing Spouses 
cannot benefit from. Commenters identify the uncertainty with 
calculating the PLF and growth rate, the cost of reducing the principal 
balance, and the short deadline by which the Non-Borrowing Spouse must 
meet the Principal Limit Test as obstacles.
    Commenters urge HUD to provide alternative options to protect Non-
Borrowing Spouses, such as the Hold Election. One commenter suggests 
that HUD could satisfy the HECM by paying the lesser of the unpaid 
principal balance or 95% of the property's appraised value on behalf of 
the deceased borrower and then take a new mortgage interest due upon 
the Non-Borrowing Spouse's death. Another commenter recommends that HUD 
allow Non-Borrowing Spouses to remain in the home and pay a portion of 
the interest accruing on the loan based on their ability to pay; HUD 
would accept early assignment of the loan and defer the due and payable 
status of the loan so long as the Non-Borrowing Spouse pays a portion 
of the interest accruing on the loan and fulfills the obligations under 
the mortgage. Commenter also recommends that HUD allow surviving Non-
Borrowing Spouses to pay money to reduce the unpaid principal balance 
to meet the requirements of the Principal Limit Test over time, rather 
than in one large, lump-sum payment; HUD would accept early assignment 
of the loan, defer the due and payable status of the loan and allow the 
surviving spouse to pay the necessary amount over a period of years.
    HUD Response: As previously stated, HUD cannot interfere in private 
mortgage contracts. HUD also has a statutory obligation to ensure the 
fiscal soundness of the FHA insurance funds, and as such, cannot ignore 
its fiduciary duty to the fund. HUD has provided what it believes 
permissible, while recognizing the sanctity of private contractual 
relationships and upholding its statutory obligation to ensure the 
fiscal soundness of the FHA insurance funds.
    Additionally, as stated previously, Mortgagee Letter 2015-03 does 
not place restrictions or requirements on the source of funds that may 
be used to bring the outstanding loan balance in compliance with the 
Principal Limit Test, or the manner in which an outstanding loan 
balance may be brought into compliance with the Principal Limit Test. 
However, the mortgagee letter does require that the outstanding loan 
balance not exceed the MCA and that either the Factor Test or the 
Principal Limit Test is satisfied at the time of assignment.
    Finally, as noted above, HECM loans are non-recourse and cannot 
result in a deficiency judgment against any party. A HECM foreclosure 
that may occur as a result of the last surviving borrower's death 
should not constitute a reportable event in the credit file of either 
the borrower's estate or the surviving Non-Borrowing Spouse.
    Comment: Additional procedural protections are needed for Non-
Borrowing Spouses. Commenter asserts that 90 days to obtain good, 
marketable title is not enough time and the proof of title that is 
required should be reasonable. Commenter urges HUD to make clear that 
marketable title is not the same thing as probate, and an opinion 
letter from a Title Company or a licensed attorney practicing probate 
law in the jurisdiction should suffice to establish ``marketable'' 
title.
    HUD Response: HUD would like to confirm that Mortgagee Letter 2015-
03 does not require a surviving Non-Borrowing Spouse to obtain legal 
title to the mortgaged property in order to qualify as an Eligible 
Surviving Non-Borrowing Spouse. A surviving Non-Borrowing Spouse must 
obtain either legal title to the mortgaged property or some other legal 
right to remain within 90 days of the death of the last surviving 
borrower. Where a surviving Non-Borrowing Spouse is unable to obtain 
legal title, the surviving Non-Borrowing Spouse must be able to 
establish some other legal right to remain in the mortgaged property.
    Comment: HUD should instruct servicers about how to communicate 
with surviving Non-Borrowing Spouses. Commenter notes that servicers 
need to improve communications with surviving Non-Borrowing Spouses, 
and that HUD should provide explicit instructions to servicers about 
how to adequately communicate with surviving Non-Borrowing Spouses.
    HUD Response: HUD does not instruct servicers how to communicate. 
HUD would expect servicers to communicate with the representatives of 
deceased borrowers. HUD further expects that servicers would comply 
with all Federal and state laws and requirements regarding mortgage 
servicing, including those of the Consumer Financial Protection Bureau.
    Comment: Data has not been provided to support HUD's assertion that 
providing the Hold Election to all surviving Non-Borrowing Spouses 
would be too costly. Commenters assert that HUD should provide all 
data, assumptions, calculations, conclusions and alternatives explored 
that relate to the cost of providing the Hold Election to all surviving 
Non-Borrowing Spouses.
    HUD Response: HUD's risk analysis indicates that the Hold Election, 
if broadly applied to all pre-August 4, 2014, HECMs where a Non-
Borrowing Spouse remains in residence after the borrower's death, would 
produce much more substantial losses for the insurance funds than would 
likely be generated by the extension of the MOE Assignment to all such 
HECMs. Using data from the 2010 Survey of Consumer Finances, HUD 
estimated that about 20% of HECM borrowers are married to non-borrowing 
spouses.\2\ On the basis of the correct data regarding HECM borrowers 
with non-borrowing spouses, along with data from the Centers for 
Disease Control to estimate life expectancies of the borrowing and non-
borrowing spouses, and assuming no further cash draws after the 
borrowing spouse exits the home and other reasonable assumptions, HUD 
estimated the potential cost of the Hold Election to the insurance 
funds to be $1.769 billion if it were made broadly available to all 
surviving, non-borrowing spouses and accepted by them. Using the same 
assumptions, consistently applied, HUD estimated the potential cost of 
the MOE Assignment to the funds to be $439 million if it were made 
broadly available to all surviving, non-borrowing spouses and accepted 
by them. While both figures are estimates, HUD is highly confident of 
the order of magnitude of the difference between the two figures.
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    \2\ The February 2015 Determination on Remand submitted to the 
District Court in the Plunkett case incorrectly stated this as ``20% 
of the married seniors in the HECM program'' being married to non-
borrowing spouses; however, this was a drafting error which played 
no part in HUD's actual cost calculation. That calculation was based 
on the assumption that 20% of all borrowers in the HECM program had 
non-borrowing spouses.
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    Comment: Provide notice and information to HECM borrowers and their 
spouses regarding the risk of displacement and their rights under the 
HECM statute.

[[Page 23814]]

    HUD Response: HUD appreciates the opportunity to address this 
concern. All mortgagee letters, including Mortgagee Letters 2015-03, 
2015-02, and 2014-07, are public documents and are available to the 
public on HUD's Web site. HUD also published notices soliciting public 
comment on MLs 2015-03 and 2014-07 in the Federal Register, which 
provided additional notice of HUD's HECM policy changes related to Non-
Borrowing Spouses. Finally, HUD notes that prospective HECM borrowers 
must receive housing counseling to be eligible for a HECM, and would 
like to remind current HECM borrowers and their spouses that they may 
speak with housing counselors at any time.

    Dated: April 24, 2015.
Edward L. Golding,
Principal Deputy Assistant Secretary for Housing.
[FR Doc. 2015-10019 Filed 4-28-15; 8:45 am]
 BILLING CODE 4210-67-P