www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 July 19, 1993 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER MORTGAGEE LETTER 93-22 TO: ALL APPROVED MORTGAGEES SUBJECT: Home Equity Conversion Mortgage (HECM) Insurance Program Changes and Clarifications to HUD Handbook 4235.1 The purpose of this Mortgagee Letter is to inform you of policy changes, and clarifications of existing policy, concerning HUD's HECM program, also known as the "reverse mortgage" program. These changes are effective immediately, unless otherwise indicated. I. INCREASE IN PORTION OF LOAN ORIGINATION FEE THAT MAY BE FINANCED The portion of the loan origination fee that may be financed by the borrower has been increased above the level permitted by the HECM Handbook 4235.1 (August 1989), Paragraph 5-2. The lender may continue to charge an origination fee agreed upon between the borrower and the lender. This fee will cover expenses incurred in the processing and underwriting of the borrower's loan. However, the borrower will now be permitted to finance (i.e. add to the outstanding balance at closing) an origination fee of no greater than $1,800.00. Any portion of the origination fee that exceeds the financed amount, must be paid in cash, by the borrower at closing. A Verification of Deposit must be submitted as part of the required mortgage credit documentation for any portion of the loan origination fee that will be paid in cash. II. SERVICING FEE The current HECM policy is that the lender may require the borrower to pay a fee for the servicing of the mortgage, if these expenses will not be covered by the interest collected under the mortgage interest rate. If the lender chooses to assess a servicing fee, the fee is established at closing as a monthly figure, and the amount necessary to pay this fee throughout the life of the loan is calculated and set aside from the principal limit at closing. _____________________________________________________________________ 2 In the past, HUD has not imposed a limit on the monthly fee that may be assessed. However, due to escalating fees, and their significant impact on reducing the borrower's equity, the servicing fee that may be charged will now be capped at $30.00 per month. This cap will apply to HECM applications taken on or after August 1, 1993. Lenders who are currently charging less than $30.00 per month are encouraged to continue to do so. This cap will not apply to HECMs which adjust monthly. III. POWER OF ATTORNEY/CONSERVATORSHIP GUIDELINES A. Mortgage Loan Application 1. Borrowers with legal competency: a. All borrowers must sign mortgage loan application. b. Mortgage loan application may not be executed by power of attorney. 2. Borrowers lacking legal competency: a. Incompetent borrower may not sign the mortgage loan application. b. Court-appointed conservator or guardian may execute any necessary documents, including the mortgage loan application. The lender must provide evidence that the conservator or guardian has authority to obligate the borrower. c. An "agent" or "attorney in fact" holding a durable power of attorney specifically designed to survive incapacity and avoid the need for court proceedings, may execute any necessary documents, including the mortgage loan application. (1) To be valid, a durable power of attorney must be prepared when the "principal" is competent to understand the nature and significance of the instrument. (2) The durable power of attorney must comply with state laws regarding signatures, notarization, witnesses, and recordation. _____________________________________________________________________ 3 B. Closing Documents Power of attorney (durable or otherwise) may be used for closing documents. Any power of attorney must comply with State law and allow for the Note to be legally enforced in that jurisdiction. C. Counseling Session For borrowers lacking legal competency, the counseling session may be conducted with an "agent" or "attorney in fact" holding a power of attorney, or with a court-appointed conservator or guardian. IV. TITLE INSURANCE In order to avoid incurring unnecessary expenses, lenders are reminded to review borrower eligibility requirements (age, Federal credit record, principal residence) before ordering a title insurance commitment to be paid for by the borrower. Many State laws require that a maximum mortgage amount be stated in the mortgage or deed of trust, and consequently the amount recorded will be equal to 90% of the maximum claim amount, rather than the property value or the maximum mortgage amount under Section 203(b) of the National Housing Act. Notwithstanding this smaller amount for the purpose of recordation, the title insurance policy obtained should be equal to the maximum claim amount, NOT 90% of that amount. V. LOAN CLOSING DATE The Loan Closing Date for all HECMs is defined as the date on which the borrower SIGNS the Note. THIS DATE MUST APPEAR, AND BE IDENTIFIED, AS THE "LOAN CLOSING DATE" IN BLOCK I. ON PAGE 1 OF THE FORM HUD-1 SETTLEMENT STATEMENT. Regulation Z (12 CFR 226.15) provides the borrower with a right of rescission for three business days after loan closing. Lenders are reminded that they are prohibited from charging interest on funds held available for the borrower during the three day rescission period. Interest must begin to accrue on the day after the disbursement is made. In order to ensure an accurate accounting of interest accrual, the DISBURSEMENT DATE (the date on which the lender relinquishes control of the funds) MUST ALSO APPEAR, AND BE IDENTIFIED AS, THE "DISBURSEMENT DATE" IN BLOCK I. ON PAGE 1 OF THE FORM HUD-1 SETTLEMENT STATEMENT. _____________________________________________________________________ 4 For example, if (1) the borrower signs the Note on June 18, 1992, (2) the rescission period expires on June 22, 1992, (3) disbursement of funds takes place on June 23, 1992, and (4) interest begins to accrue on June 24, 1992, the following information should appear in BLOCK I. of the FORM HUD-1 for ALL HECM LOANS: I. SETTLEMENT DATE: LOAN CLOSING DATE JUNE 18, 1992 DISBURSEMENT DATE JUNE 23, 1992 Since lenders must use the appropriate indices in effect on the date of loan closing when setting the mortgage interest rate and the expected average mortgage interest rate for adjustable rate HECM loans, lenders originating HECMs in escrow closing states must arrange to have the borrower sign the Note while the same interest rates are in effect as when the mortgage documents are drawn. Weekly average yields are published in the Federal Reserve Bulletin and are made available by the Federal Reserve Board in Statistical Release H.15(519). This Release is published weekly on Monday, or on Tuesday if Monday is a Federal holiday, and the index shown on that release is effective the day it is issued until the H.15(519) is issued the next week. Statistical Release H.15(519) is often not released until mid- or late-afternoon on Monday. Consequently, lenders closing HECM loans on Monday should use the index from the Statistical Release issued the previous Monday (one week earlier), and lenders closing HECM loans on Tuesday should use the index from the Statistical Release issued the day before closing. For purposes of Mortgage Insurance Premium (MIP) remittance to Computer Data Systems, Inc. (CDSI), lenders must use the "LOAN CLOSING DATE" from BLOCK I. of the FORM HUD-1 to complete the CDSI "CLOSE DATE" field, and must continue to use the "DISBURSEMENT DATE" in the CDSI "FUND DATE" field on the LOAN SET-UP screen. _____________________________________________________________________ 5 VI. RECORDING TAXES After closing, the lender must record the first and second mortgages. The second mortgage is not subject to any State or local recording taxes, or stamp taxes, because the second mortgage is a mortgage to the Federal government. Taxation of the property of the Federal government violates the supremacy clause of the U.S. Constitution. However, fees are distinguished from taxes. Recording fees, which are a charge for a service, may be imposed by the local recording office. Customary and reasonable fees to record the second mortgage may be collected from the borrower by the mortgagee. VII. CREDIT REPORT Any borrower that is presently delinquent or in default on any Federal debt owed to the United States, is ineligible for a HECM until the debt is brought current, paid or otherwise satisfied, or satisfactory repayment arrangements have been made between the borrower and the Federal agency to which the debt is owed and is verified in writing. Additionally, any borrower with a judgment lien against his or her property for a debt owed to the United States is not eligible for a HECM until the judgment is paid or otherwise satisfied. The requirement in the HECM Handbook, Paragraph 5-4B., that a Residential Mortgage Credit Report (RMCR) be obtained for each borrower, is being modified. A merged in-file report, containing the information currently available from three consumer credit information repositories, will be sufficient. The lender's review of the report should be limited to the Public Record Information section, in order to determine whether or not the borrower is delinquent or in default on any Federal debts. VIII. IMPLEMENTATION OF THE UNIFORM RESIDENTIAL LOAN APPLICATION (URLA) AND HUD/VA ADDENDUM TO URLA (FORM HUD 92900-A) HUD now requires HECM lenders to use the new Freddie Mac Form 65/Fannie Mae Form 1003-Uniform Residential Loan Application (URLA) with the HUD/VA Addendum, as the borrower's application for HUD mortgage insurance. The URLA should be completed according to the instructions contained on the form. All blocks on the new form must be completed, with the following modifications: _____________________________________________________________________ 6 SECTION I. TYPE OF MORTGAGE AND TERMS OF LOAN Agency Case Number - The FHA case number should be entered followed by the appropriate Section of the Act ADP Code for HECMs listed below: Assignment/Fixed Rate 911 Assignment/Adjustable Rate (ARM) 912 Shared Premium/Fixed Rate 913 Shared Premium/ARM 914 Shared Appreciation/Fixed Rate 915 Shared Appreciation/ARM 916 To prevent confusion in the event the pages of the URLA become separated, we suggest that the HUD case number be inserted on all pages of the URLA. Amount - The principal limit should be entered in this block. Interest Rate - The Expected Average Mortgage Interest Rate ("expected rate") should be entered in this block. No. of Months - This block should not be completed. Amortization Type - Check "Other" and enter Section 255. SECTION II. PROPERTY INFORMATION AND PURPOSE OF LOAN Purpose of Loan - This block should not be completed. Property will be: - "Primary Residence" must be checked in this block. Construction Loan Line - These blocks should not be completed. Refinance Loan Line - These blocks should not be completed. Source of Down Payment, Settlement Charges, and/or Subordinate Financing - The source of any portion of the origination fee that exceeds the financed amount should be entered in this block, and identified as such. SECTION III. BORROWER INFORMATION Former Address - These blocks should not be completed. _____________________________________________________________________ 7 SECTION IV. EMPLOYMENT INFORMATION These blocks should not be completed. SECTION V. MONTHLY INCOME AND COMBINED HOUSING EXPENSE INFORMATION Gross Monthly Income - Complete these blocks as completely as possible. Income from government sources should be listed as "Other" income. Combined Monthly Housing Expense - These blocks should not be completed. SECTION VII. DETAILS OF TRANSACTION Blocks a., c., e., g., h., i., j., k., l., m., o., should not be completed. Block b. should only be completed if required repairs are to be done after closing. Block d. should include any existing liens on the subject property and any delinquent Federal debts. Block f. should include all closing costs. Block n. should include the initial MIP. Block p. should only be completed if the borrower is contributing cash to the transaction. SECTION VIII. DECLARATIONS Only blocks a., b., c., d., e., f., and l., should be completed. SECTION X. INFORMATION FOR GOVERNMENT MONITORING PURPOSES These blocks must be completed. If the borrower chooses not to furnish race or sex, Federal Regulations require the lender to note this information on the basis of visual observation or surname. This information is collected, in part, for the Home Mortgage Disclosure Act (HMDA). _____________________________________________________________________ 8 The HUD/VA Addendum (92900-A) consists of five (5) pages. Pages 1 and 2 contain statutory and regulatory information and certifications, and should be completed, signed and dated, and included in the case binder at the time of submission for firm commitment processing. Omit pages 3, 4 (Direct Endorsement lender's approval/certifications and borrower certification) and 5 (VA Commitment for Guaranty). A copy of the Addendum must be provided to the borrower. The following instructions should be followed when completing the Addendum: PART I - IDENTIFYING INFORMATION Section of the Act (Block 4) - Enter the same code that follows the FHA case number in Section I of the URLA. Loan Amount (Block 7) - The principal limit should be entered in this block. Interest Rate (Block 8) - The Expected Average Mortgage Interest Rate ("expected rate") should be entered in this block. Blocks 9, 10, 12a. and 12b. should not be completed. IX. LENDER "EXTRA-TERRITORY" APPROVAL There has been some confusion concerning the Department's guidelines for mortgagees requesting "extra-territory" approval in order to originate HECMs in a HUD Field Office jurisdiction which is not contiguous to a State in which the mortgagee has an approved main or branch office. The guidelines under these circumstances are that the mortgagee can request extra-territory approval by writing a letter to the non-contiguous HUD Field Office. The letter should state how the mortgagee intends to accomplish the origination and the processing/underwriting functions. The letter must satisfy the HUD Field Office that our requirements for mortgagor and mortgagee approval are being adhered to. If the non-contiguous HUD Field Office believes that the mortgagee can effectively operate in its jurisdiction, then extra-territory approval can be granted. _____________________________________________________________________ 9 X. MODEL ADJUSTABLE RATE NOTE FORMS The Adjustable Rate Mortgage (ARM) Rider and Note Allonge in the HECM Handbook 4235.1, paragraph 7-2 A., and Appendices 5 and 6, have been discontinued. In their place, lenders must use the HECM Adjustable Rate Note and Adjustable Rate Second Note, which are attached to this Mortgagee Letter as Attachments A and B, respectively. The new Model Note forms may be used immediately, and must be used for loans closed on or after October 1, 1993. HUD no longer requires that riders be attached to the mortgages for adjustable rate HECMs. In most States, there is no clear need to record an extra rider to explain the adjustable rate features of the mortgage. The description of the note that is given on the first page of the model mortgage forms should be a sufficient description of the debt for recordation purposes, so lenders should use the model mortgage forms with no special adaptation for adjustable rate loans, if such mortgages would be fully enforceable under State or local law. However, HUD does allow the lender to add language to reflect the adjustable rate nature of the mortgages, if necessary to comply with State or local law. One or more of the following adaptations may be made to the forms: A. Change the title to "Adjustable Rate Home Equity Conversion Mortgage." B. Change the first use of the word "note" to "adjustable rate note." C. Change the first use of the word "interest" on the first page to "interest at a rate subject to adjustment (interest)." D. Add additional language, either to Paragraph 1, or as an additional numbered paragraph at the end of the mortgage, which references, describes or summarizes the adjustable rate feature of the note to the extent required by the lender, or by State or local law. XI. FACE-TO-FACE INTERVIEW GUIDELINES The HECM Handbook, Paragraph 5-4A., currently requires that the mortgagee participate in a face-to-face interview with the borrower(s) in which the information on the application is verified by the borrower. This requirement is being modified as follows: _____________________________________________________________________ 10 A. A face-to-face interview is not required if the property is at least 50 or more miles from the mortgagee's nearest office, and a face-to-face counseling session was conducted. Under these circumstances, the mortgagee may interview the borrower by telephone, and must certify as to the date and person(s) with whom they spoke. The mortgagee must elicit as complete a picture of the borrower as if a face-to-face interview were conducted. B. If the loan application is being executed by an "agent" or "attorney in fact" holding a durable power of attorney, or by a court-appointed conservator, the face-to-face interview should be conducted with the agent or conservator. Geographical limit of 50 miles also applies here. C. If married spouses, or other co-borrowers, are living apart because one of them is temporarily or permanently in a health care facility, a face-to-face interview is only required with the borrower who is still living in the home. XII. THIRD-PARTY FEES In addition to the following list of fees and charges, the HUD Field Office Manager may authorize or reject any other charge, or the amount of any charge, based on what is reasonable and customary in the area. A. Appraisal Fee and Inspection Fee. The borrower may pay HUD's established maximum fee, or the actual cost of the service, whichever is less. B. Credit Report. The borrower may pay the actual cost for a merged in-file report, containing the information currently available from three consumer credit information repositories. C. Deposit Verification Charge. The borrower may pay the actual charge imposed by the depository institution. D. Document Preparation Fee. The borrower may pay a document preparation fee if this service is performed by a third-party who is not controlled by the mortgagee. The mortgagee may not charge a fee if it performs this service itself. E. Property Survey. The borrower may pay if a survey is required by the lender, although a survey is not required by HUD. _____________________________________________________________________ 11 F. Title Examination and Title Insurance Policy. A title insurance policy equal to the maximum claim amount must be submitted in the closing package, and the borrower may pay for these items. G. Attorney's Fees. The borrower may pay only if the attorney is not an employee of the mortgagee. H. Settlement Fees. The borrower may pay only if the closing agent is not an employee of the mortgagee. A fee may be charged if the settlement agent is an independent company or a subsidiary of the mortgagee that regularly closes loans for several different mortgagees. I. Mortgage Broker's Fees. The borrower may pay only if the broker is engaged independently by the mortgagor. A broker's fee is prohibited if there is any financial interest between the broker and the mortgagee. The broker agreement must be submitted with the mortgage insurance application. J. Tax Service Fee. The borrower may NOT pay a tax service fee in order for the mortgage loan servicer to check the tax rolls in each county where loans are recorded. K. Recording Fees and Taxes. The borrower may pay recording fees on the first and second mortgages that are customary or required in the area, and recording taxes on the first mortgage that are required. The second mortgage is not subject to any State or local recording taxes, or stamp taxes, because the second mortgage is a mortgage to the Federal government. L. Tests or Treatments. The borrower may pay for tests or treatments required by HUD such as tests of water supplies, soil percolation tests for individual septic systems, or testing for or treating insect infestation. M. Courier Fees. The borrower may pay a courier fee for delivery of a mortgage payoff to a lien holder and for closing documents to and from the settlement agent. If this arrangement will take place, a written agreement between the borrower and the lender must be executed before loan closing. _____________________________________________________________________ 12 XIII. METHOD OF HECM PAYMENTS The HECM Handbook, Paragraph 9-5, is modified with respect to the acceptable types of accounts to which the lender can deposit HECM payments, by means of Electronic Funds Transfer (EFT). The payments can be electronically transferred to a savings or checking account held jointly by all borrowers, or as otherwise provided by joint instructions from all borrowers. A power of attorney may constitute instructions. Account holders are not limited only to those persons who are named on the mortgage and note. XIV. CHUMS LENDER ACCESS SYSTEM (CLAS) This is a reminder to lenders that they may utilize the CLAS system during the processing of their HECM cases. CLAS provides an electronic means of communicating with HUD on FHA mortgage applications. Lenders now have a choice of vendors; the United Communications Group an affiliate of the Mortgage Bankers Association offers CLAS through their ECHO network (800/929-4824), and Fannie Mae offers CLAS through their MORNET system (800/752-6440). The following are brief descriptions of each request type in the CHUMS Lender Access System (CLAS version 7.0A) that is available for use in processing a HECM loan: A. Receiving/Assignment. This request allows the lender to request a case number and appraisal assignment for a property. CLAS Receiving and Assignment requests use interactive CHUMS screens and require HUD Field Office intervention. B. Case Status. This request allows lenders to obtain a copy of the Field Office's Case Status screen. The lender can also request a list of existing cases by address, borrower name, or borrower social security number. The requests are processed without Field Office intervention. C. MIC Case Status. This request provides the lender with MIC and MIP information (i.e., endorsement date, MIP amount due, MIP amount received). This type of request can be made by case number only, and can be processed without Field Office intervention. _____________________________________________________________________ 13 D. Reports. The lender can order specialized CLAS reports. These reports include endorsement, MIP and pipeline reports. The reports are processed without Field Office intervention. The reports will be generated twice a week and returned to the lender. E. Compliance Inspectors. The lender may have a compliance inspector assigned after a case number has been issued. Requests will only be accepted if an inspector has not already been assigned to the case. These requests are processed without Field Office intervention. F. Duplicate MICs. The lender may request a duplicate MIC through CLAS. If the case number is on the system, the duplicate MIC will automatically be inserted into the Field Office print queue. If the case has been archived, a restore of that case will be automatically triggered. When the case is restored, the duplicate will automatically be inserted into the print queue. It is the Field Office's responsibility to print and mail the duplicate MIC to the lender. The return address on the duplicate MIC will be that of the lender who requested the duplicate. The duplicate MIC will display the message "DUPLICATE VIA CLAS". Only requests for duplicate MICs will be accepted. Original MICs cannot be printed through this feature. G. Case Cancellation. The lender may cancel a case number through CLAS. Requests are processed without Field Office intervention. _____________________________________________________________________ 14 XV. HUD-1 SETTLEMENT STATEMENT AND CLOSING CERTIFICATIONS As part of our ongoing effort to strengthen quality control procedures, HECM lenders are reminded that they are required to obtain certifications to the HUD-1 Settlement Statement from the borrower(s) and settlement agent. The borrower(s) and settlement agent in a HECM transaction must sign the applicable certifications below, which must be attached to the HUD-1 as an addendum: ______________________________________________________________________ I have carefully reviewed the HUD-1 Settlement Statement, and to the best of my knowledge and belief, it is a true and accurate statement of all receipts and disbursements made on my account or by me in this transaction. I further certify that I have received a copy of the HUD-1 Settlement Statement. ___________________________ _______________________ ___________________________ _______________________ Borrower(s) Date To the best of my knowledge, the HUD-1 Settlement Statement which I have prepared is a true and accurate account of the funds which were received, and have been or will be disbursed, by the undersigned as part of the settlement of this transaction. ___________________________ _______________________ Settlement Agent Date WARNING: It is a crime to knowingly make false statements to the United States on this or any other similar form. Penalties upon conviction can include a fine and imprisonment. For details see Title 18 U.S. Code Section 1001 and Section 1010. ______________________________________________________________________ _____________________________________________________________________ 15 Another quality control measure that HECM lenders must follow in order to facilitate HUD's insurance endorsement processing is the execution of a closing certification which assures compliance with current statutory and regulatory requirements. For HUD processed HECM cases the following closing certification must be executed (signature, title, and date) by an officer or authorized signatory of the company: "We (name of company), Mortgagee at the time of closing of this mortgage loan, certify that we have reviewed the outstanding commitments, legal instruments, closing statements, and other documents of mortgage loan closing. Our review indicates that the mortgage loan has been closed in accordance with the statutory and regulatory requirements of the National Housing Act and HUD and that the terms of the outstanding commitments have been satisfied to the best of our knowledge and belief." For further information regarding endorsement issues, please refer to HUD Handbook 4165.1 REV-1 (1992). XVI. HOME EQUITY CONVERSION MORTGAGES FOR PROPERTY HELD IN TRUST A policy change has been implemented, and HUD will now insure HECMs on property held in the name of an inter vivos trust, also known as a living trust. In general, a living trust is created during the lifetime of a person as opposed to a testamentary trust which is created by the person's will after his/her death . A living trust is created when the owner of property conveys his/her property to a trust for his or her own benefit or for that of a third party the beneficiaries . The trust holds legal title and the beneficiary holds equitable title. The person may name him/herself as the beneficiary. The trustee is under a fiduciary responsibility to hold and manage the trust assets for the beneficiary. The trustee's responsibilities are set out in a trust agreement. Property held in a living trust is eligible for a HECM if the trust, and the borrowers, meet the following requirements: A. Conditions for Origination in the Name of a Living Trust 1. All beneficiaries of the trust must be eligible HECM borrowers at the time of origination and until the mortgage is released i.e. borrower/beneficiary must occupy the property as a principal residence and new beneficiaries may not be added to the trust . _____________________________________________________________________ 16 2. The trustee must sign the mortgage, and the mortgage must be signed by each borrower/beneficiary if necessary to create a valid first mortgage. The borrower/beneficiary must sign the Note and Loan Agreement. The lender may require the signature of the trustee on the Note or the signature of the borrower/beneficiary on the mortgage. 3. The trust shall not be a party to the Loan Agreement. The borrower/beneficiary may issue instructions to the lender to permit the trustee to exercise one or more rights stated in the Loan Agreement on behalf of the beneficiary; i.e. the right to receive loan advances or to request changes in the payment plan. 4. The lender must be satisfied that the trust is valid and enforceable, that it provides the lender with a reasonable means to assure that it is notified of any subsequent change of occupancy or transfer of beneficial interest, and ensures that each borrower/beneficiary has the legal right to occupy the property for the remainder of his or her life. B. Transfer of the Property Into or From a Trust 1. The borrower under an insured HECM may transfer the property to a living trust without causing the mortgage to become due and payable if the lender finds that the trust meets all requirements that would have applied if the trust owned the property at closing. The lender may require the trust to formally assume the borrower's obligation to repay the debt as stated in the Note if considered advisable to avoid difficulty in enforcement of the Note and mortgage. 2. If the trust is terminated, or the property is otherwise transferred from an eligible trust holding the property, the mortgage will not become due and payable, provided that one or more of the original borrowers who signed the Note and Loan Agreement continue to occupy the property as a principal residence and continue to retain title to the property in fee simple or on a leasehold interest as set forth in 24 CFR Section 206.45 (a). _____________________________________________________________________ 17 C. Document Changes 1. Paragraph 9 of the model mortgage and model second mortgage must be amended by adding the following as a new subparagraph (e). The identical language must also be added to the model note and model second note as a new paragraph 6.(D). "Trusts. Conveyance of a Borrower's interest in the Property to a trust which meets the requirements of the Secretary, or conveyance of a trust's interests in the Property to a Borrower, shall not be considered a conveyance for purposes of this Paragraph. A trust shall not be considered an occupant or be considered as having a principal residence for purposes of this Paragraph." 2. Paragraph 15 of the model mortgage and model second mortgage must be amended by changing the third sentence to read as follows: Borrower may not assign any rights or obligations under this Security Instrument or under the Note, except to a trust that meets the requirements of the Secretary. 3. The reference to "Borrower's Note" in the first unnumbered paragraph of the model first and second mortgage form should be corrected by the lender as needed if the signers of the note differ from the signer of the mortgage. Similarly, the term "Borrower" may need to be clarified in Paragraph 1 of the mortgage forms. _____________________________________________________________________ 18 XVII. MORTGAGE INSURANCE PREMIUM (MIP) REFUNDS There has been some confusion concerning the guidelines which cover MIP refunds. Consequently, this is a clarification of HECM Handbook 4235.1, paragraph 8-13. Circumstances which require a refund are as follows: A. The lender remitted too much money. B. The mortgage was never endorsed, AND is not eligible for endorsement. C. An appeal of late charges and/or interest was approved. No portion of the initial MIP may be refunded, notwithstanding the fact that the loan may be paid off in a relatively short period of time. If you have any questions concerning this letter, please contact your local HUD Field Office. Very sincerely yours, Nicolas P. Retsinas Assistant Secretary for Housing - Federal Housing Commissioner Attachments _____________________________________________________________________ ATTACHMENT A MODEL ADJUSTABLE RATE NOTE FORM (HOME EQUITY CONVERSION) FHA Case Number State of 1/ ADJUSTABLE RATE NOTE ___________________________________________________________________________ , 19 Property Address 1. DEFINITIONS "Borrower" means each person signing at the end of this Note. "Lender" means and its successors and assigns. "Secretary" means the Secretary of Housing and Urban Development or his or her authorized representatives. 2. BORROWER'S PROMISE TO PAY; INTEREST In return for amounts to be advanced by Lender to or for the benefit of Borrower under the terms of a Home Equity Conversion Loan Agreement dated , 19 ("Loan Agreement"), Borrower promises to pay to the order of Lender a principal amount equal to the sum of all Loan Advances made under the Loan Agreement with interest. Interest will be charged on unpaid principal at the rate of per cent ( %) per year until the full amount of principal has been paid. The interest rate may change in accordance with Paragraph 5 of this Note. Accrued interest shall be added to the principal balance as a Loan Advance at the end of each month. 3. PROMISE TO PAY SECURED Borrower's promise to pay is secured by a mortgage, deed of trust or similar security instrument that is dated the same date as this Note and called the "Security Instrument." That Security Instrument protects the Lender from losses which might result if Borrower defaults under this Note. Page 1 of 5 _____________________________________________________________________ 4. MANNER OF PAYMENT (A) Time Borrower shall pay all outstanding principal and accrued interest to Lender upon receipt of a notice by Lender requiring immediate payment in full, as provided in Paragraph 7 of this Note. (B) Place Payment shall be made at or any such other place as Lender may designate in writing by notice to Borrower. (C) Limitation of Liability Borrower shall have no personal liability for payment of the debt. Lender shall enforce the debt only through sale of the Property covered by the Security Instrument ("Property"). If this Note is assigned to the Secretary, the Borrower shall not be liable for any difference between the mortgage insurance benefits paid to Lender and the outstanding indebtedness, including accrued interest, owed by Borrower at the time of the assignment. 5. INTEREST RATE CHANGES /2 (A) Change Date The interest rate may change on the first day of , 19 , and on that day of each succeeding year. "Change Date" means each date on which the interest rate could change. (B) The Index Beginning with the first Change Date, the interest rate will be based on an Index. "Index" means the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year, as made available by the Federal Reserve Board. "Current Index" means the most recent Index figure available 30 days before the Change Date. If the Index (as defined above) is no longer available, Lender will use as a new Index any index prescribed by the Secretary. Lender will give Borrower notice of the new Index. (C) Calculation of Interest Rate Changes Before each Change Date, Lender will calculate a new interest rate by adding a margin of percentage points ( %) to the current Index. /3 Subject to the limits stated in Paragraph 5(D) of this Note, this amount will be the new interest rate until the next Change Date. Page 2 of 5 _____________________________________________________________________ (D) Limits on Interest Rate Changes The interest rate will never increase or decrease by more than two percentage points (2.0%) on any single Change Date. The interest rate will never be more than five percentage points (5.0%) higher or lower than the initial interest rate stated in Paragraph 2 of this Note. (E) Notice of Changes Lender will give notice to Borrower of any change in the interest rate. The notice must be given at least 25 days before the new interest rate takes effect, and must set forth (i) the date of the notice, (ii) the Change Date, (iii) the old interest rate, (iv) the new interest rate, (v) the Current Index and the date it was published, (vi) the method of calculating the adjusted interest rate, and (vii) any other information which may be required by law from time to time. (F) Effective Date of Changes A new interest rate calculated in accordance with paragraphs 5(C) and 5(D) of this Note will become effective on the Change Date, unless the Change Date occurs less than 25 days after Lender has given the required notice. If the interest rate calculated in accordance with Paragraphs 5(C) and 5(D) of this Note decreased, but Lender failed to give timely notice of the decrease and applied a higher rate than the rate which should have been stated in a timely notice, then Lender shall recalculate the principal balance owed under this Note so it does not reflect any excessive interest. 6. BORROWER'S RIGHT TO PREPAY A Borrower receiving monthly payments under the Ean Agreement has the right to pay the debt evidenced by this Note, in whole or in part, without charge or penalty on the first day of any month. Otherwise, a Borrower has the right to pay the debt evidenced by this Note, in whole or in part, without charge or penalty after giving Lender two weeks notice. Any amount of debt prepaid will first be applied to reduce the principal balance of the Second Note described in Paragraph 11 of this Note and then to reduce the principal balance of this Note. 7. IMMEDIATE PAYMENT IN FULL (A) Death or Sale Lender may require immediate payment in full of all outstanding principal and accrued interest if: (i) A Borrower dies and the Property is not the principal residence of at least one surviving Borrower, or (ii) A Borrower conveys all of his or her title to the Property and no other Borrower retains title to the Property in fee simple or on a leasehold interest as set forth in 24 CFR 206.45(a). Page 3 of 5 _____________________________________________________________________ (B) Other Grounds Lender may require immediate payment in full of all outstanding principal and accrued interest, upon approval by an authorized representative of the Secretary, if (i) The Property ceases to be the principal residence of a Borrower for reasons other than death and the Property is not the principal residence of at least one other Borrower; (ii) For a period of longer than 12 consecutive months, a Borrower fails to physically occupy the Property because of physical or mental illness and the Property is not the principal residence of at least one other Borrower; or (iii) An obligation of the Borrower under the Security Instrument is not performed. (C) Payment of Costs and Expenses If Lender has required immediate payment in full as described above, the debt enforced through sale of the Property covered by the Security Instrument may include costs and expenses, including reasonable and customary attorney's fees, associated with enforcement of said debt. Such fees and costs shall bear interest from the date of disbursement at the same rate as the principal of this Note. 8. WAIVERS Borrower waives the rights of presentment and notice of dishonor. "Presentment" means the right to require Lender to demand payment of amounts due. "Notice of dishonor" means the right to require Lender to give notice to other persons that amounts due have not been paid. 9. GIVING OF NOTICES Unless applicable law requires a different method, any notice that must be given to Borrower under this Note will be given by delivering it or by mailing it by first class mail to Borrower at the property address above or at a different address if Borrower has given a notice of that different address. Any notice that must be given to Lender under this Note will be given by first class mail to Lender at the address stated in Paragraph 4(B) or at an different address if Borrower is given a notice of that different address. 10. OBLIGATIONS OF PERSONS UNDER THIS NOTE If more than one person signs this Note, each person is fully obligated to keep all of the promises made in this Note. Lender may enforce its rights under this Note only through sale of the Property covered by the Security Instrument. Page 4 of 5 _____________________________________________________________________ 11. RELATIONSHIP TO SECOND NOTE (A) Second Note Because Borrower will be required to repay amounts which the Secretary may make to or on behalf of Borrower pursuant to Section 255(i)(1)(A) of the National Housing Act and the Loan Agreement, the Secretary has required Borrower to grant a Second Note to the Secretary. (B) Relationship of Secretary Payments to this Note Payments made by the Secretary shall not be included in the debt due under this Note unless: (i) This Note is assigned to the Secretary; or (ii) The Secretary accepts reimbursements by the Lender for all payments made by the Secretary. If the circumstances described in (i) or (ii) occur, then all payments by the Secretary, including interest on the payments, shall be included in the debt. (C) Effect on Borrower Where there is no assignment or reimbursement as described in (B)(i) or (ii), and the Secretary makes payments to Borrower, then Borrower shall not: (i) Be required to pay amounts owed under this Note until the Secretary has required payment in full of all outstanding principal and accrued interest under the Second Note held by Secretary, notwithstanding anything to the contrary in Paragraph 7 of this Note; or (ii) Be obligated to pay interest or shared appreciation under this Note at any time, whether accrued before or after the payments by the Secretary, and whether or not accrued interest has been included in the principal balance of this Note, notwithstanding anything to the contrary in Paragraphs 2 or 5 of this Note or any Allonge to this Note. 12. SHARED APPRECIATION /4 If Borrower has executed a Shared Appreciation Allonge, the covenants of the Allonge shall be incorporated into and supplement the covenants of this Note as if the Allonge were a part of this Note. BY SIGNING BELOW, Borrower accepts and agrees to the terms and covenants contained in this Note. /5, /6 ______________________________ Borrower (Seal) ______________________________ Borrower (Seal) Page 5 of 5 _____________________________________________________________________ Footnotes for Model Adjustable Rate Note Form (Home Equity Conversion) 1. Either add the appropriate jurisdiction or substitute "Multistate." Use "Commonwealth of" or "Territory of" if applicable. 2. The Model Adjustable Rate Note Form is designed for mortgages with interest rates that adjust annually, subject to annual and lifetime caps on increases. If the mortgage has interest rates that adjust monthly subject only to a lifetime cap, the following modifications to the Model Adjustable Rate Note Form are mandatory: (a) Change Paragraph 5(A) to read: (A) Change Date The interest rate may change on the first day of , 19 , and on the first day of each succeeding month. "Change Date" means each date on which the interest rate could change. (b) Change Paragraph 5(C) to read: (C) Calculation of Interest Rate Changes Before each Change Date, Lender will calculate a new interest rate by adding a margin of percentage points ( %) to the current Index. /3 Subject to the limit stated in Paragraph 5(D) of this Note, this amount will be the new interest rate until the next Change Date. (c) Change Paragraph 5(D) to read: (D) Limit on Interest Rate The interest rate will never increase above percent ( %). 3. If Lender intends to round the interest rate, the phrase "and rounding the sum to the nearest one-eighth of one percentage point (0.125%)" shall be added. This language is mandatory for any loans to be included in GNMA pools. 4. The paragraph may be omitted if Lender does not offer a shared appreciation mortgage. 5. Include any required or customary form of authentication. 6. The model note is a multistate form which requires adaption for the following jurisdictions: (a) Alaska. Add the Borrower's Post Office address, if different from the property address. (b) Kansas. Delete "including reasonable and customary attorney's fees" from Paragraph 7(C). _____________________________________________________________________ (c) Kentucky. Paragraph 7(C) should be changed to read: "If Lender has required immediate payment in full as described above, the debt enforced through sale of the Property covered by the Security Instrument may include $500.00 for costs and expenses for enforcing this Note. Such costs and expenses shall bear interest from the date of disbursement at the same rate as the principal of this Note." (d) Louisiana. Add the following text following the Borrower's signature lines: "NE VARIETUR" for identification with a mortgage given before me on _______ ___, 19____.__ ________________________ Notary qualified in ________________________ Parish, Louisiana. (e) Puerto Rico. Mortgages and notes in Puerto Rico, and all riders and allonges, shall be written in English and interlineated with Spanish in the same manner as the FNMA/FHLMC forms for Puerto Rico. Contact the Home Mortgage Division, Office of General Counsel, at HUD Headquarters for guidance. (f) Vermont. At the end of the Note immediately before "BY SIGNING BELOW", add the following notice in at least ten point type: Notice To Co-Signer Your signature on this Note means that you are equally liable for repayment of this loan. If Borrower does not pay, Lender has a legal right to collect from you. (g) Virginia. The first sentence of Paragraph 8 should be changed to read: "Borrower and any other person who has obligations under this Note waive the right of presentment and notice of dishonor, and waive the homestead exemption." After the Borrower's signature lines, add: This is to certify that this is the Note described in and secured by a Deed of Trust dated _____________, 19____ on the Property located in _________________, Virginia. My Commission expires: _________________________ Notary Public A:\SRK\HECMDOCS\ARM.N1\5-4-93 _____________________________________________________________________ ATTACHMENT B MODEL ADJUSTABLE RATE SECOND NOTE FORM (HOME EQUITY CONVERSION) FHA Case Number State of 1/ ADJUSTABLE RATE SECOND NOTE ___________________________________________________________________________ , 19 Property Address 1. DEFINITIONS "Borrower" means each person signing at the end of this Note. "Secretary" or Lender means the Secretary of Housing and Urban Development or his or her authorized representatives. 2. BORROWER'S PROMISE TO PAY; INTEREST In return for amounts to be advanced by Lender to or for the benefit of Borrower under the terms of a Home Equity Conversion Loan Agreement dated , 19 ("Loan Agreement"), Borrower promises to pay to the order of Lender a principal amount equal to the sum of all Loan Advances made by Lender under the Ean Agreement with interest. Interest will be charged on unpaid principal at the rate of per cent ( %) per year until the full amount of principal has been paid. The interest rate may change in accordance with Paragraph 5 of this Note. Accrued interest shall be added to the principal balance as a Loan Advance at the end of each month. 3. PROMISE TO PAY SECURED Borrower's promise to pay is secured by a mortgage, deed of trust or similar security instrument that is dated the same date as this Note and called the "Security Instrument" or the "Second Security Instrument." The Security Instrument protects the Lender from losses which might result if Borrower defaults under this Note. Borrower also executed a First Security Instrument and First Note when the Second Security Instrument and this Note were executed. Page 1 of 5 _____________________________________________________________________ 4. MANNER OF PAYMENT (A) Time Borrower shall pay all outstanding principal and accrued interest to Lender upon receipt of a notice by Lender requiring immediate payment in full, as provided in Paragraph 7 of this Note. (B) Place Payment shall be made at the Office of the Housing-FHA Comptroller, Director of Mortgage Insurance Accounting and Servicing, 451 7th Street, S.W., Washington, DC 20410, or any such other place as Lender may designate in writing by notice to Borrower. (C) Limitation of Liability Borrower shall have no personal liability for payment of the debt. Lender shall enforce the debt only through sale of the Property covered by the Security Instrument ("Property"). If this Note is assigned to the Secretary, the Borrower shall not be liable for any difference between the mortgage insurance benefits paid to Lender and the outstanding indebtedness, including accrued interest, owed by Borrower at the time of the assignment. 5. INTEREST RATE CHANGES /2 (A) Change Date The interest rate may change on the first day of , 19 , and on that day of each succeeding year. "Change Date" means each date on which the interest rate could change. (B) The Index Beginning with the first Change Date, the interest rate will be based on an Index. "Index" means the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year, as made available by the Federal Reserve Board. "Current Index" means the most recent Index figure available 30 days before the Change Date. If the Index (as defined above) is no longer available, Lender will use as a new Index any index prescribed by the Secretary. Lender will give Borrower notice of the new Index. (C) Calculation of Interest Rate Changes Before each Change Date, Lender will calculate a new interest rate by adding a margin of percentage points ( %) to the current Index. /3 Subject to the limits stated in Paragraph 5(D) of this Note, this amount will be the new interest rate until the next Change Date. Page 2 of 5 _____________________________________________________________________ (D) Limits on Interest Rate Changes The interest rate will never increase or decrease by more than two percentage points (2.0%) on any single Change Date. The interest rate will never be more than five percentage points (5.0%) higher or lower than the initial interest rate stated in Paragraph 2 of this Note. (E) Notice of Changes Lender will give notice to Borrower of any change in the interest rate. The notice must be given at least 25 days before the new interest rate takes effect, and must set forth (i) the date of the notice, (ii) the Change Date, (iii) the old interest rate, (iv) the new interest rate, (v) the Current Index and the date it was published, (vi) the method of calculating the adjusted interest rate, and (vii) any other information which may be required by law from time to time. (F) Effective Date of Changes A new interest rate calculated in accordance with paragraphs 5(C) and 5(D) of this Note will become effective on the Change Date, unless the Change Date occurs less than 25 days after Lender has given the required notice. If the interest rate calculated in accordance with Paragraphs 5(C) and 5(D) of this Note decreased, but Lender failed to give timely notice of the decrease and applied a higher rate than the rate which should have been stated in a timely notice, then Lender shall recalculate the principal balance owed under this Note so it does not reflect any excessive interest. 6. BORROWER'S RIGHT TO PREPAY A Borrower receiving monthly payments under the Loan Agreement has the right to pay the debt evidenced by this Note, in whole or in part, without charge or penalty on the first day of any month. Otherwise, a Borrower has the right to pay the debt evidenced by this Note, in whole or in part, without charge or penalty after giving Lender two weeks notice. Any amount of debt prepaid will first be applied to reduce the principal balance of this Note and then to reduce the principal balance of the First Note. 7. IMMEDIATE PAYMENT IN FULL (A) Death or Sale Lender may require immediate payment in full of all outstanding principal and accrued interest if: (i) A Borrower dies and the Property is not the principal residence of at least one surviving Borrower, or (ii) A Borrower conveys all of his or her title to the Property and no other Borrower retains title to the Property in fee simple or on a leasehold interest as set forth in 24 CFR 206.45(a). Page 3 of 5 _____________________________________________________________________ (B) Other Grounds Lender may require immediate payment in full of all outstanding principal and accrued interest, upon approval by an authorized representative of the Secretary, if: (i) The Property ceases to be the principal residence of a Borrower for reasons other than death and the Property is not the principal residence of at least one other Borrower; (ii) For a period of longer than 12 consecutive months, a Borrower fails to physically occupy the Property because of physical or mental illness and the Property is not the principal residence of at least one other Borrower; or (iii) An obligation of the Borrower under the Security Instrument is not performed. (C) Payment of Costs and Expenses If Lender has required immediate payment in full as described above, the debt enforced through sale of the Property covered by the Security Instrument may include costs and expenses, including reasonable and customary attorney's fees, associated with enforcement of said debt. Such fees and costs shall bear interest from the date of disbursement at the same rate as the principal of this Note. 8. WAIVERS Borrower waives the rights of presentment and notice of dishonor. "Presentment" means the right to require Lender to demand payment of amounts due. "Notice of dishonor" means the right to require Lender to give notice to other persons that amounts due have not been paid. 9. GIVING OF NOTICES Unless applicable law requires a different method, any notice that must be given to Borrower under this Note will be given by delivering it or by mailing it by first class mail to Borrower at the property address above or at a different address if Borrower has given a notice of that different address. Any notice that must be given to Lender under this Note will be given by first class mail to Lender at the address stated in Paragraph 4(B) or at an different address if Borrower is given a notice of that different address. 10. OBLIGATIONS OF PERSONS UNDER THIS NOTE If more than one person signs this Note, each person is fully obligated to keep all of the promises made in this Note. Lender may enforce its rights under this Note only through sale of the Property covered by the Security Instrument. Page 4 of 5 _____________________________________________________________________ 11. RELATIONSHIP TO FIRST NOTE (A) Second Note Because Borrower will be required to repay amounts which the Secretary may make to or on behalf of Borrower pursuant to Section 255(i)(1)(A) of the National Housing Act and the Loan Agreement, the Secretary has required Borrower to grant this Note to the Secretary. (B) Relationship of Secretary Payments to First Note Payments made by the Secretary shall be included in the debt due under this Note unless: (i) The First Note is assigned to the Secretary; or (ii) The Secretary accepts reimbursements by the Lender for all payments made by the Secretary. If the circumstances described in (i) or (ii) occur, then all payments by the Secretary, including interest on the payments, shall be included in the debt under the First Note. (C) Notice of Interest Rate Adjustments Borrower agrees that as long as the holder of the First Note continues to make Loan Advances, any notice of interest rate adjustment given to Borrower under Paragraph 5(E) of the First Note shall also be considered to be notice to Borrower under Paragraph 5(E) of this Note, so that the same interest rate shall apply for the First Note and this Note. 12. SHARED APPRECIATION /4 If Borrower has executed a Shared Appreciation Allonge, the covenants of the Allonge shall be incorporated into and supplement the covenants of this Note as if the Allonge were a part of this Note. BY SIGNING BELOW, Borrower accepts and agrees to the terms and covenants contained in this Note. /5, /6 ______________________________ Borrower (Seal) ______________________________ Borrower (Seal) Page 5 of 5 _____________________________________________________________________ Footnotes for Model Adjustable Rate Second Note Form (Home Equity Conversion) 1. Either add the appropriate jurisdiction or substitute "Multistate." Use "Commonwealth of" or "Territory of" if applicable. 2. The Model Adjustable Rate Second Note Form is designed for mortgages with interest rates that adjust annually, subject to annual and lifetime caps on increases. If the mortgage has interest rates that adjust monthly subject only to a lifetime cap, the following modifications to the Model Adjustable Rate Second Note Form are mandatory: (a) Change Paragraph 5(A) to read: (A) Change Date The interest rate may change on the first day of , 19 , and on the first day of each succeeding month. "Change Date" means each date on which the interest rate could change. (b) Change Paragraph 5(C) to read: (C) Calculation of Interest Rate Changes Before each Change Date, Lender will calculate a new interest rate by adding a margin of percentage points ( %) to the current Index. /3 Subject to the limit stated in Paragraph 5(D) of this Note, this amount will be the new interest rate until the next Change Date. (c) Change Paragraph 5(D) to read: (D) Limit on Interest Rate The interest rate will never increase above percent ( %). 3. If Lender intends to round the interest rate, the phrase "and rounding the sum to the nearest one-eighth of one percentage point (0.125%)" shall be added. This language is mandatory for any loans to be included in GNMA pools. 4. The paragraph may be omitted if the holder of the First Note does not offer a shared appreciation mortgage. 5. Include any required or customary form of authentication. 6. The model note is a multistate form which requires adaption for the following jurisdictions: (a) Alaska. Add the Borrower's Post Office address, if different from the property address. (b) Kansas. Delete "including reasonable and customary attorney's fees" from Paragraph 7(C). _____________________________________________________________________ (c) Kentucky. Paragraph 7(C) should be changed to read: "If Lender has required immediate payment in full as described above, the debt enforced through sale of the Property covered by the Security Instrument may include $500.00 for costs and expenses for enforcing this Note. Such cost and expenses shall bear interest from the date of disbursement at the same rate as the principal of this Note." (d) Louisiana. Add the following text following the Borrower's signature lines: "NE VARIETUR" for identification with a mortgage given before me on ____ ________, 19___.__ ____________________________ Notary qualified in ________________________ Parish, Louisiana. (e) Puerto Rico. Mortgages and notes in Puerto Rico, and all riders and allonges, shall be written in English and interlineated with Spanish in the same manner as the FNMA/FHLMC forms for Puerto Rico. Contact the Home Mortgage Division, Office of General Counsel, at HUD Headquarters for guidance. (f) Vermont. At the end of the Note immediately before "BY SIGNING BELOW", add the following notice in at least ten point type: Notice To Co-Signer Your signature on this Note means that you are equally liable for repayment of this loan. If Borrower does not pay, Lender has a legal right to collect from you. (g) Virginia. The first sentence of Paragraph 8 should be changed to read: "Borrower and any other person who has obligations under this Note waive the right of presentment and notice of dishonor, and waive the homestead exemption." After the Borrower's signature lines, add: This is to certify that this is the Note described in and secured by a Deed of Trust dated _______________, 19 ____ on the Property located in _________________, Virginia. My Commission expires: ________________________ Notary Public A:\SRK\HECMDOCS\ARM.N2\5-4-93