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Mortgage Lending: 10.3.2 Eligibility

HECM loans have specific eligibility requirements related to the borrower and the property that will secure the loan.

Age Requirements. All HECM reverse mortgage borrowers must be at least sixty-two years of age.20

Mortgage Lending: 10.3.3 Loan Terms

Available Proceeds. The amount that can be borrowed with a reverse mortgage, also known as the principal limit, is based on the maximum claim amount (MCA), the age of the youngest borrower (or non-borrowing spouse), and expected average mortgage interest rates.37 The principal limit is the gross amount of money that the borrower can receive under the reverse mortgage. Loan costs and existing liens may be paid from the principal limit, reducing it by a corresponding amount.

Mortgage Lending: 10.3.6 Property Charge Payments, Financial Assessments, and Life Expectancy Set-Asides

While there are no monthly loan payments required for reverse mortgages, that does not mean that reverse mortgages are “payment free.”83 Rather, the loan documents require reverse mortgage borrowers—like traditional mortgage borrowers—to pay for “property charges.” These charges include real estate taxes and hazard insurance premiums and, if applicable, condominium association fees, ground rents, or other special assessments.

Mortgage Lending: 4.2.6 List of Housing Counselors

Effective January 2014, lenders are responsible for ensuring that loan applicants receive a list of HUD-certified homeownership counselors no more than three business days after the lender, a mortgage broker, or a dealer228 receives a loan application or information sufficient to complete one.229 The list must include organizations that provide relevant services in the applicant’s location.230 It also must be no more than thirty days old and

Mortgage Lending: 10.1 Introduction

Reverse mortgages are a special type of home-secured loan that allows seniors to convert home equity into cash without having to move out and without having to make periodic mortgage payments. In a typical “forward” mortgage the lender advances the principal at origination, and the borrower is required to pay off the loan balance over time. In contrast, reverse mortgage lenders advance funds to the borrower, either as a lump sum, through monthly payments, through a line of credit, or using a combination of these methods. No periodic payments are due from reverse mortgage borrowers.

Collection Actions: 3.7.4.4 UCC Limitations Period for Dishonored Checks and Defaulted Promissory Notes

If a consumer pays for goods or services with a personal check that is later dishonored, the collector can sue for nonpayment of the goods or services and/or for nonpayment of the check. Each claim has a separate statute of limitations. If a creditor sues for nonpayment of goods, the four-year UCC Article 2 limitations period applies.426 If the creditor sues on the dishonored check, U.C.C. § 3-118(c) requires that the action be commenced within three years after the check’s dishonor.427

Mortgage Lending: 1.3.6 Manufactured-Home Financing: Parallels to the Mortgage Loan Crisis

Although many states consider manufactured housing to be personal property, at least at the purchase stage, the reliance on manufactured housing as a primary residence increased significantly from 1991 to 1998.236 During that time, the manufactured housing industry experienced a boom and bust similar to the more recent events in the market for traditional mortgages. Indeed, the market share of manufactured homes in relation to new single-family homes peaked in 1995 at 33.8%.

Mortgage Lending: 1.4.1 Market Deregulation and the Crisis

The surge of abusive mortgage loans in the 2000s, particularly predatory loans, and the resulting foreclosure crisis proved the existence of major flaws in market practices. Competition and self-regulation did not prevent lenders from making predatory and unaffordable loans, nor did the weak enforcement of existing laws. Instead these practices appear to have helped promote the crisis.

Mortgage Lending: 1.4.2 The Structure of the Mortgage Market and Self-Policing

For much of the twentieth century, the mortgage market mainly consisted of banks and savings and loan associations that would originate, fund, own, and service mortgages. Banks competed by offering fixed-rate mortgages at rates as low as possible, considering the borrower’s risk. If the bank wrote mortgage loans to customers who could not afford to repay, the bank suffered losses. If the bank deceived the homeowner, the homeowner would complain to the bank and defend any foreclosure action based upon the bank’s deception.

Mortgage Lending: 1.4.3.1 Barriers to Consumer Decision-Making

One argument for unfettered lending is that consumers, as informed and rational decision makers, will insure that the mortgage market is operating properly. But the lesson of the last foreclosure crisis is that this is not true. For a borrower’s contractual “choice” to have any meaning, borrowers must be able to evaluate the risks and benefits of the credit offered. Borrowers must also have meaningful alternatives to the credit presented.

Mortgage Lending: 1.4.3.2 Mere Disclosure As a Cure for the Problem

Disclosure is not an adequate counterweight to creditor overreaching when consumers face a product as complex as a home mortgage.296 The disclosures required prior to the last foreclosure crisis utterly failed to explain the pricing of these products. For example, the federal Truth in Lending Act (TILA) disclosure requirements did not keep pace with the complex products that were sold in large numbers during the period 2000–2007.

Mortgage Lending: 1.4.3.3 Role of Prepayment Penalties in Refinancing Out of Bad Loans

Particularly in subprime loans, prepayment penalties often trap the homeowner in a loan even after the homeowner discovers that the loan terms are not what they were led to expect. One study found that about eighty percent of subprime loans contained prepayment penalties, compared with only two percent of loans in the prime market.306 These prepayment penalties created a significant barrier to refinancing a bad loan into a better one.

Mortgage Lending: 1.4.4.1 Introduction

An often heard criticism of regulation is that it reduces the availability of mortgage credit. High prices and onerous terms are excused as necessary to match the high risk of lending to certain borrowers. Critics argue that restrictions on price or terms will prevent the market from extending credit to the riskiest borrowers.

But the claim that risk accounts for rate was clearly not true in many mortgage loans during the run-up to the 2007 crisis. As explained further below:

Mortgage Lending: 1.4.4.2 Underwriting with Little Consideration of Risk

As described earlier regarding yield spread premiums, securitization, and the secondary market,313 pricing was often explicitly not based upon risk. Instead brokers and other originators focused on writing loans for as high a price as possible. They did so because their commission was based on how much the actual price exceeded the (purported) risk-based price set by the lender.314 The risk of default was not a factor in how brokers and other originators priced the mortgage.

Mortgage Lending: 1.4.4.4 Pricing Based on Race, Not Risk

Despite industry claims that loans were priced based on each borrower’s credit fundamentals, data shows that the applicant’s race or the racial composition of the applicant’s neighborhood was a leading predictor for the cost of mortgage credit. According to a 2006 study, data submitted under the Home Mortgage Disclosure Act (HMDA) revealed that for purchase-money loans, 54.7% of African Americans and 46.1% of Latino whites received “higher-priced”323 loans, in contrast to only 17.2% of non-Latino whites who received such loans.

Mortgage Lending: 1.5.2 Mortgage Lenders

Almost anyone can be a mortgage lender. Aside from government entities lenders are either depository institutions (federally or state-chartered banks and credit unions) or state-licensed non-depository institutions—more commonly called nonbank lenders. State law usually sets a threshold for the number of loans that trigger the duty for a nonbank lender to obtain a license.

Mortgage Lending: 1.5.3 Mortgage Brokers and Table Funding

Traditionally, mortgage brokers acted as intermediaries between borrowers and lenders. They did not originate loans. Instead, mortgage brokers were merely middlemen bringing home purchasers or homeowners and lenders together. Homeowners often seek out brokers because they believe a broker will find the best loan available.366 Confusingly, mortgage brokers are sometimes considered “mortgage loan originators” under state or federal law.367

Mortgage Lending: 1.5.4 Loan Officers

Loan officers are employees of financial institutions and assist home buyers or homeowners in selecting a mortgage loan product offered by their institutions. They are essentially in-house salespeople for banks or mortgage companies.

Mortgage Lending: 1.5.5 Mortgage Loan Originators

The seemingly generic term “loan originator” has become a term of art defined by numerous state375 and federal laws.376 A mortgage loan originator (or sometimes “mortgage originator” or “loan originator”377) can be a natural person or an artificial entity.378 Complicating matters, a loan originator may also be a lender, a manufactured home sales person, a loan officer, a mortgage broker, or a brokerag