Out with the Old, In with the New…

Shannon Hicks August 26, 2013 7

HECM Products to be Replaced with One…

Reverse Mortgage Program

From two came one. Over the last several years many have asked for a hybrid Home Equity Conversion Mortgage. Now it appears we may have a hybrid, but not the one we anticipated. On the heels of FHA’s newly granted authority to change the reverse mortgage program by mortgagee letter we have a peek into what we can expect thanks to a recent conference call between HUD’s Deputy Assistant Secretary Charles Coulter and NMRLA’s executive & policy committees. It boils down to a clean slate. In essense axing the remaining Standard Adjustable and Saver Fixed and Adjustable products instead offering one program. The new loan would feature lending ratios (or Principle Limit Factors) somewhere between the Saver & Standard loans, and a sliding scale for upfront FHA insurance based on…

7 Comments »

  1. John Smaldone August 26, 2013 at 6:05 am - Reply

    Shannon,

    That was a very good presentation. We have seen so many changes over the past few years and now we are on the horizon of more changes. This time it may be the most significant changes thus far.

    I fear we are seeing a program that was a salvation for many seniors disappearing and it is sad.

    Since the housing and economic crash we have seen too many panic decisions made on the part of HUD and our administration. Since the crash the CFPB has also emerged to make life even more difficult than ever for the entire financial industry.

    As we keep lowering the principle limit factors we are eliminating the reverse mortgage. The program will wind up being only for those that have money, assets and income. It will also be only for those that do not need a large amount of funds.

    Seniors with debts, mortgage balances that may be forcing them into foreclosure will probably be out in the cold.

    I have been in the reverse mortgage industry for over 15 years going on 16 years and I must say I think we are facing the death of the reverse mortgage as we once knew it to be!

    John A. Smaldone

  2. The_Cynic August 26, 2013 at 8:00 am - Reply

    Rather than a hybrid, the new product appears to be a blend of the ARM products alone, much like the fixed rate product we have today is a true consolidation but with slightly higher principal limit factors than our current Savers.

    It is too bad so many in the industry are deluded by the hope that we will see a pure fixed rate product again. The problem with the fixed rate is not that it is fixed rate but rather the only way lenders can offer such a product is as a closed end mortgage. If lenders can figure how to offer a purely fixed rate product as an open end mortgage, HUD might entertain the idea of once again insuring fixed rate HECMs. For those ambitious ones who want to find a way for lenders to adopt that platform, all I can say is good luck!

    By the way I hate calling maximum proceeds, the principal limit but FHA created this term to describe maximum proceeds which grow monthly which maximum proceeds on traditional mortgages (even other reverse mortgage products) do not. And so that everyone is clear principal is spelled exactly the same way as the word “principal” when we break down a loan balance into its components: principal, interest, and other costs.

    I hope FHA will adopt a true hybrid (with closed and open end mortgage features) soon. It could change the industry for the better for all. Even HUD should love this product prior to assignment particularly due to its fixed rate nature. It would provide less risk to the MMI Fund than an ARM since not all of the proceeds could be taken upfront without meeting FHA to be released requirements.

  3. Dick Diamond August 26, 2013 at 8:18 am - Reply

    Shannon, is there any indication when this new program may become effective? Will Reverse Purchases still be available?

    • Shannon Hicks August 26, 2013 at 10:18 am - Reply

      The general consensus is the changes would become effective October 1, 2013 (beginning of the fiscal year for FHA/HUD). I haven’t heard anything about the purchase being eliminated but it would be an adjustable rate only scenario now that the Saver Fixed will be eliminated shortly.

  4. The_Cynic August 26, 2013 at 11:55 am - Reply

    Once again it is important to address why HUD is taking this action. The ever growing problem the MMI Fund faces from HECMs comes from high percentage draws of the available net principal limit at the time of funding. The very worst example is fixed rate Standards with its mandatory full draw of all available proceeds at initial funding.

    What happens with full or near full draws at funding, is there is no room for average appreciation rates of anything less than approximately 4%. With a fixed rate HECM, there are few arguments to encourage borrowers to pay down the balance due since these HECMs do not have an accessible line of credit from which borrowers can draw out the amounts which have been “prepaid.” While that is not true with HECM ARMs, most of those who draw out such large amounts at funding cannot afford any “prepayments.”

    So while HUD could do little to improve the projected financial loss position of HECMs with case number assigned before April 1, 2013, it is taking giant strides to change that picture for HECMs with case number assignments after March 31, 2013.

    While the ultra optimists in our industry are saying that future appreciation in home values will turn around the situation in the MMI Fund, their predictions have not proved to be reliable. Even industry skeptics believe the appreciation situation will turn around but that turn around will be greater in some areas in the country than in others. We (I am skeptic) believe even the actuaries may have been too optimistic in their projections. We also believe that current cash flow will be sufficient to current losses but in the long run will mean there is less cash reserves to pay future losses.

    Shannon is right that there is no indication from HUD that the HECM for Purchase will be lost despite its abuse.

  5. Lorraine jone August 26, 2013 at 11:55 am - Reply

    Sigh…Like John, I have been in the reverse loan industry for many years and I completely agree with his comments. My concern, is that a loan program that was so unique and special for seniors will be so severely modified that many of them who truly could benefit from it, will be left out.

    It would be disastrous for many of them. I feel that this has been an over reaction by FHA and HUD to modify the program at the expense of the seniors.

    I began my career when there was only ONE program and not all of the variations of the HECM or a Fixed rate. And the Fixed rate ultimately led to huge up front withdrawals due to the fact the the YSP was so generous on them and many L.O.’s never offered the senior the LOC.

    Offering a Fixed rate was a mistake and now the senior community will have to pay for what I see, was the greed of a bunch of L.O.’s wanting to make more money on each transaction.

    You can be sure, that by this time next year, there will be more changes and I too am hopeful that we will see a Hybrid program as well, per “the-Cynic.

    We will have to simply accept the changes and hope that the future of the Reverse loan program won’t be “pounded” in oblivion.

    • The_Cynic August 27, 2013 at 9:57 am - Reply

      Ms. Lorraine jone,

      I have not been in this industry for quite a decade yet but the needs of some unfortunate seniors are secondary to the need of saving the HECM program. HUD is not overreacting but rather its actions are due to its slow response to what the fixed rate HECM was doing to the MMI Fund.

      While deploring the greed displayed by originators and lenders alike in the over origination of HECMs since fiscal 2009, FHA also took questionable action by shifting over $2.2 billion in funds from other MMI Fund programs into the HECM portion of that Fund during fiscal 2010 and 2011. It was during the budget battles in 2009 over the FY 2010 budget that FHA seemed to box itself into a corner that resulted in this unfortunate movement of funds; like most of us, FHA did not want to admit it had made a very awful decision by continuing to insure closed end HECMs or what the industry cites as Fixed Rate HECMs; however, it is not the fixed rate nature of these HECMs which cause any particular problem but rather their closed end requirement. Continuing to insure closed end HECMs was true mismanagement of the MMI Fund.

      Despite all of shifting of funds into the HECM portion of the MMI Fund, HUD did not shift any funds into the MMI Fund during fiscal 2012 and as a result most in the industry woke up for the second time to the idea that the MMI Fund really was and continues to be in trouble. It is sad that future borrowers must pay the price for the closed end HECM mismanagement of the past but they MUST unless Congress irresponsibly funds these horrific losses and shifts in funds, a policy that I cannot condone.

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