This is why we have the Financial Assessment

Shannon Hicks May 9, 2016 10

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One couple’s story highlights the rationale behind the Financial Assessment

reverse mortgage newsIn an ideal world, the government and housing agencies would not have to protect people from themselves. The truth is that is not the world we live in, especially when it comes to reverse mortgage borrowers. A recent survey by the American College shows a widespread lack of financial literacy for both retirement  and reverse mortgages with the vast majority of respondents receiving a failing score.  It should come as no surprise that some senior homeowners who lacked basic knowledge of both are facing foreclosure today.

Reverse mortgages are biting back, this according to a recent article in the Eagle Tribune. It outlines the woes of what was once uncommon; an older couple in financial crisis who are facing foreclosure after getting a reverse mortgage. The story begins with Kenneth and Sadako Miller who saw a reverse mortgage television ad six years ago.

Download a transcript of this episode here.

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10 Comments »

  1. Mike Kennedy May 9, 2016 at 4:14 am - Reply

    Why didn’t theses people use the funds which would gone to pay their existing mortgage to pay their taxes and insurance? They made some poor choices with their eyes wide open.

  2. Jeff Featherson May 9, 2016 at 6:01 am - Reply

    Sorry- can’t buy into the concept. I believe the only reason for the FA was the significant losses created by the R.E market value escalation and the government’s feeding the fire by eliminating Bank’s down payment requirements. Coupled with massive fraud amongst the brokers and appraisers, overvalued homes that became abandoned and foreclosed weren’t capable of providing the equity needed to pay off the debt during the property value collapse. All FHA insured mortgages took a bath, not just Reverse mortgages. In fact, it would be interesting to see the loss ratios of RM vs the rest of the mortgage market. I’d wager that while losses due to deaths of the borrowers might create some loss, unlike conventional secured loans, losses due to the unemployment escalation greatly skewed the numbers of the conventional insured loan market and was, in fact, the more likely and significant contributor to those losses (retired seniors enjoyed a buffer from the depressed job market).

    With or without an FA, property values are believed to be annually increasing, likely due to inflation, and those assumptions are built into a RM proposal (4%). When you eliminate the element of security risk, it makes virtually no sense to deny seniors their participation rights simply because they lack cash flow or possess a high amount of debt that is in most cases, subject to elimination, once their home is secured.
    Sorry- I don’t buy it. one of the unique perks of our job as a loan originator was to help and assist people facing foreclosure and eviction, by the use of a reverse mortgage. That capability has been all but stripped away by the FA. While I have always concurred with the need to assure there was a cash flow sufficient to pay taxes and insurance, imposing a credit restriction seems to me as a political payoff to the credit card companies that became and become vulnerable to a BK filing, without it hurting the senior Borrowers mortgaging ability. The RM was a shield against debt collectors. Massive political contributions and the influence it has in policy making may have well raised its ugly head.
    Saving seniors’ homes should remain our primary objective. While standby-lines of credit may be an alternative marketing opportunity to generate sales, I doubt very much it is the purpose President Reagan had in mind when he initiated the program.
    What attracted me out of retirement to work in the RM industry was the “pureness of concept”- helping seniors access some of the equity in their home, their single largest investment, rather that having to sell it to obtain those funds; paying off a mortgage and eliminating future monthly mortgage payments- achieving the American dream! That was the ‘valued’ motivation.
    In my opinion, stripping away the Christian charity purpose in helping senior borrowers to remain in their home, selectively eliminating seniors that are financially hindered, has potentially condemned millions of seniors to further financial problems and hopelessness and, perhaps for many, homelessness.
    I’ve helped numerous seniors who choose to pay their mortgage and utilities and forego eating the last week of their social security cycle month. One lady in Michigan, never turned her thermostat above 46 degrees. Never!
    Many seniors fight to keep their homes, finding themselves in circumstances brought about by a job loss, forced retirement and loss of a spouse or income; circumstances certainly not of their making! Where in the Constitution does it say that we, the people, have a greater obligation to fund housing and income for immigrants, in lieu of helping economically-distressed citizen seniors stay in their homes?
    Justifying FA and increasing the encumbrance on seniors is simply “spin”, and I don’t buy into it. My conscience prevents it! jf

    • James E Veale, CPA, MBT May 9, 2016 at 12:24 pm - Reply

      Jeff,

      While your comment is a rant, it is an interesting one, much of which I completely disagree with but not for the reasons you supply.

      Like you I also believe that many more FHA forward mortgages got into trouble over defaults for failure to make timely monthly mortgage payments than HECMs which have thrown off losses into the MMI Fund. Foreclosures losses were massive BUT the forward mortgage losses per mortgage were somewhat minuscule compared to HECMs where there were much fewer foreclosures when compared to HECM producing losses .

      Like many, you seem to look at HECM losses on a cash basis but this is an insurance fund. HUD must record losses as soon as reasonably measurable despite the fact the loan has not terminated, is not in default and.may not terminate for decades. The purpose of this paragraph is not to explain why recognition of the losses is crucial to managing an insurance fund but that can be presented as well.

      The first major step in fighting against HECM operating losses was dropping principal limit factors on 10/1/2009. The second major step were the changes on 10/4/2010 by going to Standards and Savers and increasing the annual rate on MIP from 0.5% to 1.5%. The third major step was the elimination of fixed rate Standards on 3/31/2013. The fourth major step was the elimination of all Standards and a slight modification to Saver principal limit factors on 9/29/2013 along with a rise in upfront MIP and a first year disbursements limitation.

      It was expected that the changes from the fourth step was so massive that most cash poor seniors would be unable to qualify for a HECM. Yet lenders demanded financial assessment despite their right to create their own.

      So in the months before HUD gave us mandated HECM financial assessment with its LESAs on April 27, 2015, every originator in the industry seemed to wake up to its potentially negative impact on endorsement volume. The draconian problem we are feeling from financial assessment today is a direct result of lenders demanding that HUD create financial assessment rather than lenders doing it on their own which they could have.

      We need to realize that the primary source of the foreclosures on forward mortgages at the end of the last decade was very much different than the primary source of the HECM losses. While the Great Housing Depression of 2008 is very much tied to the overall Great Recession, it is the Great Housing Depression with massive losses in HECM collateral values that drove the HECM losses (even if less than 5% of the losses came from actual terminations.) On the other hand, most of the payment defaults in the forward mortgage business found their primary source in the economic recession with its loss of business and jobs, although a significant minority of the payment defaults were by homeowner refusing to make their mortgage payments despite having the cash to do it but as a result of their forward mortgages being substantially underwater.

      The HECM Demonstration was but one very small part (Section 417) of the Housing and Community Development Act of 1987, P.L. 100-242, signed into law on 2/5/1988. See https://www.gpo.gov/fdsys/pkg/STATUTE-101/pdf/STATUTE-101-Pg1815.pdf

      It is very apparent that President Reagan had little to no idea what the content of Section 417 of the Housing and Community Development Act of 1987 stated; however, Congress did clearly state why they wrote Section 417 in Section 417(a). His lack of reading the content of that Section is more than reflected in the reason he gave for that section while Congress which wrote the section gave another purpose contained in the bill the President signed into law.

      For most conservatives, your idea of Christian charity is little more than a corruption of the program into a social program at the expense of the American taxpayer which in fact has occurred as has the stripping of MIP from forward mortgage programs into the HECM portion of the MMI Fund just to keep the HECM program afloat.

    • Joe Nemec May 11, 2016 at 12:51 am - Reply

      I completely agree. I also got into RM because I saw how it could help seniors live a better life and saved many homes from foreclosure — I even talked one bank into giving BACK a house they had already foreclosed and sent a Sheriff w/ 3-day eviction notice.

      RM was the best/only good thing I have ever seen the govt.do for seniors.

  3. Joyce Hanson May 9, 2016 at 10:37 am - Reply

    I totally agree with Jeff’s response and to go one step further, what is the ratio of Reverse Mortgage forclosures compared to regular FHA loans I bet there are far more regular FHA mortgage foreclosures!!

    If we are talking about not being educated on the Reverse Mortgage, why are we allowing Reverse Mortgages to be done by telemarketers, people over the phone who do not advise the Seniors in depth or correctly. I had a situation whereby I was going to meet with a client, who had been solicited over the phone and was advised that a notary public in there area, was going to go to their home to do the application. Fortunately the client had the name and number of the notary public. I called her and asked her if she was a licensed loan officer in our state, her response was no, so I told her that she was not licensed to take the loan application. I advised the senior and did meet with them and did their loan. I contacted the telemarketer (who was in another state) and advised him that he could not do this. He was with a very well known Reverse Mortgage Company!! As you could imagine, the notary public WOULD NOT have knowledge of Reverse Mortgages to advise the Seniors, if they had questions. I am sure this is just one example of what goes on in the Reverse Mortgage Industry!

    • The_Cynic May 13, 2016 at 11:07 pm - Reply

      Joyce,

      Your second paragraph is based on a false premise. I have never taken an application where I was not present; HOWEVER, HUD does not require a face-to-face meeting between originator and applicant. See Mortgagee Letter 2007-08.

      The purpose of having a notary there with the borrower is to provide procedural assistance for the borrower rather than just allowing the borrower to figure it out where to sign on their own and to assure both the applicant and the lender that the application was completed before returning the completed application to the lender.

      Normally, as explained by a lender with a call center, the loan officer is available by phone to answer all non-procedural questions of the borrower about the application and the loan officer informs both the borrower and the notary by phone of that fact along with the limitations of the notary in answering questions about the loan and the application at the time that the application is taken.

  4. Charles Guinn May 9, 2016 at 12:27 pm - Reply

    I believe that FHA should allow Seniors to defer or postpone the payment of their property taxes if they qualify for those programs in their particular state. In California it is the Property Tax Postponement Program. In Minnesota it is ​The Senior Citizens Property Tax Deferral Program. Other states have similar programs to help seniors stay in their homes. So there are programs that could apply. It seems to me the least the FHA could do is allow participation in those government programs.

    • The_Cynic May 13, 2016 at 10:48 pm - Reply

      Charles,

      States can allow their senior citizens to have property tax deferrals but most do not want to allow them that right if the collateral already has a reverse mortgage as a higher lien.

      If you are saying that HUD should permit states to place the priority higher than the HECM, then you want a new federal social program paid through the MMI Fund.

      In some states property taxes can run as high as 3% of the value of the home. Higher annual property tax rates are more common where state income tax rates are low or do not exist. With interest these numbers can get quite large.

      If the states will not allow the deferral with a reverse mortgage why should HUD subordinate to these programs? If not all states will participate why allow only HECM residents of some states to get this right provided by HUD and not others?

  5. Lance Canada May 10, 2016 at 3:15 am - Reply

    It is always good to see and try to understand both sides of the story. The sad truth is that we cannot change people and their habits. Especially when some of these habits are engrained. Both good and not so good habits. We can only post the speed limit, we can’t make folks obey them.
    HECM’s are a financial TOOL. Some will use as intended and some will not. Which patient will listen to the Doctor? Some will, some won’t. A friend of mine rented an apartment to a person on oxygen. Despite the warning not to continue to smoke they literally blew themselves up attempting to smoke with an oxygen mask on! We can’t change habits. We just try to help.

  6. John A. Smaldone May 11, 2016 at 9:05 am - Reply

    In the case of the Millers, I feel it might have been to late regardless if FA was in place when their loan was taken out. It sounded as if their ability to meet the required residual income amount would not have been able to be met.

    If this was the case, they did not have enough funds to have a LESA in place. I am sorry to say but it appears the Millers were destine to face a foreclosure either way!

    However, if we look at todays changes with the FA ruling in place, I embrace it positively. I feel many people who are either turned down or require a LEAS are those that were candidates for foreclosure in the past, before FA went into effect.

    Let us also look at the new found credibility the FA ruling has given our product in the market place. Especially with financial planers, attorneys, accountants, small community banks and many more.

    The HECM of today has the appearance of more stability than ever before. The financial planer is taken notice that the HECM is a worthy retirement planning tool.

    Sure, probably 30% of our market of the past is not going to be available to us anymore but double and triple that is now available for the taken, providing we recognize it and capitalize on it!

    Embrace Financial Assessment (FA) positively and it will most definitely give you positive results!

    John A. Smaldone
    http://www.hanover-financial.com

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