Chopped? Standard Fixed Rate Days Are Numbered

Shannon Hicks January 14, 2013 13

I’m a big fan of the show Chopped. Chefs are given a mystery basket of ingredients from which they must make an entree. Soon we may be opening that basket to find one less ingredient (the fixed rate standard). You still have to get a finished entree out of the oven so what do you do? You adjust the recipe and improvise. It appears the super sweet fine grain sugar of the standard fixed rate is flying off the shelves and it’s return is uncertain. Brokers, lenders and loan officers are now faced with selling a new product mix and perhaps focusing on a new breed of borrowers.

13 Comments »

  1. James E. Veale, CPA, MBT January 14, 2013 at 10:39 am - Reply

    Generally it is the younger generation who adjusts to change and the older generation who is loathe to it. Here it is not so clear.

    Our industry does not just need change; it desperately needs change. With an expanding demographic base, endorsements have been dropping for over three fiscal years and for the last 18 months the total HECMs endorsed in the prior month are lower than for the same month in the previous fiscal year. That is an alarming negative stat in any industry especially when it is the fourth fiscal year in the row of lower production numbers with no signs of improvement.

    HUD is doing nothing to help the industry to change. HUD is merely reacting to its lack of action when it was first clear there were serious problems in the MMI Fund back in mid 2009 during the fiscal year 2010 budget debates. The only reason why things are changing is because HUD and specifically the FHA Commissioner had no choice if she was to be confirmed by the Senate.

    Despite having Savers, the industry as a whole has ignored them and the potential mass affluent seniors who would benefit by them. In part that is due to a much richer revenue stream from fixed rate Standards and in part that is due to the much more difficult sale to financial advisers of the more affluent.

    There is an old saying: “Necessity is the mother of invention.” A corollary to that principle is that without necessity, there is little change.

    This industry is so locked into the desperately needy, it is ridiculous. Is it that they are such an easy mark for a product they clearly need there is fear of dealing with seniors who might actually delve into why they might need this product?

    The desperately needy senior homeowner will always need our product. Whether or not they will so easily qualify for it as has been the case prior to now, is an open question. The issue before us is how easily will we adjust to the product mix HUD has been forced to leave us with?

  2. Bill Danner January 15, 2013 at 7:03 am - Reply

    It seems to me we have become victims of our own greed, which by and large was a direct result of the commission standards set forth. Removing products is like putting a bandaid on a gaping shotgun wound.
    Seems to me HUD is actually afraid to face up to the real facts, that their formula is out of sync with the current market place, and I do not think they have adressed the impact on the secondary market. Much work yet to be done.

  3. Jon Sias January 15, 2013 at 11:07 am - Reply

    It just floors me that there remains some mystery over the reduction in HECM endorsements. The market crash was especially hard on senior who were about to or had just retired. Suddenly, the only asset many had was their home and they have been loathe jeopardize that; to that add the rapidly shifting demographic with some 10,000 “boomers” coming into the mix daily and these new qualifiers are not the “desperate” seniors the program was designed for.

    Finally, the crash effected the retirement regions especially hard and those who planned on a HECM but delayed, suddenly lacked the equity to qualify or the benefit could no longer justify the cost.

    As for the knee-jerk decision to pull the fixed program, once again HUD is throwing the baby out with the bathwater. The fixed rate program is not the problem, it is the scapegoat. Talk to seniors for any length of time about the housing crash and you learn THEY learned two concepts to avoid at all cost: sub-prime lending and the satanic adjustable rate loan!

    If HUD pulls the fixed the endorsements will go even further down. The problem is not rate type, the problem is that in order for a senior to get the comfort of a fixed rate they

    • James E. Veale, CPA, MBT January 18, 2013 at 12:56 pm - Reply

      Mr. Sias,

      Let us see what you are saying is that when values went down the even more desperately needy seniors would not get a product which you claim was designed for their needs and that those Baby Boomers turning 62 every single day simply do not need HECMs or any type of reverse mortgage. Can you cite any source for your opinion?

      As to the program being designed for the desperately needy, where do you find that? Your opinion is not found in the statute where its purpose is described. Certainly what the Sacks wrote in their February 2012 article in the Journal of Financial Planning was not written for the financially desperate senior homeowner. It was for the “not-quite-affluent” senior who is concerned about running out of sufficient cash flow during retirement. Strange thing is, reading the statute, Congress was also concerned about meeting the cash flow needs of seniors generally.

      So while you are not surprised by the situation today when home values are on the rise and yet endorsements are falling, forgive those of us who are. Some of us do not view the product the same as you.

  4. Patti in Reverse January 15, 2013 at 11:12 am - Reply

    Mr. Veale
    Thank you again for taking the time to share your insights about our program. I have appreciate the time you have taken over the years to add value to our industry and keep the conversation going.

    • James E. Veale, CPA, MBT January 18, 2013 at 12:41 pm - Reply

      Patti in Reverse,

      Thank you for your kind words.

  5. Jon Sias January 15, 2013 at 11:15 am - Reply

    continued
    HAVE TO TAKE 100% of the available equity, even if they only need to retire a small mortgage. Change that and there will suddenly be less of a drain on the MI fund.

  6. Fred Wells January 16, 2013 at 5:33 am - Reply

    In the near future congress will complain the industry has saddled seniors with loans that are eating up the equity in their homes with rising rates. The end of fixed rates will reduce our numbers significantly and leave many seniors out of the program.

    • James E. Veale, CPA, MBT January 18, 2013 at 12:37 pm - Reply

      Mr. Wells,

      You have your eyes fixed on the wrong issue. How can you prove what interest rates will be next year? Yet I can show you year by year what the balance due will be on fixed rate HECMs which are still outstanding by year end with no prepayments (a rare event at best).

      We have no idea what the available line of credit will be one year to the next because seniors do request payouts or have requested automatic payouts such as term or tenure payouts. So with an adjustable rate HECM who knows what the balance due will be. Right now comparing the balances due on all adjustable rate HECMs to fixed rate HECMs, guess which are higher. Most fixed rate Standards with the same principal limits as adjustable rate Standards in the MMI Fund have at least twice as much due on average as their adjustable rate Standard counterparts.

      Yet where the real problem lies is in home values. Home values are not projected to recover for years. It is home values where the problem lies.

      For 22 years, naysayers have been saying that adjustable rates would be the ruin of the program. Yet there is simply no signs of that. Historically even when high interest rates have come, they have not “long endured.” The concern is not with temporary bleeps on a lower balance due product.

      Normally higher interest rates come with INFLATION. So the home has a higher value to begin with, where is the “devilish” part of adjustable rate HECMs to HUD???

  7. Thomas Mastromatto January 17, 2013 at 5:22 am - Reply

    James In order to market adjustable rate savers to the affluent with no mortgage and no draw we need more than just an origination fee from lenders.Maybe a $4000 juice would help us crack that market.

    • James E. Veale, CPA, MBT January 18, 2013 at 11:23 am - Reply

      Mr. Mastromatto,

      Who is telling you to market to the affluent? There is a reason for the name “mass affluent.”

      Perhaps you are right, within your comp structure you simply have no choice. This could be a “bridge to nowhere” for you.

      It all depends upon the originator and her/his understanding of the marketplace along with the affordable tools available to her/him to gain originations.

  8. Terri shapiro January 23, 2013 at 6:44 pm - Reply

    I worry about seniors that want to pay off their existing mortgage and in the past the fixed was the “only” fix for their needs. I had mostly that type of client that came with that higher existing mortgage that needed The higher proceeds. I think that the adjustable is, of course, the wiser choice for borrowers for obvious reasons and they were wise to choose it but for those that didn’t have a choice, the fixed was so helpful. For that, I am sad for those that so need it :-(

    • James E. Veale, CPA, MBT January 25, 2013 at 2:32 pm - Reply

      Ms. Shapiro,

      As a salesperson, you have done well. Helping the less fortunate achieve their goals is very rewarding.

      As a government program, the last six years have exposed HECM weaknesses. Allowing a product to be originated which could result in a younger senior keeping their home only to go into foreclosure less five years later, after loss in home value has destroyed almost all, if not all, positive equity in that home, is not so positive and far less rewarding on a program wide basis.

      You have done nothing wrong. HUD has. HUD should have begun considering the elimination of fixed rate Standards in mid 2009 when OMB determined that the book of business for the fiscal year 2010 needed a positive credit subsidy of $798 million. Within 15 months HUD had to take over $1.7 billion from the capital reserve portion of the MMI Fund to shore up the HECM portion of that fund. Then within the next twelve months it had to take $535 million to do the same thing. The fixed rate Standard should have been pulled sometime within that 27 month span. It was in that time frame that the position of Commissioner changed with some frequency.

      By waiting until the second quarter of this fiscal year, the ending balance net position of the HECM portion of the MMI Fund may be significantly worse than ending balance for last fiscal year. That could kill any hope for the return of the fixed rate Standard.

      There is little way the industry will not be impacted by the loss of the fixed rate Standard. It will be even more impacted by financial assessment and mandated set asides for taxes and insurance sometime before fiscal 2015.

      In two years, the average financial demographics of borrowers could be much, much different. Current originators with more of a social welfare bent will probably not like the industry nearly as well. Others who see this product as a great cash management product will probably see lenders more willing to emphasize those features in their marketing.

Leave A Response »