Regulations Changing Practice & Behavior

Shannon Hicks January 21, 2013 15

With the recently released final rules for loan officer compensation and the expected suspension of the standard fixed rate HECM product government agencies have drastically changed the motivations and interaction between mortgage lenders and borrowers. First loan officer compensation. Released last Friday, It prohibits steering consumers into higher cost loans based on compensation. Would this have included the Standard Fixed Rate product had it remained?  With increasing costs lenders are incurring to meet federal and state regulations and now restrictions on how loan officers are paid many mortgage products may cease to be offered in the traditional market. For reverse mortgage lenders that choice has been made for us.

15 Comments »

  1. "Mortgage Mike" Koebel January 21, 2013 at 6:20 am - Reply

    I would like to know if there are statistics showing how many HECM Standard Fixed for Purchase loans are causing a problem, vs HECM’s done as a cash-out refinance. If the purchase statistics aren’t in the problem range, then I think that part of the program should remain – as it certainly would help the current housing industry.

    • James E. Veale, CPA, MBT January 21, 2013 at 12:44 pm - Reply

      Mr. Koebel,

      OK, I give up. What difference does it make if the fixed rate Standard was originated as a refi or a purchase transaction?

      Please do not give some answer related to property charge defaults. Most of those who have NO idea what they are talking about on this issue somehow and in some way try to relate it back to borrower payment defaults.

      HUD is concerned with balances due exceeding market value at termination. What difference would it make in such calculations if the HECM was generated through refi or purchase? Very seldom will a borrower get a HECM at purchase IF the purchase price was significantly smaller than the FHA appraised value. With the few which have come our way, we advise the borrower to wait and do it as a refi unless the HECM is being used as a “Standby Reverse Mortgage” or in a similar manner.

  2. Bill Danner January 21, 2013 at 7:35 am - Reply

    How will this effect the H4P business model? Why punish all for the insensitive actions of an easily traceable group of bad apples. I, for one am tired of being punished for the actions of others over whom I have no control.Like all bureaucratic organizations, leadership is built upon REACTION versus positive action.
    Perhaps it is time for a change.

    • James E. Veale, CPA, MBT January 21, 2013 at 1:21 pm - Reply

      Mr. Danner,

      Once again, I give up.

      What exactly is “the H4P business model?” Are you saying HECMs for Purchase should be fixed rate Standards based on some business model? If that is the answer, then thank goodness the fixed rate Standard is being terminated. What you are saying is that the rate sheet is the underlying principle you use in evaluating the right “educational” content you use in presenting the HECM for Purchase transaction.

      Your comment clearly explains why over 96% of all endorsed HECMs for Purchase last fiscal year were fixed rate Standards. Thank goodness HUD is terminating fixed rate Standards.

      How sad that seniors would be encouraged to look at the HECM product selection any differently based solely on the type of transaction in which the HECM is being originated. This shows a low standard of care for the senior.

  3. Mike Banner January 22, 2013 at 11:44 am - Reply

    Shannon,

    Great piece! You continue to keep the most important issues of the day right in front of our industry… Huge kudos!

    • Shannon Hicks January 22, 2013 at 12:07 pm - Reply

      Mike,

      Thank you very much for such kind words. I am honored to be a part of our community.

  4. Mike Banner January 22, 2013 at 11:47 am - Reply

    Bill & Mike,

    You bring up very valid points.

    The client scenario for a traditional fixed re-fi and a traditional fixed H4P are two totally different segments of the market.

    The traditional fixed is almost always the needs based clients, the “product of last resort” that our industry has built its national reputation upon.

    Conversely, the H4P Fixed is always the upper middle income client and above who feels maintaining his liquidity and still not being obligated to a monthly principal & interest payment makes sense in today’s volatile financial environment.

    I would not be surprised if H4P borrowers default rates are among the lowest in the nation. Clients putting 45-50% down on their retirement homes usually have very high credit scores and sufficient cash reserves. They do not default on their taxes and insurance. In fact, they do not default on anything usually.

    Too bad no one in Washington considers this topic important enough to check on. As usual, we’re throwing the baby out with the bath water…

    • James E. Veale, CPA, MBT January 22, 2013 at 6:27 pm - Reply

      Mr. Banner,

      Are you sure about your facts? By definition upper middle income people make more than $100,000 per year. The mode is in the $200,000 range.

      MetLife reverse mortgage senior management were quick to point out that of all HECM borrowers, the most affluent on average were Saver borrowers but their average income was far less than $100,000 per year.

      But let us assume you and Ms. Haviland are correct. Why would any person in that situation obtain a HECM which will not allow for a later withdrawal of a prepayment? Why not have a HECM which is far more flexible than fixed rate Standards?

      Just look to the articles by Dr. Salter, Mr. Evensky, and the Sacks brothers. Neither of those articles suggested the use of fixed rate Standards by the mass affluent, a generally much lower income group than the upper middle income class. Most CPAs and CFPs would rarely if ever recommend that choice to their upper middle income clients; most upper middle income people use the services of either CPAs or CFPs and many both. A fixed rate Standard is a very poor choice in this volatile financial environment for a truly upper middle income clientele unless on a balance sheet level they are needs based which is possible just not probable.

      Worse, it seems you are advising that working with developers who appeal to the needs based client and the mass affluent is a huge mistake. It is both of those types we are currently working with. Do you believe that is a mistake? Thanks for your advice on this specific issue.

  5. Sue Haviland January 22, 2013 at 12:33 pm - Reply

    Shannon, I echo Mike’s comment- thank you for continuing to keep the issues of the day before us. And as for Mike’s comments on the H4P Fixed transactions, I suspect he is correct.

  6. Joan Hillman January 23, 2013 at 6:20 am - Reply

    I have been involved with reverse mortgages for 10 years–long before the fixed. I have wondered and suspected foul play with many of my colleagues who had high percentages of fixed rate loans. I have done mostly adjustables during this time. I wondered if I was working with a different client base or the truth that it was easier to sell a fxed loan and appeal to the “fear” of an adjustale rate loan. To those customers who feared changing interest rates, it was fairly easy to show them the declining equity and lower appreciation rates and what the fixed rate could do to their home value. They got it!
    Yes, I am being punished for the acts of others. However, for our industry to survive and be credible, we must admit that misuse of the fixed rate got us where we are now.
    To those who have done mainly fixed rates, you need to educate yourself and be customer focused. Anyone who does that will be successful. The customer is looking to us to be their trusted advisor. If your goal was to make a heap of money, you need to look for another profession.

  7. Mike Johnson January 23, 2013 at 7:53 am - Reply

    Shannon,

    Someone please tell me how doing away with the STANDARD Fixed (which I have been led to believe represents approximately 70% of our present market and most of the MIP up front insurance FHA collects) is going to help the FHA avoid the debt they’ve incurred. I’d think the opposite when giving up 2% of the MCA on all Standard Fixed going into the insurance pool. This will make the pool much smaller in the future, UNLESS the gov’t. has other plans for the industry and is adding MIP to SAVERS upfront as well as yearly. Makes one think!

    Has any industry EVER survived a 70% HIT to their business?

  8. Mike Johnson January 23, 2013 at 7:58 am - Reply

    Don’t most LO’s apply Lenders Credits from the Std. Fixed SRP, thereby bringing down total closing costs. I know I have done so on most Fixed, even to the point of $0 closing costs for many seniors. They simply can’t afford the risk associated with variable PLUS the higher closing costs. One can’t waive Loan Origination Fees on Variable if the person is drawing $10,000. Does this cause steering, YES, I am sure it does, but it also gives seniors a $0 closing cost compared to a $18-20K closing cost in my area of high priced NY homes. Your thoughts?

    • James E. Veale, CPA, MBT January 23, 2013 at 3:14 pm - Reply

      Mr. Johnson,

      The issue is not about saving some costs to consumers but rather salvaging what can be salvaged of the program.

  9. Brad Rich January 23, 2013 at 10:00 am - Reply

    If part of the worry is the taxes and insurance staying current, couldn’t the lender’s set up an escrow account at closing and require the clients to make payments into it each month just like a forward mortgage? They could even fund the escrow account for a year or two as well. This would eliminate them not being paid. If a client misses a payment or does not have the funds in an account if it is done as an ACH then there will be a penalty. Or just put a high credit score/income requirement on it and those people for the most part pay their bill’s.

    • James E. Veale, CPA, MBT January 23, 2013 at 2:42 pm - Reply

      Mr. Rich,

      HUD insures the mortgage not the payment of taxes and insurance. So who will ultimately pay for the taxes and insurance defaults which will soon result in foreclosures are 1) lenders who presently own any of those HECMs, 2) Fannie Mae which owns a great deal of the HECMs endorsed before 2009, 3) owners of HECMs through non-GNMA issuance, 4) lenders who have “sold” their HECMs through GNMA issuance, and 5) FHA on those HECMs in assignment. So except for those HECMs in the last category and only for those in that category endorsed after 9/30/2008 (not many, if any), there will be no impact for tax and insurance defaults within the HECM portion of the MMI Fund.

      Even though less than half of the HECMs in the MMI Fund are fixed rate, it is their mandatory full draw which is creating the most significant part of the net loss position within the HECM portion of the MMI Fund as of 9/30/2012. To save the program, fixed rate Standards must go. If the HECM portion of the MMI Fund were a California based insurance company qualified to do business in California, the California Insurance Commissioner would have placed it under receivership months ago.

      Elimination of the fixed rate Standard is sound fiscal policy and the only rational, reasonable, and immediate action HUD can take to protect the program.

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