Saving the Reverse Mortgage. What If?

Shannon Hicks December 10, 2012 11

What if? That is pretty much all we can say as an industry about the certain and yet unknown changes to the federally insured HECM or reverse mortgage program. With an estimated future negative balance of 2.8 billion FHA finds itself in an awkward postion. One of defending the existence of the program before the Senate. Yes, some members of the Senate Committee on Banking Housing and Urban Affairs pushed the idea of suspending, yes stopping the program as a solution

 

 

11 Comments »

  1. Jackie December 10, 2012 at 5:53 am - Reply

    Where is Timothy Geithner when you need him? I watched the whole thing and it was sad. The only Senator in our corner was Bob Menendez from New Jersey. I wish Mr. Donovan would have spoken about how many seniors we have saved from foreclosure. Or that many take the full draw just to pay off a current mortgage and avoid foreclosure. Not to mention that it has been this country’s economy and monetary policies that have devastated retirement accounts. leaving them with little more than home equity to live on.

  2. James E. Veale, CPA, MBT December 10, 2012 at 5:25 pm - Reply

    We need a hard look at everything. While it would hurt, dumping the fixed rate Standard with a promise to implement both a very flexible hybrid Standard and hybrid Saver with some caps and other loss mitigating measures seems like a good alternative.

    While lender revenues will drop, our industry survived on adjustable rate HECMs alone for years with one big difference. FNMA bought everything we did back then without any mandated changes to our interest rates. How would we fare now in that situation? There are many questions to answer but to save the program unpleasant changes must come.

    Dumping the fixed rate Standard would make the fixed rate Saver much more desirable to lenders. Or perhaps a Fixed Rate Safer (odd name) Standard with a 10% PLF reduction off Standard PLFs would work.

    Anyway fixed rate Standards have not served FHA well. It must be remembered that FHA did not initiate the introduction of fixed rates; the industry did.

    The time for drastic changes on the fixed rate Standard product has come. Oh the joys of being a HECM originator.

  3. Bill Danner December 12, 2012 at 11:07 am - Reply

    Not one mentioned about the mandated counseling, which, originally was to be a barrier for some of these issues. If the industry will actually review the entirety of loans funded for the past 10 years, you will find a definate correlation to the rise of delinquencies and the growth of the internet sales process.Most internet salespeople only know what they read on their script, where as most of us “boots on the ground” have paid our dues in understanding the senior community.
    I do not think it would be a hard tadk to separate funding from those internet companies versus those from more conventional lenders and determine the real culprits.If I have stepped on anyone’s toes, that was not my intent, but we need to suture the wound, not put a bandaid on it. For everyone’s sake.

  4. David Levitt December 13, 2012 at 8:02 am - Reply

    Shannon, I believe we are now facing the result of the fixed rate being abused as it required the seniors to take all the cash wether needed or not. Doing so,in many cases increased the profit to the broker or lender. As you know what is most often in the borrowers best interest is not taking all the cash unless it is of true neccessity. Many that have been in this industry for a while feared that at some point the inevitablity of head line risk and or damage to the insurance fund would eventually rear its ugly head and here we are. Back in the day when there was no fixed rate the larger percentage of reverses were the line of credit as fee earned was equivalent. The borrowers need was not based on profitabilty. I believe there is a need for the fixed rate product. I think one answer to the problem may be to only allow the borrower to take all the cash when the lions share is going to be used to pay off an existing mortgage, etc. where it make simple sense. The line of credit will preserve possibly the most equity for the senior and the hiers in the future and I believe will preserve the future health of the insurance fund. After all we need to look within to make sure that at the end of the day the loan we are providing is truly in the best interest of our seniors. We all know the benefits of a reverse. There is no greater feeling then helping someone stay in their home, allowing them to sleep a little easier, and being able to make a living doing that. Had to get my two cents in. Thanks

    • Jack Lacey December 13, 2012 at 9:33 am - Reply

      David. You hit the “on the nail” with that summary”. I agree 100%.

  5. James E. Veale, CPA, MBT December 13, 2012 at 6:37 pm - Reply

    Mr. Levitt,

    What you are suggesting is a hybrid. HUD has already agreed it is an excellent concept but it claims it cannot be implemented for some time.

    What you fail to address as do others is the secondary market. That is why in 2007 S1L started with the secondary market and was told a hybrid was far too early to gain acceptance. The question is how the secondary market will react to a hybrid even if HUD permits the use of such products. Remember HUD has not taken away one of my favorite products, the annual adjusting HECM, but the secondary market is not interested in it so few, if any, originate

    Are you sure profitability was not a factor before fixed rate Standards? We saw issues arise over Homekeepers versus HECMs. The same was true with proprietary reverse mortgages versus HECMs. Then there was the day of equity appreciation rights.

    No, there were concerns about revenues even when there were no fixed rate Standard HECMs. How quickly we forget.

  6. Carlos Camargo December 23, 2012 at 3:58 pm - Reply

    Who comes up with these numbers and what do they mean? Is the statement confusing to anyone else “an estimated negative future balance of $2.8 Billion”? The program has already seen changes, and it appears that changes will continue, but aren’t the HECM loans sold on the secondary market? How is FHA incurring losses to a tune of an estimated $2.8 Billion? If the loans are sold and hey contain an upfront MIP and an ongoing MIP where do the losses stem from? I guess I am still confused how FHA is losing so much money on the HECM products?

    • James E. Veale, CPA, MBT December 24, 2012 at 11:13 am - Reply

      Mr. Camargo,

      Technically HECMs are NOT sold when they are included in a HMBS issuance. Ginnie Mae guarantees and requires that at assignment the issuer “buy back” the HECM so that it is the issuer that assigns the HECM with HUD. The issuance is so contingent as to being a purchase that for accounting purposes the SEC has ruled that HMBS issuance is not a sale by the issuer.

      Beyond that the FHA insurance stays with a HECM until the earlier of termination or assignment of the HECM to FHA; after assignment, HUD takes ownership of the HECM and is responsibility for all losses even those from T & I defaults by the borrowers. So to the extent that the balance due exceeds the value of the home at termination, FHA is on the hook for that difference no matter how much MIP revenue it has received and also on T & I defaults which may take place in assignment (if any).

      To many people, profit and loss on an individual HECM should only be determined at loan termination when a reimbursement (if any) is actually paid but in accounting that is nonsense. The net income or loss on a HECM transaction must be estimated by HUD as early in the transaction as possible so that if the overall position is a loss it must be recognized as early in the process as possible.

      Actuaries work with HUD and the outside auditors of HUD to determine what the future holds for the active HECMs (those endorsed and not terminated at year end). Assumptions, estimates, and other information used in these calculations are critical to the outcome of those calculations.

      In the past many have complained that the assumptions used by HUD were overly optimistic. New View Advisors, LLC has many blogs on this subject on their website. This year, however, they all but called the assumptions pessimistic. You can read the audit and actuarial reports on the HUD website. You might also want to read the annual reports HUD issues also on their website.

      Some look at this information as far too complex to be useful. Yet no insurance business can be successfully run without understanding how future terminations will impact their business. These computations are accepted business practices. The federal government as the owner of the HECM programs wants to know as early as possible if the HECM program is being operated at a significant loss. It now knows.

      I am more than happy to try to answer your questions but this is the most I am willing to provide until someone has a better idea of how and why the system works as it does. That is something which a mentor should be helping you with.

  7. Gary Crist January 8, 2013 at 11:04 am - Reply

    Thanks for the information Shannon, the information I am looking for with the FHA insurance, is it reverse mortgages that caused the problem, because most of them require about 30 to 35 % down or equity in the home or was the FHA insurance crisis from the younger home owners who lost their FHA insured home from job loss or unfortunately some people who got FHA insured loan when the housing market crashed simply walked away from their oblations to continue paying for a home that they did not have any personal equity in the home besides the 3% down?

    • Shannon Hicks January 9, 2013 at 10:13 am - Reply

      Gary,

      Excellent question. I have not been able to find hard data on the losses from traditional vs HECM FHA insured loans. That said FHA is using a projection or actuarial analysis of possible future losses. I do think the HECM program has substantial future losses. Does it seem fair when traditional FHA borrowers can get 97% LTV? Most likely not.

      What really upset the assumptions the HECM model was built upon was the housing crash. Without home values plummeting we would not find ourselves here today.

      It appears that HUD / FHA wants to prevent lump sums across the board. Could we see a restriction on lump sums if the adjustable Standard is kept? Perhaps.

      We know the Fixed Rate Standard will be suspended but will both Standard product be taken off market? Then there’s the question will all lump sums from any product require a suitability test or criteria?

  8. Suzie Krause January 9, 2013 at 9:53 am - Reply

    Shannon- I echo Gary’s question since this is an important distinction. I have been asked that question by potential borrowers. Thank you.

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