Overcoming Worry with Focus

Shannon Hicks October 19, 2012 25

“Worry never robs tomorrow of its sorrow, it only saps today of its joy.” said Leo Buscaglia. Welcome to Friday’s Food for Thought. I just returned from the NRMLA Annual Meeting in San Antonio. So why the quote? FHA Deputy Assistant Secretary Charles Coulter said in a session that they are considering substantial changes in “short oder”. The financial assessment is one, the other and more disturbing for some attendees was the fixed rate HECM. HUD is concerned about the vast majority of borrowers taking a full draw for the fixed rate…

25 Comments »

  1. jwolf October 19, 2012 at 4:47 am - Reply

    Possible reasons for the Fixed vs. Adjustable disparity (30% vs. 70%):
    1) Lack of product knowledge by LO; 2) Lack of understanding of borrower’s “stated need” by LO; 3) LO compensation structure that favors Fixed rate program.
    My experience has been the opposite (75% Adjustable vs. 25% Fixed), based solely on matching the best available product to the borrower’s stated need. As always, self discipline is better than formal regulation. If we work professionally and do the right thing for our client this should not be a problem.

    • Shannon Hicks October 19, 2012 at 5:24 am - Reply

      Very well said. We must police ourselves to protect the fixed rate program.

  2. jim spicka October 19, 2012 at 5:22 am - Reply

    So, a loan officer tells the client they can’t obtain a fixed rate lump sum but they can take out a traditional variable rate and still draw all the funds at closing, just like since the inception of the program. They might even have a new option that will allow them to take an initial fixed rate draw and a week later draw the remainder of the funds at a variable rate. Either way they have drawn all the funds early on. How does HUD discourage that?? Imagine the weird ill conceived rules that could be schemed up to deal with it.
    We have used a full draw of the variable rate product to pay off existing indebtedness since the beginning of the program. Will there be a fixed rate product available for this purpose going forward?
    Maybe if the financial incentive to do the fixed rate were eliminated it wouldn’t be so heavily sold to consumers.
    Last but not least, maybe the fixed rate principal limit factors need to be reduced in order to reduce claims against the fund.

  3. Jim Warns October 19, 2012 at 5:37 am - Reply

    If, as some have suggested, the primary use of the full-disbursement fixed rate has been to pay off an existing mortgage, the elimination of the fixed rate will not address HUD’s concern. Those borrowers will still take a full disbursement up front for the same purpose, but would have to do it under the variable rate option which would likely pose even greater risk to the FHA insurance pool.

    • Nancy Pedone October 20, 2012 at 3:20 am - Reply

      I agree with you Jim, more focus needs to be placed on Lenders and call centers who don’t ask the proper questions and who are only offering up the fixed rate. There are several that come to mind.

    • James E. Veale, CPA, MBT October 22, 2012 at 9:39 am - Reply

      Jim,

      If you read most of the arguments carefully, we do not want the fixed rate eliminated UNLESS we have a very flexible hybrid with a choice as to what percentage of the draw at funding (and funding alone) is fixed and what is adjustable. Any unused proceeds would be available through the adjustable rate portion of the hybrid.

  4. Bill Danner October 19, 2012 at 6:55 am - Reply

    The hybrid should have a good deal of appeal in the market place given a turnaround in property values especially when used in the refinance arena. BUT in the HCM for purchase area I really think that FHA is looking to remove itself from an over abudence of that product.
    Paying off debt and creating mobility in the market is the biggest drivers from our part of the industry. I have clients now who are having a new home built, selling their property up north and relocating to Florida and chances are that the property up north will be bought by someone up sizing and they will have a home to sell. The chain of movement is incredible aand should be looked at very closely. The senior is mostly fixated on a fixed rate where they are most comfortable. By changing it too drasticly, it could serve to cripple any growth.

    • Nancy Pedone October 20, 2012 at 3:43 am - Reply

      Bill,
      What would make you think HUD would want to limit the number of HECM for purchase loans on it’s balance sheet? The H4P borrower is more savvy and much less likely to engage in a T&I default. Just asking…
      I would think that it’s perfect and proper use of the fixed. What is the difference between paying off their current mortgage and purchasing a new home with a HECM?

      • James E. Veale, CPA, MBT October 22, 2012 at 9:51 am - Reply

        Ms. Pedone,

        What is perfect about fixed rate HECMs when used in a purchase transaction is that most consumers lose common sense and want to keep as much of the cash from the sale as possible. So who are fixed rate HECMs perfect for in those situations? Not necessarily the borrower.

        As to financing, the issues as to which kind of loan to take if the minimum amount of required financing is the same in a purchase or refinance, should be NO different. The fixed rate product is THE most over utilized in purchase transactions.

        The taxes and insurance issues are all the same whether the HECM is a traditional (old terminology, “refinance”) HECM or a purchase. If it is otherwise please provide the stats showing that.

  5. James E. Veale, CPA, MBT October 19, 2012 at 7:51 am - Reply

    As most people know I am a strong proponent of a hybrid FLEXIBLE product. The current fixed rate product should be eliminated as of “yesterday,” forcing both seniors and lenders to give a justification for a draw above 80% of available proceeds where those specific proceeds are not needed to pay off liens against the home which exist at funding.

    It would seem a 80% cap should be placed on payouts for the first 12 months following funding and a lenient policy should be in place for payouts above 80% in that same first 12 month period. The purpose of this cap is simply to put a warning system in place so that seniors do not feel obligated to take all proceeds at funding. The reason for paying out available proceeds above the 80% in those first twelve months (and only in those 12 months) should be in writing and kept at the servicer as part of HUD audit compliance.

    The espoused hybrid policy will allow borrowers to choose how much they want to borrow and not be FORCED into taking all of the proceeds. The FLEXIBLE part of that policy would allow borrowers to choose the percentage of the initial payout they want in the fixed and/or variable rate components. Any proceeds available after funding would be held in the adjustable portion of the hybrid product and available for payout as tenure, term, or as requested just as the adjustable product is structured today. The fixed rate component would be a closed end product just like it is now.

    If the secondary market were properly prepared through REAL education and accepted the product at prices similar to those we see today for the fixed rate component and also for the adjustable rate component (a separate pricing for each component), then it would seem the change would have high acceptance by the industry.

    I began this discussion in early 2007. Our senior management shopped the concept on the secondary market. At that time, there was only one HMBS being put together and secondary market response was the product concept was just too early for consideration and adoption.

    Now is the time for the hybrid FLEXIBLE product. If put into place properly, it should increase the interest of potential borrowers in HECMs, not diminish it. The time for a hybrid HECM was 2007 (and today), not some indefinite time in the future. We CAN let go of the current fixed rate HECM products if a strong hybrid is ready to replace it.

    • Shannon Hicks October 19, 2012 at 7:53 am - Reply

      Excellent points Jim and I agree. The time for the hybrid is now. Let’s hope HUD/FHA’s shot over the bow regarding the fixed rate HECM is a step in that direction.

  6. James E. Veale, CPA, MBT October 19, 2012 at 8:24 am - Reply

    Shannon,

    This post could have been presented as two, one as an industry update and the other as food for thought. BUT the apparent unnecessary worry over the potential loss of the fixed rate product as it is now constructed is an excellent example of the principle you present.

    However, I believe that in the so call Sermon on the Mount the best admonition regarding worry is presented, There Jesus admonishes those in attendance and us today to take no thought for tomorrow but let tomorrow take thought of itself but sufficient is the evil of today. His illustration of a lily in the field and the birds in the air is far more than profound. Of course my basic outlook is anchored by that man.

    The real food for thought is one we all need unveiled to us. Allowing worry to control us is like swallowing small doses of a poison which will eventually damage if not destroy us. Not all worry is bad but certainly excessive worry can rob us of some joys we might otherwise experience today.

    As usual, Shannon, each Friday you cause us to think about our practical living. The fundamental message for today was a particularly good one.

    • Shannon Hicks October 19, 2012 at 8:29 am - Reply

      Jim. Thank you for the kind words and also the good words regarding worry. I couldn’t agree more. We need to focus on what lies before us not letting worry rob us of the present.

  7. Jim Cullen October 19, 2012 at 8:49 am - Reply

    I am in agreement with the first comment posted. I have been originating reverse mortgages over eight years and my own ratio of ARM vs. fixed is about 70/30. Unless a borrower has an immediate need for a lump sum at closing the fixed rate really should never be used. The orignal intent of the HECM program was to provide senior homeowners a way to age in place by having a steady, predictable supplement to their exisitng retirement income. I definitely believe the compensation aspect has a lot to do with the current gap between fixed and ARM endorsements. As much as we would like to think everybody in our business is doing what is right for the borrower, there are those who are out to put as much money in their own pockets without regard to what is the right thng to do.

  8. Nancy Pedone October 20, 2012 at 3:47 am - Reply

    It’s those who were fiscally irresponsible their entire lives or never managed their finances due to their now deceased spouse handling them that get a fixed and get into trouble with it. We as lenders need to step up and take responsibility for this and police our mix of product distribution AND educate our loan officers. Loan Officers need to “ask the right questions” and companies need to be commission neutral with no caps on their compensation to their salespeople.
    There are Call Centers out there for major lenders right now that don’t even tell a borrower there is an adjustable rate product. Their primary goal is to just slam them into the fixed and on to the next one. That is the activity that is going to bring us all down. The industry just can’t tolerate that type of self-serving greedy behavior. If I were HUD and had to start somewhere- that would be the first place I would go. I truly applaud those loan officers who are not self-serving and take the time to place the borrower in the correct product. Their product mix resembles 30% fixed and 70% adjustable for those that are not in the business of foreclosure bail out.
    In the current environment, it is much more lucrative for a company to sell the fixed product. I am not sure what the fix is for that as it is dictated by secondary and a bit of a conundrum.

    • James E. Veale, CPA, MBT October 22, 2012 at 10:04 am - Reply

      Ms. Pedone,

      While I agree with your concern over the overuse of the fixed rate product, that should be your focus. Your comments on the reason for tax and insurance defaults are far too narrow and biased. Worse on that subject you provide no objective evidence and because HUD is gathering that data, you provide your detractors with the basis to question the rest of your comment on the over utilization of fixed rate HECMs.

      HUD needs no objective evidence to convince them that there is an the over utilization of fixed rate Standard HECMs in not only traditional but also even more particularly in purchase transactions. It also has NO objections to hybrid HECMs.

  9. Jeffrey Avella October 20, 2012 at 5:27 am - Reply

    The root of this issue lies in the LO Comp and the YSP set by he secondary market.I do believe in a fiduciary responsibility borne by the Lo,however we look towards the LO on this,,lets look at convential mortgage origination and the compensation guidelines,is HECM a exception when dealing with LO comp? I also feel our housing environment and the appraisal disparity results in the choice to draw down all the available funds in more cases then the choise to leverage a LOC.I am sure we have a increase of fixed rate loans due to economic drivers,,so why not just make the fixed rate open to all payment plan choices,then let the market sort it out,,they always do.

  10. James E. Veale, CPA, MBT October 22, 2012 at 10:22 am - Reply

    Mr. Avella,

    Despite your years of experience, I read your comment and get lost. The secondary market sets the pricing based primarily based on interest rates and type of product. They do not establish LO compensation but their pricing allows lenders to do just that.

    Most LOs have no fiduciary responsibility. For example in California the only LOs who have a specific fiduciary responsibility to the borrower are those who are licensed under the Department of Real Estate. As to lenders, most lending organizations licensed by the Department of Corporations have that responsibility (while their originators do not) and those licensed by the Department of Real Estate (whose originators do). Those loan officers and lenders who are exempt from licensing but not registration through the NMLS in California have no fiduciary responsibilities under federal or California state law.

    One CAN draw down all available proceeds through an adjustable rate HECM transaction at funding BUT is required to do so in a fixed rate HECM transaction.

    What banker/secondary market investor would want to do a fixed rate HECM if it had a line of credit? That is crazy!!! If the current rate is 8% a banker pays on financial products five years from now and the borrower can draw down a line of credit at 5% the arbitrage would kill the lending industry. That is why there is no such thing. The market already settled that issue years ago.

  11. Mike Gruley October 24, 2012 at 1:52 pm - Reply

    I agree that the fixed product is in need of some changes, however I still have difficulty with the assumption that the compensation advantage of a fixed loan is the root cause for the higher percentage being originated. It certainly isn’t for our firm. I am certain it is part of the cause, but when I look at the CFPB report showing that 61% of seniors age 62-69 have mortgage debt compared with 29% of seniors age 70+, it tells me that part of the shift in product usage has to do with necessity. And, when you see that the average age of the typical RM borrower has dropped by nearly 10 years in a very short time, we can presume that we are seeing the leading edge of the Baby Boomer Generation that is coming into the product already with much higher mortgage debt than previous generations.

    It is clear that the baby boomers are carrying significantly more debt into retirement than previous generations, and the contention that these younger reverse mortgage borrowers are taking on “more” debt may be incorrrect, at least partly. The fact may be that more and more reverse borrowers are “shifting” debt from one form (with payments) to another (without payments). Drawing a high percentage of the PL to acheive this goal may make great sense, especially in light of the low fixed rates they can lock into forever. This strategy was not in play for previous generations, and an LOC nearly always made more sense.

    Again, while I agree that changes need to be made, I don’t necessarily aspire to the thought that most of the fixed loan borrowers are being misled. There are always some, but I believe they are the minority.

    • James E. Veale, CPA, MBT October 25, 2012 at 10:24 am - Reply

      Mr. Gruley,

      I have a lot of trouble with your alleged facts; they are either just plain wrong or too elusive for establishing any conclusions.

      For example, where do you get the idea that “…the average age of the typical RM borrower has dropped by nearly 10 years in a very short time…”? Please offer any evidence pointing to such an event occurring.

      The HUD HECM Characteristics publication reports the average age of the youngest borrower fiscal year by fiscal year. Since inception, the highest age for the average youngest borrower was in the year of implementation, fiscal 1990, at 76.7 years. The lowest it has EVER been is last fiscal year at 71.9. That is not even a 5 year drop over the life of the program. Read the report yourself at:

      http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/hecm/hecmmenu

      Moving to the number of fixed rate originations which should have been adjustable, let us say you are right that a minority of fixed rate borrowers are in the wrong loan. What is that percentage? 49%?. Your comment provides more concern than comfort.

      Too much rumor and poor data rules this industry.

  12. Mike Gruley October 26, 2012 at 4:57 am - Reply

    Mr. Veale,

    There were only two facts implied by my submission. The CFPB information which is in their report, and the approximate 10 year figure which I must say is based on our experience. We have seen a very significant drop in the age of our borrowers. The fact is, Baby Boomers are entering our marketplace at a rapid rate and quickly displacing previous generations.

    The point of my submission was not to “establish conclusions,” it was only meant to point out that this constant drum beat that “lenders are overselling the fixed product” may not be as valid as many believe, and that there may be other significant causes of this phenomenon.

    The facts are (let’s say in general) that borrowers are getting younger, and more borrowers are members of the Boomer generation, a generation that factually carries more debt. Therefore, it is highly possible in my view that they have a greater need for a fixed product to which they can convert forward debt.

    Nobody is absolutely certain about this yet, neither you nor I, but I think it is worth thinking about before we assume that the fixed product is just being oversold by lenders opting for a higher commission. If product changes occur based on this one emotion-charged assumption, it will not serve the consumer or the industry well.

    You know I didn’t mean 49% when I said minority. C’mon Mr. V.

    • James E. Veale, CPA, MBT October 26, 2012 at 10:18 am - Reply

      Mr. Gruley,

      The 49% was a gesture in respect to you. (I am also showing great restraint and respect for you by ignoring your response.)

      You gave ONLY two reasons in your comment for the truly sudden increase in fixed rate endorsements from fiscal 2009 to fiscal 2010 and the foundation for one of them was so overblown it left one with no other choice as to what you believed the single most significant source is. Using the logic in your comment, the percentage I should have used should have been much higher.

      Like so many others rather than trying to find a reasonable cure, you are so caught up in scapegoating, you do not even mention possible cures. Why alienate the next generation of borrowers by using their actual debt issues in such an overblown argument?

      While I like you and believe in your integrity in the industry, I find these scapegoating games futile. While these games are going on, the percentage of fixed rate endorsements are still on the rise. The percentage of fixed rate Standard endorsements to total Standard endorsements were:

      0%, 0.1%, 2.4%, 11.6%, 68.9%, 71%, and 73.6%

      for fiscal years before 2007 and then fiscal years 2007 through 2012 respectively. The jump in fixed rate HECM Standard endorsement volume from fiscal 2009 to fiscal 2010 was from 13,258 to 54,498 while total endorsement volume dropped from 114,785 to 79,150. So please forgive me for disdaining the scapegoating game using bogus foundations for presumptions.

      I would rather be discussing reasonable cures such as FLEXIBLE hybrid HECMs. With and showing all due respect, what is your answer to the situation?

  13. Mike Gruley October 26, 2012 at 11:40 am - Reply

    Mr. Veale,

    I too look foward to meaningful, necessary changes to the fixed product. I too agree that it needs changes to better suit the MIP fund, consumers, and lenders. I adore the idea of hybrid product. We all agree. All I am saying is that there may be many causes for the rise in the use of fixed HECMs such as historically low rates, generational and cultural preferences and behaviors, and perhaps many other things including LO comp.

    I am respectfully suggesting that focusing, as many have done lately, heavily on the LO comp issue,
    or any other single issue for that matter, may perhaps be a distraction from all the many other factors that are likely in play. I don’t have a concrete solution, but I suspect discussions like these will lead us to one.

    That is all I mean to say. Thanks:)

  14. James E. Veale, CPA, MBT October 26, 2012 at 5:18 pm - Reply

    Mr. Gruley,

    As a preliminary item for discussion, one needs to define how the product will work. It should be divided into two distinct parts, one to operate just like the current fixed rate operates today and the other just as the adjustable rate does today.

    So the real issue is how to determine the principal limit for each segment. First, determine the principal limit for the fixed rate portion. First the consumer must select the percentage of the initial payout which will be fixed rate and multiply that by the proposed initial payout. Then divide the result by the fixed rate principal limit. That percentage is then subtracted from 100%. The difference is then multiplied by the adjustable rate principal limit and that becomes the principal limit for the adjustable rate portion of the hybrid at funding.

    For example, say the principal limit is $150,000 if the HECM were fixed rate and $153,000 if it were adjustable. The upfront total initial payout at funding including upfront costs is $91,325. The borrower wants 75% of that payout to be fixed.

    So rounding to the next hundred dollars, the principal limit for the fixed rate portion will be $68,500. The percentage of the initial draw which is fixed rate to the total fixed rate principal limit is 45.667%. Subtracting that percentage from 100%, the percentage of the principal limit on the adjustable rate segment of the hybrid is 54.333% or $83,200 (which is 54.33% times $153,000 including rounding up to the next $100).

    So at funding the Balance Due in the fixed rate portion of the hybrid will be $68,500 and on the adjustable $22,825. The available line of credit at funding would be $60,375. The combined principal limit at funding will be $151,700 ($68,500 fixed and $83,200 adjustable).

    From that point forward the two segments would be separate and the fixed rate segment would work just like the fixed rate does today and the adjustable rate segment like the adjustable does today.

    That is one approach and only one. There are many others just as valid but this one gives the borrower the option of deciding how much of the initial payout and only the initial payout will be fixed.

    Perhaps you have a different option in mind. If so, please describe it.

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