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What the HECM Happened?

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Our Industry’s History Reveals the Whys of Change

reverse mortgage newsI’m sure I am not alone in thinking ‘what the heck happened to the reverse mortgage program’. It’s only natural to find yourself pondering this quandary if you’ve been originating federally-insured reverse mortgages four years or longer. While asking the question will not change anything, we can put the puzzle pieces together with a short retrospective. Let’s take a short trip down memory lane.

2005: A year after creating guidelines for refinancing a HECM loan the first reverse mortgage refinances hit the market. A boon for lenders and borrowers alike as home values are appreciating rapidly, much to rapidly in hindsight.

2006: After years of struggling with county by county lending limits a national lending was established at $417,000. This was an immense help to borrowers with higher valued homes in counties where the average home value was much lower allowing them to substantially increase their benefits. In an appreciating market the risk was negligible.

2008: There were headwinds indicating a possible slowdown in the housing market but the crisis had not yet…

Download the video transcript for this episode here.

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10 Comments

  1. Whatever else happened, government remained in control of our futures and utilized this tool to stay in charge as they continue to dangle the FA poison over our drinks. Yes. No. Maybe. Maybe not. That pretty well sums it up.

  2. Great insight! The one other thing that occurred was that in 2008, HUD made it easier for mortgage brokers to do FHA loans and many sub-prime specialists who’s business disappeared when the housing market collapsed, discovered that reverse mortgages especially the HECM Fixed was an easy way to make a quick buck. That (in my opinion) is how most of the loans from 2008 – 2011 became HECM Fixed.

  3. Shannon,

    Good overview of the past 10 years. What happened, Personally I feel FHA/HUD had not done their home work like they should have.

    I also feel the CFPB interfered by creating a lot of pressure on HUD to make decisions they did not want to make.

    The FA ruling was partially a creation of the fear of an abundance amount of foreclosures coming down the pike because of borrowers not paying their T&I as well as other property charges.

    I suggested a long time ago to set up an escrow account where the borrower could make monthly payments into an account to pay these property charges when do.

    Seniors can handle monthly payments but have a hard time getting hit with large expenses all at once, such as the property charges that come annually!

    My suggestion was ruled out very quickly. Now you have the Life Expectancy Set Aside (LESA) fee, what do you call that?

    If you have a full LESA the service r will have to make the property charge payments, right?

    I could go on and on but why frustrate myself or others any more. It is plain and simple, we have to much Federal Government interference in every part of our walk in life! It must stop but how?

    Who knows what HUD will come up with now, especially after they review all they have done thus far. What about all the educational courses we have all been taking, what changes to what we have learned up to this point will take place?

    Time will tell???

    John A. Smaldone

  4. Great title! And great overview of the changes. While I miss the days of “easy” processing, I accept the changes. My philosophy is to adapt, keep educating about the benefits of the reverse mortgage and helping seniors have funds during their retirement years. I have found that once the change is made, not to focus on the change with the seniors, which I think puts fear in their minds and scares them from doing one. Just explaining the program as it is, focusing on the benefits, the seniors don’t/won’t even think about what was…but how they can take advantage it.

    • I agree.

      Your reasoning is exactly why it seems calling the current HECM “New” is to put the emphasis on the changes. When someone tells me that a car model is NEW, I want to know how it differs from the other models before it and the ones that continue. Do we really want the focus to be on the changes of the current HECM?

      Calling the current HECM, the Saver v.3, just means that there have been some tweaks but basically it is the same HECM we have known for four years. Then the issue is how is the v.3 different from the v.2. The answer is not much except that the principal limits are a little better for most borrowers at the current expected interest rate levels and HUD has added some benefits for spouses who were not borrowers at the time the loan was taken and meet certain qualifications.

      Calling the current HECM New has added no growth in endorsement numbers and the TV ad results for the Extreme Summit in three mid size markets is generally considered an abject failure described by NRMLA euphemistically as mixed results. In fact endorsement numbers, the true test of success or failure was over 10% worse for fiscal 2014 than for fiscal 2013 with only 2005 as a worse year for endorsements in the last decade than 2014. The “New” campaign by its own measure of success (more endorsements) can only be considered a total failure at the cost of hundreds of thousands of dollars and wasted time and talent.

      When we call the current HECM new and emphasize that it is safer today than ever before, we are walking right into the change argument and worse we are focusing on the changes which went into place on September 30, 2013 rather than those that went into effect on August 4, 2014. Which set of changes do you want to focus on?

      Good comment.

  5. The history of the fixed rate HECM is probably the most understood part of our industry today as is the history of the HECM for Purchase. From the beginning HUD has permitted fixed rate HECMs but not HECMs for Purchase.

    The participation in Ginnie Mae issuance had absolutely nothing to do with the first endorsements of fixed rate HECMs. According to the HUD generated Outlook report which provides details on endorsements, the first fixed rate HECM was endorsed in the first half of April 2007 (gleaned from the prior information on the April 2008 report) although there is no published information on HECMs before fiscal 1998.

    The total fixed rate HECMs endorsed in fiscal 2008 was 2,658. For a product which allegedly had not even originated, the endorsements for fixed rate HECMs was greater in that fiscal year than for any fiscal year when it comes to HECMs for Purchase.

    Let us say it another way. HECMs for Purchase have never reached a single fiscal year total of 2,650 endorsements which fixed rate HECMs did in its first full year of endorsements and before it supposedly was ever originated.

    We should not be surprised. History is rewritten all of the time according to the need. Shannon was simply reciting the most popular version of the myth about fixed rate HECMs.

    What is very crazy to me is that in fiscal 2009, we did not have fixed rate HECM originators calling themselves fixed rate HECM experts the way we do today with HECMs for Purchase. Yet fiscal year 2008 had more endorsements for fixed rate HECMs than we have had of HECMs for Purchase in a single fiscal or calendar year. Yet we saw our first HECM for Purchase endorsed in fiscal 2009!!! Talking about the HECM world being turned upside down!!

  6. For over a year, we have been telling seniors that the HECM is now a better product. In the last decade I do not remember the industry ever coming together the way it has to tell the HECM story the way it has in the last two years through the Extreme Summit.

    Last fiscal year almost every lender had a campaign to grow endorsement through reaching out to the financial planning and management community. There has also been an enormous push into the Realtor and builder communities. There seemed to be no slow down in Fred Thompson commercials or other general marketing efforts.

    So despite seeing never seen before efforts on four distinct fronts, the results were significantly fewer endorsements for fiscal 2014 than for fiscal 2013. It seems the restrictive measures taken by FHA more than offset the expanded efforts by the industry as a whole and each of the major lenders individually.

    The elimination of all Standards and the new first year disbursements limitation would seem to have done what HUD needed, eliminate the most potentially dangerous HECMs to the MMI Fund. BUT did it also do what lenders needed and sufficiently mitigate property charge defaults?

    What seemed a necessity when MetLife was still in the industry may not be as imperative today. Perhaps lenders will start backing away from their demand for such a strenuous form of financial assessment. Some of the scare in the last five years over excessive property charge defaults due to so many homes being underwater may not seem as overwhelming now.

    Perhaps the September 30, 2013 changes were enough. During this delay, lenders should be asking themselves as well as FHA whether this is the time for lender financial assessment. In my opinion, lender financial assessment can wait until property charge defaults actually present the reputation risk they did 4 years ago. At least there is a policy in place which can be instituted if a similar crisis develops in the next few decades.

    In conclusion, why not drop lender financial assessment until the situation calls for it sometime in the future?

  7. Shannon,

    Great piece and very well timed.

    Like in all matters of life, knowing our history decreases the chances of making the same mistakes.

    And that is the point much of our industry seems to have a problem with. It was our mistakes that caused most of our problems.

    Originations fees had to be capped to prevent the greed that was spreading throughout the industry. This greed was made even more aggrieves when you consider these fees were being charged to a very “needs based” group of clients.

    Loan officers “urging” clients to take a lump sum simply due to their higher commission schedule on that option. (Hello Dodd -Frank)

    Lending tens of thousands, and in some cases hundreds of thousands of dollars, to people with such bad credit history that we knew they would squander their money and ultimately lose their home. (Hello financial assessments)

    The truth of the matter is this great product was “flawed” from the beginning. The unusually high upfront costs and the lack of any type of qualification process gave us the label of “product of last resort” and we’re still fighting that reputation today.

    These changes, whether made voluntarily or forced upon us, were necessary for the reverse mortgage to survive.

    And this is a god thing…

    • Mike,

      There are several points we agree on and some we do not.

      You state: “Originations fees had to be capped to prevent the greed that was spreading throughout the industry.” Origination fees were capped under HERA on July 31, 2008 when the industry was selling all of its production to FNMA. It was not until early 2009 that we began securitizing through GNMA. It was the securitizing process that brought us huge premiums on the back end and competition drove not only origination fees very low but also upfront MIP.

      Then you say: “The unusually high upfront costs and the lack of any type of qualification process gave us the label of ‘product of last resort.'” While that is an interesting view of the product, neither reason is all that compelling. Combining the potential ratio of high balances due to home value at termination and seniors not paying down their balances due, leave many seniors vulnerable to losing their greatest investment at a most inopportune time especially if there is a need to move to a medical facility for over a year. It is that vulnerability and false sense of security that has driven many senior advocates to proclaim HECMs as the loan of last resort. But we all know that is not how it has to be nor should be encouraged to be.

      Which leads me to HECMs for Purchase. When the percentage of endorsements was over 70% fixed rate Standards, 97% of all HECMs for Purchase were fixed rate Standards. Yet even to this day we hear that the business model for a HECM for Purchase is with a fixed rate HECM. Why? The HECM for Purchase has no design differences from the Traditional HECM and if seniors could have kept proceeds below the 60% first year disbursements limitation they would not be subject to additional upfront MIP of 2% of the maximum claim amount. Also the risk from negative arbitrage would be greatly reduced if seniors did not try to unnecessarily hang on to their cash when the best line of credit available in the lending industry could help them.


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