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Were They Consulted?


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Proposed HECM Rules Raise Questions of Industry Collaboration

collaborationIt’s no secret. For the last three years our industry has born the brunt of numerous changes to the Home Equity Conversion Mortgage program. Not only us, but senior homeowners applying for the loan. In the light of recent proposed rule changes one may be left with several lingering questions.

The latest round of proposed rule changes raises the question of consultation. In other words, were industry lenders and secondary market investors invited to the table before publishing proposed rule changes? The proposed adjustable rate caps warrant just such a question as secondary market players point out…

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  1. As I had stated in other publications, the “Cap” being referred to could have a serious impact in the trading of trailing GNMA’s. Especially in rising market conditions, these caps, as they may be attractive to the borrower and the origination market could put a stop in trading some pools that started out with low UPB’s. These pools could consist of low margin product and low initial rates, which may be fine for the initial trade!
    The problem lies in trading future pools, consisting of those same loans. Remember, pools that start out with low UPB’s, low margins and low initial rates trade again at some point in time as additional draws are taken against the line of credit or when tenure payments build up.
    With the proposed caps, based on those low initial rates (Especially ARM’s) in a high interest rate environment, could make that pool, untradeable! What do you think that would do for the marketability of the HECM, today and tomorrow!
    Like one of my colleagues stated, lets hope FHA is open minded during the comment period on this subject!
    In closing, my opinion is simple, this proposed rule needs to be “Eliminated” and laid to rest, as it stands, this rule could become the death of the needed HECM product!!!!!!!

    John A. Smaldone

    • John,

      It is not pools of future draws that would have trouble selling. It is hard to imagine investors buying the HECMs you described except at a discount even at closing.

      Unlike borrowers, investors know what yesterday’s loan terms were. There is no fooling them that today’s HECMs are no more risky than yesterday’s despite lower interest rate caps. If they decide to buy they will use the same parameters they did the day before. So lower caps call for lower premiums or bigger discounts.

      What lender can afford to sell their closed loans at a discount? Wells Fargo and Bank of America might do it for awhile but most of today’s lenders do not have so much profit from other operations that will more than offset and even dwarf any loss that they might incur with HECMs in that scenario.

      If you under the impression that HUD can lower interest rate caps on currently outstanding HECMs, it cannot do that retroactively. But it can do it on all closings prospectively.

      If the changes come, so will much higher margins. When those margins come, expect fixed rate HECMs to return to popularity and to see endorsements take further hits.

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