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A Dysfunctional Marketplace?


The Mortgage Professor Examines the HECM Marketplace

reverse mortgage newsDysfunction: abnormal or impaired functioning of a person, organ, or in our case Home Equity Conversion Mortgages. Is our market truly dysfunctional? If so, what corrections can we make to better expand our reach to eligible homeowners?

Some people report on what is. Others ask the more difficult questions of ‘why’ and how to fix it. Jack Guttentag, also known as the Mortgage Professor is the latter. His recent column in Wharton University of Pennsylvania’s website should grab the attention of every reverse mortgage professional. Guttentag opens stating, “More seniors should be funding their retirement years by drawing funds from their home equity through reverse mortgages. But not enough homeowners do it because of a dysfunctional HECM market, as well as fear, ignorance, and distrust of reverse mortgages that make seniors stay away.” Point well taken since industry estimates show us having a mere 2% market penetration of…

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  1. I have to respectfully disagree with the Mortgage Professor.
    It’s not the HECM market that is dysfunctional. It’s the HECM industry that is very dysfunctional!
    And until that changes we will continue to maintain our present image of a needs based “product of last resort.”
    And with that very negative image comes our very minimal penetration into the mainstream financial community.
    Sad, but true….

    • Mike,

      This might not be considered respectful but I find myself disagreeing with both views.

      It has taken almost four years but it is nice to read members of the industry finally being realistic. Shelley gave a similar view in a post yesterday on RMD: “Giordano said. ‘I was surprised to learn that equity release in the U.K. is originated by financial advisors, given the lack of cooperation with the financial planning community we see in the U.S.'”

      The truth is the industry does not know how to sell HECMs as the cash flow products they are. Originators want to sell them as an aging in place product, or as a buffer asset, or as catastrophic loss insurance on home values. Few originators in the industry know what to do with the “NEW” reverse mortgage.

      Once shallowly understood, strategies are promoted as if cure all. Most have no idea how to construct relevant examples and compute results. Yet they refuse to learn fundamental time value of money mathematics. It is as if, their software should be adaptable even though they do not understand what is needed.

      What is needed is a core of originators who have financial math backgrounds, understand what a cash flow projection is and how to demonstrate solutions in various scenarios. All of this will take time. Between now and then, be prepared for more disappointments.

      Right now our product is more adaptable to being a mortgage of last resort than ever before. It still has potential but it is not the product it was on June 1, 2009 just after the lending limit became a nationally uniform $625,500 and principal limit factors were at their peak.

      With the changes HUD is now proposing, it is hard to see the product becoming a “better” cash flow product.

      We need change but will come in time to turn this around before 2023?

  2. when you have dysfunctional people messing with
    something that needs sold that’s what we have.
    The financial assesment is an over kill That puts good people thru the ringer. How many seniors have
    credit that quallifies?

    • Cliff,

      If endorsements tell us anything, the answer to your question is 85% of those who qualified in fiscal year 2015.

      Calling the people at HUD dysfunctional is unacceptable. I agree that financial assessment was overkill but at least blame the right people.

      It was Wells Fargo, Bank of America, MetLife, Quicken, and AAG. They wanted it, could not agree on what it should look like, and the last two were pleased when HUD finally took on the project. HUD did NOT want to do this. HUD even told the lenders that they had the right to make up their own and MetLife did for a while until they found out the hard way that the other lenders would not.

      By the way the last point is exactly why the Extreme Summit was doomed from its start. It was a terrible idea that met a well deserved end.

  3. No disrespect intended Cliff but this is exactly what I mean.
    FA was not over kill, it finally made us into a real mortgage.
    And as a matter of fact, even with FA, we are still the easiest mortgage in the nation to qualify for…
    You want a no income, no credit verification loan. Those days are gone and as well they should be.
    And as a matter of fact, how many seniors have credit that qualifies? Millions…

    • Mike,

      Too much of this industry is based on vague idealism and anecdote. If in fact HECMs were more appealing because of financial assessment, where are the endorsements matching and verifying that conclusion? All your comment does is bring us to a perverted version of the future that has little foundation in fact.

      So how will this fiscal year’s total endorsements fare? We are staring at endorsements of less than 50,000 for the twelve months ended August 31, 2016. RMI clearly shows this number in its 12 month endorsement trailing total of 49,844. Yet somehow RMI failed to report this in the summary of significant information linked to its August 2016 HECM Lender’s Report dated 9/1/2016. This is the first time in a decade the industry has suffered an endorsement volume of less than 50,000 for any 12 month period since December 2005.

      How do you know that the version of Financial Assessment proposed by Dr. Moulton in her OSU study would not have done a better job at a lower loss in endorsements? Using the more common measuring device for credit of FICO, the proposed version might have been better received, more effective, and less of a burden on underwriting and processing overall.

      The four reasons that we did not need the draconian financial assessment provided by FHA on 4/27/2015 are as follow: First, the economic environment is much better than at any time since 2007; second, home values are less prone to volatility and are generally rising; third, lower principal limit factors seem to be eliminating many of the applicants who would be the most likely to default on payment of property charges; and fourth, the test for the maximum disbursements available in the first year also should eliminate a significant number of those who might default on payment of property charges. While the first and second premise could change, no substantive economic authority is predicting much change in the near future or much later. As to the last two, nothing is on the rise that would indicate either of them will be changed any time soon.

      However, FHA should neither eliminate the current Financial Assessment nor adopt the one proposed in the OSU study. FHA Financial Assessment must be modified to lessen the 15% drop in business we saw this fiscal year but be sufficiently strong enough to meet the elusive standard of acceptability by the financial community and senior population generally.

      You bring us no evidence but make claims that go against the facts. HECMs have always been a nonrecourse mortgage to say otherwise shows a fundamental lack of understanding what repayment is solely dependent upon. You can talk about perception but endorsements speak otherwise. Seniors and financial services industry vote on their perception by originating HECMs which ultimately show up in endorsement numbers.

      Forgive me for not believing the hype. In 2006 and 2007 the hype was that proprietary reverse mortgages would dominate originations by the end of fiscal 2010 and the industry would still be on the rise. In 2012, it was the Extreme Summit that would turn our endorsement count around. In 2009, it was HECMs for Purchase that would be a significant percentage of our endorsements.

      I know you see facts as nothing more than debris in your outlook of the future. Yet no one can escape them and be considered credible.

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