Homeowners Marooned

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Australia’s cautionary tale for America

[Download transcript] It’s said that nature abhors a vacuum. In the case of Australia, the question is who will fill it? Like an episode of Lost, senior homeowners in Australia now find themselves marooned being unable to tap their equity with no monthly payments. “Retirees are being blocked from accessing the money trapped in their property as banks pull out of the reverse mortgage market, fueling a growing income inequality among older Australians”, writes columnist Eryk Bagshaw for the Sydney Morning Herald. We had reported the recent exit of Australian banks from reverse lending in the wake of several large bank exits, many who feared repetitional risks in the wake of several negative media stories.

Even retirees who made contributions to Australia’s superannuation fund find themselves facing poverty. The superannuation or super is Australia’s compulsory program which requires compulsory minimum contributions of a percentage of one’s income into a government-managed portfolio. Australia, like many developed countries, finds itself threatened by tax policies which limit tax-advantaged retirement savings contributions. Today Australia, like the United States, is grappling with how to keep their rapidly expanding older population from slipping into poverty. or placing a further strain on its social welfare programs.

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Will this Save the Reverse Mortgage Industry?

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More looking outside the HECM as a single solution

What will save the reverse mortgage industry or at least put us back on a trajectory of sustained growth? One industry leader sees a path for recovery- one that broadens our vision and approach. Finance of America Reverse’s President Kristen Sieffert has successfully made inroads in expanding the reverse mortgage’s appeal. First, by engaging traditional mortgage originators through a strategic campaign that couples education and motivation. More recently, she helped shape Finance of America’s flagship jumbo reverse mortgage- the HomeSafe Select. The loan’s unique features such as a line of credit and the ability to be placed as a second lien behind a low-interest rate first mortgage align with the lender’s mission to be a retirement solutions provider.

So what is the solution to stop the slide in loan production? “It’s critical to be focused on what will help Americans get to work on retirement more holistically”, says Sieffert in her recent interview with the Reverse Review. “Historically our industry has offered a single solution to everyone...

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2018: A tumultuous year for the reverse mortgage

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As we closed out a tumultuous 2018 reverse mortgage professionals were not anticipating a blockbuster month for HECM endorsements. However, many were taken aback when December endorsements came in at a meager 1,751 units. Even factoring in the government shutdown which halted endorsements on December 21st, estimates would have only placed us at 2,300 plus units had the government remained fully operational. A record low by any measure. In fact, December was the lowest monthly volume of HECM endorsements since 2004.

Suffice it to say, 2018 ended with a whimper after a year of slumping volumes. Most industry participants rightly point to the trifecta of changes enacted on October 2nd, 2017 as the primary culprit for lackluster loan volume. The brutal truth is that 2019 will continue to test HECM professionals and lenders alike, albeit not an insurmountable challenge.

Jumbo Reverse a Respite for Some

Originators in high-value markets such as California and Washington state stand to benefit in originating private jumbo reverse mortgage loans while decreasing their dependence on the Home Equity Conversion Mortgage. However, most will find themselves working harder not only to prospect older homeowners but the shrinking pool of those with enough equity to qualify.

Future value of HECM program

The specter of increasing ‘losses’ from HECM loans in FHA’s portfolio has been with us for several years and will continue. A dearth of more specific data for HECM insurance claims by real estate market, product design (fixed, adjustable, etc), and average home appreciation rates have left many wondering how countless reforms have failed to stop the bleeding. Such data would help pinpoint the factors contributing to losses in the HECM program. Truth be told, the economic value of the Home Equity Conversion Mortgage will continue to vary significantly each year as its future valuation is extremely sensitive to current interest rates and home appreciation.

And speaking of appreciation, while the application of a national PLF for all HECM loans may be easier to administer, it also increases the likelihood of loans in markets with little or no appreciation resulting in an insurance claim. The result- PLF reductions for all borrowers- regardless of their market or historic appreciation rates.

What lies ahead this year?  Expect increased scrutiny of HECM foreclosure timelines, more effective verification of borrower occupancy, and a final determination of the effectiveness of the second appraisal rule.

Government Shutdown, Endorsement Plunge & Outlook

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Thinking Big in a Smaller Market

The bickering continues in Washington DC resulting from the budget stalemate and subsequent limited government shutdown. Veteran originators will recall a 16-day shutdown in October 2013.  During this time endorsements of all Home Equity Conversion Mortgages cease. All FHA mortgages stand to be impacted the most during this temporary shutdown. Payments to reverse mortgage borrowers will not be interrupted but endorsement numbers for December and January stand to be somewhat skewed as a result.

The number of federally-insured reverse mortgages endorsed in the month of December was just released. A record low 1,751 Home Equity Conversion Mortgages were endorsed. For some perspective December endorsements totaled 4,765 in December 2017, 4,658 in 2016, and 4,233 in 2015. This December’s volume was somewhat of an outlier being only 68% of November endorsements, whereas in previous years December typically reached 90-100% of the prior month’s volume.

While we may collectively dream big as to how we would like to see our business and industry grow in 2019, we must also embrace the fact that we are a much smaller industry than just a few short years ago. As a result, brokers and lenders will become increasingly lean in their overhead costs and nimble in their marketing efforts. Long-term operators have addressed these challenges 10 years ago in the wake of the housing and economic crisis of 2008. What’s different this time is that interest rates are relatively stable and home appreciation is slowing moderately. The two legacy reforms that continue to impact the acceptance of the HECM are the decreased interest rate floor of 3% and numerous principal limit factor cuts...

HECM Risks: A Balancing Act

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FHA is addressing risks on both sides

The federally-insured reverse mortgage or Home Equity Conversion Mortgage while holding tremendous value has been challenged with continued losses paid from the FHA’s insurance fund. In the wake of the housing bubble and economic crisis the program, several changes were enacted. The repeal of the standard fixed-rate HECM, the introduction of the HECM Saver, increases in mortgage insurance premiums, the financial assessment, first-year distribution limits, repeated principal limit factor reductions, and most recently, the enactment of the second appraisal rule as part of the Collateral Risk Assessment. The pace of these changes increased with the passage of the Reverse Mortgage Stabilization Act of 2013 which allows HUD to establish new rules via mortgagee letter rather the previous protracted rule-making process. The intention was to allow the agency to act quickly to slow the mounting losses incurred by the program.

When it comes to HECM risks there are basically two types: front end and back end. Front-end risks would include the valuation of the home, lending ratios or principal limit factors, and product design.

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FHA Commish speaks out on HECM Fix


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FHA Commissioner doing ‘deep dive’ to isolate source of HECM losses

The following commentary does not represent the official position of Reverse Focus, Inc.

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FHA Commissioner Brian Montgomery

 

Last October just days after the agency enacted substantial cutbacks to the Home Equity Conversion Mortgage, HUD Secretary Ben Carson spoke before the House of Representatives saying “the changes we’ve made will sort of stop the bleeding in terms of new reverse mortgages”.  However, despite rising home values, numerous program tweaks and lending ratio reductions the program continues to raise concerns among lawmakers who see increasing liabilities in FHA’s Mutual Mortgage Insurance Fund.

FHA Commissioner Brian Montgomery addressed this challenge in a recent interview with Reverse Mortgage Daily “We are digging deep in the portfolio to find out of the problem is on the front end or the back end,. My sense is that it’s more on the back end in terms of the losses we are experiencing.” Commissioner Montgomery is rightfully concerned that many of the HECM program’s ‘losses’ may be on the back end since HECM liabilities continue to mount even after the enactment of the financial assessment, principal limit or lending ratio reductions, and first-year distribution limits.

One area that FHA intends to closely examine is the appraisal process- more specifically to see if home values are being artificially inflated. The concern is heightened since properties with a HECM tend to depreciate more quickly than homes with traditional mortgages, said Montgomery.  FHA will be comparing existing appraisals with AVM

Download the video transcript here

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HECM declines: A new approach needed


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Fees, lending ratios (PLFs), and market growth

The following commentary does not represent the official position of Reverse Focus, Inc.

perspectiveYou don’t have to the read industry blogs to know that reverse mortgage volumes are in retreat, not only from the historic levels, but even from the previous year. Recent data shows current 2018  HECM endorsements  are down 13% from the previous year. As reported here, last month Reverse Market Insight saw signs of a potential leveling off of market volume with May HECM endorsements nearly identical to April. However many originators in the field remain challenged in the post-October 2nd world of originating HECMs. HECM professionals are finding that many interested homeowners no longer qualify due to the last round of lending ratio or principal limit factor reductions enacted last Fall.

However, some HECM lenders and originators have bucked the attrition in loan volume posting gains in 2018. They key? Specialization

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Stability, Marketshare & Appreciation


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Fees, lending ratios (PLFs), and market growth

The following commentary does not represent the official position of Reverse Focus, Inc.

balancing_actSince the housing and economic crash nearly 10 years ago our industry has valiantly labored to not only increase reverse mortgage acceptance and loan volume but also adapt to a plethora of new regulations and HECM program reforms. The real test of our industry and the Home Equity Conversion Mortgage is to balance the need to reduce program risks while ensuring the HECM remains accessible to older homeowners.

On one side many originators cite the two biggest challenges to increased acceptance as high upfront costs and reduced principal limit factors or lending ratios. On the other side, HUD faces the task of taking measured steps to reduce the likelihood of HECM loans resulting in an insurance claim or payout. Recent reports showing increased ‘losses’ in the program have resulted in significant HECM cutbacks in recent years. The tension lies between increasing accessibility to the HECM while successfully managing the risks to the FHA insurance fund which has backed the program since 2009.

Earlier this month the Brookings Institution (a Washington D.C. think tank) advocated for a ‘reformed’ reverse mortgage. Their proposed reform? Offer reduced FHA insurance premiums for low-risk borrowers utilizing fewer funds- in essence, a return of the HECM Saver. The study as covered in Reverse Mortgage Daily elicited a slew of comments-many which took exception to the study’s conclusions. Perhaps overlooked was the Brookings Institution’s outright support of the HECM program.

Beyond the debate or reintroducing a Saver product lies the question- what will increase acceptance of the federally-insured reverse mortgage?

Download the video transcript here