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“Handle them carefully, for words have more power than atom bombs.”
Pearl Strachan
Ironic. That is on the eve of the National Reverse Mortgage Lender’s Association Annual Meeting in San Antonio the New York Times published a front page expose “A Risky Lifeline for the Elderly is Costing Some Their Homes”. The morning prior to the conference members quietly discussed their concern if the article would create substantial public fallout. After a year and a half of mostly positive press since the introduction of the HECM Saver has the media pendulum swung back to its traditionally negative view? And more importantly, does the article point out some legitimate issues that we as an industry must address?
Words are powerful
The media’s choice of words when discussing reverse mortgages is not a matter of chance but design. For example the word “pitch”. Referring to selling a “pitch” is often used in a negative light to describe a huckster selling an inferior or worthless product much like the traveling snake oil salesman in the old west. Columnist Jessica Silver-Greenberg’s sees lenders ‘pitching’ reverse mortgages to those who cannot aford it nor the property taxes and maintenance. Choice of words aside this makes absolutely no sense. Haven’t these same senior homeowners paid property taxes and maintained their home long before getting a reverse mortgage and wouldn’t they continue to do so regardless? This begs the question, how would increasing one’s cash flow also increase the risk of default from not paying property taxes?
The choice of words by some reverse mortgage originators cannot be overlooked either. I have lost count over the last eight years on how many mailers promoted the loan as “free money” and claims the borrower could never lose their home. Certainly these misleading and outlandish claims have diminished greatly over the years, yet those who continue such practices provide easy ammunition for critics like the Times.
Time Bombs
Both the removing of a younger spouse from title and the disproportionate number of fixed rate HECMs have come back to tarnish our industry’s reputation in the eyes of some. The Times article cites two heartbreaking examples of widows facing foreclosure having been removed from title. Contrary to what the article claims most instances of removing a spouse were not done to increase commission payouts but rather to make at least one borrower eligible if the younger spouse was under the age of 62. Regardless of motive, any spouse removed from title to close a HECM poses a potential future time bomb, creating both legal and repetitional risks.
Then there is the fixed rate HECM. It’s a case of numbers and trends creating the perfect storm. The introduction of the fixed rate in March of 2008 and investor’s preference for a product less risky than the adjustable rate created a demand that proved profitable for both lenders and investors. Consumers won in part as well as many lenders waived origination fees ‘sharing’ some of the profits from the secondary market. Now with nearly 70% of HECMs being fixed rate the specter of greed has risen in the minds of media critics and government regulators.
Following the refinance boom and housing crash of 2008 the introduction of the fixed rate HECM could not have come at a better time. Many retirees found themselves enticed to either refinance their mortgage and in many cases take cash out. This left many with higher mortgage balances. The fixed rate HECM had a higher principal limit often needed to payoff the existing mortgage balance and close the loan. A strong argument for “need” versus greed could be made in many instances however high compensation to brokers can not be overlooked. . A risk-adverse FHA who insures these loans sees future risk of these full draw products accelerating loan balances leading to more insurance claims and reassignments. Some lenders sensing the potential backlash and seeking to remove undue influence in product recommendations, have adjusted their commission schedules to equalize fixed and adjustable rate payouts to originators.
Moving forward
One front page story critical of our industry does not constitute a crisis. After all, how many of our potential borrowers read the New York Times. It does however point to the need for our industry to improve it’s effectiveness in policing itself. We serve two missions: to help our senior borrowers and make money in the process. No real business should ever apologize for making a profit. After all without profit we would not remain to serve the needs of future borrowers. However, we must take an unflinching look a media negativity (even when inaccurate or exaggerated) and ask “what brought this about?”. The silver lining of this article and even the CFPB’s report to Congress is that such criticisms may drive innovation. The HECM Saver answered criticisms of high costs and perhaps a future Hybrid HECM (fixed & adjustable rate) would improve the reality and perception of consumer choice and care.
Self-policing our industry and responding to an ever evolving borrowing climate will serve both lenders and borrowers well. As for the media, good news doesn’t sell as good as bad but we can work to eliminate easy targets for criticism.
14 Comments
Shannon,
Great article!
It was not just well written but was well balanced and thought provoking.
Shannon is absolutely right about one article not making a crisis of any type. This comment is not about basic content but rather emphasis.
Much of the very well worded and genius marketing of the past belongs THERE, in the past. For example, some still love the phrase “the house pays you.” But the fundamental truth is the HECM contract is not between the home and its owner but rather between a mortgagee and mortgagor. While it is a very slick description for a nonrecourse option pay negatively amortizing mortgage, that is all that it is, slick wording. The phrase may be OK to use in an extended presentation where such illustrations can be clarified, but in a one minute ad it can hardly be classified as responsible, ethical, financial product advertising. It leads observers to believe that the product is far more simple than it is and less financially detrimental that it can be.
The first indication of an endorsement of a fixed rate HECM is in the HUD Outlook report for April 1-15, 2008 where it shows that the first fixed rate HECM was endorsed in the prior fiscal year (ended September 30, 2007). That means in the three highest fiscal years for HECM endorsements, fiscal years 2007, 2008, and 2009, fixed rate HECMs were being endorsed. There were 120 endorsed during fiscal 2007, 2,667 in fiscal 2008, and 13,258 in fiscal 2009. That is a total of 16,045 fixed rate HECMs out of a total of 318,357 HECMs endorsed in that 36 month period.
All of a sudden in fiscal 2010, fixed rate HECM endorsements shot to 54,498 out of a total 79,106 HECMs endorsed which is 68.9% of all HECMs endorsed in that fiscal year. That is an enormous change.
Fiscal 2010 is also the second fiscal year of higher volume GNMA activity. In November 2007, the first HMBS was issued with another coming in the next year. During fiscal 2009, the next 16 were issued. Before fiscal 2010, the investment community was just beginning to warm up to our adjustable rate products. Without Fannie Mae to sell to, lenders put a huge emphasis on fixed rate HECMs not only because it provided much better profits but they also were in higher demand in the secondary market.
Not only does HUD need our fixed rate numbers to drop but so do lenders when it comes to T & I defaults. The hybrid HECM is a great option for seniors since it can be structured just like our current fixed rate HECM but also always HUD to mandate written explanations for total payouts exceeding 80% of the principal limit at closing including closing costs since it is nothing more than part of the initial cash draw at funding.
I’m an LO with a journalism background so my criticism of the NY Times article is mostly that it was poor writing, choosing to look for holes in the RM program without a comparison of the choices. People who slam the RM product because it has challenges without painting an accurate picture of the senior financial choices in the retirement phase is one sided and inaccurate and amounts to flimsy journalism to grab a headline. It’s not RMs that are in trouble, it is the NY Times. I’m sure the RM product can use more focused fixes, but in the end, it is much superior to the alternative 20 year forward loan it replaces to help limping seniors get home.
Mr. Strycker,
You brought a very interesting perspective. But you are right the NYT is not trying to help seniors with these types of articles but desperately attacking others all in the hope of seeing higher sales volume.
A top notch presentation and Shannon hit upon earch and every issue of import and consequence, especially the “self policing”. This part can and will be the hardest “sell” (Pitch) to industry partners who could not survive without the lavish YSP’s associated with the fixed rate product.
Time will tell.
A sage observation of journalistic motivation as well.
We could use more of this at the Association level as well.
Mr. Spicka,
NRMLA is doing a lot about negative press, more than ever before. It is hard to fault them on that front based on their costs and shrinking revenue base. Too many do not understand the situation NRMLA finds itself in.
Shannon does a great job with industry insiders but his influence is very limited which to tell the truth is sad. It would be great if besides Mr. Peter Bell, and Mr. Jeff Lewis, Shannon was another face of the industry to outsiders. He would be a help to all of us.
Another perspective is that ARMS have been suspect to the public since their inception, and people in their sixties and seventies are even more suspicious of ARMS. Younger people who know they will likely only be in a home for five years or so often opt for an ARM to keep their monthly payments low. There is no need to do that today, since long term fixed rates have been so low.
It might be well to study the statistics of the lowering of the age of recent and current applicants for HECMS. According to recent reports approximately 70% of all applicants take a fixed rate primarily because the higher payout is necessary to pay off a current mortgage. Loan officers should not be indicted for their customers financial condition; they are simply serving them what their condition requires. This phenomena may be the result of refinancing at say, age 50,; then when sixty five comes along they either voluntarily or involuntarily are retired with another fifteen years of mortgage payment to make. This is an example of short term relief becoming a monster when the payment is nearly impossible to make.
The number of HECM products available are probably way out of proportion to the needs of the seniors. When the payout is the same for ARMS wih different margins it is often difficult to explain why one might be better than another. One of the key questions should always be “can you sleep at night knowing the ARM can go up while the fixed rate cannot ?”
On a personal note I never take an application for only the borrower who is married to a much younger person without advising them to carefully think over what could happen.
With the economy in such dire straits many seniors are looking more to staying in their home rather than having to move in with children. Fewer and fewer are holding on to the old feeling of “I want to leave something for my children, and my home is all I have”. Even with all the newer restrictions and constrictions placed on our industry it is my opinion that the two biggest deterrents to funding more HECMS are the children and low valuations. It takes a very determined set of parents to go against the demands of only one child who does not want mom and dad to dilute their future inheritance.
There is little we can do with low valuations, but it would seem that if seniors take a reverse in these down times the value of their home is very likely to increase when the economy revs up again, and if that happens then FHA’s mortgage insurance fund should not suffer because there will be so much more equity in all the homes that were appraised during these tough times..
The two issues spelled out in the NYT article are very much at both ends of the spectrum.
Removing a younger (under 62) spouse should be a drastic last resort move to losing the home anyway. That younger spouse must not only have “counseling” but sign off after reading in 30 point type that they understand they may be foreclosed upon in the event that the other spouse passes or ceases to reside in the home.
I know of some local bankers that have unlicensed “reverse mortgage marketing reps” running all over the NY metro area fast talking deed changes to make deals happen – this is pure greed. Pigs will get slaughtered. And as usual the few dirty pigs will stink up the entire pen.
Regarding fixed rate vs ARM product – what I have found is that the large existing mortgage balance dictates the need for a fixed, both from a loan size perspective as well as how much of the proceeds are being utilized instantly. I understand that not needing the majority of the proceeds now makes the ARM look attractive – but the cap on the maximum interest rate is a scary proposition in and of itself. Most seniors are frightened about a dramatic rise in their rate over time. The “hybrid” product may be just the right fix.
Great article & great review Shannon.
And Mr. Spicka, you hit the nail square on the head when you said we could use more of this on the Association level!
Per usual, media who are not familiar with reverses state factual errors about HECMs. I have had a number of occasions where there was a non age qualified spouse and in each of those occasions I made the dangers perfectly clear. It also goes without saying that the subject would have been discussed in great detail in their government mandated counseling. This is not to say of course that there arent LO’s who will gladly downplay the possible drawbacks in order to make their loan quota for the month, but that simply isnt the typical experience, and polls continue to show that.
Mr. Scerpella,
What polls are you referencing in regard to underage spouses or if not underage spouses, what polls are you citing? It is my understanding we only have one recent poll and unfortunately NRMLA had to commission it.
I am truly tired of the “negative” remarks about Reverse mortgages. The indication that the seniors with a Reverse Mortgage are being foreclosed on because they did not pay their property taxes. I have saved two clients from being foreclosed on by their COUNTY OR STATE for back taxes, by doing reverse mortgages to payoff the property tax liens.
Regarding doing a Reverse Mortgage with the younger spouse Quit Claiming their interest, I recently did a reverse mortgage under these circumstances BECAUSE THEY WERE BEING FORECLOSED ON by their existing lender and by doing the reverse mortgage we SAVED their home from foreclosure by paying off a $190,000 loan on a $350,000. property. They tried loan modification and to do so, were told NOT to make their mortgage payments, only to be told 8 months later, they COULD NOT do a loan modification and now they were so indebted to the lender with added attorney fees, interest, late payments etc, they did not have the funds to pay the lender.
Why is the NY times and other newspapers not exposing the unscrupulous practices of Banks and forward servicing companies, preying on seniors by giving them bad advise, then wanting to take their homes! The Reverse Mortgage SAVED their home so at least they can enjoy their home. I also advised them to seek advise from an attorney regarding the title and ownership of the property. The good that comes out of Reverse Mortgage needs to be published as well.
Mr. Hackney,
A favorite saying of mine is that those 80 and above never wanted any mortgage and if they had one, never want another as long as they live. Those 65 and older will use mortgages if they really, really, really need to. Boomers, on the other hand, have never seen a mortgage they did not want.
In our peak endorsement year our industry did over twice the number of endorsements than we did last fiscal year. In fiscal 2009 we did few fixed rate HECMs and many, many adjustable rate HECMs. The rules were basically no different then than they are now.
Unfortunately less than 10% of the currently active HECMs were originated last fiscal year. The biggest segment per HUD at over 100,000 still active came from fiscal year 2009. The total active HECMs from fiscal years 2008 and 2009 exceed the total of active HECMs from 2010, 2011, and 2012 per the HUD HECM Characteristics report for September 2012. That is astounding.
Many of my friends have tried to convince adjustable rate borrowers from the era before 2010 to become fixed rate today. Guess what they found. It is better than any poll which could be taken. Borrowers just love their adjustable rate HECMs. If you think seniors are distrusting about them, JUST try to get them to switch. Yes, the impact of lower home values come into play but if they do not, they love their adjustable rates.
Is it enough that home values rise? Not really unless the appreciation rates are substantially greater than 3.9%. Remember on those homes where the value exceeds the balance due, home values which grow faster than ongoing costs accrue do little for the HECM funds. We need the strongest home appreciation in places where the loss in values were the worst such as Florida, Nevada, Arizona and many counties of California as well as other parts of the country.
One reason why we saw the increase in fixed rate HECMs is because of secondary market conditions. Fixed rate HECMs are highly prized in the secondary market and less so adjustable rate HECMs. It was worse in 2010. This is when we began to see some lenders stop offering adjustable rate HECMs. It started with annual adjusting and quickly moved to monthly.
It is very doubtful that many of the fixed rates were taken solely because ALL of the funds were needed to pay off liens. Even if true lien holders have no preference about fixed or adjustable. There are really only two choices: limited lender offerings and consumer choices.
Thank AARP for this..