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Is FHA Stabilizing the HECM Program?
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Is the Patient Critical or Stabilizing? Is the Home Equity Conversion Mortgage or federally-insured reverse mortgage in critical condition? One could argue that projected losses of the HECM portion of FHA’s insurance fund are just that…projected and not realized. Whether real or expected FHA is taking strong measures to -quote- fix- the program. Speaking before House Republicans on the agency’s dire financial condition, Commissioner Carol Galante…
6 Comments
Shannon, thanks for your continued support and education in this industry.
I’m not sure if HUD has solved their problem with eliminating the Standard Fixed Rate product. People that want all the funds still have the lump sum option with the Adjustable. I have tried to discourage some clients from taking the lump sum over the line of credit option or tenure options and sometimes you just can’t convince them.
I would welcome guidance on escrowing for taxes and insurance AND have some restrictions on what the funds can be used for. While I understand the freedom of being able to use the funds for “whatever” you want (It is their money). It may be a stronger product for HUD by adding some restrictions. I think that would also reduce some of the abuses of the program from “helpful” family members.
Pamela G,
Since the beginning of the program total lump sum payouts have been available. At no point did the program see anything close to 70% of the fundings reach 100% of all available proceeds until the rise of fixed rate Standards. Even if a borrower takes all the proceeds at funding from an adjustable rate HECM, the borrower can prepay any part of that at any time and draw it out later. That cannot be done with a fixed rate Standard.
Despite their high interest rate risk, adjustable rate HECMs have never proven themselves nearly as risky as fixed rate Standards. With assignment, the high interest rate issue of adjustable rate HECMs is greatly mitigated as to FHA. So the risks of adjustable rate HECMs are greatly exaggerated in the industry except as to borrowers and even history would say even that is exaggerated. If the high payout risk still presents itself, HUD will just restrict payouts in the first year or so with limited exceptions.
Is it really “their” money? This is a loan and restrictions (covenants) are the name of the game. If the HECM transaction were somehow a sale then the proceeds would be unrestricted [such as proceeds from 1) sale of appreciation rights, 2) options, 3) etc.]. But borrowers must pay the required amount due (up to the value of the collateral) at termination; so are the proceeds really theirs to use any way they want? That is not true now. All liens must generally be paid off before borrowers receive a dime of proceeds.
In the Friday industry conference call, FHA would take no position on the terms of mandatory set asides for T & I (or worse escrow accounts fully paid for at funding). Commissioner Galante was vague in the hearing on Wednesday as well.
What has never been addressed in any open forum to date is what the actuaries were actually warning about in their report had the fixed rate HECM stayed in the product mix. Fortunately that is not the case.
Warnings went out from the first day the fixed rate HECM was announced. Some of us felt then as we do now, seniors and FHA would have been much better off with a hybrid HECM instead. The secondary market should have been vetted about six years ago now. Instead the initial reaction was no from the parts of the secondary market and we in the industry backed off.
So the real issue is where do we go from here?
As a loan officer who has been in the business for 10 years, I have been around since BTF (Before the Fixed). With the reverse mortgage now appealing to younger borrowers, who will hold the mortgage more than the previous older customers, the potential to decimate FHA insurance with the Fixed was inevitable. This is especially true in a markets with lower appreciation rates over the next decade.
I have always predominately done the adjustable because it made more sense. I agree that someone who has a mortgage may need all the funds to improve their available cash flow. However, I fear that many individuals took the fixed because they were encouraged to do so, not because they needed to.
Why? First, it is easier to sell. Who doesn’t want a fixed rate not be subject to fluctuating interest rates. Secondly, loan officers may have been encouraged to push the fixed because it paid more money.
So here we are. The risk of default is greater in the future for these loans. The probability of an upside down loan is greater since these loans elminate equity within 7 years. Younger borrowers are more likely to take out these loans so they will hold them longer.
It should have been the loan officer’s and HUD counselor’s responsibility to point out the pros and cons. I seriously doubt that was done in most cases.
I think we all need to think who our customer should be and what is in the best interest for the customer and this program. The reverse mortgage cannot help everyone. Our role as loan officers is to be an advisor and let the customer make a decision for now and the future based on accurate, complete information.
Joan,
I think you just coined a new industry term… BTF. Great comment.
I am incensed at the penalty for lump sum pay out on HECM Fixed. Perhaps some persons abused the loan, but should all borrowers be punished. I received a RM in 2010. my pay out was a lump of $40k . I am currently taking out another RM to take advantage of the increased equity in my home. The original RM lender will make about $30,000 form the refi. Not bad.
Here’s my problem: I am 80 yrs old and I must wait one year to receive aprox 60% of my payout. I recently had a stroke. I don’t have any heirs and I DON”T KNOW IF I WILL BE AROUND IN ONE YEAR. I’m being fucked by FHA because of the actions of others
Stan,
What are you complaining about? If you could wait for a refinance for over 3 years, you can wait a year for more proceeds.
Of course, you may not like an adjustable rate HECM. For the first four years I was in the industry we had no fixed rate HECMs to offer anyone.