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Soon Reverse Mortgages May be More Difficult for Consumers to Obtain
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If the present gridlock in Washington DC is any indicator change is something that comes slowly and often long after the proverbial horse is out of the barn. The word is out: The reverse mortgage program’s book of business for loans written in the years before the housing crash of 2008 spells trouble for FHA’s mutual mortgage insurance fund. In the wake of this reality lawmakers, FHA/HUD and industry trade groups are working to shape a workable solution. Ideas range from the outright elimination of the program, further product eliminations or more stringent qualifications. For future reverse mortgage borrowers qualifying may become problematic. In a recent article in the New York Times “Rules for Reverse Mortgage Borrowers May Become More Restrictive” Christopher Mayer describes the likely approach. “Instead of using a scalpel…
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It is ridiculous that both FHA and our industry are hanging onto and repeating the tired, worn out, and false message that the problems which HECMs are stirring up in the MMI Fund are coming from loans created before 2008. HERA of 2008 is the legislation that forced FHA to put new endorsements into that group for accounting purposes. That did not start until October 1, 2008. The earliest related appraisal could not be older than approximately 12/1/2007; however, there would have been most likely fewer than 2 dozen such loans during that first month with most dated somewhere around June 2008 (using the 4 month lag rule, from case number assignment to endorsement).
Our problems, however, cannot be entirely laid to rest with the drop in home values but rather in the reckless policy surrounding the fixed rate HECM in the face of growing warnings from such groups as the OMB back in spring 2009. Many leaders and originators in our industry falsely concluded that the projections of OMB were invalid because, FHA was not losing cash on HECMs and foolish accusations that FHA was diverting millions in HECM revenues to forward mortgage programs.
By the time FHA could react to what was going on to the HECM portion of the MMI Fund, it was already too late to mitigate losses from the fiscal 2009 book of business. Even with an overly optimistic projection of home appreciation in the near term, FHA projected that the first cohort of new endorsements into the MMI Fund would result in over a half billion dollar loss to that Fund. During that first year of accounting for HECMs in the MMI Fund, HUD tried to satisfy Congress by lowering Principal Limit Factors (PLFs) for the second year of HECM endorsements into the MMI Fund. When that clearly would not help enough, FHA transferred over $1.7 billion in funds from other MMI programs into the HECM portion of that fund. Now it seemed FHA had the window dressing it needed to hand a good report for Congress and simply allow time and a recovering home market to correct the losses the HECM program had endured. FHA took the same tact in the third fiscal year but also raised the rate for ongoing MIP 150% from 0.5% to 1.25 but with two major exceptions. FHA suddenly lowered the floor for the expected interest rate for determining the Principal Limit (PL) from 5.5% (effectively 5.56%) to 5% (effectively 5.06%) while increasing the PLFs in that expected interest rate range and below 5.06% for most borrowers and created a second set of much lower PLFs for something it named the HECM Saver while lowering the upfront MIP on that product to almost nothing, i.e., from 2% to 0.01%. From fiscal year 2011 forward, most HECM expected interest rates were suddenly slightly under 5.06%, particularly on fixed rate Standards meaning principal limits had effectively been raised on fixed rate Standards for most borrowers. Rather than transferring over $1.7 billion from other MMI Fund programs as it did in fiscal 2010, FHA restrained itself taking just $0.535 billion in that fiscal year.
But someone at FHA seemed to have conscience pangs in fiscal 2012 and did absolutely nothing to change the program or transfer any additional funds into the HECM program last fiscal year. However, the loss problem was exposed. Then in fiscal 2013 HUD finally admitted to Congress that the HECM program was in deep trouble and would need changes it was not authorized to do. That was a startling admission by a group who tried to hide the problem by taking over $2.2 billion from other MMI Fund programs and placing them into the HECM portion of the that Fund during fiscal 2010 and 2011.
So here we stand today in fiscal 2013 with 1) the industry in turmoil 2) other MMI Fund programs shorted by over $2.2 billion, 3) three of the largest banks in the country and largest endorsement producers no longer offering HECMs, 4) endorsements less than half of what they were in fiscal 2009, 5) the House Financial Services Committee creating the PATH bill mandating the termination of the HECM program, 6) no fixed rate Standard, 7) FHA still begging for more authority to change the program and 8) FHA announcing a little while ago that the HECM portion of the MMI will see about a $2.6 billion loss for this fiscal year but down from a record $4.2 loss for fiscal 2012. Using projections from the actuaries not updated since September 2012, it would seem that even with a strong recovery in home values, the HECM portion of the MMI Fund will stay billions short of being able to be both self sustaining and meeting its portion of the current 2% capital reserve requirement. While many question the need for even a 2% requirement, Congress is debating taking it to 4%.
The inherent problems created by the fixed rate HECM and the fixed rate Standard are deep and stubbornly will not go away any time soon. While most observers seem to believe the HECM program will survive this session of Congress, will it survive the next? Will we see the end of all Standard products? While these are the most drastic questions, what will the HECM program look like in 2014? If we do not defend the program, who will?
So I join with Shannon calling the industry to lobby with clarity, truthfulness and honesty regarding the need of HECMs for our seniors but with the message that FHA needs more authority to change the program as needed. Hopefully we will reject the model of our predecessors who in the face of evidence to contrary went to Congress to “educate” its members with such propaganda as 1) HECMs being self-sustaining, 2) taxpayer dollars will never be in danger, 3) borrowers are getting MUCH younger, 4) closed end HECMs have no negative impact on seniors and 5) the housing recovery soon will strengthen the HECM program.