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Is the new HECM program a better fit for financial planning clients?
Better Match? The New HECM and Partnering with Financial Planners. For those of you watching who have been originating for five years or more you are very familiar with the needs based reverse mortgage borrower. Those looking for maximum cash proceeds, unconcerned for the most part about financed closing costs and wanting an immediate solution to their financial problems. An unfortunate side effect of the HECM’s historic appealing to this demographic was the program being characterized as a loan of last resort. HUD’s recent reinvention of the Home Equity Conversion Mortgage Program may help change this perception.
If we look at the primary source of technical defaults which spurred HUDs Principal Limit cuts and distribution limits it was the needs based borrower. Those with little additional assets and restricted cash flow. That brings us to today. Several needs based borrowers may no longer qualify under the upcoming Financial Assessment guidelines and could choose to forgo a reverse mortgage due to a lack of proceeds. Which leads us to the question, “where is our potential market?”. Michael Kitces, director of research for Pinnacle Advisory group …
23 Comments
I understand the reasons behind the recent changes and have worked with financial planners for years, but I am concerned about the result of the changes that are coming.
Once the financial assessment changes are rolled out, I expect the press to see this as an abandonment of needs-based seniors, which is partially true. If we are working with financial advisors, it could be seen that we are only appealing to the affluent borrower, not the middle class borrowers.
With one-third of seniors living solely on Social Security, I hope we will not totally abandon that segment of seniors. These folks have often paid taxes and insurance and may have exhausted their savings, retirement funds, investments to be able to do this.
My hope is that HUD has considered this group, especially if they have faithfully paid taxes and insurance. If the emphasis is on capacity and willingness to be responsible, I am looking for HUD to not abandon these people or not penalize them with large amounts escrowed.
We will know this week hopefully and go forward. We have struggled over the years to educate and assist homeowners. I do not want to see more criticism from these changes.
Ms. Hillman,
Where do you get the idea that HUD will “penalize them with large amounts escrowed?” There is nothing in either Mortgagee Letter that requires large escrow amounts.
The trouble is with the potentially high Life Expectancy Set Aside (“LESA”) especially for younger borrowers but that is not an escrowed amount. If it were escrowed, borrowers would incur interest on that entire from initial funding forward; however, like Servicing Fee Set Asides, interest will only be incurred as amounts are paid out from the set aside. Unlike the Servicing Fee Set Aside, LESA will only be set up for those borrowers who are qualified for a HECM but do not meet certain financial assessment requirements.
Why are you so overly worried about criticism for excluding those seniors who have got themselves in trouble with HECMs? If anything we should be promoting the idea that we welcome the changes because they exclude exactly those borrowers.
Shannon, great insight. Since most of my clients have been in the $400,000 to $600,000 home value range, cash poor and house rich, I have sold the fact that it is a great financial planning tool. Now with your message this morning, it really hit home with me. I have networked with 2 Financial Planner Groups and 2 CPA groups over this last year. I have sown the seed and now need to do a little watering with your approach. As you mentioned this morning, it has been primarily a needs based, last resort type of loan. And that is why most of the professional groups shied away from it. But now, it is taking on a whole new look. I am hopeful that the complexity of the loan process will not become a negative. Working with more professional and intelligent people should offset that. Again, good stuff. Have a great week.
“Technical Default” is the key to this hand crafted calamity HUD has created for the MMI Fund. By forcing foreclosure during a down market HUD is “realizing losses” that could be avoided.
As for the future of the program and the “new borrower”:
“If the Lord’s willing….and the creek don’t rise.” is how the old expression goes.
The wild cards for all this hope for the future are Interest Rates, and Consumer Home Equity.
I can’t recall the last time a successful program started with a Product and then went looking for customers. Remember the when the consumer was identified and then the Hecm program was designed to meet the need not the other way around?
What exactly is HUD’s mission and how does this “new borrower” fit into it?
Jim,
Your comment is full of hearsay, myths, and false conclusions.
“Technical defaults” are NOT the issue in any change other than financial assessment. Foreclosures are NOT being forced in a down market. Few losses have yet been realized but the projected losses are massive considering the size of the HECM program.
No new product has been created. What we have today is the elimination of Savers with the resuscitation of the fixed rate Standard with significant tweaks to all Standards reducing their value except to those who will not need 1) more than 85% of the proceeds over the life of the HECM and 2) more than 60% of the initial principal limit in the first year.
Yes, the landscape has changed but for now the revised Standards are what we have to work with. HECMs are what they are.
Jim,
As to the 85% of proceeds in the reply immediately above, I meant to say 85% of the proceeds which Standards provided for originations occurring throughout 2012.
Yes, absolutley, question is, the time it will take for the HECM to be more accepted. It will take more than originators to change the schema, it will finally take a national effort, to change perceptions. This is truely rebranding at its best!
You got it right, Steve. The “new” HECM is undoubtedly the product of the future, but the future ain’t quite here yet from a public perception standpoint.
Although I understand and support the reasoning behind HUD’s recent changes to the HECM product. The old SAVER product was a beautiful tool for the financial planning community and I wish we could have kept it. I was proud to reach out to the FP community and share it with them. .01% MIP is a pittance compared to .5%. On a $500K home the costs are vastly increased. UFMIP from $50 to $2500. This increase will cause concern among the financial professionals as one of their biggest criticism’s of the HECM has always been cost.
We can only work with what we have, and though more expensive, the HECM is still an important part of most boomer’s retirement plans. As they age, I predict our phones will be ringing of the hook!
🙂
Shannon, in the past couple of weeks I have talked to three different people who have home values of $1,000,000. or greater. Two had outstanding mortgage balances and one had no mortgage. In all three cases when I ran the numbers, the people were somewhat disappointed with the numbers. I think the recent changes have had a negative impact on what financial planners and seniors ultimately realize they are eligible for. I have noticed an increase in the lower end values (80K to 150K) interest because they view this as a good deal for them.
I general, people have a perception of what they should receive, and the higher value senior thinks they should get more money. I understand that we have to continue to educate and cross our fingers!
I do not agree that technical defaults spurred all of the recent changes. Technical defaults no doubt have spurred the need for financial assessment but all of the other changes had an entirely different source.
If there had been no defaults on property charge payments, HUD would have been forced to reduce PLFs, increase initial MIP, and institute a limitation on draws at least in the first year. The reason is that in the last five fiscal years too many HECMs had full or nearly full draws at funding coupled with low home appreciation in the areas where HECM originations are most concentrated; those two factors resulted in such high projected losses that on a projected basis, the HECM portion of the MMI Fund cannot meet capital reserve requirements for the foreseeable future.
cynic, all of our comments are “full of something” I suppose. I’ll stick with my assertions, including the ones you neglected to discredit.
Rising interest rates…..and home equity.
I find your comment about the new hecm standards …..”it is what it is”….. how insightful.
As to the question about the revised HECM being a better fit, that is more euphemism than fact. Since the principal limit of the revised HECM is not much better than the Saver and with higher initial MIP, the net available proceeds available after deduction for the initial MIP makes Savers and revised HECM as to proceeds very comparable. As pointed out by another person, the initial MIP cost of the revised HECM is significantly higher than the initial MIP for the Saver.
I find it odd that some originators claim that the difference between the initial MIP for a Saver and for the revised HECM are not a problem to consumers. I do not know one person, rich or poor, who would not find it difficult to pay $2,500 today for something they could have paid $50 for just a few months ago.
What the changes mean is that those clients who would find value in Savers will generally find value in the revised HECM. However, those who want the proceeds of a former Standard will find the revised HECM far less valuable as will those who do not have mandatory obligations over 50% of the initial principal limit but nonetheless need more in the first year than the 60% limit allows.
So is it a better fit? Absolutely not. But financial planning clients is one area where the revised HECM is still quite fertile even though fewer financial clients will find HECMs as desirable as Standards or Savers. So is the revised HECM a far harder sell to financial planners than the Saver? Only marginally so. The revised HECM is nothing more than a slightly more expensive Saver.
Mr. Veale and Cynic, I am fully aware of the 40 percent decline in real estate values in the united states of America since the beginning of the great recession of 2006 (yes 2006) and I have been promoting changes in PLF factors for much longer than most of my peers.
My first comment in this string of exchanges pointed to two REAL impediments to the future success of this program regardless of the perspectives or rationales for the changes that confront us today, they are rising interest rates that are 2.5 percent BELOW AVERAGES and the serious reality that many of our “new borrowers” owe too much money on their mortgages.
Mr. Spicka,
Why do you address me? While I wrote about technical defaults, I wrote my comment to address what Mr. Hicks shared not what you stated. Indeed my comment about technical defaults has direct application to what you wrote but was not written to achieve that.
But since you addressed me directly, there is only one HECM change which property charge defaults resulted in and that is the future implementation of financial assessment.
No, not even the Great Housing Depression with its loss in home values occurring in the last decade alone caused the need for the extreme nature of the other changes in Mortgagee Letter 2013-27 but home value losses plus the abuse of the fixed rate HECM (pre 10/4/2010) and the fixed rate Standard (post 10/3/2010) did. Like many others you confuse the property charge default issues with the HECM financial modeling problems. They are not the same. Also not all property charge defaults are technical. In fact most were actual due to seniors not having the funds to make such payments.
The term technical defaults developed when many homeowners who had the funds to make their monthly mortgage payments refused to do so because they did not see the value in paying down a mortgage which was significantly greater than the current value of the home. Their homes were foreclosed upon despite their ability to pay; it was not a matter that they could not pay but rather that they would not pay. Thus the term “technical default” came about.
I really do not believe that any more than a handful of the property charge defaults our industry has experienced in the last five years find their source in the concept of a technical default. So why do you use that term to describe the property charge defaults we have seen growing in our industry???
Jim,
Yet none of your comments address the issue of home appreciation loss until this one. Why?
When President Regan endorsed the program 25 years ago, the reason behind it was to help the financially strapped seniors to be able to reman in their homes. Now the program is designed for more of a “financial planning tool” Not only does a senior get less of their equity from their home, they are receiving even less with the 2.5% MIP cost. In my opinion it is “all about the money” many seniors WILL NOT be able to stay in their homes with the new version of the program because many of them owe more on an underlying mortgage then the funds available on the HECM for them. I recently have had to turn down about 3 seniors, who would qualify under the old program, who no longer can get a reverse mortgage. Pretty sad I would say!!
I am unaware of President Reagan ever endorsing the HECM program because “it was to help the financially strapped seniors to be able to reman in their homes.” [Sic] The purpose clause in the law itself makes no such reference. Can you cite your reference?
It is rare for any law to codify its purpose in the law itself; yet that is exactly what we find in the following:
“§1715z–20. Insurance of home equity conversion mortgages for elderly homeowners
(a) Purpose
The purpose of this section is to authorize the Secretary to carry out a program of mortgage insurance designed—
(1) to meet the special needs of elderly homeowners by reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing, and subsistence needs at a time of reduced income, through the insurance of home equity conversion mortgages to permit the conversion of a portion of accumulated home equity into liquid assets; and
(2) to encourage and increase the involvement of mortgagees and participants in the mortgage markets in the making and servicing of home equity conversion mortgages for elderly homeowners.”
For clarity, I need to add that none of the comments or replies that I have made in this thread necessarily reflect the opinions of RMS or its affiliates.
I have not seen anyone talk about the fact that in many markets property values have risen dramatically in the last 18 months–more than 25% in the markets that I work in. I doubt if the HECM pool of loans is in near the trouble that some have claimed. I expect further substantial appreciation in the next 2 years which will further improve the owner’s equity position and decrease the chance of loss by the FHA on HECMs which have been done in the last 4 or 5 years.
Ms. Silverster,
You are not the only one to take notice of the turnaround. There are several of us in the industry who write about this with a great deal of frequency. But also remember your anecdotal tale is a small portion of the real estate market where the collateral of active HECMs which have been endorsed after 9/30/2008 (i.e., those HECMs accounted for in the MMI Fund) lies. Also HECMs are not evenly spread out throughout the country in proportion to where residential homes are located. HECM collateral is disproportionately represented in states such as California and Florida and even then are not proportionately spread out even in those states.
The actuaries for the HECM portion of the MMI Fund projected that the net position for the HECM portion of the MMI Fund would go from a negative $2.799 billion as of September 30, 2012 to a less negative $2.668 billion as of September 30, 2013. (The information is shown Page ii of the actuarial report dated 11/15/2012 which can be accessed at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/actr/actrmenu .) Just remember the actuaries were not aware that the fixed rate Standard would be discontinued on 4/1/2013; just imagine how much less negative they would have projected the net position of the HECM portion of the MMI Fund would be as of 9/30/2013 if they were.
Yet it is the FHA Commissioner who, in recent written testimony to the House Committee on Financial Services dated 10/29/2013, presented on Page 8 that the net position of the MMI Fund as of September 30, 2013 was not a smaller negative number than on September 30, 2012 but almost twice as negative at $5.151 billion. This says that the present situation for property values is far worse than either you think it is or even the actuaries thought it would be on 11/15/2012.
While some see no slowdown in the meteoric rise in home values we have recently observed, others of us believe that the steep rise will peak out before October 2014 (perhaps much sooner). The problem for the steep rise is that there is insufficient “easy” mortgage financing to sustain it except in very unusual market conditions and situations.
So while your view is very logical, its premises are either inaccurate or overly simplistic. While we cannot agree on premises, your reasoning is “spot on.”
(The views expressed in this reply are not necessarily those of RMS or its affiliates.)
Thanks so much once again. I believed I commented on this video before, but not I am putting together new material for my seminars and find the information here right on target.