Irrelevant HECM endorsements and recent developments
The Irrelevancy of Historical Volumes
A sense of frustration can set in for those expecting rapid expansion of loan volume back to our pre-recession levels. After several years of rapid expansion culminating in 2009’s record endorsement tally of 114,629 loans, last year’s endorsements were a sum total of 48,000 endorsements. Such comparisons are suspect for a number of reasons- a simpler product offering, rapid home appreciation, generous underwriting guidelines, increased loan complexity, lending ratio reductions, and the post-recession and housing crash.
Considering the headwinds the HECM has endured we can claim both a modicum of success and a measured optimism for future market expansion. However, fixating on the apple and oranges comparison of historic volumes ignores larger macroeconomic forces and serves only to distract us from more pressing matters.
Too good to be true?
One hurdle to increased consumer adoption of the HECM is the fear that if it sounds too good to be true, it probably is. The ability to leverage an illiquid asset and transform it into a potential source of predictable cash-flow is an attractive yet counterintuitive proposition for many Americans wanting to age in place. Sweetening the deal is the fact that the HECM’s unused available funds, or principal limit, grows each year based on the current interest rate plus the MIP. Caution must be exercised when making claims as to just how large
4 Comments
Let’s have a cry everyone. We are not gaining on endorsements. Rules have changed. Economic conditions are not at optimum. Ultra Optimism isn’t working.
Let’s cheer up by not measuring ourselves by endorsement production. We need to be measured by the number of voluntary LESAs we generate. Or maybe the variety of colors we wear during the week.
Yeah, and because of the changes in football since 1960, NFL wins should be based on ticket sales, tackles, saved fumbles, or something other than the score at the end of the game. Or maybe the NFL should go to participation awards?
Come on. How silly do we have to get? Fellow originators grow up. When things get tough, it is time to hunker down and get things moving. It is not time to say that we need a new way to compare ourselves to prior years.
I cannot believe the capitulation to defeat I just heard. Surely as always, ultra optimists are the first to become ultra pessimists. Emotions are now ruling our industry? No wonder our endorsement counts cannot permanently rise. With this attitude it is clear why we have yet to find bottom.
First, let us deal with the idea of switching the measuring standard which has traditionally been used in the industry, endorsements. First, they are verifiable. Second, they are empirical and not subjectively measured. Third, they are easily understood by those familiar with the product. Fourth, they are an actual measure of production.
As to the rationale for a switch. So the numbers produce a depression in the industry, Imagine the depression that hit the car manufacturing industry when VWs, Toyotas, and Nissans, all took turns being the rage. Were the EPA regulators easier on them as a result? Did cars change drastically with little to lower performance as to buyers? Were buyers dismayed by how Detroit responded?
It is time for the industry to grow up and realize maturity is not an easy process. Regulators do not provide rules to make us more successful; so let us quit pretending that the “NEW” HECMs are a better deal for the consumer. Both market and regulations can be a tough taskmaster. Hardly anyone is mocking our industry about our lower production but even members of this industry hissed and told off the car industry that they brought on their own problems and don’t look to DC for bailouts. Didn’t we see the same with the overwhelming shift to our pushing (oh, sure with “improved” education) fixed rate Standards. Let us move forward and quite the self pitying; it is getting rather maudlin in the industry which unfortunately is being accompanied by unwarranted fear and anxiety. In two words: “Grow up.”
Enough about changing from endorsements as the standard measure of success so let us move on to the third limitation on HECM lines of credit. I genuinely appreciate the calm with which Shannon spoke on this subject. It is one that was just recently presented to me.
The limitation is found at 24 CFR 206.19(f) in the current regs. It was reinforced by being updated and added to the final but proposed Regulations found in the January 19, 2017 Federal Register at 206.19(h)(1).
In summary the provision in the final, proposed regs states that “no disbursements shall be
made under any of the payment options,
notwithstanding anything to the
contrary in this section or in § 206.25,
in an amount which shall cause the
outstanding loan balance after the
payment to exceed any maximum
mortgage amount stated in the security
instruments or to otherwise exceed the
amount secured by a first lien.” In essence this means that the maximum mortgage amount stands as the third limitation. The maximum mortgage amount is 150% times the Maximum Claim Amount with is the lower of the appraised value of the collateral or the HECM lending limit. Thus the highest the maximum mortgage amount can be on a HECM closed in 2017 can be is $954,225.
As a practical matter this means that HECM application amortization schedules that show the available line of credit exceeding $954,225 are accurate but not accessible above $954,225. There are some in the industry who believe the security and mortgage documents can be modified to increase the maximum mortgage amount. Although modification of the security and mortgage documents is allowed for tenure payouts, no such thing is stated in regard to the line of credit.
So the three limitations are 1) the first year disbursements limitation rule in the first year, and 2) after the first year, the lower of the available line of credit or the maximum mortgage amount minus the applicable balance due as stated in 24 CFR 206.19(f) as found in the current regulations.
Excellent and easy to understand explanation Jim-especially when speaking to modifications. Thank you.