Fees, lending ratios (PLFs), and market growth
The following commentary does not represent the official position of Reverse Focus, Inc.
Since the housing and economic crash nearly 10 years ago our industry has valiantly labored to not only increase reverse mortgage acceptance and loan volume but also adapt to a plethora of new regulations and HECM program reforms. The real test of our industry and the Home Equity Conversion Mortgage is to balance the need to reduce program risks while ensuring the HECM remains accessible to older homeowners.
On one side many originators cite the two biggest challenges to increased acceptance as high upfront costs and reduced principal limit factors or lending ratios. On the other side, HUD faces the task of taking measured steps to reduce the likelihood of HECM loans resulting in an insurance claim or payout. Recent reports showing increased ‘losses’ in the program have resulted in significant HECM cutbacks in recent years. The tension lies between increasing accessibility to the HECM while successfully managing the risks to the FHA insurance fund which has backed the program since 2009.
Earlier this month the Brookings Institution (a Washington D.C. think tank) advocated for a ‘reformed’ reverse mortgage. Their proposed reform? Offer reduced FHA insurance premiums for low-risk borrowers utilizing fewer funds- in essence, a return of the HECM Saver. The study as covered in Reverse Mortgage Daily elicited a slew of comments-many which took exception to the study’s conclusions. Perhaps overlooked was the Brookings Institution’s outright support of the HECM program.
Beyond the debate or reintroducing a Saver product lies the question- what will increase acceptance of the federally-insured reverse mortgage?
6 Comments
I am both a HECM originator and borrower. I think the top problem with the program is that the people writing the rules are too young and too disconnected to truly understand the HECM borrower.
The people writing the rules for forward mortgages have likely had one. With a forward mortgage, the same person is likely to handle the transaction from beginning to end. Not so with a HECM. If a HECM is intended to be a loan on the borrower’s last home, this loan is often closed out by someone other than the borrower because the borrower may be either dead or medically incapacitated. There is inadequate process in place to deal with this situation.
The other factor that is not considered is how a HECM interfaces with Medicaid. If a HECM borrower goes on Medicaid, Medicaid has a claim against any equity in the property. This means that even if the HECM payoff shows equity in the property, the Medicaid claim may more than exhaust this equity. If the HECM payoff plus the Medicaid claim leaves no money for heirs, and there is no other titled property, it may be a prudent decision for the heirs to abandon the property to foreclosure. Losses could be mitigated if there was a process for FHA to promptly probate and sell the property instead of foreclose it when a borrower dies. There should be a quick, easy, and inexpensive way to gain title and sell the property if the borrower goes to a memory care facility. The people writing the rules fail to see how many HECM borrowers do not have adequate provisions for a Personal Representative or POA to deal with these situations.
In other cases, heirs who have spent years caring for their parents may be caught with few personal assets, no recent job history, and be trying to re-enter the labor market at age 60-80. With subsidized housing difficult to qualify for, these people will want to live in the parent’s home until foreclosure pushes them out.
The bad stories about HECMs often come from heirs or others who don’t understand why the loan was originated. They don’t know how the HECM helped the borrower. They often have misinformation about both the HECM and the borrower’s financial situation. They hear and tell stories that simply are not true because they don’t have access to accurate information.
Other bad stories result from borrower who are dealing with various degenerative conditions after they get the HECM. If half the population is dealing with some form of dementia at age 85, many HECM borrowers will be in this group. Macular degeneration and other eye problems can make it difficult to read statements and notices. Hearing problems can make it difficult to communicate with loan servicers, particularly when the call is to or from a call center outside the US. People who prey on elders can access the money that should be available for other things.
Looking at statistics does not tell the stories of why people do or don’t get HECMs. Statistics will not explain the losses and what to do about them. It will take people who know these borrowers, and their stories, to make the appropriate changes. This means not just knowing the borrowers at time of origination, but people who know the borrowers and their stories for the life of the loan, and after the loan comes due.
Don,
We are at opposite ends of the HECM structural issues. If one does not stop the bleeding of losses and instead focuses on the needs of seniors, the HECM portion of the MMIF will be worse. If we meet in middle ground, nothing substantial gets accomplished.
Since the HECM program is already (and always has been) subsidized annually to cover all general and administrative costs of the program, it is important that the reimbursement and loss subsidy be brought under control, i.e., be no gain/no loss. This will require more PLF belt tightening.
Once the program is under control, then adjusting the program to SOME degree to accommodate the needs of seniors should be considered. If seniors are the primary concern, the HECM program will be lost. It is not that I am against a special program for seniors, but let us mix it up with an FHA insured mortgage program.
The cost of leads, gas, Homes and they have cut the commissions 75% in the last few years.
You want good salespeople you need to pay them good. What is so complicated about that?
On Saturday evening (PDT), HUD posted the endorsements for June 2018. It was not good. Total endorsements for June were 15.5% LOWER than for May.
In the last few weeks we have been hearing claims that the endorsements post 10/2/2017 changes had hit bottom (April 2018). The basis for that determination was a one month (May 2018) rise of 14 endorsements (a 0.4% increase). That conclusion was more than hazardous. Ultra optimism is reckless. It would be humorous if not for the fact that many rely on such predictions and what is at stake for them is next month’s family’s meals. Predicting HECM endorsements is not a game to see who can be the most cavalierly optimistic. The data was sitting there in the CNA (Case Number Assignment) data and the ongoing conversion rate but appears to have been ignored.
Those who made the prediction know every well that one insignificant change is not a new trend.
Shannon,
I disagree that the think tank supports HECMs. They support their version of a HECM. They believe the bank owns the home! What else do they get wrong?
The think tank supports another go of the Saver. Yet the PLFs today are nearly the same as the PLFs of the Saver. So are they suggesting that the PLFs of the revised Saver be dropped in proportion to the PLFs of the Standards back in 2011 or are they just rambling without any substance to their suggestion.
The information was so vague that to support or not support it are much too speculative. However, I am sure that if they support a HECM, it is the one they believe to exist which we know is inaccurate.
Has there ever been a HECM audit? How do we know what we are told is in fact the truth in so far as Insurance claims and foreclosure losses are concerned?
How does LESA & FA affect property tax and the local Government it supports ?? Does the property tax in any given area go up faster and higher in areas where “old HECM folk” have communities? What about Insurance and claims ratio’s?
In fact why do we hold any so called “truth” a fact and tailor programs on that information, when we don’t have any independent evaluation? Or do we?