FHA Commissioner doing ‘deep dive’ to isolate source of HECM losses
The following commentary does not represent the official position of Reverse Focus, Inc.
Last October just days after the agency enacted substantial cutbacks to the Home Equity Conversion Mortgage, HUD Secretary Ben Carson spoke before the House of Representatives saying “the changes we’ve made will sort of stop the bleeding in terms of new reverse mortgages”. However, despite rising home values, numerous program tweaks and lending ratio reductions the program continues to raise concerns among lawmakers who see increasing liabilities in FHA’s Mutual Mortgage Insurance Fund.
FHA Commissioner Brian Montgomery addressed this challenge in a recent interview with Reverse Mortgage Daily “We are digging deep in the portfolio to find out of the problem is on the front end or the back end,. My sense is that it’s more on the back end in terms of the losses we are experiencing.” Commissioner Montgomery is rightfully concerned that many of the HECM program’s ‘losses’ may be on the back end since HECM liabilities continue to mount even after the enactment of the financial assessment, principal limit or lending ratio reductions, and first-year distribution limits.
One area that FHA intends to closely examine is the appraisal process- more specifically to see if home values are being artificially inflated. The concern is heightened since properties with a HECM tend to depreciate more quickly than homes with traditional mortgages, said Montgomery. FHA will be comparing existing appraisals with AVM
Download the video transcript here
12 Comments
I love the “ghost” at 3:29. ha. In all seriousness, another well done video with some great news/education.Shannon!
Oh well. The commissioner, at least, wants to do something. I do think his condition of worry about the HMBS, is kind of interesting, which I think, is a bit callous. Yes, we need to maintain the investor relationship, but we also need to remember that we are serving the senior community and their wants and NEEDS. The HECM is always the magnified focal point in MMIF. I would like to see a OVERALL strategy to bolster the HECM. Again, as I do when leaving these comments: The originators cannot make any money with extremes of lower volume and revenues. The margins are killing us and our clients. That is a BIG problem that is cyclical.
Robin, as to the HMBS investor relationship, Ginnie Mae’s relationship to HUD is no different than that of FHA.
Except for MOOB, who can afford to hang onto HECMs today? Lenders must have a secondary market outlet. Ginnie Mae is the source of the best outlet the industry has.
At the beginning of this fiscal year if it had not been so blatantly ultra optimistic, it would have been humorous when industry leaders argued that the new 3% PLF floor combined with existing margins will not harm the ability of HECM originators to offer maximum or near maximum PLFs. Ultra optimism never looks realistically at the future where the economy would be much better, increasing employment to the point where the Federal Reserve would be increasing its prime lending rate.
The problem is the index, not the margin when the PLF floor is 3%. Years ago, the expected interest rate was much higher than today with much lower lending limits so I am not clear when in HECM history was the period where the overall strategy was to bolster the HECM. The biggest problem is the HECM PLFs were far too high before fiscal 2014.
Also, I guess I might be a bit ignorant on this point: Where is all of the upfront MIP going? Does it just disappear? We sell that fee under the “guise” that it is a fee that enables lower rates and non-recourse. Every HECM has to pay. I would think that this SHOULD help in the default ratios? I have heard that this fee has been utilized in the past for other problems. If that is the case, this fund should remain separate and unused, so that the HECM remains solvent and untainted. Not used for anything other that what it was intended.
Thank you Positive. Yes the floor… then follows the margin. to maximize the amount of monies the client gets, (scenarios abound) , we have to lower the margin to accommodate the PLF floor. They go together. To maximize monies, the originator has to lower the margin. NO monies left to make a living. It is a downward spiral for everyone . Hurt the client, the originator makes more money. Not ethical and NOT right for this industry.
Job well done Shannon, learned a lot and great news reminders.
What is the answer, that is the $64,000 question, we all have our opinions.
There is no question that we still have liability problems with the MMI fund, there is no simple answer!
We do know the adjustment in the PLF’s hurt production drastically, was that the answer along with the MIP premium going to a flat 2%? Again, in my opinion, it was not the complete solution.
I feel very strongly about the PLF’s being adjusted upward again, even 50% of what they used to be.
One problem I feel we have that is plaguing the industry is the old loans on the books. Seniors are living longer, staying in their homes longer and HECM’S are on the books much longer.
This means, principle balances are rising and in many cases rising higher than the original gross principle limit and even the value in some cases.
I personally do not feel we will see the positive effects of FA and the October 2nd ruling for some time to come.
I repeat myself again, I feel it is necessary to readjust the PLF’s to a more positive level, in order to put some life back into the origination stream!
I reiterate, the PLF’s are not our main problem, I feel in my opinion, time is the enemy, we need to give it a lot more time for the changes to come to the point of it’s true benefits.
This will mean losses will continue, hopefully not at the rate they have been and in time they will level up. In the meantime, the FED’S may need to pony up!
The HECM is a product that needs to stay in existence’s, our seniors need it in order to have something to fall back on rather than what they have!
John Smaldone
I believe that the investors in the new proprietary reverse mortgages are not planning on losing money. And that’s without insurance. Maybe HUD should hire better actuaries. Could that be the problem?
This video is interesting, but clearly is from the 30,000 foot perspective of not understanding what is happening with real borrowers:
Mention is made of appraisal issues and how they are being examined. Comparing a personal appraisal with an AVM might be valid in some cases if the property is a production-built home that is less than 5 years old and the builder has built a minimum of 100 units of the same model. Anything else and the comparison is virtually useless. Even when properties meet this criterion, it doesn’t account for rapid changes in condition. One owner may buy what is sometimes described as a new “white box” just to get the shell in a neighborhood. They then almost immediately gut and remodel the interior and spend significant sums on exterior work. In contrast, another buyer moves in with 6 dogs and 4 cats. The home is destroyed almost immediately. An AVM will never detect the difference.
I’ve walked neighborhoods where the homes were identical when built 40 years ago, but today they are very different. Some have never had a coat of paint. Others have been well maintained and upgraded. County records and AVMs cannot tell the difference. An AVM, by it’s very nature, will consistently overvalue the junk and undervalue the nicest homes.
It was suggested that AMCs were a solution to appraisal problems. What I see is that the banks and credit unions have found ways to avoid using AMCs, pay appraisers more, and they get the appraisers who give them the values they want. These appraisers will not work for an AMC. They get plenty of work at higher pay. The incompetent appraisers all work for AMCs. The regulators think there is no foul in a low appraisal, but I hear concerns about churning HECMs. It should be obvious that if an appraiser significantly undervalues a property, it becomes a good candidate for a rapid refinance if the loan closes at all.
This video assumes no one is harmed by a low appraisal. I will suggest that many borrowers or prospective borrowers are harmed. The minimum harm is caused when the value is low, but the loan closes. In this case, the regulators failure to enforce reasonable standards on low appraisals intentionally deprives the borrower of money they should get so they can stay in the home longer. These borrowers can make up the difference by refinancing the loan after 18 months, but then the harm is transferred to the lenders and FHA if it is a no cost refinance where all closing costs are paid with yield spread money. If the borrower pays any additional closing costs, this is additional harm to the borrower. I will suggest that properly valuing all homes would reduce the churning of HECMs, but I have not found a regulator interested in the subject.
In other cases, the loan fails to close and the borrower is forced from their home because of an intentionally low appraisal. If the borrower is forced to sell because they could not get a proper appraisal, they quickly spend the equity and end up on a subsidized housing program of some kind. This costs the government far more than what was saved with the low appraisal. It just comes from a different bucket of money.
Another way borrowers are harmed is when they are forced to pay for an incompetent low appraisal and the loan does not close. In these cases, the borrower pays for an appraisal, waits until the appraisal expires, and then pays for another appraisal. These are unnecessary fees forced on borrowers by regulators who think there is no foul in a low appraisal. I will suggest that there are adverse consequences to bad appraisals, whether they are high or low.
My observation is that the required use of Appraisal Management Companies guarantees we will get bad appraisals. The appraisers are independent contractors. Individual appraisers can sign up with many, or all of the AMCs. No one is monitoring their work. No one ever removes a bad appraiser. When they get busy, the appraisers have learned to cherry pick the work they want. Some gets done on time. Other work gets done some day. No one is obligated to deliver on time or for a quoted price. I’ve had an appraisal on a house in town take 4.5 months. I’ve seen an appraisal cost $2,200 on a house that was nothing special.
Before appraisal independence, we used an appraisal company where the appraisers were employees. We ordered appraisals from the company, they assigned the work to one of their appraisers. The appraisers got a fair mix of easy and hard ones. Pricing and delivery was predictable. We are no longer allowed to use this company because they are not an AMC. They have plenty of work without dealing with AMCs.
I don’t see any change in principal limits or lending ratios affecting the losses. From my observation, the people writing the rules have no clue what is causing their losses. Let me suggest a few. This is not intended as an all-inclusive list.
Many HECM borrowers either are on Medicaid or will go onto Medicaid. Medicaid has an estate recovery process that will take much if not all of any equity that is available when the home is sold. In many cases, Medicaid would take all of the equity even if the home was free and clear. When combined with any mortgage balance, the heirs, if there are any, have no incentive to spend time or money probating and selling the property. It is a reasonable business decision to abandon the property to foreclosure. In Colorado, the Medicaid people have a process in place to probate and sell the property if the heirs don’t. From what I see, HUD has no similar process in place to probate and sell a property when the last borrower dies. I think HUD should identify all heirs and the personal representative as part of the application process. They need a process in place to promptly probate and sell if the heirs do not take action. I talked to a real estate agent this year who sold a property that had been in default for 5 years without being foreclosed. Does HUD’s failure to act cause losses?
If the last borrower leaves the home for an assisted living facility, a POA could sell the property. There is no attempt to identify a POA at time of application, and no attempt to have a POA in place. I’m told that half the population is dealing with some form of dementia at age 85. Many of our HECM borrowers will live past 85, go to assisted living, and be unable to deal with maintaining or selling the home while they are in assisted living. Is it any surprise that a person in assisted living may not pay the taxes, insurance, or utilities? If the borrower has no heirs, the utilities are turned off, pipes freeze and thaw, how much damage can be done to the home before the water is turned off? If the property is damaged by a storm, and not properly and quickly secured, how much damage can result? How much damage can vandals do to an unoccupied home? It is pure nonsense to think that tinkering with principal limit factors can solve these and many other issues.
If HUD is going to address the losses, they will have to get down and talk to people who understand these borrowers. The HECM borrowers are different than forward mortgage borrowers. A HECM is inherently a product designed for the borrower’s last home. This means that in many, if not most cases, the borrower will be either dead or incapacitated when the loan comes due. Expecting a dead or incapacitated person to deal with selling the home and paying off the loan is blatantly unreasonable! Why is there no provision for an orderly closing of the transaction when the borrower is dead or incapacitated?
In other cases, there are no heirs, the heirs are incapable, or unwilling to close the transaction. HUD needs an orderly way to deal with these issues. I got a call from one heir whose parents had died more than a year earlier. He said the house was valued at $435,000 and the loan was $275,000. He had done nothing to probate the property. He could not understand why no one would lend him money on a house he didn’t own with bad credit and no money. He had no interest in probating, selling, and walking away with more than $100,000. He preferred to wait for the foreclosure.
Accurate and compassionate servicing of these loans is particularly important. It is very frustrating for these borrowers when they get false claims from the loan servicer and then only have access to an anonymous call center that is not helpful. I have had an instance where I had to go to the NRMLA national convention to find a person who would actually help resolve a servicing problem for my borrower. It shouldn’t be that hard to resolve servicing errors.
These borrowers are inundated with mail and phone calls from people who claim to represent their mortgage company. It would be very helpful if servicers provided one point of contact for each loan so the borrower had a real person they could call with questions. The same person should be aware of all mail and email traffic on the loan. It’s easy to understand the borrower’s confusion when I see how these loans are serviced. We try to help our borrowers and care givers navigate the maze when they call us. There needs to be some reasonable accommodation when borrowers cannot read notices because of vision problems or cannot understand phone calls because of hearing problems. Servicers should expect to deal with these issues and connect the borrowers to appropriate local resources for help when necessary.
There seems to be concern about reduced origination volume since the October 2, 2017 changes, but those changes effectively took two groups out of the market. The refinancing of HECMs was stopped by a combination of lower principal limit factors and higher up front mortgage insurance. These changes keep borrowers who would benefit from lower interest rates and lower ongoing mortgage insurance rates from refinancing. This harms borrowers by the old loans continuing to consume more equity than necessary. The borrower’s equity is consumed and HUD is more likely to foreclose these old loans because of the changes.
For borrowers with a free and clear home, the cost of setting up a line of credit has become unreasonable. For a borrower with a $700,000 home with no mortgage, the up front mortgage insurance is $13,593. Other closing costs might total about $3,000. There is almost no yield spread money on this loan, so the costs can easily exceed $16,000 if the originator works for free. If the originator charges the $6,000 origination fee, the cost exceeds $22,000 for a line of credit. The October 2, 2017 changes raised the up-front cost of this loan $10,194.75. Prospects who are not financially stressed will not pay this for contingency funds. These borrowers are used to getting a HELOC with low or no closing costs. The net effect of the most recent changes is to intentionally drive the borrowers who are least likely to default out of the market.
My perspective is both as a HECM originator and borrower. The people writing the rules seem to be dropping bombs from 30,000 feet with no idea of what the effect is on the ground. they are causing massive collateral damage while having no effect on the problems they are supposed to be solving.
I could keep going, but I have written enough for today.
Don, you spoke a lot of truths in your article, especially about the servicers of HECM loans. Half of the people working at the servicing companies DO NOT know the ins and outs of the program. They give the Seniors erroneous information. Like you say, they confuse the Senior.
You are definitely right about the borrowers who have a free and clear home, who wants to pay$15,000. to $20,000- for a HECM when they can get a HEL OC for no cost? Sure they make payments on the HELOC but $15,000 to $20,000. covers a LOT of monthly payments!
I have lost a lot of HECMS because of the high closing costs! Do the math!
I have been doing HECM loans for 23 years, I have seen many changes and most are certainly not to the benefit of the Seniors.
Wow. Many people seen to have a bunch of time on their hands? A reflection of what is going on in the industry. Not much.
Mr. Veale, Thank you for your kindness. I am very happy that you called and I could vent and you listened.
You are the only person, for me, that has the breadth of knowledge to understand what is going on, and it is refreshing to let it all out and have that ear. Especially now that many are exiting the space.
I did listen to Scott G. on the podcast with Lynkken. Interesting his comment and reasoning for the decline of closings. Naive? As I listened to the rest, I heard the same old sales pitches. Oh well.
I have never met him. I have been with them coming 6 years. Not a phone call.
He is right, but it is a bit harsh and leaning to a discriminatory bent and not exactly the reason originators are leaving,(maybe part.)
Yes the older originators might be leaving due to age, but the ones I know that have been in the industry for a long or short time, are there for different reasons.
Cannot lump them all together. They like (liked) the job in retirement. They are on medicare and are pretty well established. Not too many worries and are good at talking to their peers.
Most are part-timers. I am not. I truly would not be leaving the industry, if it were not for the decline in my income.
If you have been an originator in this business for any length of time, it is total burn out, and then a sharp kick in the behind. Newbies have to take over they have the youth, stamina and .. well maybe not. I do not think they are a remedy.
I have many calls. Most are now not doable. HECM to HECM. Clients that I closed 3 -4-5 years ago wanting to refinance to value increases. All that I told them at the table then, is not applicable. Some understand, some are angry.
The new clients are aghast at the funds that they will receive. Then I have to explain away their frustrations with the “it is the same for everyone”.
Most have not called back or are “thinking about it”. I have not had a needs based client in a long time.
I have clients that call and are working with another lender. I give them my comparison which will always be a lower margin, some just use the information to give to the other lender, which then lowers theirs.
I right now am a consultant to people that are considering the mortgage and in a different way than I was before this happened.
I feel differently. I am like the Wizard of Reverse. I pull back the curtain for the clients to see what is really going on. Making sure they don’t get ripped off.
Anyway , Mr. Veale. You and I have had our bouts. I too, am very glad you called. It is like a emotional moment and the door closing.
A sigh or relief knowing that someone understands what I ,( we) have been fighting. The dragon seems to have won.