The housing market shift has begun


Eviction Ban Drama & the signs of a cooling housing market

As the housing market goes, so goes our industry. And a shift in the U.S. housing market has begun. Before we dive into the data showing why let’s discuss the most recent breaking news- eviction bans.

In a 5-4 decision on June 29th, the U.S. Supreme Court put the Centers for Disease Control on notice saying the agency overstepped its statutory authority in issuing a nationwide eviction ban. However, with the ban’s expiration of July 31st fast approaching the high court allowed the ban to remain in place another month. The CDC argued the eviction moratorium was warranted to prevent homelessness which they argued would lead to further spread of COVID-19.

Why does the eviction ban matter?

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First, once the bans actually expire available housing inventory would increase as rental properties are sold increasing inventory which could slow the pace of red-hot home values. That means slightly reducing the available proceeds for future reverse mortgage borrowers. Second, the White House under increasing and unrelenting pressure from top House and Senate Democrats directed the CDC to extend the deadline again despite the Supreme Court’s warning. On August 3rd the CDC issued another temporary order for an eviction ban, however, this time is limited to renters in counties with a high level of COVID-19 community transmission. The new ban is to expire on October 3rd.


While the moratorium drama played out a significant shift in the housing market was largely underreported and generally unnoticed. In fact, the market is at a tipping point. Consider these statistics. In June the pace of homes under contract fell 1.9%. “Buyers are still interested and want to own a home, but record-high home prices are causing some to retreat,. The moderate slowdown in sales is largely due to the huge spike in home prices”, said Lawrence Yun, Chief Economist for the National Association of Realtors. You can’t blame potential homebuyers for standing back since median home prices have increased for over 112 months. According to a U.S. Census Bureau report, sales of new single-family homes dropped by 6.6% in June compared to May. Annually, sales of newly constructed houses were down by more than 19% compared to a year ago.

In their July 2021 report, Zillow said, “for-sale inventory saw meaningful recovery for the second month in a row, improving 3.1% over May”. Realtor-com reports a 10.9% increase of newly-listed properties from May to June. Perhaps the housing market shift has already begun.

While the eviction bans will prevent some rental properties from going on the market, homebuyer fatigue from a hyperactive market appears to be slowing home purchases and relieving some pressure on housing inventory. The means future reverse mortgage borrowers are likely to see their home appreciation slow or even plateau in several markets. A gradual slowdown or soft-landing of the real estate market is not only more likely but also much more preferable to reset in home values. In the meantime, older homeowners are poised to get the most with a reverse mortgage with robust home prices and a Federal Reserve that’s reluctant to tinker with today’s low interest rates.

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As moratoriums end seniors stand to lose the most


As moratoriums end, seniors stand to lose the most

A federal ban on evictions expired Saturday, July 31st. Consequently millions of Americans are facing the specter of housing insecurity or homelessness.  The financial protections put in place for millions of households throughout the pandemic including foreclosure moratoriums, stimulus checks, and unemployment benefit bonuses only delayed the inevitable for some.

While the federal government has extended eviction and foreclosure protections multiple times, it’s unlikely we will see another intervention. However, as we are recording today’s show we should note that anything can happen. Case in point- the rapid increase of new cases of the Covid Delta Variant led the CDC to reverse its recent mask guidance for vaccinated individuals. While Covid hospitalizations and deaths had dropped precipitously the government could justify further stimulus and housing protections due to the potential economic impact of the Delta variant strain.

While eviction moratoriums are scheduled to end on July 31st struggling homeowners have until…

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September 30th to request a mortgage forbearance. Homeowners who obtained a forbearance last spring have up to 18 months of protection. That means someone who entered forbearance last March would exit forbearance this month. Their choices would be to obtain a loan modification, sell the home, or let the mortgage go into default. Those with an FHA, USDA, or VA loan are not required to make a lump sum repayment of missed payments.

The good news is only 2.9% of all active mortgages are over 90 days late reports the Wall Street Journal. That’s a marked improvement from the 4.4% of households who were delinquent last summer. The bad news is roughly 1.55 million are still seriously delinquent and some of those are over the age of 60. Those who stand the lose the most are those who’ve paid down their mortgage balance significantly over the years and have a strong equity position in the property which would be lost in a foreclosure. 


Of all age groups, older homeowners stand to lose the most having accrued significant equity. Census Bureau data shows households aged 45-54 have an average of $70,860 in equity totaling 64% of their net worth. Those aged 55-64 have $103,400 in equity for 61% of their net worth. Homeowners between 70 and 74 have $153,300 in home equity totaling 72% of their net worth. That spells trouble for the struggling homeowner who is delinquent on their mortgage and the opportunity for many to escape potential eviction with a reverse mortgage. This data also confirms that the banks stand to profit the most by foreclosing on older homeowners with substantial equity.

All things considered, we can conclude the following outcomes are likely- There will be a spike in foreclosures across the country, how big we don’t know. Those foreclosures will impact housing values and stand to improve existing home inventory.  We can also expect further government intervention and stimulus, especially considering the strong reactions to the Delta variant despite vaccinations. Those emergency measures when added to previous protections will come at a significant economic cost- one that older American’s are ill-suited to absorb.

Moratoriums are winding down and struggling older Americans stand most at risk of losing their accumulated home equity. That’s where you, our viewers, as reverse mortgage professionals can offer a potential remedy to restore housing and financial security.

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A Day of Reckoning is Coming


A reset is coming to the U.S. housing market and reverse mortgage lending
A return to the ‘New Normal’

A day of reckoning is coming. It’s not doom and gloom. It’s an economic reality. Think of it as the natural end result when a series of mistakes and irrational decisions must be paid. After an unparalleled run the economy and the housing market always seek equilibrium. Now how that exactly plays out we don’t know. But what we can be certain of is there will be an adjustment.

The surge in housing prices has provided an umbrella for many. Extra cash for those who’ve taken a cash-out refinance. A line of credit for homeowners who’ve secured a home equity line of credit. Or a first-time reverse mortgage for older homeowners who are looking to take advantage of today’s ideal market conditions. Then, of course, there are the 4 out of 10 reverse mortgage applicants who are refinancing their existing HECM loan into another to harvest more of their home’s value, and perhaps secure a lower starting interest rate.

Each have benefited although not equally.

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Borrowers who’ve taken out a HELOC should recall the words of Mark Twain. “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” That rain is when home values drop and the umbrella is the open line of credit HELOC lenders will reduce or freeze altogether.

But there’s another day of reckoning. One which motivates sage mortgage professionals to play the long game. A view that looks beyond today’s hyperactive market and plans for a return to moderate home appreciation and realistic interest rates.

One person who’s taken the long view when it comes to our industry’s market is John Lunde- founder and CEO of Reverse Market Insight. “Given the preponderance of H2H refi activity we’ve been seeing, it looks to me as though the industry could be testing the limits of loans available to be refinanced in some of the historically higher volume areas,” Lunde said in a recent Reverse Mortgage Daily column. Another concern is the leading indicator of future endorsements – FHA case number assignments for new HECM applications. After steady application volume increases last spring and fall case numbers fell in the winter months to rebound to a high of 7,564 case number assignments this March. Following that high-water mark submitted applications fell 13% in April and and 9% in May.

The tapering of application volume may be the result of the HECM-to-HECM refinance boom simply running out of fuel. “Interest rates for new production HECMs are at or near the minimum expected rate, so refinance burnout should start to occur, all else equal,” New View Advisors partner Michael McCully tells RMD. “The industry will need to stay alert on appraisal quality as the impact of lower rates producing genuine net tangible benefit to borrowers recedes.”

The proverbial ‘day of reckoning’ is as natural as the ocean’s tides. The trick is to know when the tide is receding and have a plan in place to continue catching new business as the waters recede. That day may come well before the Fed hikes interest rates so the question is how do each of us prepare to succeed in a new market?

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When stimulus is not enough


“I lost my job during the pandemic. Now I have $40,000 in credit card debt”. Similar tales of economic devastation as a result of the Covid-19 pandemic are not limited to younger working Americans. In fact, many older workers who were preparing for retirement now find themselves saddled with much more debt than they had one year ago. Some tapped into their retirement savings without penalty thanks to special emergency provisions of the coronavirus CARES Act.  The true impact of the pandemic on those approaching retirement remains to be seen. [read more]

Unemployment checks and stimulus payments only went so far in mitigating a job loss, a reduction of hours, or the increased cost of living as inflation continues to surge. As a result many may consider postponing retirement or working a side-hustle to bring in a bit of extra income each month. The Wall Street Journal reports, “The Labor Department reported Tuesday that its consumer-price index increased 5.4% in June from a year earlier. Excluding volatile food and energy categories, prices rose 4.5% from a year earlier, the most in 30 years.” Older homeowners feeling the squeeze of inflation or cut in income have several choices. Cut expenses, work longer, get a part-time job, start taking Social Security benefits earlier or later, or perhaps looking to their home’s value.

Options are your best asset when facing a financial challenge. While every older homeowner may not need to seriously consider getting a reverse mortgage, millions should but never do either from a sheer lack of awareness or fear having been told by friends or the media to avoid the loan altogether. Such prejudices preemptively eliminate a strategy when practical solutions are needed most. With this in mind we should discuss what options the homeowner has considered so far and why they have not chosen them.

Here are several alternatives to a reverse mortgage that may be considered and their benefits and liabilities.

First, refinancing into a lower interest rate. While this may lower the monthly principal and interest payment a couple hundred dollars each month- many are restarting their amortization and in effect will be saddled with required payments for decades.

Then there’s the cash-out refi. While this certainly borrowing at a low interest rate the homeowner’s monthly payments may actually increase with a higher starting principal loan balance.

Others may contemplate selling and downsizing to reduce monthly expenses but few do preferring to stay put . Getting a HELOC or home equity line of credit sounds appealing but there’s still a required monthly payment and payments will increase after the initial draw period expires.

Most of the so-called alternatives to reverse mortgages presented in the press are short-term solutions for a long term problem. In other words, they focus on the immediate need often ignoring the enduring need to meet their monthly cash flow challenges.

All things considered, despite short-term unemployment bonuses, mortgage forbearance, and stimulus checks millions of older Americans are in need of a long-term solution and strategy that helps meet their needs for decades to come- not one that gives them a cash infusion and new debt that further strains their cash flow. [/read]

 

HECM Refis: Are they Peaking?


Your News Roundup for July 12th

 

The question every older homeowner should be asking…today


Washington Post: “Should you tap into your home equity to fund your retirement?”

It’s perhaps the most important question every older homeowner could be asking. Should you tap into your home equity to fund your retirement? That question is the title of a recent column written by David Mount in the Washington Post. Mount presents a fair and factual representation of reverse mortgages. However, we will also examine his approach as to when one may be appropriate.

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“The strong stock market and a new perspective from the coronavirus pandemic may have you considering home equity as a way to accelerate a move in retirement”, writes Mount. An interesting point and one that leads me to reflect on the present state of both the real estate and equities markets. Much like we rush to buy replacement wiper blades during the first week of the rainy season, homeowners considering a reverse mortgage often wait until it’s too late. In some cases that means they no longer qualify lacking the required proceeds to pay off their mortgage. In other instances, they can no longer make a monthly withdrawal from their investment accounts due to stock market losses. In a nutshell- a proactive strategy will always outperform a reactive one.

Mounts cautions if one is to use their home equity for retirement “it should be done at the right time and for the right reasons”. Mount notes three of the most popular options for tapping into home equity. The first two are to refinance your existing mortgage to lower your payments or taking out a HELOC or home equity line of credit. Each will only improve a homeowner’s cash flow position modestly not to mention the inherent risks with variable rate HELOCs and payment shock after the initial draw period ends. The third option Mount presents is a reverse mortgage.

When should an older homeowner look to their home’s equity? “Overall, using home equity toward retirement works best for those with a high level of equity in their home,” Mount writes. That position makes sense for someone taking out a line of credit or a cash-out refinance but with one caveat: their cash flow must support the new loan.  Does that mean seniors with sizable savings should only consider these typical home equity extraction methods? Not necessarily. And that’s where Mr. Mount and I would disagree when he writes, “Reverse mortgages are a viable option for those with limited access to funds and a sizable amount of equity in their home.”

Let’s unpack that statement. Should homeowners with adequate funds steer clear of a reverse mortgage as a rule of thumb? It really depends on their unique situation. Perhaps some moderately affluent homeowners and their advisors not only see the benefit of a reverse mortgage but are using it as part of a larger financial strategy. “As with any big financial decision, you should work with a financial adviser to create a plan and strategize scenarios that will help you stay financially independent into and through retirement.” Now that’s a statement I can agree with.

Read the Washington Post column

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2020 in Review

top reverse mortgage news of 2020



The stories that shaped our industry in 2020

Negative Interest Rates?!

negative interest rates



Negative Interest Rates?! It’s not what most think

Negative interest rates? You heard that correctly. No, you don’t have to turn up your volume. In fact negative interest rates in the U.S. are here. (CNBC article). While you most likely will not see this economic anomaly mentioned on your local or national evening news, financial outlets have assiduously reported on central banks around the globe who are now pulling out all the stops in the effort to stimulate the economy. The European Central Bank, Sweden, and Germany currently are in negative interest rate territory and the U.S. may follow.

Does this mean the banks will pay you to borrow money? Not quite.

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Negative interest rates penalize banks for hoarding cash reserves instead of lending to consumers and businesses and earning interest income. It’s an unusual economic tool and a rare one at that. So closer to home- how will this impact our industry and older homeowners?

Savers and older retirees stand to feel the immediate impacts being unable to count on interest earnings to offset inflation. That could conceivably increase demand for alternative sources of cashflow such as a reverse mortgage. Last Monday the 1-year US Constant Maturity Treasury rate was just .10% or one-tenth of one-percent! The 1-month LIBOR index was a mere .157% and the SOFR (Secured Overnight Financing Rate) was just .09%. Let’s assume the base index for the federally-insured reverse mortgage fell below zero percent. What impacts would existing borrowers see? First, their principal limit or line of credit growth rate would slow significantly- but not altogether thanks to the lender’s margin in the loan. Something to keep in mind when touting the benefits of future borrowing power with financial pros and homeowners.  Next, future home equity will be consumed at a much slower rate as the loan’s balance grows much more slowly than it would in a normal interest rate environment. Lastly, with the average lender margin hovering around two-percent new HECM borrowers will benefit by being in the lowest interest rate tier of the HECM’s principal limit factor tables bumping up the present three-percent interest rate floor. While the word ‘unprecedented’ has become increasingly popular in the wake of the COVID-19 pandemic, the truth is negative interest rates have been employed on a few occasions.

And speaking of rates, Ginne Mae- the issuer of HECM Mortgage Backed Securities has provided a reprieve of sorts. In September our industry found itself somewhat caught off guard when Ginnie announced that any HECM mortgage-backed securities tied to the LIBOR index would not be accepted for any HMBS received on or after January 1st, 2021. That news came as a surprise as NRMLA was in active discussions Ginnie Mae, HUD and others on what replacement index would be used for future HECM loans. The good news is the deadline has been extended to March 1st. As RMD reported, “Ginnie Mae did contact the [reverse mortgage] industry, the members of which provided us with additional feedback relating to the volume of applications received by the initial publication date,” a Ginnie Mae spokesperson said.

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Is the HECM Durable or a Drain?



Despite improvements, the HECM remains a reliable target of fiscal scrutiny

In its Fiscal Year, 2020 Financial Report the Department of Housing and Urban Development called out the HECM program saying it ‘undermines’ the financial soundness of FHA’s Mutual Mortgage Insurance Fund which backs both HECMs and traditional FHA loans. There have also been repeated statements that the program is being subsidized by traditional FHA mortgages- a claim that has been recently challenged in a recent blog post by New View Advisors writing,

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“We think Forward Mortgage does not subsidize Reverse Mortgage now any more than Reverse Mortgage subsidized Forward Mortgage in 2009. A true subsidy would mean outsized realized HECM losses, and a compelling case that this will continue. This is not demonstrated in the report.” New View concluded by referencing a recent revision to the Actuarial review of FHA’s insurance fund. That revision increased the HECM’s economic net worth in the MMI fund from a negative $5.4 billion to a positive $1.268 billion. That revision was made after Jim Veale- an industry watcher and HECM originator contacted Pinnacle Actuaries in late November. Veale noted a discrepancy between the actuaries calculation of Total Capital Resources of a negative $5.64 billion versus a positive $1.597 billion shown in HUD’s report to Congress. As a result, Pinnacle updated their report which now has added $7 billion dollars to make the HECM’s economic net worth a positive $1.2 billion. This strengthens the argument that the HECM is presently not a drag on the overall FHA fund which backs the program.

Looking back the HUD’s recent annual report released December 4th, one area of concern that rightly deserves focused effort and attention is monitoring the servicers of loans that have been been placed into assignment with HUD. That oversight is crucial as HUD states the majority of losses from Type 1 claims are the result of the borrowers no longer occupying the home as their primary residence (or in some cases even living in the property at all) and the failure to pay property charges such as taxes and insurance. Such instances call for active and prompt intervention by assigned HUD servicing vendors to preserve the economic values of properties, and preventing occupancy fraud- both which stand to substantially contribute to continued and avoidable insurance claims and losses.

HUD Secretary Ben Carson’s comments became somewhat political in the December 9th official HUD press release which accompanied the agency’s financial report which reads in part, “When an institution becomes insulated from the success or failure of its policies, it loses its incentive to operate efficiently. Private businesses, while engaged in different work than the federal government, do not have the luxury of being protected from their failures or maintaining damaging courses of action,” adding, “Irv Dennis was able to accomplish the impossible task of providing the financial stability that had gone left unchecked for so many years.” Keep in mind, January will bring us a new administration and agency heads which are certain to have a direct impact on housing policy and the HECM program.

Setting politics aside much has been accomplished to improve the HECM program since the great recession of 2009. However, merely increasing oversight of lenders. “HUD must strengthen its effort to ensure that the lenders participating in the HECM program comply with its regulatory and administrative requirements and minimize claim costs” reads the agency’s 2020 financial report. With very few notable exceptions, HECM lenders have worked closely with HUD to ensure ethical and efficient lending to today’s older homeowners. Chances are that the largest liabilities to the economic value of the program can be found in the servicing of assigned loans for non-compliant borrowers as mentioned earlier, and reexamining the structural change of upfront FHA insurance premiums charged made in October 2017.

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Lending Limit Increase Cheered & Criticized

reverse mortgage lending limit increase



Many cheer & some criticize the latest FHA loan limit increase

Mortgagee Letter 2020-42 announced new loan limits for 2021 and once again, the federally-insured reverse mortgage will see its maximum claim amount significantly increased. HECMs with a case number assigned on or after January 1st are eligible for the new national lending limit of $822,375. But wait, you may say- didn’t HUD echo the Trump Administration’s call for Congress to abandon a national lending limit in favor of local or county-limits? Yes, they did. But remember the key word is Congress. Neither FHA nor HUD can unilaterally change the present loan limit scheme, rather legislative approval by Congress is required.

Today we are going to examine three questions: who stands to benefit the most, what role could the geographic concentration of HECM loans play in the future, and will jumbo and proprietary loans suffer as a result?

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If you originate HECM loans along our nation’s coasts, then congratulations. You are most likely to find eligible homeowners with higher who now stand to have an additional $55.775 of the home’s appraised value considered in the calculation of their principal limit. That would mean a 70-year-old borrower with a home appraised at $850,000 and a 3.25% effective interest rate would have a gross principal limit of $468,753 versus $436,392 in 2019. That’s an increase of over $32,000. This could incentivize homeowners in urban and high-valued markets who wanted access to more of their home’s value to taking out the federally-insured version of the reverse mortgage.

However, within hours of FHA’s announcement, HUD issued a formal press release questioning the wisdom of the increase. While FHA is mandated under the National Housing Act to set the lending limit based on 115% of the area median home value  based on the Metropolitan Statistical Area (MSA) and county, HUD expressed their concern in a press release.“FHA has seen consistent increases in loan limits during the past few years, putting it in a position to serve a segment of borrowers that may be better served by the conventional market. FHA’s mission is to support low-to-moderate income borrowers, so why does the law permit FHA to insure mortgages up to $822,375? This is a question for Congress and the taxpayers who stand behind FHA to answer,” said Assistant Secretary for Housing and Federal Housing Commissioner Dana Wade. To clarify while the FHA’s mission is certainly intended to assist low and moderate-income borrowers the HECM statute makes no reference to income or wealth.

With sixty-percent HECM loan maximum claim amounts originating from five states with higher home values increase the likelihood of more claims against FHA’s insurance fund? It certainly could. FHA’s most recent annual report to Congress notes that California alone accounts for 25% or one-quarter of the total maximum claim amounts in HECM loans in fiscal year 2020. Core Logic noted last in August that 3.8% of home loans in California are seriously delinquent-(over 90-days overdue)  a six-fold increase from .6% a year earlier. If these loans result in a wave of foreclosures in 20201 values could drop appreciably. Florida, Colorado, Arizona, and Washington state account for an aggregate of 35% of total HECM maximum claim amounts in 2020.

What about private reverse mortgages? The good news is the jumbo and proprietary markets should not be unduly impacted. The potential owners of high-valued properties are typically focused on tapping into more of the value of their home- a substantially larger portion- more so than the consideration of the HECM’s unique features and benefits.

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