Unwinding Legacy HECM Issues

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Back-end issues such as occupancy fraud, delayed foreclosures, and deferred maintenance pose risks

As a wise man once told me, “it’s easy to wind something up. It’s quite another thing to unwind it”. Since 2013 the FHA and HUD have taken a number of steps to try to unwind the components of the Home Equity Conversion Mortgage that have led to increased claims against FHA’s insurance fund and those that negatively impact its projected future economic value of the program.


Just how both agencies will continue to address this momentous challenge remains to be seen. While the increasing losses from HECMs are troubling, it should be noted that $73 billion of the $1.2 trillion of the insurance in-force in FHA’s MMI fund are HECMs. That is 6% of all loans insured by FHA are HECM loans according to a report last month from the Congressional Research Service. The problem is that even that small cohort of HECM loans can have a significant impact on the overall fund.

While most may agree the most problematic issues in the HECM warranted correction, many are concerned that future policy changes are based on actuarial reviews. Reviews that have historically shown significant volatility and wild swings in their valuation of the program.

Larger issues may be lurking in the back end of the HECM portfolio which could be significantly contributing to continued insurance claims. Issues such as delayed foreclosures and conveyances to FHA, deteriorating property conditions and occupancy fraud in cases where the last borrower has died or moved. These require timely remedies. [download transcript] 

They would rather move & Fewer HELOCs in 2019

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Survey finds 1-in-3 would prefer to move elsewhere
Analyst predicts fewer new HELOCs in 2019

It certainly won’t stop those with a home equity line of credit or HELOC from tapping their equity, but it may give pause to those considering the loan. Housing Wire reports Bankrate’s Chief Analyst Greg McBride saying there will not be strong demand for HELOCs in 2019. This despite some predicting boom in home equity lending. “Yes, people are staying in their homes longer, home prices have gone up, people have more equity than they’ve had before, and it’s still a place that people look when they need access to significant chunk of money, But because of the fact that there is a wider aversion to borrowing from home equity than there was 12 years ago, the volumes are just not going to be what we had seen in previous economic cycles” he said. Perhaps the memories of the housing crash versus anticipated Federal Reserve interest rate hikes will give some pause before incurring another financial obligation. The good news? Despite the HECM ’s significant upfront FHA insurance premiums, many may find the HECM’s line of credit attractive in avoiding the risk of rising monthly payments.

Researchers at Age Friendly Ventures found one-third of today’s retirees would prefer not to age in place, but to move elsewhere. The top three influencing factors are family (65%), livability (36%) and the climate (32%). The cost of living is motivating some consider moving, not just to another state, but internationally. Last month I spoke with a well-respected financial advisor in our community who shared that increasingly the choice of where to retire is weighed, especially in states with high-income taxes cost of living. Despite this Age Friendly’s study found 2 out of 3 retirees did not conduct in-depth research to determine where to retire. While the majority of retirees do remain in place despite their stated desires, those who do move can retain more of their liquid assets by utilizing the HECM for purchase.

Any industry finds itself challenged when the regulations and rules which govern it remain uncertain. With that in mind, one lender says proprietary reverse mortgages are the solution. New York-based Quontic Bank CEO Steven Schnall thinks so. “I think the proprietary mortgage is the industry’s solution to the whipsawing around that HUD is causing with all the guideline changes.” The number 17 ranked HECM lender plans on prioritizing proprietary loans this year in the effort to reclaim some of their lost HECM volume. Being in New York does come with its own unique challenges. The state prohibits lenders from originating non-agency reverse mortgages but Schnall remains optimistic being a federally-chartered bank. Quontic’s strategy makes sense for lenders in states with high-valued properties while others continue to adapt and implement strategies to adjust to the new norm of originating HECM loans.

Down Under: When lenders disappear

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Australia: largest reverse mortgage lenders exit

What happens when reverse mortgage lenders suddenly disappear? Australia is instructive on what happens when lenders offering a needed loan to help seniors age in place suddenly disappear. Despite the strong criticism and negative media stories covering the loan, it would seem the need older homeowners down under remains. And despite increasing criticism of the program, one senior advocacy group laments the exit of the nation’s largest reverse mortgage lender Commonwealth Bank reports Reverse Mortgage Daily. Bankwest is also ceasing their reverse mortgage operations all which have left a handful of smaller lenders to offer the loan to Australia’s aging population.

Earlier in 2018, the Australian government opened discussions on the feasibility of offering government-backed reverse mortgages to all Australians over the age of 66 enabling them to age in place. Against the backdrop of a potential government product, the Australian Securities and Investments Commission opened an investigation into the financial health of reverse mortgages finding that 92% of over 100 files examined lacked any evidence that the broker or bank explained the risks to future financial security and repayment with the borrower.

Lender consolidation has complicated matters with five banks accounting for 99% of all reverse mortgages originated in the last two years. Why are Australian lenders exiting…

Government Shutdown, Endorsement Plunge & Outlook

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Thinking Big in a Smaller Market

The bickering continues in Washington DC resulting from the budget stalemate and subsequent limited government shutdown. Veteran originators will recall a 16-day shutdown in October 2013.  During this time endorsements of all Home Equity Conversion Mortgages cease. All FHA mortgages stand to be impacted the most during this temporary shutdown. Payments to reverse mortgage borrowers will not be interrupted but endorsement numbers for December and January stand to be somewhat skewed as a result.

The number of federally-insured reverse mortgages endorsed in the month of December was just released. A record low 1,751 Home Equity Conversion Mortgages were endorsed. For some perspective December endorsements totaled 4,765 in December 2017, 4,658 in 2016, and 4,233 in 2015. This December’s volume was somewhat of an outlier being only 68% of November endorsements, whereas in previous years December typically reached 90-100% of the prior month’s volume.

While we may collectively dream big as to how we would like to see our business and industry grow in 2019, we must also embrace the fact that we are a much smaller industry than just a few short years ago. As a result, brokers and lenders will become increasingly lean in their overhead costs and nimble in their marketing efforts. Long-term operators have addressed these challenges 10 years ago in the wake of the housing and economic crisis of 2008. What’s different this time is that interest rates are relatively stable and home appreciation is slowing moderately. The two legacy reforms that continue to impact the acceptance of the HECM are the decreased interest rate floor of 3% and numerous principal limit factor cuts...

Reverse Mortgage Loan Limit Increased: Impact & Outlook

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Potential Impact of Lending Limit Increase

reverse mortgage newsThe Department of Housing and Urban Development announced the third consecutive increase of its national lending limit to $726,525 for the federally-insured reverse mortgage and FHA loans beginning January 1st, 2019. An increase of over $46,000 from its previous limit of $679,650. The risks the Home Equity Conversion Mortgage poses to FHA’s mutual mortgage insurance fund have been well-documented which may lead some to ask will the loan limit increase losses or negatively impact the thriving jumbo reverse market?

Well generally lauded by industry participants there are perspectives that warrant further consideration. Will this make a notable change to help boost overall loan volume? Are there any particular advantages in HUD attracting more owners of higher-valued properties? How does this impact the recent growth of private or proprietary jumbo reverse mortgage loans? To answer these question we reached out to a few our fellow reverse mortgage professionals.

Dan Hultquist VP of Education & Organizational Development at Live Well Financial and author of Understanding Reverse sees the move as such a positive he’s written a new chapter in the 5th edition of his book. Dan sees more money for the homeowner and lower risk for FHA. “Consider a 73-year old borrower with a 5% expected rate, that allows the borrower a principal limit factor (PLF) of 47.50%. So long as the home appraises for at least $726,525, this borrower’s initial principal limit will be $345,099. However, when you calculate the initial maximum Loan-To-Value (LTV) for homes above this amount, it is obvious that FHA’s risk declines with higher property values.” The bonus for FHA is that these borrowers will pay the maximum upfront mortgage insurance premium of $14,530.50- even when there is a lower loan to value ratio... [download transcript]

2018 Year-End Thoughts

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Final thoughts on 2018

Merry Christmas and a happy new year from the team at Reverse Focus!

 

HECM Changes in 2019: Inspector General’s Report Provides Clues

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Inspector General report points to specific risks

reverse mortgage newsIn October HUD’s Office of the Inspector General released their report which telegraphs what changes to the HECM we may see in 2019.

If you were to ask ten HECM professionals what their outlook was for 2019, you would likely get ten different answers. Of all the responses one were to receive the most honest and realistic would be- expect more change.

There’s been much talk in the media of Inspector Generals recently- most of it centered on the political war that rages in the wake of alleged Russian collusion in the Trump administration and also the Inspector General (IG) investigations into the Department of Justice and the intelligence community. However, what most may not know is that all major federal agencies have a functioning IG who serve as watchdogs to ensure that the best interests of the government and taxpayers are served. On October 15, 2018, the U.S. Department of Housing and Urban Development Inspector General’s office released their report outlining 6 challenges facing the agency.

Of the six the most troubling and problematic are the continued risks to FHA’s Mutual Mortgage Insurance fund, which backs both HECM and traditional FHA loans. The OIG states that HUD is presently lacks sufficient safeguards to prevent loan servicers that fail to meet foreclosure and conveyance deadlines from incurring holding costs which are passed onto HUD. It is estimated these delays cost the agency $2.23 billion in ‘unreasonable and unnecessary’ holding costs in a five year period. While not specifically mentioning HECMs it’s not a stretch to believe these issues plague both traditional and HECM loans. This comes as no surprise considering our recent report and an article in HousingWire which reveals a number of illegitimate occupants continue to remain in properties with a reverse mortgage; many times years after the borrower has moved, passed away, or in some cases even rented the property to another party. In other instances, heirs have reported considerable delays in getting a deed in lieu of foreclosure processed or waiting over 5 months for an appraiser to come to the property so the family can arrange for a purchase. While noncompliant occupancy of HECM properties is not specifically addressed, the report does cite delayed property claim reporting by servicers and/or lenders.

There’s no question that the HECM is flashing brightly on the radar of government watchdogs as evidenced in the report which reveals large losses attributed to the reverse mortgages… [download transcript]

Strong Words: Comments on Reverse Mortgages Spur Controversy

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This week: Former FHA Commissioner takes aim at reverse mortgages and a clear and present danger to the HECM

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Some industry participants question David Steven’s recent criticisms of the HECM industry

Former FHA Commissioner David Stevens wasn’t merely providing some suggestions on how to improve the Home Equity Conversion Mortgage. He also took aim squarely at the industry, its alleged practices, and those who have made the origination of HECM loans their chosen profession.

Last week we got our first look at the commissioner’s comments on LinkedIn where Mr. Stevens posted a link to a Wall Street Journal article on FHA’s new appraisal rule. The comments were both lively and heated. Stevens accused reverse mortgage lenders of making outrageous profits and engaging in predatory sales. He also slams the use of celebrities and presidential candidates as ‘pitchman’.

Stevens’ proposals to reform the HECM include mandatory credit score guidelines, mandatory set-asides for all borrowers, and the elimination of full-draw HECM loans... 

 

Tip of the Iceberg: HECM Occupancy Abuses

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HECM abuses when borrower no longer occupies the property pose risk to FHA’s MMI fund

reverse mortgage newsHow quickly are HECM properties sold or called due and payable when the last borrower has died or moved out? More importantly, how many properties with a HECM are sitting on the books for years while the borrower’s heirs or unauthorized tenants remain in the house; in many cases for years?

It’s not often during my show prep that I strike gold, but this week was the exception finding an intriguing and unsettling article by Mike Branson. It details where a significant portion of our HECM losses may be coming from. Mike is the CEO and owner of All Reverse Mortgage. He has over 40 years experience in mortgage banking and also has served as an expert witness for the FBI in mortgage fraud cases. That particular experience plus numerous questions he has fielded has raised some very serious concerns which we will address here today. A very timely topic since the HECM may be facing additional changes this year. 

 

HECM Risks: A Balancing Act

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FHA is addressing risks on both sides

The federally-insured reverse mortgage or Home Equity Conversion Mortgage while holding tremendous value has been challenged with continued losses paid from the FHA’s insurance fund. In the wake of the housing bubble and economic crisis the program, several changes were enacted. The repeal of the standard fixed-rate HECM, the introduction of the HECM Saver, increases in mortgage insurance premiums, the financial assessment, first-year distribution limits, repeated principal limit factor reductions, and most recently, the enactment of the second appraisal rule as part of the Collateral Risk Assessment. The pace of these changes increased with the passage of the Reverse Mortgage Stabilization Act of 2013 which allows HUD to establish new rules via mortgagee letter rather the previous protracted rule-making process. The intention was to allow the agency to act quickly to slow the mounting losses incurred by the program.

When it comes to HECM risks there are basically two types: front end and back end. Front-end risks would include the valuation of the home, lending ratios or principal limit factors, and product design.

Download the video transcript here