Too Much Too Soon?

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Reexamining Product Design and Use of Proceeds

reverse mortgage news

The recent overhaul of the HECM program was a watershed event for both the reverse mortgage industry and senior homeowners. The elimination of the Standard Fixed Rate, consolidation to one product, two-tiered upfront FHA premiums and first year distribution restrictions all were born from FHA’s attempt to reign in the HECM program back to its original intent while reducing the risk of defaults and payouts from the MMI fund. The idea was to prevent borowers from using all of their proceeds in the first or early years of the loan which could leave them with little or no financial options once they’ve exhausted all their funds. Also, lower upfront withdrawals and deferred or tenure payments or a line of credit reduce the likelihood that the loan balance would exceed the home’s value in the early years of the loan or when the loan ultimately terminated. Most program changes were spurred by the Consumer Financial Protection Bureau’s report to Congress…

10 comments

Warren Strycker February 3, 2014 at 4:43 am

So long as LOs are paid more or less on the basis of how the borrowers take the money, the industry will continue to send a mixed message.

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Ray Fry February 3, 2014 at 8:04 am

I think the changes made by the CFPB made a misunderstood product much more confusing to the potential borrowers and will drastically lower the number of HECM loans being originated. The old expression “throwing the baby out with the bath water” seems appropriate here. My hope is that the CFPB makes some
borrower friendly changes after 6-9 month, before the business totally falls apart.

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The_Cynic February 3, 2014 at 10:39 am

Ray,

Unlike you or Shannon, I really do not believe that the CFPB has that much impact on consumer or congressional behavior or at least, not yet. Have any borrowers brought up the CFPB to you?

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Elio Ronchini February 3, 2014 at 10:07 am

Why not consider eliminating the school tax burden from seniors and the default rate for RM will fall to zero. This simply is an unjust tax and an unnecessary burden on seniors. Most seniors need this amount of money to pay for healthcare and medicine— not to pay for schools.

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The_Cynic February 3, 2014 at 10:51 am

Hey Elio,

Neither my dad or I sent our children to public schools except for college. So why would my dad or I ever pay that tax?

Your suggestion is not just over the top….

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The_Cynic February 3, 2014 at 10:17 am

It is hard to believe that most of the changes were introduced because of the CFPB report to Congress except as to borrower/consumer issues. The removal of the Standard products, particularly the fixed rate Standard, was due entirely to their detrimental impact on the MMI Fund and the anger of Congress over the condition of the HECM portion of the MMI Fund as of 9/30/2012 and the subsequent reports by FHA to Congress on its deteriorating condition.

As to products, what we have left are modified Savers with a new stepped initial MIP of 50 times or 250 times the old Saver initial MIP depending on whether or not the sum of mandatory obligations plus (if available) the 10% additional draw election exceeds the 60% first year disbursements limitation. There is little doubt that the 60% first year disbursements limitation finds much of its support in the CFPB report and the increased rate of property charge defaults occurring in the last five years caused mainly by inadequate cash flow and no line of credit available to pay such costs. By and large these were not “technical defaults” since homeowners were not “investing” into their homes through payments of interest and principal.

There is a perception within HUD and reflected in the 60% first year disbursements limitation that those who do not take full draws in the first year following initial funding of a HECM are less likely to default on property charge payments. Yet will a one, two, three, or even four year delay on a full mandatory draw really change the situation that much for those who are still the “other asset poor, house rich” borrower?

As to property charge payment defaults, what will significantly turn the situation around is a viable and flexible financial assessment. Seniors do not need significant qualification barriers if this program is still nonrecourse with no payments required until termination but rather one which is flexible enough to require some proceeds set aside for all, not just some, property charge payments. Such set aside should be tailored to the expected financial situation of the borrower ranging between 5 and 15 years worth of set aside based on the age of the youngest borrower. (If the average HECM is outstanding for 8 plus years currently, the 5 to 15 year period for a set aside seems reasonable.)

The amount set aside for property charge payments should be discounted by the sum of the expected interest rate and the ongoing MIP rate. Finally, the annual amounts to be set aside should be based on an estimated shortage of adequate cash flow to pay such charges, not on the entire amounts due. Perhaps there needs to be a cushion of 10% of the minimum amount computed to be needed for the set aside.

So the big question facing the industry is whether the first year disbursements limitation is little more than window dressing and whether financial assessment will be a process to ensure the success of the borrower experience or simply a means to cur off more potential borrowers.

Reply
The_Cynic February 3, 2014 at 10:25 am

Warren,

You need to add TPOs to your list since many times the majority have only offered the products which produce the greatest revenue stream.

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CLIFF RIDDLE February 3, 2014 at 2:11 pm

ONLY THE GOVERNMENT WOULD TRY TO CORRECT SOMETHING THAT IS 95%
CORRECT

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Bill Danner February 4, 2014 at 8:40 am

When decisions are made based on faulty or short term historical facts, or Political issues, the product emerging is always flawed and it is most always to the determent of the “Senior” community.
The actions or lack of actions are always designed to CYA and until we get some true statesmen who serve at the will of the people, we will continue to wallow in the messes we have allowed to be created.
For our industry to continue to grow and survive it is vital that we first consider the cares and concerns of the Seniors we serve, because for many, this is their last hope.

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The_Critic February 4, 2014 at 9:58 am

As attested to in this thread, human beings detest change to something which is working for them and those they support. Yet change in almost everything is inevitable.

After the experience of the last few years, it is clear that change was needed. Yes, the government did not get it exactly right but that is why this program started as an experiment and by the refusal of Congress to completely remove the cap on the number of HECM endorsements that HUD can do, this program is still in large part an experimental program.

Could this program be taken from seniors and us? You bet. For now we need to roll with the punches while fighting to preserve as much of the benefits we can for those we serve.

Reply

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