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Though Unwelcome Change was Crucial
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The Importance Of Intent In The Reverse Mortgage Industry
The saying goes “the road to hell is paved with good intentions”. The same could be said of the federally-insured reverse mortgage program’s recent predicament and HUD’s swift action to avoid disaster…the closure of the program. Much of the recent reverse mortgage news has focused on the announced overhaul of the Home Equity Conversion Mortgage Program, but few look at or understand it’s original intent. The words original intent are fitting when examine the origins of our program versus its evolution over the last 24 years. The Housing & Community Development Act which laid the groundwork for the reverse mortgage program says the purpose is “to meet the special needs of elderly homeowners by reducing the effect of the economic hardship caused by the increasing costs of meeting health, housing, and subsistence needs at a time of reduced income, through the insurance of home equity conversion mortgages to permit the conversion of a portion of accumulated home equity into liquid assets.”
11 Comments
If a private company had been offering this loan and insuring it, they would have continually been monitoring their risk. The fixed loan was created and released in a period of the greatest downturn in decades. No one pulled the product when it was clear that lower home values and growing debt balances equaled loss. I have to ask “why”. Equity in homes evaporated in a few years. Wasn’t that a warning that something needed to be done.
If Congress, FHA and NRMLA had thought about the “original intent” we wouldn’t be in the situation we are now. If they had limited yearly withdrawals from the start, escrowed for taxes and insurance and even done a cash flow analysis with possible set asides it would have been a different story. And where was the “foresight in updating the program with a mandatory withdrawal for all fixed rate loans. Anyone looking at an amortization schedule could see trouble ahead. Problem is all changes from the original design were not done with the seniors in mind. So who really has controlled this program?
Loved your post this morning. You are spot on. Several years ago I began focusing my reverse mortgage business away from “loans of last resort”. I felt then and now that we were only delaying the inevitable; that sometimes in retirement a senior can no longer afford to be a homeowner. There are loans that I have done where I know that 5-6 years down the road my borrower was going to be in the exact same place financially as they were the day we closed their loan.
The new guidelines will restrict the use of the program to those that can still afford to be homeowners. Those that don’t qualify will have to look at giving up the home and finding an alternate living solution using what equity they may have remaining. It’s a hard truth for anyone to face, but it is necessary to preserve our program for its original intent.
I truly don’t think my business will suffer very much from the new guidelines at all. If anything I’m hoping we’ll end up with a few less competitors since the big buck lump sum option will largely be a thing of the past.
As always thanks for your timely commentary.
The value of any product is not determined by the original intent of its developers but whether it meets the needs of consumers. HECMs have proven to be a very adaptable tool that seniors use to address many different challenges – from boosting the income of impoverished widows, to middle income seniors who want a safety net, to younger homeowners coping with overwhelming debt.
Given today’s retirement challenges, the need for financial solutions will continue to grow. From this perspective, the new guidelines and return to a one-size-fits-all HECM loan are important but not enough. Rather than just narrowing the market to fit the product, the industry should also develop and adapt reverse mortgages that offer new ways to meet these diverse cash flow needs in safe and appropriate ways.
Barbara,
Excellent points. I appreciate hearing your perspective as you work so closely with aging in place initiatives. Good to hear from you once again!
Barb,
All of that being true (which it is not), still the question begs, is that kind of use sustainable when there is a MMI Fund capital reserve requirement? HUD took over $2.2 billion in funds from other MMI programs during fiscal 2010 and 2011 as shown in outside actuarial and auditing reports to allow these well intended purposes to go on. Yet this kind of window dressing has resulted in a program which was totally out of control with HUD feeding its flames through these transfers. The problem is so enormous that the HECM portion of the MMI Fund is projected to be $5.2 billion negative.
So for the sake of “meeting the needs of consumers” (but in actuality far less than 600,000 seniors or sixty days of seniors turning 65 this year), HUD raided other MMI programs (whose participants were just as worthy as HECM borrowers) and in the process put the entire HECM program in jeopardy. Are those actions excusable despite their good intentions?
The farther HUD has allowed this program to go from its basic purpose, the farther the program has been put it into real jeopardy. This is not just a House Republican reaction, it is far more fundamental and goes to the heart of the responsibility of HUD to the all of the American public, not just HECM borrowers.
By the way, debt proceeds do not boost the income of widows. They increase their cash inflow but they also add to their debt (which income does not). It is exactly that kind of reasoning which has led many seniors to believe that when they do a HECM, they have lost their home except for the right to live in it.
Good intentions are used to excuse many less than reputable actions. The child with his hand in the cookie jar claims that he ate the cookies because he did not want his sibling to get into trouble for eating them. The cop who breaks into the house under pretext of “exigent” circumstances yet with little to conclude those circumstances actually exist. A luncheon where funds are committed to a counseling executive (and later paid for that purpose) by lenders to a project involving HECM counseling for the good of those in property charge payment default despite prohibition of such funding by Mortgagee Letter.
So what ideology was used to support the perversion of the HECM purpose clause found in the law? Nothing less than aging in place or rather its dogma and its many derivatives.
While HECMs for Purchase make no sense in aging place, they do when looked at from the perspective of the purpose clause in HECM law as long as the senior is not purchasing a home with a higher price than they could otherwise substantially afford.
Under the purpose clause, the counseling financial interview tool (“FIT”) is largely nonsense while the Benefits Check Up tool (“BCU”) is not. FIT is allegedly a holistic approach to financial assessment but HUD completely and correctly ignores the largely non-financial approach of FIT in Mortgagee Letter 2013-28 and its attachment. How FIT relates to a reasonable assessment of the financial situation of a senior is more puff than anything grounded in fact.
So while the origination process is overcoming the aging in place dogma, counseling is steeped in it. While the aging in place concept is very valid, its dogma has harmed the MMI Fund, all but irreparably.
I also find the tenure election by many seniors in the early days of HECMs suspect. If that claim is valid, where are the published numbers of HUD verifying that claim? It is my contention that the hijacking of the program by the aging in place dogmatic (through AARP, other senior advocates, and, yes, even HUD staff) all but took place at initial program implementation. These folks see little difference between a FHA insured mortgage program and food stamps.
The HECM program is not a social welfare program but a FHA insurance program available for qualified reverse mortgages. Too many HECM originators do not seem to understand the difference. Personally I would prefer that HECMs were a social welfare program but the fact is, they are NOT.
I believe NEW DAY will be the first of many companies and l.o.s that bail out of the market because of the changes,,,good or bad,,,,life is what you make it,,,sometimes you have to work with what you have and other times you need to move on,,,,,,,,,,cliff
I am no longer involved in originating reverse mortgages but did personally originate & attend the closings on nearly 100 reverse loans from 2006-2008 and I am here to tell you in almost every case it was a “need based” circumstance. If I was still in the business, I would welcome it reverting back to its original intent. Most every one I closed was either tenure or credit line…The culprit was the push for cash out at closing.
I’m sorry, but I just don’t buy it. The solution would be simple: eliminate the lump sum portion of the program and initiate a tax/insurance set aside. We are no longer helping those with “economic hardship caused by increasing costs”. We are eliminating them as surely as putting out the garbage. The poor, who need this program the most, will not be getting the help they need. This program is now structured toward those that don’t really need it at all; but “may” need it in the future. This is a travesty.
As Shari Crook stated: “The new guidelines will restrict the use of the program to those that can still afford to be homeowners.” I rest my case.
Kate,
You are applying “economic hardship caused by increasing costs” to the needs based senior homeowner only. Yet it has wide application to all those who are dependent on fixed income other than wealthy and super-wealthy seniors.
Hardship is an intentionally undefined term; so like beauty, hardship is in the eye of the beholder. HUD foolishly embraced the “aging in place” dogma rather than the cash flow concept described in the purpose clause of the HECM law. The dogma says everything (within a reasonable range) should be done to save seniors from losing their home even if the MMI Fund suffers. The cash flow principle looks at seniors to see if after the HECM is in place, seniors will improve their cash flow AND meet their mortgage obligations. Congress later added that the HECM program must meet minimum capital reserve requirements by moving the accounting of all HECMs endorsed after 9/30/2008 to the MMI Fund.
It is strange that neither you nor Ms. Crook complained about the move to the MMI Fund. Why not? Surely you recognized that HERA added this new requirement back in early July 2008. Democrats added this provision in a move to show that HECMs needed to be better than self-sustaining when it comes to reimbursing note holder mortgage note losses. Laws have ramifications that many swipe aside as “not my problem” and later regret their actions.
The MMI Fund requires fiscal responsibility the GI Fund (in which all HECMs endorsed before 10/1/2008 are accounted for) did not. Add the legal standards of fiscal responsibility and cash flow principles and suddenly after certain unanticipated economic events, you and others do not like what has to be done to right the ship. You are crying over spilt milk. Whether you are sorry or not, it is time to move on; your case is lost.