HECM: A Mortgage or Social Program?

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Recent Policy Changes Push the HECM Toward Traditional Mortgage Underwriting

Federally-insured Reverse Mortgage Program

It may seem like an odd question: Is the federally-insured reverse mortgages a social program or a mortgage loan? The question should be addressed as it goes to the heart of recent program changes, restrictions and requirements. While few argue the HECM program is a social program many often lament that the loan no longer serves the needy, cash-poor or typical borrowers or the past due to principal limit reductions and further loan restrictions. When created in 1989, the Home Equity Conversion Mortgage Program was designed specifically for senior homeowners 62 or older. With few qualifications beyond age and sufficient equity the bar of entry was low. Also couple a government-insured and supervised loan designed specifically for a protected class such as seniors and one could easily begin to see the HECM as a social program.

Recently two developments have brought the question if the HECM is a mortgage loan or social program to the forefront: the financial assessment and non-borrowing spouse policy. Many fear the financial assessment will discriminate against borrowers who have little financial means or meager cash flow. The financial assessment signals the realignment of the reverse mortgage to more closely…

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12 comments

jim spicka August 4, 2014 at 4:40 am

Good article Shannon. You’ve made this important issue harder to ignore.
I have long questioned if HUD’s “mission” was ever meant to “enhance retirement lifestyles” of more affluent retirees. The NBS changes are an even more dubious departure from the spirit and intent of the program.

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Brett Bayne August 4, 2014 at 6:24 am

If the financial condition of seniors is or becomes a social/political issue, the effectiveness of the HECM will definitely be a social issue. If the government can be blamed for the poor financial position of the exploding baby boomer demographic, the government will have to make sure seniors will be helped by the HECM program.

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Joyce Hanson August 4, 2014 at 9:44 am

I certinly question the latest non-borrowing spouse changes. What if the non-borrowing spouse IS over 62 when the borrowing spouses passes away? Rather than having to go through a HECM refinance (which may not qualify because of the existing loan balance) could they not make a provision that the surviving spouse be added to the existing HECM so they could continue to use the balance of the funds?

With the reduction in principal limit, some of the seniors who are at risk of losing their homes through foreclosure, can no longer draw enough funds to payoff the existing mortgage. My feeling is that the initial intent of the Reverse Mortgage program is lost in the changes, and the truly needy cannot get a reverse mortgage.

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jim spicka August 4, 2014 at 12:29 pm

Actually there is no doubt that it is a “social program” or it would not be legislated, regulated and insured by the federal government. The FHA “first time homebuyer’s program” is also a “social program” as are any FHA sponsored financing programs in so much as HUD’s mission is to benefit a special class or “low to moderate income individuals” so this is not really even a valid question unless of course the purpose of the question is to shine a bright and critical light on HUD’s radical departure from its mission and into the brave new world of the hecm lite (60) product replete with full credit underwriting, full mortgage credit report (coming soon!) and all the other bells and whistles that this “SAFER” product is all about after “Financial Assessment.
In my opinion, this product will soon be so restrictive and exclusionary as to push it directly into the private sector, Conventional Mortgage market and should no longer be in need of taxpayer support, hence no longer a government sponsored or federally insured financing product.

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The_Cynic August 4, 2014 at 5:00 pm

Since when has the HECM ever been a mortgage program? It has always been an insurance program whose costs (operating and general and administrative) have always been subsidized by the federal government.

Optimists and pessimists have always colored the program in a way that helped them score their points. But the fact is HECM insurance is intended to indemnify lenders on mortgages which meet minimum HECM insurance requirements. It is just that simple. Looking at the program from the eyes of a realist, it is what it always has been, a quasi government social program. What it has never been is a mortgage program.

By subsidizing HECM costs, underwriting the balance due exceeding the value of the home, and placing specific requirements on lenders to qualify for the insurance on the HECM qualifying mortgages they originate, Congress created a quasi-governmental social program. Taxpayers neither cover all of the costs nor none of them. The program is neither all government nor all private industry.

Now one must ask if the program is too costly. That all depends on how one defines costly. As the end of fiscal 2013, HUD has taken $1.685 billion out of the US Treasury just to cover future losses and another $6.5 billion from other FHA programs to cover those same losses. So add in the annual operating and general and administrative costs of running to the subsidies for losses and the program has a real identifiable cost according to HUD, its actuaries, its outside audit firm, the US Treasury, and the President’s Office of Management and Budget.

So the question is whether or not a program which is strictly for seniors who own homes (not our poorest seniors) worth its costs? A further question is whether or not a program which has little chance of being financially endangered by losses from the seniors with higher valued homes and can benefit from their insurance premiums be excluding those seniors from the program? Finally can a program which has been bleeding losses but is supposed to provide sufficient insurance premiums to offset its note termination losses afford to keep its most risky transactions?

So in conclusion, the HECM program is NOT a mortgage program. It is in fact a government cost subsidized mortgage insurance program which needs borrowers with home values exceeding its current lending limits and also needs to exclude its riskiest transactions. So far HUD is on course to achieve those objectives.

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jim spicka August 6, 2014 at 1:22 pm

Dear Cynic, you sharpen an ax till it’s dull.
Presumably you are familiar with the “Home Equity Conversion MORTGAGE Program”.
Cynic, have you ever taken a reverse mortgage loan application or are you just a reverse mortgage enthusiast?

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The_Cynic August 6, 2014 at 6:55 pm

Jim,

I work for a lender, not FHA or HUD. I help create the mortgages that FHA insures. I am a licensed NMLS residential mortgage originator, not a licensed California insurance salesperson.

The law authorizes the HUD Secretary to insure mortgages that qualify as HECMs. In fact in the purpose clause it starts off by saying: “The purpose of this section is to authorize the Secretary to carry out a program of mortgage insurance….” Mortgage insurance is a type of insurance, not a type of mortgage.

You see even the funds which hold the HECM Mortgage Insurance Premiums (not interest or principal) being collected today are named the General Insurance Fund and the Mutual Mortgage Insurance Fund. They are insurance funds, not mortgage funds.

Yes, the type of mortgage which can be insured is called a HECM but HUD is not a lender which creates HECMs. HUD through its FHA division is the party which insures them. HUD never owns these mortgages unless it buys them through assignment.

When it comes to the authority to issue insurance the law at 12 USC 1715z-20(c) states: “The Secretary may, upon application by a mortgagee, insure any home equity conversion mortgage eligible for insurance under this section…” So the HECM is one thing and the insurance an entirely different thing and is between the mortgagee and HUD.

As a licensed NMLS residential mortgage originator I help create HECMs. Other employees at my employer apply for FHA insurance. Mortgagors cannot apply for FHA insurance and even if they could, I could not take that application, only a licensed California insurance salesperson could do that in my state.

Better sharpen that dull knife you are using.

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Jonathan Messeloff August 5, 2014 at 11:37 am

It is a shame that the original intent of the reverse mortgage program has been turned on its head. When the financial assessment finally kicks in it will substantially reduce the number of seniors who will benefit from the program, a 180 degree turn from the purpose of the program to begin with. This is precisely what government does even when its initial concept is laudatory.

As more and more people enter retirement with little to show for their years at work, how is it possible that the government is taking away from them one of the very best options to make their senior years that much better financially. When more and more seniors go on the public dole, the true nature of the new regulations will become apparent.

Hopefully, saner heads will prevail and the program will revert to its original intentions.

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The_Cynic August 5, 2014 at 1:04 pm

Jonathan,

Where is it stated that the purpose of the HECM program was to help ANY specific group of seniors?

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jim spicka August 6, 2014 at 3:28 pm

Cynic, do you ever cease with the obfuscation? Really. It is pointless for you to take exception with every rational and well intentioned effort to bring our industry’s issues and concerns into a broader discussion. I will assume you are only remotely or tangentially interfering in the reverse mortgage business until you factually state otherwise.
Are you a loan originator or just a rm enthusiast? Do you hold some recognized position with a HUD approved hecm lender? Do you have anything constructive to add to discussion of reverse mortgages?

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The_Cynic August 7, 2014 at 8:38 am

Jim,

It seems you are so steeped in industry lore that you are lost when it comes to pointing to primary sources as to why you fundamentally believe what you do about HECMs. Yes, such lore and anecdote provide great support to what you are promoting but they become a milestone to our supposed position of “educating” prospects. Since when is sacrificing truth for expedient and palatable responses education? Some have called this acceptable marketing as long as the prospect can comprehend the subject. I have heard the same logic and rational in other sales industries.

What I see in these “discussions” to which you allude are lore and anecdotes. Why not raise the level of these discussions rather than dummying them down? Yeah, we may not like the answers but isn’t that what discussion should engender, differences in how we view the same subject and in the process perhaps stumble on a readily understandable element of truth?

You and some others in the industry seem to want to sacrifice diversity for dominance. That is always the easiest way of suppressing what we do not like. Who knows you could succeed then we would have a “pure” line of reasoning of whatever those in dominance say it is?

It is interesting when I read the complaints of so many in the industry that HUD is diverting from its so called fundamental mission of helping the needy when we still have a $625,500 single national lending limit and all but a very small few of the industry complainers are pointing to that amount with the same fury and righteous indignation demanding that HUD bring that limit down to the range of home values of needy homeowners. That sounds like the stuff of hypocrisy.

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Alex August 10, 2014 at 1:30 pm

Hey Cynic… Hard to believe your employer allows you to opine on the computer so much. Get to work!

Reply

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