CFPB to Congress on Reverse Mortgage Industry

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CFPB Report On Reverse Mortgages To Congress

CFPB Report On Reverse Mortgages To Congress

The CFPB Report to Congress on reverse mortgages was released last week. The report was even-handed, factual, and painted a historical picture of the reverse mortgage industry.

Get the report here

4 comments

The_Cynic July 10, 2012 at 11:31 pm

There are many ways to look at this report. Where it lacks is in its way of looking at the financial, economic and cash flow aspects of the product and its uses. By its wording, the logic of many of the financial and economic arguments are extremely flawed. In this regard on scale of A to F, it is no better than a C-, if that.

Limiting these remarks to the initial summary in the Study, some troubling concepts emerge. First the Study states: “The original purpose envisioned for reverse mortgages was to convert home equity into cash that borrowers could use to help meet expenses in retirement.” Then it states: “Borrowers today are increasingly
taking the full amount for which they qualify upfront as a lump sum. In many cases, borrowers are using that money to refinance an existing mortgage or other debt early in their retirement or even before reaching retirement. By refinancing with a reverse mortgage, these borrowers eliminate their monthly mortgage or debt payments, but the interest on the loan will chip away at their remaining home equity over time.” Here the issue is simple. It is not a matter of expenses or payment of debt but rather cash flow. If debt payments go down $500 then cash flow goes up by $500. The same would be true if $500 was paid out of the HECM for expenses over the same period that the period of amortization remained on the existing mortgage. Yes, the debt against the home will go up but the whole idea is to trade a current cash outflow for an accruing cost which can be paid in the future.

Then one must look at the cash outflow in payment of interest. Interest net of any income tax benefit is a permanent loss of cash no different than paying for groceries. As one of my friends frequently says to prospects, “Why waste cash on interest when you are so concerned about eventually running out of cash. Stop the bleeding.”

While the Study correctly cites the fact that HECMs are all but the exclusive reverse mortgages being originated today, when it comes to costs which increase the balance due, the only cost mentioned is interest. Yet ongoing MIP is not insignificant when charged monthly at a 1.25% annual rate.

The Study states: “Yet most of today’s reverse mortgage borrowers do not use their loans to convert home equity into an income stream or a line of credit.” While the Study gets the principle right that some portion of the equity in the home which is an asset is exchanged for another asset, cash, it also gets it terribly wrong that somehow debt proceeds are income. Income does not have to be repaid nor do expenses start accruing as a result of the earner receiving cash in payment of income earned.

So the concern is that the authors of the Study may believe they understand the underpinnings of reverse mortgages when in fact the language and the thoughts expressed on the economic, financial, and cash management subjects do not match that level of understanding. If that conclusion is true, one has to wonder how regulations related to such areas will end up. For now it is enough to say on the objective facts level, the Study makes an excellent attempt at being impartial but as a document which analyzes reverse mortgages on the economic, financial, and cash management levels, the document is flawed and one wonders how these flawed concepts will impact future decisions by the CFPB in regard to HECMs and other types of reverse mortgages.

Reply
jim spicka July 11, 2012 at 9:36 am

Very good points and an accurate assessment of this aspect of the report.
Now, what is important is to get these comments where they belong, on Richard Cordray’s desk.
The so-called “stakeholders” that CFPB says they consult with in our industry don’t seem to be getting the crucial points across to CFPB on our behalf.

Reply
Galen Call July 11, 2012 at 11:00 am

Just printed the report out for summer reading “this weekend.” For one idea going forward I wouldn’t be surprised if the future requires a still higher level of oversight and education on the originator, perhaps higher still to what NRMLA suggests today. A quasi FINRA authority requiring originators to be certified if they expect to be paid.

Reply
The_Cynic July 12, 2012 at 5:11 pm

Hey Galen,

Could you please expand on your last two sentences?

Thanks.

Reply

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