Sacred Cows



HECM Line of Credit (Principal Limit) Growth Rate in AARP’s Crosshairs

reverse mortgage newsSacred cows. Those tenets or beliefs that have been long held above reproach and which are seen as immune from criticism. For the Home Equity Conversion Mortgage, one benefit has been largely left unscathed, that is until now. AARP is recommending the elimination of the principal limit growth factor, or as many refer to it the credit line growth rate feature.

There are many competing and cooperating opinions that are voiced when HUD makes revisions to the federally-insured reverse mortgage program. Industry stakeholders, trade groups and consumer advocacy groups. While all groups stated goal is to serve the needs of aging homeowners, the proposed policies have profound differences in implementation, and most importantly on the future appeal and accessibility of the HECM to future borrowers…

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16 comments

don mccue August 15, 2016 at 8:50 am

My experience since impimination of FA is it does disqualify people who I know would always pay their taxes and insurance but due to RI will not qualify the concern over elimination of growth on loc is less worrisome but even our escrow accounts on conventional mortgages are allegedly earning interest and we know the lenders still have those untapped dollars at work someplace earning them something

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The_Cynic August 16, 2016 at 8:19 am

Don,

It seems you are more concerned about the interest on impound (or as you call them, escrow) accounts than on the policy position of AARP. If you have a descent servicer they should be able to explain to you your legal right to interest on your account. As to their right to earn income on the funds in your account call the CFPB or ask Senator Elizabeth Warren.

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Brett Bayne August 15, 2016 at 8:59 am

The shocking demographics of seniors numbers should alert all of us to the risks this huge population faces. If assistance is going to be needed, it would be more efficient and fair for a limited Federal help rather than a wholesale panic caused by not being prepared.

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The_Cynic August 16, 2016 at 7:17 am

Brett,

You make a good point but how is a mortgage a good vehicle to provide it? Let us not burden this mortgage with even more complications. Besides many seniors who cannot get a HECM need help as well.

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James E. Veale, CPA, MBT August 15, 2016 at 1:12 pm

All this comment deals with is “the credit line growth feature”as presented in the letter by Certner that Mr. Hicks cites in his post above. Mr. Certner states:

“An additional benefit of the interest rate cap is that it will limit the credit line growth feature of HECM adjustable-rate mortgages. This feature allows borrowers to have access to increasing amounts of loan proceeds over time. The growth is determined by the interest rate, lender margin, and mortgage insurance premium and borrowers have access to increasing amounts of funds….”

By his own definition of the components for growth, Mr. Certner shows that he does not know how to determine the very growth he criticizes. He states: “The growth is determined by the interest rate, lender margin, and mortgage insurance premium….” This is not just incorrect; it is also alarmingly sophomoric especially from an organization that headed up counseling for so many years. I have to believe that Mr. Certner could have leaned on someone at AARP to help him understand the growth, its rate, and how it is applied to the available line of credit to determine the line of credit monthly (and daily, if needed) growth. But it does not seem Mr. Certner believed such expertise was required.

The growth in the line of credit is computed monthly. Assuming no activity in the line of credit during the month, there is but one monthly growth rate. It is one-twelfth of the sum of 1) the current month’s note rate, and 2) the applicable ongoing FHA mortgage insurance rate for the particular loan. That rate is then multiplied by the available amount in the line of credit to arrive at the growth in the line of credit for the month.

If there was activity in the line of credit during the month, then the growth rate is determined on a daily basis (rather than using one-twelfth) which then is applied to the amount available in the line of credit for each day of the month. The sum of those daily growth amounts are then totaled to calculate the growth for that month.

So how is it again that Mr. Certner tells us the growth in the line of credit is determined? “The growth is determined by the interest rate, lender margin, and mortgage insurance premium.” First the growth in the line of credit has nothing to do with mortgage insurance premiums but is impacted by the ongoing MIP rate applicable to the HECM. Second, Mr. Certner does not tell us which interest rate he is referring to, the current note interest rate or the expected interest rate. Mr. Certner does not seem to realize that each of the interest rates are simply the sum of 1) the lender interest rate (the same rate is used in both interest rates) and 2) the applicable interest index rate. Worse he does not even mention the available line of credit throughout the month as even entering into the determination of the growth in the line of credit. What Mr. Certner shows is that he has never CORRECTLY determined the growth in the line of credit for ANY month. So since it is clear he does not understand it, why is he so committed to terminating it?

In the next comment, the unintended consequences of this suggestion will be dealt with.

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Robin Faison August 15, 2016 at 1:47 pm

Don’t these people have anything better to do? What complete dumb stuff.

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The_Cynic August 16, 2016 at 7:09 am

Robin,

Yet what is wrong with protecting the MMI Fund? While I read your disdain of David’s proposal, without giving us some reasoning you give credence to his argumemts. Instead of telling us what David writes is dumb, tell us your position so that we conclude what David wrote is dumb.

Remember David has more credibility.by the very nature of the position he holds at AARP than most of us will have in our lifetimes.

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james mccarron August 17, 2016 at 6:23 am

I hope regulators and the reverse mortgage industry can see through AARPs thin veil of greed. To call AARP a “consumer advocacy group” it stretching it. They are in the business of marketing products to seniors. Including financial products. The HECM’s LOC diminishes the value of the financial products they/their advertisers advocate.

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George Owellia August 19, 2016 at 12:01 pm

You would think that AARP would want an even larger growth rate on the HECM LOC. Why? So that seniors have more money to buy their products. It is doubtful if the HECM LOC diminishes in anyway how the financial products that AARP promotes perform. The growth is not income like with financial products. The HECM LOC growth is just more available debt proceeds.

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Joan E Hillman August 17, 2016 at 6:40 am

It is beyond me that the PL growth rate would be a target given the fact that reverse mortgages do not generally last 20-30 years. The addition of the Financial Assessment has redirected loan officers to referral partners who are interested in securing the future for their clients.
For consumers who have managed to pay off their homes and qualified for a LOC, the idea of not growing the PL LOC takes all meaning from uniqueness of the reverse mortage. Stand-by reverse mortgages are a very useful tool for times of volativity and depressed markets, not mention increased expenses and death of a spouse.

Without the PL growth, the loan becomes a Home Equity loan only having s guaranteed loan amount and no payments What?

The MMI fund should be just fine. The homeowner is qualified, so foreclosures that drove the MMI Fund into red should not be a problem.
Those of us who have worked for years in this business have endured “fixes” ;reduction of funds available; and financial assessment; and carried on. However, eliminating the PL growth factor will be a deal breaker. I cannot imagine going on with what I do without that that component. And borrowers will turn away.

Does the industry only want homeowners who have mortgages or take funds as fixed monthly payments? I don’t think so.

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The_Cynic August 19, 2016 at 12:51 pm

Joan,

You tell us that “the MMI Fund should be just fine” because of financial assessment.

Yet financial assessment has not, does not, and will not protect us from the reason that most defaults took place in the last 7 years: nonpayment of balances due when the related HECMs were in the due and payable status and home values were less than the related balance due. Financial assessment will do absolutely nothing to cure that situation.

As to strategic defaults for not paying taxes and insurance, how do you know that financial assessment will prevent many defaults at all? It is the changes which occurred on September 30, 2013 that will prevent the vast majority of defaults from strategic defaults. Financial assessment is creating far more loss in business than it will ever prevent strategic defaults when one looks at all the September 30, 2013 changes accomplish in that regard.

Again as to the MMI Fund going red when it did, strategic defaults were all but nonexistent in the MMI Fund. Fiscal 2009 was the first year endorsed HECMs were going into the MMI Fund and even then only HECMs endorsed in that year went into the MMI Fund. To this day, all financial information related to HECM endorsed before fiscal 2008 are found in the General Insurance Fund of HUD, not the Mutual Mortgage Insurance (MMI) Fund of HUD. The only HECMs in the MMI Fund are those endorsed in and after fiscal 2009. We had a half billion dollar loss in the MMI Fund by the end of fiscal year 2010. So where did that huge loss come from?

The answer is in the projected values of homes at the time that the related HECM terminates. Home values fell far worse that than anyone predicted. There is no way that the overall value of those homes will be equal to their value at origination plus 4% per annum until termination. Thus HUD was required to take huge losses on two of their four largest years for endorsements since all losses must be recognized as soon as they can be reasonably estimated.

So financial assessment will do little to cure the situation that the MMI Fund found itself in. Only higher than expected home appreciation can do that.

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James E. Veale, CPA, MBT August 17, 2016 at 12:12 pm

How is it that Mr. Certner wants us to post pay downs on the balance due by the borrower to the line of credit? Now the entire payment increases the available line of credit but from a logic point of view under the Certner/AARP regime, the MIP and Interest portion of the payment would no longer be eligible to increase the line of credit.

For example, say two seniors close their HECMs on the same day. They are the youngest borrower on their respective loans and both were born on the exact same day. Their homes are appraised at exactly the same amount and their HECM ARMs have the exact same interest rates and they used the same lender. The difference is Borrower One gets a HECM for Purchase and takes all proceeds at closing while the second borrower gets a HECM for Purchase but only uses the HECM to pay upfront costs. Because they bought newly built homes in the same track, all of their upfront costs are the same except Borrower One had upfront MIP cost of $9,000 more than Borrower Two.

Borrower One gets $237,000 in proceeds at closing, has a $0 beginning balance in the line of credit but a balance due of $252,000. Borrower Two closes with a balance due of $6,000 but a line of credit of $246,000. After 6 years, Borrower One has a balance due of $360,875.16 but still has no line of credit. Borrower Two after six years owes $8,592.27 but the line of credit is still just $246,000 (assuming AARP gets the growth in the line of credit eliminated). The same day the HECMs turned six years old, Borrower One pays off $260,875.16 and Borrower Two borrows $91,407.73 out of the line of credit.

So after posting the transactions, both Borrowers One and Two have a balance due of $100,000 and Borrower Two has an available line of credit of $154,592.27 but what should Borrower One have as the available line of credit? Under current rules, it would be $260,875.16 but that hardly seems fair to Borrower Two, since he had to forego any increase to his line of credit for interest or MIP. If we remove the accrued MIP and interest of $108,875.16, the remainder would be principal of $152,000 and also the available amount of the line of credit.

Some may wonder why Borrower Two has a line of credit that is $2,592.27 larger than the line of credit for Borrower One. This exactly represents the amount of accrued MIP and interest that Borrower Two has not paid in the $100,000 balance due. Or Borrower Two has borrowed that much less from the line of credit than Borrower One. Although Borrower One and Borrower Two owe the same amount of $100,000, $2,592.27 is unpaid accrued MIP and interest where the balance due for Borrower One has no unpaid accrued MIP or interest.

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James E. Veale, CPA, MBT August 17, 2016 at 1:05 pm

This comment explains why the proposal Mr. Certner and AARP make is without foundation.

Almost three decades ago, the math brain trust of HUD came together and created a mathematical model of the HECM program that was based on the premise that if the program ran as intended, upon final termination of all HECMs, the program would show no net income or loss.

The model was created on certain assumptions such as the average appreciation rate on the collateral in the program growing at 4% annually and termination based on a now outdated unisex mortality table. The structure assumed that the fair market value of the home should equal the balance due as of the expected date of death of the youngest borrower using the selected mortality table. The program was also designed to charge premiums to cover losses if they occurred and to serve as cushion. With that in mind, the brain trust calculated principal limit tables at various ages and interest rates.

For decades the model was never really tested by the real estate market but that all changed in 2008 and suddenly the HECM program was in trouble based on the calculations the Obama OMB made in the Spring of 2009. HUD kept tinkering with the model until September 30, 2013 when it made unprecedented and substantial changes to the HECM program. Now outside of the model, HUD has adjusted some issues through the creation of financial assessment. HUD even got law in place in 2013 so that it could adjust the model at will if it looked like the model needed adjustment to avoid what occurred to the MMI Fund during fiscal 2009.

Now in the wisdom of Mr. Certner who cannot even correctly tell us what the components of the growth rate are (see my first comment above in this thread), he and AARP have concluded that the model is operating so poorly that to save the Mutual Mortgage Insurance Fund, HUD should eliminate the growth in the line of credit. Yet he forgot to mention how pay downs on the balance due should impact the line of credit (see my second comment above in this thread).

Not legally but mathematically, is Mr. Certner or AARP sufficiently competent to instruct HUD to take this action? Yes, the move would help the MMI Fund BUT is it necessary? HUD has taken considerable steps to reduce the exposure the MMI Fund has to the HECM program but Mr. Certner does not seem to believe he has any responsibility to address that.

To say that Mr. Certner is making a well reasoned argument to change the HECM program has no foundation in fact. He and AARP are at best throwing this idea against the wall to see if it sticks. This is hardly the arena where this should be done especially since they are not saying that they have not tested out how their suggestion will impact the MMI Fund. Why AARP is doing this is a mystery.

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Paul Stabin September 12, 2016 at 8:52 am

It seems there are many people staying up late at night trying to find a way to reduce the benefits and accessibility of the HECM program. The credit line growth is one of the best features for seniors. As for the MMI fund, let me remind everyone this is not a for profit, or break even enterprise but something our tax dollars are supporting that is first and foremost supposed to be helping the senior population. With banks paying just above zilch on savings and c.d.s the growth factor is a real boon. Given FA, the reduction in principal limit factors, and the elimination of the HECM Saver, maybe, just maybe, AARP and other misguided but well intentioned entities could leave the growth factor alone?

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BREAKING: The CBO proposes 4 major HECM changes | HECMWorld.com May 27, 2019 at 1:00 am

[…] In August 2016 AARP recommended the elimination of the HECM ‘line of credit’ […]

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The HECM CBO report, politics & Congress | HECMWorld.com June 3, 2019 at 1:00 am

[…] In August 2016 AARP recommended the elimination of the HECM ‘line of credit’ […]

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