President Trump has directed HUD to examine the ‘viability’ of the Home Equity Conversion Mortgage and to take other steps to strengthen FHA and the housing GSE’s Fannie Mae & Freddie Mac…
How quickly are HECM properties sold or called due and payable when the last borrower has died or moved out? More importantly, how many properties with a HECM are sitting on the books for years while the borrower’s heirs or unauthorized tenants remain in the house; in many cases for years?
It’s not often during my show prep that I strike gold, but this week was the exception finding an intriguing and unsettling article by Mike Branson. It details where a significant portion of our HECM losses may be coming from. Mike is the CEO and owner of All Reverse Mortgage. He has over 40 years experience in mortgage banking and also has served as an expert witness for the FBI in mortgage fraud cases. That particular experience plus numerous questions he has fielded has raised some very serious concerns which we will address here today. A very timely topic since the HECM may be facing additional changes this year.Â
[Download full report]Â [View 1-minute video summary] [Full Actuarial Review]Â
A recap of FHA’s and HUD’s media conference call, an examination of HECM risks, and how the value of the fund is calculated.
Not too many years ago there was a time when the typical reverse mortgage professional could confidently build their business on a singular loan; the Home Equity Conversion Mortgage. That business model has become increasingly difficult to sustain in recent years. While some continue to succeed only offering the federally-insured reverse mortgage, others have diversified their product offerings to buffer against continued cutbacks and requirements that have become the new norm for the federally-insured reverse mortgage.
While all mortgages are sensitive to current interest rates, the HECM has the added challenge of bearing the brunt of repeated and significant regulatory changes, underwriting standards, and mortgage insurance premium pricing modifications. It soon became clear that dependence came with a cost.
Many can recall the irony of taking the required National Mortgage Licensing Safe Act exam whose questions that centered almost exclusively on traditional mortgage lending rules and terminology. Sure there may have been one or zero questions remotely related to the Home Equity Conversion Mortgage but many found themselves frustrated having to absorb a glut of information not remotely related to their origination practice. Who would have known this test would herald an upcoming seismic shift for our industry.
While those reverse mortgage professionals that began offering traditional mortgages enjoyed a more diversified business model they still found older homeowners struggling to tap their housing wealth without the burden of required monthly payments. While providing the means to generate an alternate income stream, the need to provide a viable alternative to tap into housing wealth remained. Fortunately, HECM lenders have launched several proprietary or private reverse mortgage programs this year that may provide some relief for originators and homeowners alike.
Several years ago the Federal Housing Administration stated their desire for a more robust private mortgage market that is less dependent on the backing of the American taxpayer. One could say the curtailment of the HECM and the expansion of private reverse mortgages has taken us one step closer to achieving that goal.
Despite a year of setbacks for many, the 2018 National Reverse Mortgage Lenders Association Annual Meeting not only signaled a retooling of our industry but the course that lies before us.Â
[there is no video transcript for this week’s episode]
Before any further changes or cutbacks are enacted, the source of ongoing HECM losses must be identified.
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HUD’s most recent actuarial review and net value of the Home Equity Conversion Mortgage sent shockwaves through the reverse mortgage industry last week.
**Listen to this week’s podcast for the latest reverse mortgage news stories**
The 2017 Fiscal Year actuarial review of the HECM portion of FHA’s MMI fund showed a present negative net worth of $14.2 billion and a standalone negative net worth of $14.5 billion. With the traditional or forward mortgage book of business generating a positive cash flow value of $1.89 billion, the rationale behind repeated calls by both lawmakers and even the support of HUD Secretary Ben Carson to remove the HECM from the MMI fund become increasingly clear.
One could safely assume that HUD was aware of these developments when it chose to enact further cutbacks to the HECM by decreasing lending ratios in the effort to prevent future losses. Referencing October 2nd changes HUD senior advisor Adolfo Marzol said, “The HECM program has been a substantial net economic drain on…
Without any prior warning or industry comment, HUD formally announced an increase of upfront insurance premiums for all borrowers, regardless of initial distributions, to 2% upfront, and .5% for ongoing mortgage insurance premiums. The agency stated the need to ensure the continued economic sustainablity of the HECM program and its fiduciary responsiblity to taxpayers.  [See Mortgagee Letter 2017-12] [ Wall Street Journal Article View on Facebook to see full article]
HUD has lowered the interest rate ‘floor’ from 5.06% to 3.00% in it’s PLF tables, essentially pushing lenders to compete on interest rates and margins. We expect to see more lenders switch from the monthly to the annual adjustable LIBOR index in response. In addition the new PLF tables accomodate a rising interest rate enviornment with lending ratios provided as high as up to 18.875%, wheras the previous tables zeroed out lending ratios at 10%. [New 2017 PLF Tables] [Old 2014-2017 PLF Tables]
In our analysis, the reduction in ongoing FHA premiums will significantly reduce the ongoing growth of the HECM’s Principal Limit (available funds), or what many refer to as the line of credit. This development will substantially change several strategies touted in recent years, such as the Standby Reverse Mortgage, and those seeking to use increasing available funds as a hedge against unexpected financial shocks in retirement.
Principal Limit Factor will be reduced from 64% to 58% on average and an approximate 20% reduction available funds for most borrowers:
* 20% reduction with new PLFs and lower interest rate floor after October 2nd, 2017
HUD is soliciting feedback from interested parties until September 29, 2017. Feeback can be submitted to: answers@hud.gov
Official Mortgagee Letter 2017-12 “Home Equity Conversion Mortgage (HECM) Program: Mortgage Insurance Premium Rates and Principal Limit Factors”
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President Donald trump embodies the essence of a political wrecking ball in Washington D.C.- a city known to cling tightly to political traditions of governing and supporting long-standing social programs, despite our ballooning deficits.
While the President weathers opposition from both Democrats and Republicans alike, his administration’s draft 2018 budget for the Department of Housing & Urban Development reflects populist sentiments of a smaller, efficient government with parsimonious allocations for social program spending. Many feared the populist agenda would gut essential HUD, programs, and more specifically, the Home Equity Conversion Mortgage program.
Politico obtained a copy of the Trump administration’s preliminary HUD budget revealing plans to gut $6 billion from several programs including the outright elimination of the Community Development Block Grant, neighborhood initiatives, and a housing program for veterans. Despite these unpopular cuts, the HECM program was spared and even strengthened.
Two changes stand to liberate the HECM – the removal of the annual cap and the erosion of the unchecked powers of the Consumer Financial Protection Bureau…
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If you want an example of rapid industry change look no further than the Home Equity Conversion Mortgage program.
Recently Reverse Mortgage Daily interviewed Peter Bell, president of the National Reverse Mortgage Lenders Association or NRMLA seeking insight on the recent spate of changes to the HECM program and our industry’sfuture.
First RMD asked- given the Financial Assessment is underway and the non-borrowing spouse issue seems to be getting resolved, how would you classify the footing of the Reverse Mortgage program right now relative to other points in history?
Download a transcript of this episode here.
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