HECM_Dude,rnrnThere are many positive aspects to what you present. One area that needs immediate attention is some of the confusing terms used in computing the principal limit. First and foremost is the u201clending limit.u201d What this term means has nothing to do with a true lending limit. Then we come to the clumsy term, u201cmaximum claim amount.u201d This is not the maximum claim amount and is nothing more than the lower or lowest of several factors.rnrnOne very intelligent naturalized citizen became infuriated when I began defining the term u201clending limit.u201d He had read that the current lending limit is $625,500 and he had a home he believed worth just over than limit. In his broken English he all but proclaimed the principal limit I presented was a u201cbait and switchu201d tactic. He refused to hear my explanation all of the way through and pushing his wife out the door stomped out of my office very disappointed and angry.rnrnYou presented the easy issue — making the principal limit based solely on age and home value. The hard part is what should the permanent expected interest rate be? Many have suggested 5.56%. From a HUD point of view, how could they support such a low interest rate unless MIP rose substantially? It seems the Principal Limits would have to be very low to have one universal expected interest rate without significantly raising the MIP — which would mean using a much higher expected interest rate than 5.56%. Imagine how many fewer seniors would be helped if the principal limits went appreciably lower.rnrnAs to other issues, I agree with the remarks of Mr. Agbamu. rn

Mr. Sprinkle,rnrnAlthough certain information is based on historical information, the $798 million subsidy is strictly based on the projected results of HECMs expected to be endorsed during the fiscal year ending September 30, 2010 and those HECMs alone. It has nothing to do with actual losses that might arise in that fiscal year except for losses that might arise from HECMs endorsed during that year which should be nothing or next to nothing.

Mr. Kelly,rnrnThe things you address in your blogs are fundamentally important both now and for the future of our industry; I applaud you for taking them on. I also believe the product you propose could have its place. Unfortunately some seek to stifle free discourse and reasoned opinions on such matters. rnrnI apologize if some of my remarks about your first blog (related to the RMD article by Mr. Morse on August 24, 2009) appeared to be overly strong; they in fact were. I am passionate about seniors and this program as I know you are also.rnrnTo make things clear about one of the prior remarks, not long ago there was an u201cirrational exuberanceu201d in the industry regarding the importance of proprietary products and their alleged imminent dominance in origination over HECMs. However, there is no glee or delight in the loss of those products. But the unfounded euphoria that developed in 2007 and early 2008 distracted from the attention that should have been paid to the HECM program and HERA, especially as to the shift of the HECM program from the General Insurance to the Mutual Mortgage Insurance category and its potential impact on the HUD budget. We are now living with some of the results of that distraction.rnrnAlmost everyone in the industry is well aware of the risk to the HECM insurance fund from declining home values. A much smaller percentage are aware of the negative impact the dynamic shift in originating higher and higher percentages of fixed rate HECMs also has had on that risk. A significant portion of the huge overall subsidy for fiscal year 2010 comes from the higher percentages of balances due to MCAs at funding due to the increasing numbers of fixed rate HECMs.rnrnVery early in 2007 when our company was looking at designing a unique proprietary reverse mortgage, I suggested that a product be designed that has two distinct components. Upon funding, the initial balance due would be captured into the fixed rate component structured in principle just as most fixed rate HECMs (but obviously without MIP or servicing fees) are structured today. Any available proceeds which are not taken at funding would be available to the borrower through an adjustable rate line of credit component. It is my understanding that recently MetLife looked into such a product and now HUD is looking at this idea. Since many seniors would prefer not taking all available proceeds at closing on a fixed rate HECM, this would not only answer the concerns of those seniors but should also lower estimated subsidies for future fiscal years. rn

The original intent of the legislation that created the HECM demonstration program was to encourage the private sector to follow FHA’s lead and develop its own, non-FHA reverse mortgage programs. If Congress ends up passing a budget that includes a subsidy for the HECM mortgage insurance program, there no longer will be an incentive for the private sector to create competing reverse mortgage programs. That result will be okay if Congress and the American people want for the government to stay permanently in the reverse mortgage business.rnrnAssuming the government is in the reverse mortgage business to stay, Congress should direct HUD develop a completely new model for calculating the reverse mortgage. Changes should include: 1) a principal limit calculation that is easy for the consumer to understand, based solely on property value and the age of the borrowe — a constant “expected rate” may be hardcoded into the formula; 2) elimination of the servicing fee set-aside — the servicing fee can be included in the rate or paid by the investor; 3) reduction or total elimination of the up-front MIP — periodic MIP may be increased to offset the loss of up-front MIP, and those with larger balances will pay more MIP in keeping with the greater risk such loans present.rnrnPayment of taxes and insurance is a serious issue, and failure of the homeowner to pay these has become the chief reason for HECM defaults. Property tax rates vary considerably from one jurisdiction to another, so a cookie-cutter approach is not feasible. rnrnSome states, such as California, have property tax deferral programs that enable the homeowner to postpone the payment of property taxes until the home is sold, not unlike a reverse mortgage. On the other hand, other homeowners may have burdensome property taxes and do not qualify for help from their state. rnrnOne change to HECM counseling that should be made immediately is a requirement that homeowners be apprised of the ongoing obligation to pay property taxes and insurance premiums after they obtain their reverse.mortgage. The originator also should discuss the issue with the homeowner, and if their documented income is not sufficient to pay their taxes and insurance as well as living expenses, a set-aside for their payment should be mandatory. This also should be part of the underwriting process.

If the Servicing Set Aside is abolished,how are Lenders going to collectrnthe monthly fee.? The T&I 6 month Reserve sounds like a most workablernplan to address this problem. Bob LaFay Reverse Mortgage Consultant

The $798 Million subsidy, is this based on actual number of loans that have balances > value that must be subsidized or is it the Govt’s fuzzy math based on potential loans to be subsidized because they are currently underwater? Example: If the average loan is 100,000, the 798 Million would represent 7,980 loans. Are there actually, right now, 7,980 loans that must be subsidized due to Senior deaths &/or homes sold? Or are there potential of 7,980 homes that are underwater, but may not need to be subsidized due to Seniors living longer and values returning.

I would like to see the HECM balance sheet adveraged out over the years the product has existed to see where on the bottom line it has been profitable or not, whether it has brought in more than the subsidy.

To clarify an important point, New View Advisors is advocating for 75 bps ongoing MIP which would be calculated on current UPB, and accrued to the loan balance. rnWith the HECM II product, there would be no upfront MIP, which is currently calculated based upon MCA.

I think we all agree that there need to be changes to the HECM program, however, we also must be mindful that due to the lowered YSP’s on these loans, lack of major buyers in secondary markets, and a non existent proprietary product pipeline, we run the risk of making the HECM program an unattractive product to be offered by lending institutions due to the lack of profitability. Those of you who want to say that it is about helping seniors, I 100% agree, but if a company cannot make money writing the product, what is the incentive to continue writing it? There is a danger than the HECM will become much like a HELOC in that it will be a secondary product offered by larger institutions and those of us who specialize in selling this product ethically, exclusively, and properly will be left out in the cold with nowhere to go.

Thanks — as we state in our blog, we do favor offering HECM II as an alternative (not a replacement) to the standard HECM.

Additionally,
I believe that without proprietary products…you cannot expect to make the HECM perfect for everyone…there was a low cost alternative to the HECM 2 yrs ago with lower ltv's and even allowed 60 yr old clients , it was called Simple 60…guess what happened to it? Poof. Gone as quick as it came even though it was a good product, part of the problem…there was little money to make on the loan and only one lender offered it…

In terms of proprietary products…be careful what you wish for. There are some very good reasons they are not around today and some very good reasons we should not wish them to reappear.

The $798 Million subsidy, is this based on actual number of loans that have balances > value that must be subsidized or is it the Govt's fuzzy math based on potential loans to be subsidized because they are currently underwater? Example: If the average loan is 100,000, the 798 Million would represent 7,980 loans. Are there actually, right now, 7,980 loans that must be subsidized due to Senior deaths &/or homes sold? Or are there potential of 7,980 homes that are underwater, but may not need to be subsidized due to Seniors living longer and values returning.

If the Servicing Set Aside is abolished,how are Lenders going to collect
the monthly fee.? The T&I 6 month Reserve sounds like a most workable
plan to address this problem. Bob LaFay Reverse Mortgage Consultant

The original intent of the legislation that created the HECM demonstration program was to encourage the private sector to follow FHA's lead and develop its own, non-FHA reverse mortgage programs. If Congress ends up passing a budget that includes a subsidy for the HECM mortgage insurance program, there no longer will be an incentive for the private sector to create competing reverse mortgage programs. That result will be okay if Congress and the American people want for the government to stay permanently in the reverse mortgage business.

Assuming the government is in the reverse mortgage business to stay, Congress should direct HUD develop a completely new model for calculating the reverse mortgage. Changes should include: 1) a principal limit calculation that is easy for the consumer to understand, based solely on property value and the age of the borrowe — a constant “expected rate” may be hardcoded into the formula; 2) elimination of the servicing fee set-aside — the servicing fee can be included in the rate or paid by the investor; 3) reduction or total elimination of the up-front MIP — periodic MIP may be increased to offset the loss of up-front MIP, and those with larger balances will pay more MIP in keeping with the greater risk such loans present.

Payment of taxes and insurance is a serious issue, and failure of the homeowner to pay these has become the chief reason for HECM defaults. Property tax rates vary considerably from one jurisdiction to another, so a cookie-cutter approach is not feasible.

Some states, such as California, have property tax deferral programs that enable the homeowner to postpone the payment of property taxes until the home is sold, not unlike a reverse mortgage. On the other hand, other homeowners may have burdensome property taxes and do not qualify for help from their state.

One change to HECM counseling that should be made immediately is a requirement that homeowners be apprised of the ongoing obligation to pay property taxes and insurance premiums after they obtain their reverse.mortgage. The originator also should discuss the issue with the homeowner, and if their documented income is not sufficient to pay their taxes and insurance as well as living expenses, a set-aside for their payment should be mandatory. This also should be part of the underwriting process.

Mr. Kelly,

The things you address in your blogs are fundamentally important both now and for the future of our industry; I applaud you for taking them on. I also believe the product you propose could have its place. Unfortunately some seek to stifle free discourse and reasoned opinions on such matters.

I apologize if some of my remarks about your first blog (related to the RMD article by Mr. Morse on August 24, 2009) appeared to be overly strong; they in fact were. I am passionate about seniors and this program as I know you are also.

To make things clear about one of the prior remarks, not long ago there was an “irrational exuberance” in the industry regarding the importance of proprietary products and their alleged imminent dominance in origination over HECMs. However, there is no glee or delight in the loss of those products. But the unfounded euphoria that developed in 2007 and early 2008 distracted from the attention that should have been paid to the HECM program and HERA, especially as to the shift of the HECM program from the General Insurance to the Mutual Mortgage Insurance category and its potential impact on the HUD budget. We are now living with some of the results of that distraction.

Almost everyone in the industry is well aware of the risk to the HECM insurance fund from declining home values. A much smaller percentage are aware of the negative impact the dynamic shift in originating higher and higher percentages of fixed rate HECMs also has had on that risk. A significant portion of the huge overall subsidy for fiscal year 2010 comes from the higher percentages of balances due to MCAs at funding due to the increasing numbers of fixed rate HECMs.

Very early in 2007 when our company was looking at designing a unique proprietary reverse mortgage, I suggested that a product be designed that has two distinct components. Upon funding, the initial balance due would be captured into the fixed rate component structured in principle just as most fixed rate HECMs (but obviously without MIP or servicing fees) are structured today. Any available proceeds which are not taken at funding would be available to the borrower through an adjustable rate line of credit component. It is my understanding that recently MetLife looked into such a product and now HUD is looking at this idea. Since many seniors would prefer not taking all available proceeds at closing on a fixed rate HECM, this would not only answer the concerns of those seniors but should also lower estimated subsidies for future fiscal years.

Mr. Sprinkle,

Although certain information is based on historical information, the $798 million subsidy is strictly based on the projected results of HECMs expected to be endorsed during the fiscal year ending September 30, 2010 and those HECMs alone. It has nothing to do with actual losses that might arise in that fiscal year except for losses that might arise from HECMs endorsed during that year which should be nothing or next to nothing.

HECM_Dude,

There are many positive aspects to what you present. One area that needs immediate attention is some of the confusing terms used in computing the principal limit. First and foremost is the “lending limit.” What this term means has nothing to do with a true lending limit. Then we come to the clumsy term, “maximum claim amount.” This is not the maximum claim amount and is nothing more than the lower or lowest of several factors.

One very intelligent naturalized citizen became infuriated when I began defining the term “lending limit.” He had read that the current lending limit is $625,500 and he had a home he believed worth just over than limit. In his broken English he all but proclaimed the principal limit I presented was a “bait and switch” tactic. He refused to hear my explanation all of the way through and pushing his wife out the door stomped out of my office very disappointed and angry.

You presented the easy issue — making the principal limit based solely on age and home value. The hard part is what should the permanent expected interest rate be? Many have suggested 5.56%. From a HUD point of view, how could they support such a low interest rate unless MIP rose substantially? It seems the Principal Limits would have to be very low to have one universal expected interest rate without significantly raising the MIP — which would mean using a much higher expected interest rate than 5.56%. Imagine how many fewer seniors would be helped if the principal limits went appreciably lower.

As to other issues, I agree with the remarks of Mr. Agbamu.

matmel,rnrnHow does the average of the HUD HECM balance sheet for prior years relate to the HUD HECM subsidy request for the fiscal year 2010? Please explain.

Mr. Sprinkle,rnrnAlthough certain information is based on historical information, the $798 million subsidy is strictly based on the projected results of HECMs expected to be endorsed during the fiscal year ending September 30, 2010 and those HECMs alone. It has nothing to do with actual losses that might arise in that fiscal year except for losses that might arise from HECMs endorsed during that year which should be nothing or next to nothing.

HECM_Dude,rnrnThere are many positive aspects to what you present. One area that needs immediate attention is some of the confusing terms used in computing the principal limit. First and foremost is the u201clending limit.u201d What this term means has nothing to do with a true lending limit. Then we come to the clumsy term, u201cmaximum claim amount.u201d This is not the maximum claim amount and is nothing more than the lower or lowest of several factors.rnrnOne very intelligent naturalized citizen became infuriated when I began defining the term u201clending limit.u201d He had read that the current lending limit is $625,500 and he had a home he believed worth just over than limit. In his broken English he all but proclaimed the principal limit I presented was a u201cbait and switchu201d tactic. He refused to hear my explanation all of the way through and pushing his wife out the door stomped out of my office very disappointed and angry.rnrnYou presented the easy issue — making the principal limit based solely on age and home value. The hard part is what should the permanent expected interest rate be? Many have suggested 5.56%. From a HUD point of view, how could they support such a low interest rate unless MIP rose substantially? It seems the Principal Limits would have to be very low to have one universal expected interest rate without significantly raising the MIP — which would mean using a much higher expected interest rate than 5.56%. Imagine how many fewer seniors would be helped if the principal limits went appreciably lower.rnrnAs to other issues, I agree with the remarks of Mr. Agbamu. rn