Although I do not expect our industry will learn any lesson from T & I, one thing stands out. Fear, timidity, indecision, inaction, and a reactive posture only make things worse. Decisive action was needed from NRMLA but none has come. Why?

If this issue had been taken head on when the first default took place, we would all be better off. Even though the problem may only be at 2%-3% today or below 15,000 HECMs, most of us believe that percentage will only be creeping up especially with a predominance of closed end HECMs having been generated in the last two years and little increase in home appreciation. If current trends continue, in less than 3 years the majority of outstanding HECMs will no doubt be closed end.

So why didn’t the industry deal with this issue when the servicing committee at NRMLA was first formed? Vacillation on this issue has only created a greater number of problem cases. Imagine if the decision is to foreclose. All of a sudden, like when a logjam is cleared up, a large number of foreclosures will flow at once. That will produce bad press.

Where has the industry leadership been on this issue? Tax and Insurance set asides MIGHT mitigate the problem for new HECMs, but what about the past? I have never met an ostrich which has ever successfully built or led an industry. Problems of this nature do not go away; they only get worse.

So now indecision leaves us with no good alternatives. No matter what HUD does it will be a bitter pill to swallow -- especially now with lowered principal limits, a higher ongoing MIP rate on the horizon, and low appreciation rates. Perhaps for now inaction is the best answer but with a course of action in place just in case Congress does not provide any relief before January 1, 2013.

Good day all,

I have read everyone's comments so far and they all have validity. However, the borrower (our seniors) must take some responsibility, such as paying their taxes and insurance annually. If we create a set aside fee for T&I we are going to be putting a reverse mortgage out of reach for many seniors around the country.

As one person said, do we allow a default to take place because a borrower did not pay their T&I, Then it hits the news media? No simple answer to this, maybe the answer is yes, foreclose on the default.

When you compare the amount of people that will be able to get a reverse mortgage because of no set aside for T&I, I think you will see no set aside is the way to go! My opinion only?

John A. Smaldone

We suggest to the borrower to open up a money market account and auto debit into it a 12th of their annual T&I each month from their income stream and then its always available when they need it. Very few of them say no.

Currently, the choice of Seniors obtaining Reverse Mortgages has been
to select fixed interest. All available funds are paid out at closing. My
question is how do we deal with the ongoing T&I Reserve to insure future
payment. Bob LaFay, Reverse Mortgage Consultant

same as the loan servicing set-aside is set-up today. Before the funds are released setting aside some funds for furture T&I...not a great idea because then all HECM borrowers are punished because some defaulted. KICK em out! Lets face the facts...they defaulted.

The question arises....which would be the better scenario for the industry?

- "Forced" set-asides for taxes and insurance are implemented - thereby reducing the number of borrowers who would qualify for a reverse mortgage. Origination volumes would certainly decrease.

or

- Major news outlets picking up stories of senior citizens who took out a reverse mortgage, ran into tough times, and where subsequently evicted from their home for failing to pay their taxes and insurance.

As many of us have seen in the media, the negative news is what gets legs. We think this industry has image problems now? Think of the roadblocks that would be placed in front of originators trying to convice a senior citizen to take out a reverse if there are stories of borrowers being evicted from their life-long homes in the media...

During the reverse mortgage origination process, it is important for the originator not only to emphasize the need to maintain the property and keep current property taxes and insurance coverage (and HOA dues, if applicable), but to ascertain the ability of the of the homeowner to do so. While there currently is no income requirement for a reverse mortgage, it might be prudent to ask homeowners how they plan to come up with the funds to meet these recurring obligations. This should be done as part of the counseling process, but we should make sure the homeowner understands that reverse mortgage proceeds usually are not used to pay these expenses.

In a few states, property tax relief programs may be available to low income senior homeowners. In California, property tax postponement, which must be repaid with interest upon sale of the home, may be used in connection with a reverse mortgage until the CLTV reaches a threshold of 80 percent.

Semantics about "technical" default aside, failure to meet these obligations does, in fact, constitute default. In the past, servicers advanced funds from the homeowner's available net principal limit to keep these current. Once the principal limit is exhausted, continuing to make such advances can be problematic, especially if the loan balance exceeds the property value.

The recent, steep decline in property values has brought this problem to the forefront, and it must be dealt with. The HECM program was not designed to be a taxpayer -funded "benefit." It must stand on its own, and that includes managing risk in a manner that protects the interests of senior homeowners and taxpayers.

HECM_Dude,

Programs can change or be changed. Just look how Social Security (or Medicare) started and where it is today. Change happens.

The HECM program switched from the GI category in the budget to the MMI category. The Administration forced a lower appreciation rate than was contemplated in the HECM financial model that HUD created. As a result a deficit was indicated for the HECMs to be endorsed in this fiscal and next. Congress would not fund it and now proceeds are lower. That sounds like definite changes to the program that were not intended.

Social Security contributions were never supposed to be used in the general fund. We were never supposed to have gone off the gold standard. But like William Barrett Travis at the Alamo, you are telling us that there is a line drawn in the sand when it comes to HECMs.

So what is the answer? It is time we begin thinking outside of the box.

Cynic,

The HECM program is not Social Security or Medicare. The vast majority of American workers participate in Social Security and Medicare, which constitute a social contract between generations of Americans and their government to provide certain benefits to which they are entitled during their later years.

No such contract or entitlement exists in the case of the HECM program. Borrowers under the HECM program constitute a small, and some would say privileged, minority of seniors who are so fortunate as to be homeowners. Seniors who are not homeowners, or senior homeowners who are not HECM borrowers, might justifiably resent seeing their tax dollars used to subsidize HECM borrowers when their own finances are strained.

Why do you mention that the HECM program was switched from GI to MMI other than to show off your knowledge of minutiae that are not relevant to the discussion?

What should the Government do with Social Security and Medicare funds that are not needed to fund current obligations? Who says they never were to be used in the General Fund? If surplus Social Security and Medicare funds cannot be loaned to the General Fund (as they currently are), they would have to be invested elsewhere, and the Treasury would have to replace those funds by borrowing even more from the private sector (incurring more interest expense).

Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession. Many economists believe that the U.S. adherence to the gold standard prevented our early recovery from the great depression. According to later analysis, the earliness with which a country left the gold standard reliably predicted its economic recovery from the great depression. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer.

The total amount of gold that has ever been mined has been estimated at around 142,000 metric tons. Assuming a gold price of $1,000 per ounce, or $32,500 per kilogram, the total value of all the gold ever mined would be around $4.5 trillion. This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit (M2). Therefore, a return to the gold standard, if also combined with a mandated end to fractional reserve banking, would result in a significant increase in the current value of gold, which may limit its use in current applications.

I'm still scratching my head, trying to figure out what the gold standard and the Alamo have to do with this discussion.

At the time of the American Revolution, Virginia had belonged to England longer than Social Security has been part of our retirement system today. It might be a generations’ contract to you but my mom and dad were teenagers when Social Security became law.

In 1965 when I was a teenager, LBJ got a bill passed that transferred the Social Security Trust Fund into the General Fund. That is just part of American economic history. Come on HECM_Dude, they should have presented that in at least one economic course you took.

My ancestors and extended family fought in every major American war including the American Revolution. America is a great experiment full of change. So what was true yesterday was true yesterday. Two years ago, you would have attacked me for saying that lower principal limits would be mandated by HUD. Why? Because there was some contract or another…. Moving the HECM budget category from GI to MMI changed all of that.. You, as an economist, should know that!!!

When ol' Sam Houston told Billy Travis to get out of the Alamo, young Billy could not see what was on the horizon and thought he knew better. Young Billy drew a line in the sand and forced some very heroic patriots to die behind inferior fortifications in a losing effort. He would not change.

I appreciate your magnificent efforts to protect American taxpayers but some of us were not pleased with cash for clunkers and other government programs. Some of us believe more in the HECM program than we believe in forcing those who did not want TARP funds to accept them. What constitutional argument do you hold for not funding the subsidy? The right answer is -- there is none.

Obviously, my comments were misinterpreted as a diatribe on the reverse mortgage lenders who in the past have misled seniors during the origination process. Nothing could be further from the truth.

Having been in the business for over 10 years, it no longer amazes me how many seniors truly do not understand what their responsibilities are when it comes to T&I (or they have forgotten), and it also no longer amazes me how the public, especially Congress, do not understand the HECM program. That is why we see public officials state that the HECM program could be the "next subprime crisis", or supposedly informed journalists writing article after article about how "the bank owns the home and once the borrower dies, they take it".

The point I was trying to make and apparently failed at miserably, was taking issue with the Cynic's claim that T&I defaults should be treated like any other default which means the property will likely end up in foreclosure. Borrowers who cannot resolve the T&I issue will be provided no other option!

This is precisely why HUD has labored over providing specific guidelines on how to handle T&I defaults and it is also the very same reason Fannie Mae has not had any lender/servicer proceed with foreclosure on their portfolio.

No one wants the headline risk!

T&I defaults are unlike any other default because they impact a very sensitive demographic of our population and trust me, once foreclosures on the HECM product start and seniors are being tossed from their homes, Congress and state legislators will over-react and it will be just horrific.

Just my opinion.

reversemanic,

I respect your opinion and your scenario is one reasonable outcome. The risk of that outcome is not worth the cost. As in most such conversations, other possible scenarios pale in comparison even though your scenario might not even be a highly probable outcome.

Most solutions deal with future loans. So who is to pay for the past?
With the rise in closed end HECMs the problem will only grow.

Which covenant violations are "non-technical" and which are "technical"? Which ones should be enforced and which ones should not be? Once this mind frame sets in where does it end? A true slippery slope....

The reason why everyone has been kicking the ball down the road is because no alternative is a good solution. If investors are enduring the loss happily, then let that continue. HUD will not pay these costs.

So should the 97% - 98% suffer? The way things seem, lenders are willing to throw out seniors who default on their forward mortgages but have problems with reverse mortgage defaults. Why is that?

What is your suggested solution? If it involves set asides or impound type escrow accounts, why many years of insurance and taxes should be involved? Should be it be different with a home with no expected positive equity in the future versus one with enormous equity now and expected in the future? Not so easy but ignoring some types of defaults while enforcing others does not seem equitable or fair either.

I agree with almost everything you have posted on this topic and if you want to know what I think is a workable solution, read the “white paper” created by the NRMLA Servicing Committee; it is posted on NRMLA’s website.

My only point is with those people who are so comfortable in saying things like, “If the borrower is in default, foreclose just like on the ‘forward’ side!”

There has been so much unwarranted and unfounded negative attention being paid to the reverse mortgage industry, and who knows when NRMLA will actually go-live with a PR campaign?

My concern is that once we start foreclosing on, what will be portrayed in the media as “poor destitute seniors”, we will have a PR nightmare scenario and I wonder how we will be treated by state and federal regulators.

If we get several showcase foreclosures in the mainstream media (think about how much damage was done by Senator McCaskill’s hearing about ONE borrower who was taken advantage of) I shudder to think what she would do with them!

Hopefully, the upcoming HUD mortgagee letter will allow for clarity on this issue, but it will not keep me from losing sleep over the potential fallout once we start foreclosing.

That is some heavy conversation Reversemaniac. I don't think Cynic meant it in the way you are taking it. Or, I may be misunderstanding what you are saying?

The problem we face is going to be if the borrower has enough funds in the loan to set aside anything? What happens in that case.

Another solution could be to escrow funds on a monthly basis. However, will we face the same problem, not enough funds for escrowing. We must rely on the borrower to pay their own taxes an insurance each year.

We keep picking away at the available principle limit with reductions in principle limits, higher margins, lower home values and now set asides for T&I. The reverse mortgage is losing its effectiveness for our seniors.

Why don't we compare the reverse mortgage to a typical FHA loan, compare the foreclosure history. Surprising, isn't it! The reverse mortgage is not the high risk product the agencies, the secondary market and the industry is making it out to be. Time will tell!

Best regards,

John Smaldone

Okay Cynic, how would you like to have your company's name on the first foreclosure?

Picture an 85 year old widow, sitting on the curb with all her earthly possessions because she has just been evicted from the home her and her deceased husband lived in for more than 50 years.

Now picture her on the 6:00pm news telling the whole world that you just took her home because you told her she should get a reverse mortgage and "I could stay in my home for the rest of my life", but you lied.

Now picture yourself in front of Barney Frank's committee, being broadcast to the entire nation, with Barney demanding to know why you evicted this poor woman and why was there no consideration for her "plight"? And why did you tell her she could live in her home the rest of her life? And oh by the way, "How much money did you make on her reverse mortgage"?

"...technical defaults are nothing more than defaults and should be treated as such"...really?! Is that why HUD has been struggling with this isssue for more than 10 years?

Again Cynic, attach your company's name to the first T&I foreclosure and then you can talk about them being "...nothing more than defaults and should be treated as such".

One last question on this issue: why is the Obama administration willing to spend tens of billions of dollars on keeping subprime borrowers in their homes, but does nothing for our seniors who are in dire financial straits? I just don't get that!

reversemaniac,

If originators had a factual basis to say that most HECMs terminate because of borrowers’ deaths then it would be somewhat understandable why some make such stupid, ignorant, and untruthful claims without caveats about seniors -- with HECMs -- living in their homes for life or tenure payments being for life “just like an annuity" extending for the life of the senior (with no mention of suspension of payments because of covenant violations or termination due to the termination of the underlying HECM). The problem is the truth is just too “inconvenient,” difficult to explain, use in ads, etc. Yeah, most of these originators will argue they did not know any better at that time, they were in competition, the senior could not understand it any other way, …. But the result is the same. Where is personal responsibility? It quickly gets lost. Enough on a subject I did not bring up.

I have watched (and re-watched) last year as one bank exec with a very significant retail reverse mortgage operation made a statement before the esteemed Chairman under oath profusely declaring that his firm had never made even one negatively amortized residential mortgage -- not even one. This declaration was not in response to a question he was asked; he volunteered this information. Fear of Congress? Well, the number of HECMs that firm originates speaks for itself. Again enough on a subject I did not bring up.

Now let’s get back to the subject at hand.

John Smaldone worked for months with one senior to save her home. The servicer was an affiliate of one of the nation’s largest HECM providers. You seem to be saying that this firm will throw seniors out of their homes with little thought for helping them when it is a forward mortgage issue but shake in their boots of doing the same when it is a material covenant violation on a HECM, even if it is a repeated violation? I am afraid to put into writing what I really think about such posturing. Do these banks stop tenure payments or suspend availability of lines of credit because of declaration of bankruptcy? Think about the double standard you claim exists (and I agree with you).

HOWEVER, your statements clearly express the opinion of many execs in the industry. They also reflect a much higher level of personal responsibility than what has ever been reflected by many who were responsible for the subprime lending mess, even to this day. I just wish these same reverse mortgage execs had been as strong about truth in advertising and information presented to borrowers years ago as they appear to be today. Unfortunately it still is not true for all -- even some of those most loudly crying out for positive publicity. What a contradiction!!!!

Cynic,

You did good as usual and said it the way it needed to be said. Thank you for your comeback comment.

John Smaldone

John,

Thank you. I appreciate your support.

For approximately half of the life of the HECM program this issue has been kicked back and forth. Maybe it needs another ten years or more before an equitable solution is reached. Brighter minds than mine and individuals with far more experience in HECMs have been addressing this issue for years with no resolution.

What should be done???

Cynic,

You are welcome, it was my pleasure to support you. You are also probably right in what you just said. The T&I issue can't be resolved in this environment. I feel it is better left alone for now. The industry has gone through so many changes and to fast for one year.

Like you said earlier, if their is to be a set aside for T&I, make it for a term and an amount that means something. However, I am against a T&I set aside all together. We need to start working with what we have, learn and understand all the changes that have taken place. We need to take a moratorium on any more new changes for a while. We need to get back to business and focus on our seniors. Cynic, you have a good day.

What should be done?? For now, nothing!!

John A. Smaldone

Take care,

John Smaldone

To establish a rule that negatively impacts 97%-98% of borrowers is ridiculous. How does a set aside equal to six months of insurance and real estate taxes make much sense?

If there is going to be set asides, I agree with New View that the servicing fee set aside should be eliminated; however, interest rates will creep up to compensate for this loss of direct revenue. Even though I strongly disagree with the MBA position of setting aside three years of real estate taxes and insurance, at least it is not a meaningless amount.

What is a “technical” default anyway? Is that like a “soft” default? After all of the suitability testing and signing of documents letting seniors know they must pay insurance and real estate taxes or default will occur and then backing away from actual default based on some position called “technical default” is preposterous. Only a minute handful of homeowners do not realize that they must pay real estate taxes and insurance. No one can change human nature. When a home is underwater and it does not look like the situation will turn around, the natural tendency is to stop paying real estate taxes and insurance, creating “technical defaults.”

While some lenders will fret about the failure of originators to do their jobs, with counseling and extensive disclosures, technical defaults are nothing more than defaults and should be treated as such.