On a Sunday afternoon, two weeks before Christmas, I went to my grandma’s house for a holiday luncheon. My grandmother and aunt (who lives with my grandmother) had just finished preparing our meal, and we were sitting around the kitchen table.

“What is it that you write about again?” my grandma asked about my relatively new job.

I explained that I wrote for Reverse Mortgage Daily.

“Oh, reverse mortgages, Robert Wagner is always trying to get your grandma to get one of those, hm, Mom?” my aunt said.

“A reverse mortgage?” my grandma looked up from her spaghetti. “I got one of those.”

I leaned back in my chair as my aunt processed this piece of information. “What? I thought you just had a line of credit!” she protested.

Yes, Grandma does have a line of credit, but not a traditional HELOC like my aunt had figured.

“It’s great. I don’t need to use it all the time, just once in a while. Like for Christmas gifts for [the grandkids],” my grandma said. “[My sister] got a lump sum reverse mortgage, I think, but I don’t need all that money.”

Why exactly my aunt reacted the way she did isn’t exactly clear and it wasn’t something I wanted to bring up at the dinner table right then.

But a couple of weeks later when I was visiting my family back home in Pennsylvania for Christmas, I asked my dad how he felt about it. His reaction was more neutral, or even positive: it’s her home equity, and it’s hers to use as she sees fit.

Back when I had first heard about reverse mortgages, the concept of not being able to leave the home to heirs seemed outrageous, but my dad’s right—it’s not like children are entitled to an inheritance.

As for my aunt, I’m not sure if she understands what exactly my grandmother’s reverse mortgage means for her. Does my aunt know that once my grandmother leaves the house, she won’t be able to live there, unless she can pay back the loan?

It just goes to show: when a borrower takes out a reverse mortgage, there’s often a ripple-effect for the entire family.

My family’s story seems to be a perfect case study for reverse mortgages, featuring the satisfied borrower, the dissenting adult child, and the supportive adult child.

Even though it is ultimately the homeowner(s)’s decision to take out the loan, this choice can affect multiple other people. But how is the industry supposed to handle this? Should everyone living with the borrower be required to get counseling, or does that overstep boundaries? True, non-borrowing spouses and other residents are supposed to sign a form that they’re aware they won’t be allowed to assume the reverse mortgage upon the borrower’s death, and that the loan will become due and payable upon the borrower’s death. But this doesn’t necessarily resolve the problems that could arise.

There’s no question that this can be a very complicated issue, and at the same time… there doesn’t appear to be an easy answer.

In a perfect world, family members of reverse mortgage borrowers should also have access to education on the loan and its implications. In the long run, however, it is the borrower’s decision to make.

While I understand my aunt’s point of view, a reverse mortgage’s benefits are intended for the borrower—not necessarily for the borrower’s friends or family. In my family’s particular situation, my grandmother is happy with her decision, and at the end of the day, that’s what matters.

Written by Alyssa Gerace

This edition of RMD Report is brought to you by Landmark, a leading national appraisal management and compliance company serving the reverse mortgage lending industry.

Having stated in a recent piece of commentary that FHA’s outlook was “still too rosy” when it reported in November on the state of its Mutual Mortgage Insurance (MMI) fund, today, New View says that despite having an economic value of -$5.4 billion, the HECM program stands to gain, as long as the housing market sees a rebound.

“Barring another housing catastrophe, the worst may be over,” the analysis states. “If so, the current position of the HECM will improve each year, as FHA’s HECM risk profile reflects an increasing percentage of the new, more conservative standard HECM loans and HECM Savers.”

The estimated negative value of the HECM portfolio can be attributed in large part to HECM loans originated from 2005 to 2008, New View says. And because of those loans paying off over time, the numbers will get worse before they get better.

However, several months of new loan production of improved HECM products indicate that the MMI fund has avoided the deterioration that could have occurred, New View writes. “Combining FHA’s estimates of what will happen with our estimates of what has happened, the program’s net economic value since inception now stands at about -$5.4 billion. We think that FHA’s current projections are a bit optimistic, but even using their old numbers, the program’s economic value held steady.”

Read the New View Advisors commentary in full, with detailed calculations.

Written by Elizabeth Ecker

Even after consumer protections have been implemented for reverse mortgages, we continue to see the same outdated arguments presented before politicians.

Case in point, during an early October hearing before the Senate Banking, Housing and Urban Affairs Subcommittee on Financial Institutions and Consumer Protection, we saw firsthand how misinformation can force Washington to focus on the wrong things.

Several experts testified on the different factors that led up to the creation of the Consumer Financial Protection Bureau. One of the panelists was Robert M. Lawless, a Professor at the University of Illinois College of Law who said that significant increases in consumer debt was not the only thing that led to the financial crisis.

Lawless joins the ranks of dozens if not hundreds of “academics” and “experts” who relay information gleaned from books, not practice or firsthand experience, to Congress.

Despite the CFPB being up and running—partially at least—new problems have appeared and have become “salient” in new ways, he says. One of the problems he noted are reverse mortgages.

“To make an informed decision on a reverse mortgage, a consumer needs a good understanding of the value of the home, life expectancy and a competitive interest rate. All of these pieces of information require estimation. Moreover, we can expect consumers to display bias in making these estimates such as overestimating the value of the home or life expectancy.”

Hard to disagree there, but Lawless begins to veer off track when he shows a clear lack of understanding about the challenges facing the reverse mortgage industry.

“Some of the same players in the subprime lending market have moved into reverse mortgages, leading to complaints from consumer advocates that were similar to the complaints about subprime lending,” he said.

If he said this in 2007 or 2008, there could be some truth to it. But here in 2011, Lawless shows just how behind the curve his observations are today.

Those “subprime” lenders that may have tried to enter the business are no longer here because they didn’t succeed. Would a subprime loan officer stick around in a business that typically takes 60-90 days to close a refi? I think not.

Lawless continues by saying that reports of high fees and financial products inappropriate for the consumer are becoming more and more prevalent in the industry as well. Anyone who has spent a bit of time in the industry or at the very least looking at more than AARP’s website would know those problems have already been addressed.

By law, fees charged to consumers are capped on HECM loans, and the Department of Housing and Urban Development forbids lenders from participating in cross selling—all protections developed in the last couple of years. Lawless fails to mention any of these during his testimony.

This article isn’t about picking on Lawless, who could very well be a great resource for other topics, but it’s about a bigger problem. If Congress wastes time trying to fix problems from three years ago, it will never be able to fix things that are impacting reverse mortgages today.

There is already enough reverse mortgage misinformation coming from members of Congress. The most recent came in May, from Rep. Nydia Velazquez (D-N.Y.) who blatantly misquoted a survey that had nothing to do with reverse mortgages to push an agenda of her own.

The last thing we need are more experts pointing out problems from three years ago.

No one expects Congress to be perfect or be able to see things before they happen. But if Congress doesn’t know what’s impacting the industry today, we will be lucky if funding is restored for HECM Counseling by 2013.

[President Obama added another $447 billion to the super committee's challenge by asking it to pay for his jobs plan announced in last night's speech to Congress.]

Congressional members and staff should look first to easy savings from Medicaid’s hemorrhaging long-term care program. Here’s how to save tens of billion of dollars while improving the Medicaid program and long-term care services at the same time.

It’s no secret Medicaid is rife with waste, fraud and abuse. But did you know Medicaid’s basic eligibility rules contain perverse incentives that exacerbate all three problems?

Do you think Medicaid requires low income? How naïve. Income almost never disqualifies anyone from qualifying for Medicaid long-term care benefits. Why? Because Medicaid deducts all health and long-term care expenses from income before determining eligibility. You don’t need low income; only a cash-flow problem.

Do you think Medicaid requires that you spend down into poverty? Think again. Medicaid exempts home equity up to $500,000 plus a business, including the capital and cash flow, prepaid burial plans, a car, term life insurance and personal belongings, all without limit.

On top of that, a quick Internet search for “Medicaid planning” will yield thousands of lawyers eager to impoverish you artificially for fees equal roughly to one private-pay month in a nursing home. Come and get ‘em: special trusts, transfers, annuities, life care contracts and unlimited exempt assets.

So what? Would changing any of this save significant money? Yes and here’s why.

Relatively few Medicaid recipients account for a plurality of the program’s costs. Dual eligibles who receive both Medicare and Medicaid benefits are only 15% of Medicaid’s recipients, but account for 39% of its costs, 70% of which goes for long-term care.

To save a fortune in Medicaid expenditures, all we need is to divert people who would otherwise end up as dual eligibles away from future public dependency. In fact, to save $30 billion per year, Medicaid would only need to reduce the number of dual eligibles by 1,868,460 or 21%.

Is that feasible? Yes. According to the National Council on the Aging, half of households headed by people over 62 could get over $70,000 each from a reverse mortgage. Imagine if they used that wealth to pay privately for long-term care. Far fewer would ever need Medicaid.

So, why don’t people pay for their own long-term care with reverse mortgages already? Simple. Medicaid exempts their home and all contiguous property up to a minimum of $500,000 and $750,000 in California, New York and other spendthrift states. Why use home equity when Medicaid will pay and protect the home?

What’s to be done?

Eliminate Medicaid’s home equity exemption. Replace it with a requirement to use home equity for long-term care before qualifying for Medicaid. Extend the asset transfer look back period on real property from five to ten years so people can’t get rid of home equity without a Medicaid eligibility penalty.

Too politically sensitive? Hardly. Reverse mortgages allow people to remain in their homes without monthly payments until they move out, sell or die. Most Americans would rather age in place in their own homes than go straight to a nursing home on Medicaid.

Too draconian? Hardly. The home equity exemption in England, where socialized medicine is supposedly “free,” is only $38,000. Why are we more generous with our scarce welfare dollars than the Brits?

Besides, why should a welfare program like Medicaid provide free inheritance insurance to baby boomer heirs? No wonder people don’t worry about long-term care until it’s too late for anything but Medicaid to pay.

Much more needs to be done to close Medicaid’s egregious eligibility loopholes, target the program’s diminishing resources to people most in need, and incentivize the public to save, invest or insure for long-term care so they don’t end up on public welfare in the future.

But tapping home equity to purchase quality long-term care for our elders and to save Medicaid billions of dollars is a great place to start.

Stephen A. Moses is president of the Center for Long-Term Care Reform in Seattle, Washington. He’s currently working with the Cato Institute on a study of Medicaid and long-term care financing.

And little did I know, that was just the beginning of the change I’d see. BofA’s exit was only the first in a series of events that have ruffled, but not injured, the industry in the past six months.

From my first phone calls with people in the industry, everyone seemed to indicate that the reverse mortgage business has always been filled with change, and that the cream rises to the top. “Get used to it,” they told me. But in following the news of this industry, I have to admit, I’m not sure that’s possible. It’s a little bit like saying “get used to whiplash.”

And, while it has still been just a matter of months for me, the scope and speed of the changes seems to be increasing:

Within weeks of that initial BofA announcement, AARP filed suit against the Department of Housing and Urban development over three HECM borrowers facing foreclosure for several different reasons. (The case has since been dismissed, but it may not be the last the industry sees from AARP’s actions.)

The suit cast reverse mortgage products in a bad light as the largest senior association out there spoke against it in such a public way. Friends of mine, who knew about my new reverse mortgage beat, emailed me daily with links to articles covering the lawsuit, wondering whether the lawsuit was representative of all reverse mortgages. (I assured them it was not.)

At that same time, lenders and brokers geared up for major changes in loan officer compensation. Many told me they wondered: “Will I still be able to run my business once the laws are in place?” I wondered the same thing. Was this normal? Was this kind of regulatory change strong enough to truly damage the industry? (We are still here.)

Next, former industry spearhead and mainstay Financial Freedom shut its doors. Even if that had been the end of the major lender exits, most would call this a bumpy ride.

But then, Wells Fargo sent the industry reeling—albeit temporarily—when it announced last month it would exit the business. In spite of numerous discussions in the Department of Housing and Urban development regarding a potential assessment to determine whether borrowers will be able to meet their HECM loan obligations, the lack of such an ability to assess a borrower’s situation was precisely the reason the reverse mortgage giant cited for its departure.

Once again, alarm bells sounded. And yet, we are still here. This week, the Consumer Financial Protection Bureau bids adieu to its training wheels and its oversight of the industry will become a reality. While we don’t yet know the scope of its authority, we do know that it will be responsible for conducting a report on the industry. What will that report uncover and what will it mean for the industry? I can only guess.

And on top of it all, the state of our economy is sort of the icing on this cake of uncertainty. Will new job numbers increase? Will home values rebound? Will Social Security benefits fall?

At the end of the day, the economic times are also attributable to the particular need for reverse mortgage products at this moment in history. Even in spite of uncertainty and change, often lenders tell me there is no business they’d rather be in. Right now is a time when people who are 62 and older simply cannot count on the retirement savings they built over past decades. For many, home equity is a viable—and increasingly necessary—option.

Here’s where change may not be such a bad thing. In six short months, it seems that the public is actually starting to catch on to the concept of a reverse mortgage. The tune is slightly different today from what I heard in my first couple of months covering the industry. While financial advisers and mainstream news shows still note that a reverse mortgage is not for everyone, they seem to be acknowledging that it is a good option for some.

While I have not seen very much coverage of the HECM for Purchase, the introduction of the HECM Saver sparked several news stories that covered the product in a positive light. The exit of Wells Fargo on the heels of Bank of America also prompted a flurry of news coverage that seemed to say: we wish the economy was better, but people are going to need this option.

I have confidence after talking with executives at the many companies that remain in the industry, specialized or not, that they are flexible enough to recalibrate to the changes we have seen. Many companies have made acquisitions that allow them to operate reverse mortgage divisions. Others, including non-FHA-approved lenders, have just started originating reverse mortgages or have formed relationships with bigger lenders to get them up to speed. The number of players may be in flux, but with potential for growth and introducing new participants to the industry (something I’m told was not a regular practice in the past).

For what it’s worth, my 6-month take is that the entrepreneurial companies remaining in the industry are in a particular position to gain—from all of the above. While they may not have the huge national presence of Bank of America, the branch network of Wells Fargo or the history that Financial Freedom built over the last two decades, the vast majority have their own history of working with borrowers, assessing their needs, and they are flexible; more adaptable to the changes that are yet to come.

While six months is no lifetime, in some ways it certainly can feel like one.

Written by Elizabeth Ecker

This edition of RMD Report is brought to you by Landmark, a leading national appraisal management and compliance company serving the reverse mortgage lending industry.

After getting over the initial shock of the announcement, I was expecting some sort of explanation of why such an industry mainstay was exiting the business. But only a few hours later did I realize that “making sure it’s done right” meant blaming the most important ally of the industry… The Department of Housing and Urban Development.

If you compare the way Bank of America and Wells Fargo each made their exit announcements, they couldn’t be more different.

Bank of America said the company was dedicating resources to other parts of the bank and Wells Fargo decided blame “unpredictable home prices” and restrictions that make it difficult for seniors to meet their obligations of the Home Equity Conversion Mortgage (HECM).

As Financial Insyghts CEO Peter Atwater wrote, “to exit a business today because of ‘unpredictable values’ suggests that the decision to enter the business back in 1990 was somehow based on ‘predictable values’ then, as in Wells Fargo believed in 1990 that it could predict home prices into the future. When things work out as we hoped, the outcomes are always ‘predictable’ and when they don’t, well, we use ‘unpredictable’ as the excuse.”

Lets not forget—the Federal Housing Administration insures Wells against the losses, which makes it all even more unreasonable.

But the real kicker was the way Wells began to blame HUD in the media for its exit because of the inability to assess borrowers’ financial health.

“We are not allowed, as an originator, to decline anyone,” said Franklin Codel, head of national consumer lending at Wells Fargo in an interview with the New York Times. We “worked closely with HUD to find an alternative solution and we were unable to find one with them, which led to this outcome.”

It’s no secret the industry has been working with HUD to develop the financial assessment, with Wells Fargo playing a large role in process, according to my sources. Did HUD decide not to move forward with the financial assessment? Nope.

RMD was the only publication—thank you Liz—to ask HUD if the assessment is still in the works, and the answer is…Yes.

So why couldn’t executives hold out and help move the process forward? Big players like Wells Fargo have that ability. What drove the decision to act now instead of waiting it out?

An email that was leaked to American Banker seems to suggest the decision stemmed from HUD telling Wells Fargo to foreclose on seniors.

“The last straw in our decision was the recent HUD decision to require servicers to initiate foreclosure on the Senior Reverse Mortgage customers [who] could not pay their taxes and insurance,” the email said. “When a product or program creates more reputation risk than value … well … you get the picture.”

No one wants to see seniors lose their homes, and I think Jeff Lewis, chairman of Generation Mortgage, said it best in a New York Times article.

“The idea of reputation risk is such a canard in the hands of these institutions that I don’t even know where to start,” he said. “They took the very interesting strategy of making the government the scapegoat for them deciding to abandon a market that desperately needs them.”

It’s hard to argue with that, but what confuses me even more is why would the largest “forward” lender of FHA loans—37% market share—decide to blast HUD in the media?

“You don’t just punch the government in the nose for no good reason,” said a CEO at one of the nation’s largest reverse mortgage lenders during a conversation a couple of days after the announcement.  It’s no secret that large banks have had their fair share of squabbles with the government over mortgage practices, and Wells’ decision to blast HUD feels like it’s taking a cheap shot at a government agency.

While in a statement, Wells said it “takes great pride in the exceptional work that its reverse mortgage team has done to build the HECM business over the past 20 years,” it clearly doesn’t care how it left the industry’s relationship with HUD.

Make no mistake, the industry is grateful for all of Wells’ support over the years. But blaming a government agency that has been incredibly supportive of the program over the last two decades is a horrible way to exit the industry.

Up in Canada, the market for reverse mortgages is continuing to grow, up 16% from last year and brings HOMEQ Corporation’s portfolio to $1.1 billion as of Q1 2011. The decision to lower the age from 60 to 55 comes “primarily in response to a significant demand by couples where one spouse is over 60 while the other may be a few years younger,” said the company.

Besides it being something AARP might approve of considering its non-borrowing spouse lawsuit, it made me wonder: Does the U.S. need a reverse mortgage product for people as young as 55?

It sounds great, but all lowering the age of a product to 55 means is that borrowers are going to get less money. With people continuing to live longer, estimating where that loan and the housing market might be in 30 years is impossible. The only way for lenders to protect themselves is by offering less money. This is the problem. Borrowers in the U.S. are looking for one thing… more money.

Offering a product with a lower age doesn’t address the biggest desire of consumers thus far in our market. I’ve spoken with plenty of people who’ve developed private reverse mortgage products and they’ve never once mentioned they see a demand for younger borrowers. Nope, everyone is looking for more money.

The whole idea of getting less money hasn’t yet proven to be a winning strategy here in the U.S. We’re testing it out right now in the form of the HECM Saver and only some of the industry is having success. While initial Saver results are encouraging, the industry saw applications slip for the first time and it has yet to prove that borrowers are looking for less money at a lower cost from their reverse mortgage.

Let’s also not forget that the industry had a product that allowed people as young as 60 years old access to reverse mortgages. The Senior Lending Network’s Simple60 was an exciting product, during an incredibly exciting time for the industry. However, it never really got the chance to take off, with KBC deciding to close down the company during the subprime crisis. But from what I’m told, there was never enough volume to prove there was a “significant” demand for the product. It was a nice, “oh yea, we offer this product too.” Why didn’t it ever take off? Because people always want more money, which is why the HECM remains the dominant product in the market.

Many in the industry feel the private markets could offer a product to younger borrowers and I’m sure it could… eventually. But people also seem to think there is a private product that will be able to compete with the HECM in the near future. To all those people, I think you’re crazy.

The private market will always offer less money and that’s why for the time being at least, no one in the U.S. will be seeing reverse mortgage products available to 55 year old borrowers unless it has the word HECM attached to it.

Until that happens, I say congrats to our neighbors up North, but I still like our products better.

This shows that risk for the insurance fund has grown and is growing when just looking at the cushion in appraised values, i.e., the difference between appraised values and MCAs.  Generally the greater the spread, the less risk there is to HUD.

Few specific conclusions can be drawn from the following ratio but it is interesting to observe that the overall ratio of the average of the estimated Unpaid Balances to the average MCAs is only over 98% for HECMs endorsed before fiscal year 1997.  This indicates that many HECMs which have been endorsed in the last 13 fiscal years still are not eligible for assignment to HUD.

There is still no cohort of HECMs for any fiscal year which have completely terminated.  There are still 2 HECMs outstanding for the fiscal year 1990 a fiscal year in which only 157 HECMs were endorsed.  The most recent cohort of HECMs which have had over 50% terminations is fiscal year 2004.  That information confirms the notion that most HECMs terminate within 7 years of endorsement.

While most are aware that the average age of borrowers is dropping, it is interesting to note that the average age is still over 72 years old even though baby boomers are accounting for more and more endorsements.  The shift down is not nearly so dramatic as has been previously portrayed.  But nonetheless, over the last two decades, the average age has dropped by well over 4 years.  It is also clear that the single female is becoming a smaller segment of new endorsements.

Average expected interest rates for each fiscal year have ranged from a high of 9.8% to a low of 5.2% for the fiscal quarter ended December 31, 2010.  A 62 year old has a PLF of 61.9% at an expected interest rate of 4.99% but only a 22.9% PLF with an expected interest rate of 9.8%.

Charts

The two graphic charts help drive in some important aspects of the changes to the program.  The first shows the growth in the number of HECM endorsements and the second the percentage of single females, single males, and multiple borrowers.

While the growth in HECM endorsements in early years is impressive as percentages, it is the sheer growth in volume over the last decade that makes one sit up and take notice.  Of course, the sudden drop last year, makes one’s stomach sink.

Total Endorsements by Fiscal Year by State

Looking at endorsements by fiscal year of endorsement broken down by state was revealing.  For example, it was interesting to see that homes in California represented over 18.7% of all HECM endorsements.  Florida had 11.8% and Texas came in at a distant third with 5.71%.

Then looking at the number of outstanding HECMs by fiscal year of endorsement broken down by state shows that California has 17.3% followed by Florida with 13.3% and Texas at 6.4%.  With some additional data, we will see market penetration in these three states.

By simply adding another worksheet and once again performing some simple calculations, one can determine terminations by fiscal year of endorsement and broken down by state.  Now the picture becomes even more interesting.  First over 77% of all HECM endorsements are still outstanding.  With only 22% of all HECMs ever endorsed being terminated as of December 31, 2010, almost one-quarter were related to homes located in California, only 6.7% for Florida, and just 3.4% for Texas.  Texas is low because HECM endorsements did not begin until fiscal year 2001.  Without the necessary data it is hard to tell why California is so high.  However, due to home value increases and constant increases in county lending limits before fiscal year 2009, some of the higher percentage is no doubt attributable to comparatively higher HECM-to-HECM refinancing.

Reverse Market Insight recently reported:  “While California (2.1 million) and Florida (1.9 million) both have more senior homeowner households than Texas (1.5 million)….”  That data is very helpful in understanding market penetration in those three states.  Based on the RMI data plus the number of outstanding HECMs related to homes located in each of these states, California has a 4.17% penetration rate, Florida, 3.55%, and Texas, 2.16%.  This means the penetration rate in California is about 20% larger than Florida and almost twice as large as that of Texas.

Conclusion

Unfortunately, I can only touch on some of the data in the Workbook and other data HUD provides.  Reviewing and understanding the data can not only help in looking at market segments for marketing budgetary purposes but can also help in designing and writing marketing materials.  Spending a little time on this information can yield some interesting “market insights.”

Written by James E. Veale, CPA, MBT

He is the SVP of Tax and Government Affairs & Director of Originator Recruiting for Security One Lending