FNMA’s Reverse Mortgage Pricing Changes Worry Industry

image Last week the Fort Mill Times published a great article detailing how the changes in Fannie Mae’s pricing is causing problems in the industry.  In Changes in reverse mortgages worry industry, Adrian Sainz writes that industry veterans are concerned that the change to “live pricing” can confuse seniors and cause them to question whether they’re getting fair treatment.

“Instead of (Fannie Mae) announcing the problem and then pitch in to help find an alternative, what do they do? Like normal, drop a bomb, this time on the reverse mortgage industry and our senior citizen population,” said John Smaldone, senior vice president for reverse mortgages for AAXA Mortgage, said in a letter to U.S. Rep. John J. Duncan, R-Tenn.

Last month – and without any real warning – Fannie Mae made changes that allow for higher margins for reverse mortgage lenders. Simply put, margins are the interest rate spreads a lender makes on the loan. So, the higher the margin, the higher the interest rate the borrower pays.


Worse still, under the new rules the margin – typically 2 to 3.5 percentage points – can change from the time a borrower submits an application and the loan is funded, which can be up to 120 days.

The borrower signs a form from the lender projecting the maximum amount of money the borrower may receive. But with rates that can change, the senior will not really know how much they can borrow until closing, or days before. That makes the disclosure form practically useless, Smaldone said.

“The reality of the draconian move by Fannie Mae is to create uncertainty in the reverse mortgage market place,” real estate attorney and Florida International University law professor Dennis Haber wrote on his blog.

Amy Bonitatibus, a Fannie Mae spokeswoman, said the pricing adjustments are meant to bring more investors and more cash flow into the reverse mortgage industry.  In theory, more investors in the marketplace should help drive margins back down in the long run, but it’s unclear when that will happen.

Changes in reverse mortgages worry industry

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  • The sad thing is that with just a little planning and some prudent use of TARP and/or HECM FHA MIP, the impact of this crazy policy change could have been greatly mitigated. This is one of those times when I would love to see Representatives Maxine Waters (D-CA) and Barney Frank (D-MA) grilling Fannie Mae over this draconian change in policy. With Representative John Campbell’s (R-CA) background as a fellow CPA from E&Y and a USC MBT grad, maybe he might be willing to introduce such a plan.

    Good job, Mr. Smaldone. Please keep us informed on your progress and any help you may need.

  • No, Mr. Veale – what we really need is for Barney Frank (D-MA) and Maxine Waters (D-CA) to go home. The thought that either one could do anything constructive to prevent further interference in the reverse mortgage business is laughable.

  • I couldn’t agree more with Mr. Smaldone’s article. It is especially troubling when seniors are trying to pay off a mortgage and don’t know whether or not they’re going to have to bring money to the table or not. Now it’s a crapshoot and if they don’t know and we don’t know and it’s going to be close, it may not be possible to even attempt to move forward unless they have a stockpile of money available — and I can’t remember the last time that happened.

    Hopefully someone is going to address this problem. It may be useful in the forward market but the reverse market must be handled differently.

  • I also agree with Mr. Smaldone’s article.I’ve had several reverse loans that from time of application had their margins raised before closing causing great anxiety with the borrower.Not to mention, greatly reduced amounts available. Now the loan officer has to re-sell the mortgage to the client several times over & hope that by closing date things don’t change again!

    Seniors need security in knowing what they have applied for & qualified for from the beginning, not this “we won’t know until we get to closing”!

  • It’s unfortunate that we have come so far in overcoming all of the “myths and misconceptions” and bad reputation associated with reverse mortgages in the past only to now have to explain what seems like a “bait and switch” tactic to the senior. Now we’re in a situation where a small delay in an appraisal or survey, through not fault of the borrower, can result in a reduced benefit of thousands of dollars, possibly making them unable to continue.

  • To be fair,, I don’t think that Fannie is gratuituiously raising margins to hurt seniors. They are trying to jump start the secondary market to buy HECMs which is in the best interest of the whole RM industry. Its a shame to see people who need the loan lose conditions to do it because of the rising margin, but everyone is affected by the current economic climate and seniors are no exception. We just need to hope that interest rates on T-Bills get backt their normal benchmarks and much of this problem goes away. Is it really realisitic to have seniors set up as a special class of people who have to be insulated from everything that negatively affects them?

  • Matt, it’s not the rising margins, per se. It’s the fact that nothing is locked in at the time of application. The borrower needs to know, notwithstanding the uncertainty of the appraisal, at the very least, whether there will be enough money at the end to pay off their existing mortgage if they have one. As to your last comment about seniors being a special class of people, right or wrong, HECMs have made seniors a special class of people. No other mortgage requires counseling certification. As far as I know, the only other financial situation with such a requirement is bankruptcy. However, that was not really the point.

  • I was in this industry before 2003 and I do not see a difference now. We cannot lock in the amount of proceeds until just prior to loan closing. Locking in the index is useful but only locking in half of the equation is only somewhat better than not locking in anything. We need to be able to lock a margin at application. That is all we need. The problem, this lock must come without a charge to borrowers (not allowed) or to brokers (not feasible). So it would have to float down or the borrower will just move to another lender in the case of interest rate reductions. It gets complicated but I believe that it could be worked out with FannieMae and HUD. It does not take that long to process a loan these days so a 60 day margin lock will work fine. Other investors would follow if it becomes the industry standard and they can make enough on the margin.

  • I understand the increase in margin which will help reverse mortgages be more attractive to investors. But the lock feature is imperative for seniors, for all the reasons stated. Asking seniors to pay for counseling, pay for an appraisal and not know if the loan will close is a lot to ask when most seniors are short of cash. I ask, “if a forward loan rate can be locked in at application so the customer knows what funds will be available, why does the reverse product not have the same benefit?” Float the note rate but the expected rate NEEDS to be locked.

  • I think most people are missing the big picture. We are all lucky to have jobs right now. The secondary markets are frozen. No one is lending money, yet we are all still working. We still get to originate reverse mortgages with Government (be it taxpayer) money. Fannie Mae could stop buying reverse mortgages and we could all change careers. Think of the luxuries we have all experienced in the last six months. Can anyone claim they have not made more money from the increases to 417K and 625.5K? I am in CA so perhaps much of you did not experience the boom we have experienced here. I am thankful that I had the opportunity to originate a lot of loans. If you grew your business by selling CMT 225’s last year and getting two points on the back end, well, time to re-tool your business. I never participated in that and will still eat a negative eigth of a point to get my borrower the best product.

    If you ask me, I would say the worst is yet to come and we should enjoy 2009 as a year we all kept making money. Some of you have made a lot of money.

  • I echo Ranya’s concern and Raymond’s excellent question. How can we make seniors pay for counseling and an appraisal, sign all the documents, and so many people do so much work, only to find out that the rate in effect at closing prevents them from getting a Reverse Mortgage — when we could have known that at Step One? (Appraisals create enough of a risk these days). It certainly makes it look like I’m doing a “bait and switch” and I don’t like being put in this position!

  • The interest rate is the interest rate. What it’s going to be, it’s going to be. There could, however, be a lock on the expected rate which doesn’t affect the ongoing interest rate at all. It merely would guarantee that the available funds at closing do not change except for the usual variables. Maybe I have it wrong but as a CSA and loan advisor, I still think my job is to help seniors and I feel awful when I have to tell them that it’s not going to work after all.

  • The Fannie Mae margin changes and uncertainty it provides will have an even larger negative impact if longer a rescission period is implemented such as the 10-days proposed in MN. The 30-day rescission proposed in CA is impossible as it is.

  • Dear Critic,
    I very much appreciate your analysis of some of the potential problems with the reverse mortgage program. I don’t think it would surprise anyone that our Government may have miscalculated mortality rates. But my concern remains that the credibility of this program, especially because we’re dealing with seniors and their families, rests on our ability to produce a document that gives a clear and accurate disclosure. What will hurt this program is leaving information with potential clients that is most likely to be wrong. Our credibility with the potential client is extremely important, especially with the constant negative press that we unfortunately experience. This lack of a lock on the expected rate has given fodder to the naysayers of this program. In fact, the Orlando Sentinel published an article a couple of days ago with the heading “Beware Reverse Mortgages,” which talked about exactly that. I am not suggesting locking in a low rate or a low margin. I am simply suggesting locking in ANY reasonable rate that will guarantee an outcome. The entire FHA HECM program was not thrown into turmoil just a couple of months ago when this was the common practice and a disclosure lock was included in the application packages. If MIP collections prove not to be sufficient to cover short sale claims in the short run, the shortfall will certainly be made up over time.

  • Good evening,

    I want to thank all of you that liked and commented on the release. This actually came out over the Associated Press. If you go back up to the top of the page where the article starts, you will see a link a link. The link is in blue and has the same name as the heading of the news story. If you click on it, you will go into the entire article. You will also see a story about a 71 year old handy-caped widow who tried to get relief from a reverse mortgage. She was approved, however, she was 5 months late on her mortgage payments and heading into foreclosure.

    If you read the entire release and read this woman’s story, it is sad. You will see what happened to her because FNMA dropped the BOMB with out any warning. What you will read is happening all over the country to people like this handy-caped woman.

    Something has to be done to get the ear of those that are in power. Our industry is slowly eroding, we have more so called experts interfering and changing things daily. We need to take a breather, analyze all that has been done to the Reverse Mortgage industry over the past year and bring it back to what it was intended to be. The Reverse Mortgage industry was intended to be a regulated program by HUD for seniors. A program whereby seniors could take a portion of their equity out of their homes with out worrying about ever making a payment again for the rest of their lives, as long as they lived in their home. It was supposed to be a program that did not have the characteristics of the forward mortgage world, it was meant to be a non-competitive regulated product and it was meant to give our seniors a way to improve the quality of their lives.

    We have turned this product into another mortgage product that has the characteristics of the forward lending world. We have predatory lending, fraud, bate and switch and you name it. I blame government, I blame government because they did not police this product through their quazi governmental agencies the way they should have. We now are in an industry that true Reverse Mortgage professionals don’t understand, it is against their principles and values. Instead of being able to concentrate on educating them selves, spending the proper time with the borrower and doing what they did 4 or 5 years ago, they now are in a battle zone. The battle zone is fighting and scraping to compete with the next guy on the street fighting to get his or her customer. They are trying to figure out live pricing. They are worried about having to lock the loan in because if they don’t, they will lose a lot of money. What about the bait and switch we are forced to do.

    Lets say you have a loan in process, a HECM Libor 275 with a $30 servicing fee. When you took the loan it was paying a premium of 0.78, you are now a few days from getting it out of underwriting. Guess what, a HECM Libor 275 with a $30 service fee is now in negative territory. The loan is at a discount of 075% instead of a premium. The loan has a pay off of an existing loan of $210,000, closing costs of $19,000 and the borrower wants $25,000 at closing. This totals a UPB of $254,000 times .75% equals $1,905.00. Now you are facing not only no premium gain like you thought you would have but $1,905 that must be deducted from the origination fee. What do you do? Most companies will re-disclose at a higher margin and a good chance show a $35 servicing fee. It was not supposed to be this way in the Reverse Mortgage business. The senior is suffering and so are the companies and the loan officers. Mainly the senior is the one suffering the most, they are going to face another fleecing.

    What has happened? Almost overnight we are destroying a program that we have struggled to make a success since 1989. The objective was to make this a tremendous benefit to our seniors. A program with simplicity to it and one with no surprises at the end. Why do we always take away from our seniors. These are the people that fought in battles to preserve our freedom, they are pioneers who struggled and worked so hard to give us a country to be proud to live in. We just hang them out to dry. This is wrong, our system is wrong, we must do something to preserve this program and roll it back in time.

    Please read the entire release, I would appreciate it.

    Have a good evening.

    John A. Smaldone

  • Live pricing, margin increases?? All this and the 625,500 limit is only temporary. What happens if it goes back to 417K at the end of the year.

    Does anyone know if any progress is being made in keeping the new limit permanent?

  • John,

    Well said to say the least. This program has changed and is being destroyed almost overnight by people that are incompetent enough to actually think theey are helping.

    “It was supposed to be a program that did not have the characteristics of the forward mortgage world, it was meant to be a non-competitive regulated product and it was meant to give our seniors a way to improve the quality of their lives.

    We have turned this product into another mortgage product that has the characteristics of the forward lending world. We have predatory lending, fraud, bate and switch and you name it. I blame government, I blame government because they did not police this product through their quazi governmental agencies the way they should have..”

    Those that have not been around very long do not get it.

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