Industry Veteran Calls Out HUD On Reverse Mortgage Recourse Policy

Atare Agbamu has been very vocal about the way HUD updated its non-recourse policy with Mortgagee Letter 2008-38 and he follows it up with An Assault on Fairness: Quash Mortgagee Letter 2008-38, part 1After asking HUD to revoke Mortgagee Letter 2008-38, Agbamu received emails from senior policy employees at HUD and below is a copy of one of them:

Yes, well, I would agree that it’s of concern that we’ve closed the one loophole that existed – that is, heirs could BUY the properties from the estate to keep the home, but not pay off the full loan balance.  Other than that, you’re actually offering up some inaccurate statements about the program’s history.

Although many people SAID, “Neither the borrower nor the heirs will ever owe more than the value of the home,” that’s an inaccurate statement on their part and our guidance has never said as much.   Our policy position has always been:  UPON SALE, the borrower or heirs will not owe more than the value . . .    This distinction is VERY clear in our regulations.  So the ML does not represent any change in policy position on this matter.  Therefore, the ML [2008-38] that has been charged is appropriate and consistent with historical policy. AND, the definition of non-recourse IS just as we said it was – so that doesn’t represent a change. 

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So, the only change presented in this new ML is that that the heirs can’t buy the property from the estate to avoid paying off the full loan balance.”

Agbamu takes issue with the comment about how many people said “Neither the borrower nor the heirs will owe more than the value of the home,” which HUD says is an inaccurate statement and its guidance has never said as much.  If you take a look at the language of chapter 1, paragraph 3C (1-3C) of the HUD HECM Handbook 4235.1 Rev.-1 which defines “non-recourse” it reads:

The HECM is a “non-recourse” loan. This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.

So if it’s an inaccurate statement, why has it taken HUD 20 years to clear up the misinterpretation of its non recourse policy? 

Some of the industry’s largest public resources like Fannie Mae and the National Reverse Mortgage Lenders Association must of misinterpreted it as well.  He points to a Fannie Mae consumer education Q&A posted in August 2004 which reads:

Q: Will my heirs owe anything to the mortgage lender if I die?

A: Upon your death, the loan balance, consisting of payments made to you or on your behalf plus accrued interest, becomes due and payable. Your heirs may repay the loan balance by selling the home or by paying off the HECM loan so that they may keep the home. If the loan balance exceeds the value of your property, your heirs will owe no more than the value of the property. FHA insurance will cover any balance due the lender. No additional financial claims may be made against your heirs or estate.

Next he points to the consumer safeguards section of the National Reverse Mortgage Lenders Association’s website which states:

Asset Protection. The reverse mortgage is a “non-recourse” loan. This means that the amount due can never exceed what the home is worth. Title to the home always remains with the borrower. When the loan becomes due, the lender is repaid the sum of funds advanced plus the accrued interest, but never more than the value of the house. If there is remaining value, it belongs to the homeowner or the estate.

He brings up some great points and it will be interesting to see what HUD has to say about it now. 

An Assault on Fairness: Quash Mortgagee Letter 2008-38, part 1

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  • I agree. Perhaps two independent appraisals should be enough to determine a payoff amount for the heirs if they promise to keep the home for five years. And I bet HUD would buy this — has anyone asked them? The HUD clarification about recourse was necessary to ensure that a third-party, hands off value was determined.

    This ‘industry veteran’s’ website has a bunch of info about roller coasters and little about RM’s. Based in Minnesota, rescission periods are a topic to focus on. If there are no more HECM originations, non-recourse provisions won’t matter much.

  • I agree. The real issue is a true market value sale, not WHO the buyer is. The policy of keeping the heirs out of the purchase only encourages fraud by the heirs setting up a third party to buy the home and transfer is back.

    Why not just come right at the issue of “fair market value” to accomplish the desired result? Have the heirs pay for two independent appriasals and end the run-around.

    Simple solutions don’t seem to by the way HUD likes to approach issues.

  • HUD is merely trying to prevent the families of reverse mortgage borrowers the ability to short the sale and avoid paying what is due. I am sure this was not something that HUD decided to do out of the blue. There must have been some abuses being committed by people. HUD caught on and closed the loophole. It needed to be done. If abuses of the program continue, eventually the program could be in jeopardy. You would not want that, would you?

  • Would it not be great if we lived in the world our parents and Kindergarten through 4th Grade teachers taught us largely existed and which they urged us to contribute to and maintain: Tell the truth; if and when you don’t or circumstances change, admit it, apologize, and correct it.

    Why HUD simply couldn’t acknowledge the fact that their language of 20 years left the window open for legal maneuvers that resulted in hits to their MI escrow accounts that they didn’t plan for and never intended, but which conform logically and reasonably to their own prognostications, is beyond me and is just another nail in the coffin of trust and good will, and another boost to cynicism and mistrust.

    They needed to do what they did for financial reasons, but rather than admit the plain meaning of their original pronouncements allowed for a logical interpretation that no family member would ever have to repay more than 95% of the value of the home on the occasion of a loan due event, they added new language which changed the plain and logical meaning of their words of 20-years, and then rebuked the vocal challengers directly and we who know better indirectly, ” . . . that’s an inaccurate statement . . . Our policy position has always been: UPON SALE, the borrower or heirs will not owe more than the value . . . This distinction is VERY clear in our regulations.”

    It was NEVER this clear. And as long as HUD insists it is when it isn’t they’ll engender mistrust and foment anger, and once again seniors and their heirs will suffer, and originators will take hits to their incomes.

  • I for one intend to send this discourse to my Senator and my Congressmen and ask that they put this on their list of things to look into and ralley against.

    This is not about us, as originators, not being able to make a living. This is about a government agency attempting to take back what they have professed for 20 years because it doesn’t suit their current needs. This “oh I didn’t mean it that way” attitude is not acceptible. It is an injustice to the senior and their estate. It makes liars out of everyone who ever helped a senior with a HECM, including the government.

    If HUD wants to change their stance they can take it to the vote of the Senate and Congress, just like all other changes to the program. It can then be affective, if it passes, for all new reverse mortgages. They will like not have to worry about having too many new loans out there. Most seniors will not put their estate, aka family, in a position to have to pick up the bill.

    Are all of you out there going to just comment here, to one another, or are you going to do something about this. The more vopices heard the better our chances of getting HUD to back step…again…only this time on the side of what is right. Let’s not wait until one of us, or HUD, is sued by a family member for fraud.

  • And don’t forget there may be income tax payable (by the estate) on the portion of the loan balance that exceeds the amount of the payoff (but there also would be an income tax deduction of the accrued interest that is paid).

  • James Veale, Please continue..
    and is it true that there may be an income tax payable by the estate on the portion of the loan balance that exceeds the payoff? I had not considered this. I didn’t believe this could be possible since it is forgiven and there is no deficiency judgement.

  • Terry —

    Your comment is on the money. What most of us should realize is that this is a fundamental issue of fairness and justice for the very customers we profess to serve, the very foundation of our industry, the New Customer Majority in an aging society. Customers make industries, not products. This is where the rubber meets the road.

    As a friend puts it the other day, if HECM were a car, non-recourse would be the transmission. Now, how would you like to pay hefty comprehensive car insurance premiums for 20 years and end up with a liability-type insurance benefit? Meanwhile, for 20 years, you were promised in writing full coverage.

    Think about that for a minute. Someday we are all going to be reverse mortgage candidates. So, this is also about fairness and justice to ourselves. As my African parents taught me very early in life: “When we honor our elders, we honor ourselves.”

  • There are a number of reasons that HUD has taken the position they have here, some of which have been articulated accurately in the dialogue above and some which have been explained incorrectly. Basically, there is concern by some HUD career officials about the possibility of heirs “gaming” the system to acquire the home at a lower price.

    We have been quietly working on this matter with the department. The new leadership appears to be receptive to analyzing the issue and re-visiting it.

    It is not very helpful for folks to go running to members of Congress on issues like this. They really have no involvement in a tehnical, administrative matter of this sort. In fact, with many elected officials’ limited understanding of such matters, their reaction might be that there is even more risk to this program than they realized, leading to calls to cut it off.

  • Ms. Del Priore,

    I really hate diverting attention from an issue I, like Atare, have a concern about. What HUD did is not right. I appreciate the effort that Atare has expended in this regard.

    I will say, however, gain may result from forgiveness related to a nonrecourse mortgage with real tax consequences. It may be better or worse when it comes to the ordinary income rules on forgiveness related to recourse debt. But I will submit an article on this issue in the next four weeks.

  • Mr. Bell,

    It is always good to hear how NRMLA is taking action on behalf of seniors and the industry. I hope we all follow your advice and wait for a resolution.

  • The notion that a critical public policy such as ML-08-38 (potentially affecting the lives and fortunes of millions of senior citizens and their relatives as well as the foundations of an emerging industry) should be made or should be accepted because some “career officials” at HUD had “concerns” about some heirs “gaming the system,” not hard empirical evidence, is interesting to say the least.

    Assuming these “concerns are valid (i.e. there is overwhelming proof of fraud by heirs/estate), is the proof statistically significant? Is ML-08-38 the right, thoughtful, measured policy response? Is HUD using a sledgehammer on an imaginary fly, and smashing the heart of HECM in the process?

  • As a senior with a HECM and also a reverse mortgage professional I have concerns that HUD is speaking out of both sides of their mouth… again! Shame on you for claiming to protect seniors while hurting them at the same time, all the while hiding behind the sanctimonious position of Big Government! I have never heard a professional in this industry tell a senior their heirs will never have to repay what is owed. The term non-recourse has always meant “the HECM borrower (or his or her estate) will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.” HUD, hear this, anything other than the above explanation is an assault on seniors and their children, period. End of story!

  • Allowing the “family” to purchase the home at Current Value (or even 95%) is better for HUD (and taxpayers) than letting the home go empty and vandalized, only to (sometimes much) later getting MUCH LESS at a REO sale.

    I do NOT see this as a family “gaming” the system, and buying at a short-sale.

    This is not the same as an “owner” buying his own short-sale.

    The “owner” is GONE (dead), so what if the family wants it. At that point in time, they should have as equal a chance to buy it as any other person.

    There is indeed an advantage to HUD (and taxpayers) if a family member is ready/able to IMMEDIATELY purchase at current value, considering the fact that it will soon be worth (much?) less if the REO sale is delayed.

    So I see it as a winner for everyone. The “family” does not lose the home, and HUD (taxpayers) will recover more than a later REO sale.

    There was a recent (Dec. 29) article in the Sacramento Bee about a (underage) “HUSBAND” who lost “his” home after his (over 62) wife died.

    The paper of course did not fully explain that “he” was not the actual owner, it was wrote as if he WAS the “owner” and that the REVERSE MORTGAGE was 100% responsible.

    Note that I had not even seen this article until a VERY LOUD AND VOCAL LADY WAS telling EVERYONE about how terrible “Reverse Mortgages” were at a New Years Eve Party.

    I tried to explain to her that she may be slightly misunderstanding what the article said, but she didn't want to hear it, and proceeded to spread the (bad) words to almost everyone at the party.

    IF the “husband” had been allowed to purchase/keep the home, at current value, the foreclosure – and negative article, may never have happened.

  • Allowing the “family” to purchase the home at Current Value (or even 95%) is better for HUD (and taxpayers) than letting the home go empty and vandalized, only to (sometimes much) later getting MUCH LESS at a REO sale.rnrnI do NOT see this as a family “gaming” the system, and buying at a short-sale.rnrnThis is not the same as an “owner” buying his own short-sale. rnrnThe “owner” is GONE (dead), so what if the family wants it. At that point in time, they should have as equal a chance to buy it as any other person. rnrnThere is indeed an advantage to HUD (and taxpayers) if a family member is ready/able to IMMEDIATELY purchase at current value, considering the fact that it will soon be worth (much?) less if the REO sale is delayed.rnrnSo I see it as a winner for everyone. The “family” does not lose the home, and HUD (taxpayers) will recover more than a later REO sale.rnrnThere was a recent (Dec. 29) article in the Sacramento Bee about a (underage) “HUSBAND” who lost “his” home after his (over 62) wife died.rnrnThe paper of course did not fully explain that “he” was not the actual owner, it was wrote as if he WAS the “owner” and that the REVERSE MORTGAGE was 100% responsible.rnrnNote that I had not even seen this article until a VERY LOUD AND VOCAL LADY WAS telling EVERYONE about how terrible “Reverse Mortgages” were at a New Years Eve Party.rnrnI tried to explain to her that she may be slightly misunderstanding what the article said, but she didn’t want to hear it, and proceeded to spread the (bad) words to almost everyone at the party.rnrnIF the “husband” had been allowed to purchase/keep the home, at current value, the foreclosure – and negative article, may never have happened.

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