Negative Loan Growth Hits Reverse Mortgage Credit Lines

image A local NBC television station aired Reverse Mortgage: Man calls 12 about dwindling credit line which describes how Donald Conn took out a reverse mortgage with Wells Fargo and after noticing small amounts ($3, $5, and $7 every month) disappearing from his credit line he called to ask Wells what was happening and they blamed HUD.

"They say it’s because of the computer program that HUD wrote. So, they’re blaming HUD," Donald said.  Donald blames his lender for not telling him sooner.  "Yea, yea, they admit there’s a boo boo, but they don’t know how to fix it," he said.

This isn’t happening only to Wells Fargo borrowers.  I’ve received a few emails form differen’t RMD readers who have seen it happen to their borrowers as well.  "We are seeing this on some loans we are servicing as well and it’s because the accrued monthly MIP, interest, and servicing fee is in an amount greater than the growth of the principal limit," said Ryan LaRose, Executive Vice President of Celink.

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"Because interest rates are so low, the growth of the principal limit is not enough to exceed the interest accrued to the loan balance, which results in a pattern of negative loan growth," said LaRose.  He added, "In addition, some of the HECM servicing calculations utilize differing interest types (current interest rate vs. expected average rate) and that can result in negative loan growth to the borrower."

The HUD spokesperson also says, this happens with the line of credit, loans. She also says he could have re-financed.  Meantime, Donald has withdrawn his money from Wells Fargo and placed it in his bank. That way he’s not hit with additional fees.

Reverse Mortgage: Man calls 12 about dwindling credit line

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  • dduck,

    This question is not easy to answer.

    As to tenure payments themselves, this is a promise to pay an agreed amount until specific events occur such as an adjustment requested by the borrower, borrower bankruptcy, or HECM termination.

    As to the line of credit in a tenure payment situation, yes the credit line could go negative with no impact on the tenure payments.

    I also have one borrower who has taken out all of the available principal limit and she is seeing negative amounts accumulate in her line of credit.

  • What is being experienced requires a few things to be in play. The first is that rates at the time the loan was established must be higher than what rates are currently. This causes the spread between the ever-growing Principal Limit and the outstanding debt to shrink because both increase at the same rate (cuurent rate plus .5%) except that the debt also increases a little faster because of the monthly service fee being charged each month. If rates remained constant, or increased from the time that the loan closed, then the servicing set aside would have been a sufficient equity buffer to never experience a “shrinking” LOC. We have experienced this lately because the loans that were written 3 to 5 yrs ago had higher rates than what they had been late last year and early next year. It is most easily noticed when there is little remaining LOC b/c the $35 (or 30/25/20/etc) is proportionally greater to the “spread” than what you would see if a large LOC existed.

    Bottom line, LOC’s NEVER grow at a flat .5% over current rate!!! PL’s do, but the “spread” growth depends on how much of a “set aside” was established at day one, and where rates are today relative to day one.

    This is just a function of the program seldom seen…not a purposeful deception of any party involved. The fix would be to always establish a servicing set aside as though the rates were at the “floor”. Then there would always be enough buffer in play. But then that would be less available cash to the senior which would be a greater negative net effect in my opinion.

    I hope this helps those who enjoy the mechanics of our product!

  • There are several inaccuracies in the original story, and the quotes from the Celink rep and HUD rep do not help. The commment by the Celink rep in the article is unfortunately not really correct. The above comment is almost right, but not quite.

    The problem does have to do with the service fee, but not as described above. In the HECM program, as originally established, the principal limit, creditline, and SFSA were supposed to always grow at the same rate, which was the expected rate established at the time of loan closing. In 1997, HUD changed this to require that the principal limit would grow at the CURRENT loan rate, with the creditline also growing at that rate. The change was also supposed to be made with the SFSA. However, something went awry when these regulations were established, and the servicers began using an incorrect formula in which the loan balance, principal limit, and creditline were all growing at the current rate, while the SFSA was still growing at the Expected rate. This means that, whenever the loan’s Expected rate (which never changes) is higher than the current rate, each month the SFSA grows a little faster than the principal limit or the creditline. Servicers have been “stealing” the extra growth out of the creditline growth, which is why sharp-eyed borrowers will see less growth in their creditline than they would expect.

    By the way, the title of this article is actually misleading. In most cases, it’s not that the creditline is shrinking, it is that it is not growing as fast as it should. Only when there is nothing or a very little left in the creditline do you see the creditline actually go down. That is, when the growth on the SFSA exceeds the growth on the creditline.

    This has been pointed out to HUD and the servicing community repeatedly, and they are capable of fixing it, but for whatever reason have not found the will to do so. There was even a draft Mortgagee Letter that addressed the problem a few years ago, but it never saw the light of day for some reason.

    My understanding of this problem comes from information shared by Ken Scholen, one of the foremost experts on the HECM program. My apologies to him if I’ve gotten any of it wrong.

  • Chris,

    To quote you – “Servicers have been “stealing” the extra growth out of the creditline growth, which is why sharp-eyed borrowers will see less growth in their creditline than they would expect.”

    Stealing?? A bit harsh, wouldn’t you say? It seems to me that this is the result of a HUD mortgagee letter that is – amazingly enough to everyone in this industry – not concise and clear, leaving it open to interpretation.

    Based on the Wells comments, it sounds like the HUD system itself is handling the servicing fee set asides and LOC growth in this manner – so how can Wells be wrong, if HUD’s own system behaves in this manner?

    Telling the servicing community to “find the will” to fix this problem is like telling originators to “figure out a way to not charge as much upfront.” Everyone realizes there is an issue in both examples, but HUD needs to be the one to step in and fix it.

    If this was left completely up to the servicers to interpret in their own manner, you would have inconsistency in how one servicer to the next is handling these types of issues – an even worse problem.

  • dduck –

    The amount of a Tenure payment would not be affected (either by going up or going down) by monthly principal limit growth. Once the Tenure payment amount is set, it would not change unless the borrower did a payment plan change. This negative loan growth phenomenon only occurs on loans where the payment plan is a Line of Credit.

    Regardless of what happens with principal limit growth, etc., the borrower that selects the Tenure payment plan will continue to receive their monthly payment – as long as they are living in the home and they keep their taxes and insurance current.

  • The credit line growth can also exceed the projected growth rate of current interest rate plus .5%. One of the big reasons The variance occurs because the service fee set aside calculation uses the expected rate to

    You see the biggest differences in the growth rate at times like this when the short-term interest rate is either very low or very high, and it affects those HECMs the most that were closed with an expected rate that is very different from the current interest rate.

  • Critic,

    You are correct in your statement. I could have taken the time, and thank you for doing so, to lay out every situation where a loan could have an issue.

    I did make a broad comment and I apologize for that.

    Ryan

  • Critic,

    Before you try and jump over Ryan, I’d like to point out that Ryan was the only one willing to have any sort of comment published on RMD for this subject.

    I can’t stress enough the amount of chaos this type of issue being “aired” out to the public has caused, and anyone that reads RMD should be thankful that someone like Ryan was willing to speak on the record about a subject like this.

    I had no idea it would stir things up as much as it has, but Celink is doing all of us a favor by speaking on the record about these topics. I understand why people choose not to and respect that.

    However, it’s very easy to point out when someone is wrong but leaving a broad comment is no reason for you to jump all over someone.

  • dduck,

    Mr. Conn is simply wrong. There are no more fees incurred if Mr. Conn left his money in the line of credit than if he took it all out. However, Mr. Conn will certainly be charged more interest and FHA MIP based on the additional proceeds he takes.

    The “additional” fees Mr. Conn references is, no doubt, nothing more than “expectations” lost. Mr. Conn was probably misled to believe that his line of credit should have been several dollars (yes, only several dollars) higher each month than it was — due to an oversimplified explanation of how the line of credit grows. The news story is no doubt in part due to this oversimplified explanation. Oversimplification can come back to bite more than the person promoting it.

    As Mr. LaRose correctly stated, the true difference occurs because the increase in the principal limit was smaller than the total of the accrued interest, MIP, and servicing fee assessed during the month that accounts for this difference.

    The theoretical rational behind the differnce is beyond the scope of this comment but involves the expected interest rate used to amortize the servicing fee set aside versus the interest rate used in computing the accrued interest for the month.

  • I agree. The other quotes you cite are really appalling, and demonstrate a basic lack of understanding of the whole notion of creditline growth. Unfortunately, that’s pretty common, even among lenders and counselors, and apparently also among HUD representatives.

    With reference to someone’s objection to my use of the word “stealing”, note that I put it in quotes with the intention of softening it. What I meant was that because of the incorrect formula used by servicers to calculate the creditline, the excess, incorrectly calculated SFSA growth was being removed from the creditline available, which is not what was ever intended based on the HUD Handbook and ML. This is a problem that either HUD or the servicers themselves could have corrected when they became aware of it, but they have chosen not to do so. There is nothing to stop the servicers from doing it correctly, and it has been demonstrated that they could do so, but they are waiting for HUD to tell them to do the right thing, and HUD is being HUD. Borrowers are paying the price in reduced creditline amounts. Small amounts of money in any given month, but it has been estimated that it adds up to something like $20,000,000 across all existing HECMs.

  • Chris,

    I don’t think it’s fair to but this blame on the shoulders of the servicers. HUD gets that honor.

    Sure, the servicers should be the ones working with HUD to get this issue to a final conclusion. But, servicers are following HUD’s guidance on this – as they are required to. If the HUD system handles these calculations the same way, how can you expect the servicers to program their systems to behave in a way different than HUD’s – just because you think it’s the right thing to do?

    As I said in my previous post, what if I said that I think that you should lower the initial MIP for borrower’s in tough financial situations – because I feel it’s the right thing to do?

    Or, what if “the right thing to do” is to change the principal limit calculation when originating your next loan because you have a different interpretation of some random mortgagee letter. How would you reconcile that with a HUD auditor if they wanted to know why you are out of balance/compliance with their systems…would you really use the line “Because I felt it was the right thing to do?”

    The reality is that there is a hole in HUD’s servicing systems and I hope they move quickly to close that hole. Sniping at the servicers that they can fix this with a wave of a wand is a bit ridiculous.

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