Reverse Mortgage Industry Needs to Be Ahead of the Curve on Risk and Compliance

image Mortgage Orb published one of the best editorials I’ve read in a while about where the reverse mortgage industry currently stands and where it needs to go. 

The article came just a few days after Comptroller of the Currency John C. Dugan declared that reverse mortgages pose significant compliance risks that require proactive input from regulators to ensure the safety and soundness of the product.

SME editor Phil Hall wrote that, Duggan talked about the excessively positive promotion of reverse mortgages – a bit of marketing overkill that he severely deflated by dropping the industry’s epithet, the “S-word”, AKA Sub Prime.


Next, he says that Dugan also broke another taboo by openly calling on a neighboring federal agency to get moving on the subject of T&I defaults.  “Given the predominance of the HECM product in reverse mortgage lending, I think it would be a major step forward for HUD to issue guidelines or requirements addressing the escrow issue for HECMs, and I would like to begin a dialogue with them on the issue,” said Dugan.

Here was the best part of the editorial:

The industry should not be a quiet spectator to this situation. As more originators begin to offer reverse mortgages, there needs to be an industry-wide, coordinated effort to ensure that no red flags are raised over issues of safety and security. Self-policing has not traditionally been a strong point within the industry, but with reverse mortgages, there needs to be a proactive – and not reactive – effort to guarantee that all concerns relating to risk management, compliance, due diligence and quality control are fully addressed.

Key to this effort is ensuring that all of the HECM eggs don’t go in a single federal basket. The return of a private market is essential to encourage a secondary marketing future for this product. It is incumbent upon the industry to explore all possibilities – and, perhaps, invent a few new ones – to encourage the weaning away from federal over-dependency.

Hall throws out the idea of starting a “Reverse Mortgage Project”, taking the same approach as the Warehouse Lending Project to actively pursue solutions to spot and address concerns raised by regulators like Dugan in regard to risk and compliance.

Like Hall, I’d like to see a more proactive approach but I do think the industry in general is doing a better job at being ahead of the curve than people realize.

The Mortgage Bankers Association is about to release model legislation for proprietary reverse mortgage products and NRMLA has been working with HUD in establishing guidelines to help prevent T&I defaults.  According to a recent alert from NRMLA, HUD is piloting a program to address these issues and is nearing completion of a proposed rule.

I couldn’t agree more about Hall’s comment regarding the need for the private market to encourage a secondary marketing future for the product.  Changes at Fannie Mae have started to put this into motion, but the “million dollar” question is when will it start to attract other investors?  Different executives I’ve spoken with believe that it’s coming soon.  One good sign is the interest from Wall Street for Ginnie Mae’s HMBS fixed rate product.   

Are there other things that could be done to be more proactive?  Sure, but everyone needs to remember our industry is still small and our resources are limited, so we need to make sure we’re picking the right issues because attacking all of the problems isn’t possible right now.     


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  • Mr. Hall wrote a great editorial but it is fundamentally flawed. His recommendations are based in part on the idea that the reverse mortgage industry is being pressured by more than one government agency but his only proof is the unfortunate and ill advised statements of Mr. Dugan in one speech along with the alleged concerns of Mr. Donovan in the budget process. He then concludes: “But the fact that Donovan and Dugan are expressing concerns should give everyone reason to pause and ascertain that the rumbles of distant thunder remain in the very far distance.”

    Maybe I am just naïve but how would a reverse mortgage group like the Warehouse Project work in relation to Mr. Donovan? It certainly would be helpful to combat the statements of Mr. Dugan but Mr. Donovan? The fundamental problem with the HECM budget is home values. If home values were rising at least 4% per annum, would there be a projected FY 2010 deficit? So is Mr. Hall proposing that we go out and shoot ourselves in the foot by fighting the fact growth in home values is driving this one time dip? Do we have a positive spin to put on the short fall? Let’s say the amount is overstated by $600 million, is that what we should be fighting Mr. Donovan about? His department does not project home values or interest rates used in the budget process, OMB and CBO do. Mr. Donovan is stuck defending a budget request that his department contributed information but did not control or calculate. I do not blame him for wanting to discuss it with Senator Patty Murray (D-Wash) behind closed doors.

    As to Mr. Dugan, it seems a quiet discussion needs to prevail. On the other hand a strong reaction needs to be aired publicly and thoroughly over the subprime headline and article comparisons that resulted. Mr. Dugan’s unfortunate statement about the similarities of the risks of reverse mortgages to that of subprime needs to be totally discredited. It was also disappointing to read his attack on HUD. Since HUD is not shy, it is doubtful if Mr. Dugan has not heard some kind of response in a less public setting from the staff and administration at HUD.

    Not long ago, Mr. Dennis Haber suggested that a few in the industry come together to form a response team that would be unrelated to either NRMLA or the MBA. I whole heartedly support that idea.

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