House Appropriations Bill May Lower Proceeds From Reverse Mortgage Program

National Mortgage News is reporting that House appropriators have instructed the Federal Housing Administration to cut the proceeds seniors receive when taking out a home equity conversion mortgage in fiscal year 2010 or Oct. 1. 

In June, Housing and Urban Development Secretary Shaun Donovan told a Senate appropriations committee that he was open to raising premiums or restricting eligibility for reverse mortgages to avoid the $798 million taxpayer subsidy that was requested for the program.

"We do have options for changing the HECM program," Donovan told a Senate appropriations committee in June, referring to the FHA’s Home Equity Conversion Mortgage.

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The House Appropriations Committee approved the appropriations bill on July 17 instructs HUD to reduce the principal amount a senior can receive on a HECM.

Rep. Tom Latham, R-Iowa, told Newsday that he identified almost $800 million worth of budget savings by lowering subsidies in the housing program that guarantees reverse mortgages for older people. Latham proposed slightly lowering the amounts of the federally insured mortgages to eliminate the need for the subsidies.  How much it would lover the principal limit is unknown. 

Peter Bell, president of the National Reverse Mortgage Lenders Association, told National Mortgage News that the committee’s action "reduces what seniors will get, which is problematic at a time when there is great need."

"We might find that some people that want a reverse mortgage won’t be able to get enough money to pay off their existing mortgage. They will be forced to sell the house and move."

Peter Bell sent the following email to RMD:

The appropriations bill reported out of committee (and awaiting floor action in the House) instructs HUD to adjust principal limit factors to a level that would allow the program to continue to operate without additional credit subsidy. This bill must still be passed by the House. Then, the Senate must pass its version of the Transportation-HUD appropriations bill, which it hopes to do prior to adjourning on August 7 for summer recess But might not).

Once Congress returns in September, a conference committee would have to negotiate any differences between the House and Senate versions of the appropriations bill, so there are still a few steps left in this legislative process.

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  • This is nonsense. One body of Congress cannot instruct HUD to do anything.

    With all the surpluses that the HECM program has reduced the federal budget by in prior years, this response seems inappropriate. Why do Representative Latham and his cohorts want to place another portion of the deficit problem on the backs of HECM borrowers.

    Where is AARP in all of this? It is terrible they attacked our origination fees but they were very helpful in getting the $625,500 lending limit. Here is another time they could be out front helping seniors.

  • Like many of us thought. No matter what Mr. Donovan intended by what he said, his words have come back to bite us. I doubt if Senator Patty Murray intended on this particular result to her somewhat probing question.

    Here is a new battle to fight. I just hope AARP does come to rescue. Hopefully, NRMLA will be able to work this piece out of the appropriations bill.

    Mr. Bell, you have our support.

  • The original HECM formula, developed some 20 years ago, is based on a number of assumptions. The female mortality tables are used for all single borrowers, male and female, which is a conservative approach. For couples, the same female mortality table is applied to the age of the younger borrower, which actually is not conservative, since joint and several life expectancy is longer than that of a single individual.

    Some flaws in the HECM calculation formula have become evident as we gained experience with the program. The most bothersome one is the concept of the expected rate. When the expected rate declined below 5.5 percent for the first time earlier this decade, it resulted in a distorted principal limit factor that caused HUD to assume an unreasonable amount of risk. Perhaps some of HUD's problem loans are in this category. This was remedied by the implementation of the 5.5 percent “floor” in the expected rate.

    The other problem we all have with the expected rate is that it is not applied equally to all HECM borrowers. Instead, it is highly dependent on the timing of their loan application or closing. The 60-day principal limit lock (later increased to 120 days) worked until market disruptions caused the margins to fluctuate, making it impossible for brokers to cover their locked-in deals.

    I'm not convinced this fluctuating expected rate is a reliable indicator of future short-term rates. Not too long ago, we had an inverted yield curve, which meant the HECM borrower actually was being charged an initial note rate that exceeded the expected rate. In the current environment characterized by a positive, but steep, yield curve, a larger margin is applied to the short-term index (CMT or LIBOR) in order to achieve the investor's required return. The consequence is we have an unrealistically high expected rate.

    The recent economic downturn, along with the unprecedented decline in housing values, exposed a possible weakness in the HECM formula's assumption that homes will appreciate at an annual rate of four percent. Perhaps this percentage should be reviewed for consistency with the actual, historical rate of appreciation, to include the recent market “correction.”

    If Congress and HUD are committed to reforming the HECM calculation in order to reduce the amount of subsidy to the HECM insurance program, a few key objectives should be kept in mind:

    1) The ability of senior homeowners to obtain the funds they need should not be impaired. A 10-year index has no relationship to future short-term rates. The expected rate calculation formula should be revised so that it is tied to the required margin and a long-term (10- or 15-year) average of the monthly or annual index value used to determine the note rate in the case of an ARM. This number would be a moving average that varies little from month to month, so there will be no surprises at closing. It might even be a good idea to publish an expected rate index value less frequently, perhaps once a year.

    2) Upfront costs should be reduced — not increased. If it is necessary to increase the MIP in order to avoid subsidy of the HECM insurance fund, then greater weight should be given to the periodic premium. The upfront MIP should be reduced or eliminated. This also would have the effect of placing the greater burden where the higher risk is — on the longer-term HECM loans.

    3) Finally, the cross-selling, by the broker, lender, servicer or any affiliate, of any other financial products to HECM borrowers should be prohibited for a period of at least one year after closing. Period. Our industry's reputation has been damaged severely by the bad press it has received because of the cross-selling issue. Let's not delude ourselves — there is no such thing as ethical cross-selling when it comes to HECM loans.

  • We are already being forced to turn away approximately half of our applicants because they can't get enough from a reverse mortgage to pay off their existing loan. They are sold an 80% equity loan that they soon find they can't pay for, but we can only get them 45-50%. Many seniors are caught in a trap they didn't understand.

  • Good evening,

    This is absurd. Our economy dictates just the opposite should be happening. Our seniors can't face any more reduction in what they get from a reverse mortgage. The HECM program will wind up becoming useless, is this what they are trying to achieve, doing away with the HECM? We are finding it difficult as it is to pay off existing mortgages due to the drop in housing values.

    AARP is needed more than ever to come to the aid of the senior and the entire industry. They need to join forces with NRMLA and fight this Tooth and Nail. NRMLA can't fight this alone. Peter Bell did a good job in his letter to the National Mortgage News representing our position on this appropriations bill. However, AARP has strength by its pure size. Mr. Bell, you have my support and I am sure many more join me. If I can be of any assistance, please call on me.

    Regards to all,

    John A. Smaldone

  • AARP operates a for-profit marketing company as a subsidiary of its 501(c)(4) non-profit organization. It makes millions of dollars selling various insurance and other financial products, primarily to seniors. AARP earns more income from selling insurance to members than it does from membership dues.

    BusinessWeek magazine says that in the past questions have arisen about whether AARP's commercial interests may conflict with those of its membership, and characterizes many of the funds and insurance policies that AARP markets as providing considerably less benefit than seniors could get on their own.

    In an editorial column in the Los Angeles Times, critic Dale Van Atta wrote that AARP does unauthorized lobbying for its membership, and lobbies against the best interests of its membership. Van Atta says that by lobbying for the Medicare Prescription Drug, Improvement, and Modernization Act, AARP leaders betrayed the membership.

    I would not be surprised to see an AARP-endorsed reverse mortgage lender emerge. It remains to be seen whether the AARP-endorsed reverse mortgage will provide a greater benefit to the senior than those available from other sources.

  • Alright, look.

    It's not great for seniors that benefits may decrease, however from the standpoint of making the program stomachable for investors I understand it.

    In 2005, 2 bedroom homes in Compton, California were going for $500,000. If I was a smart Compton resident (well, if I were smart I wouldn't live in Compton, but play along…) I'd sure as hell reverse mortgage or HELOC or do whatever I needed to pull the equity out before my house was only worth $80,000 again.

    Well, an investor can be left holding the bag there, and lest you claim that the risk has passed, what about Harlem? To my knowledge condos there are still going for $700k+ in some instances.

    Moreover, I'm not an actuary. I've met a lot of you folks who run around signing people up for reverse mortgages, and, many of you are very, very nice, but most of you certainly are not actuaries. So neither I, nor most of you reading have any idea what the prudent amount to let someone take out is… just food for thought.

  • AARP operates a for-profit marketing company as a subsidiary of its 501(c)(4) non-profit organization. It makes millions of dollars selling various insurance and other financial products, primarily to seniors. AARP earns more income from selling insurance to members than it does from membership dues. rnrnBusinessWeek magazine says that in the past questions have arisen about whether AARP’s commercial interests may conflict with those of its membership, and characterizes many of the funds and insurance policies that AARP markets as providing considerably less benefit than seniors could get on their own.rnrnIn an editorial column in the Los Angeles Times, critic Dale Van Atta wrote that AARP does unauthorized lobbying for its membership, and lobbies against the best interests of its membership. Van Atta says that by lobbying for the Medicare Prescription Drug, Improvement, and Modernization Act, AARP leaders betrayed the membership.rnrnI would not be surprised to see an AARP-endorsed reverse mortgage lender emerge. It remains to be seen whether the AARP-endorsed reverse mortgage will provide a greater benefit to the senior than those available from other sources.

  • Some further information on AARP. Recently I posted on the AARP site in response to an article on seminar spying.

    “AARP certainly knows how to throw rocks from within their glass house. The last post explains why. I am a retired insurance person and I'm not selling anything. I have been to free lunches/etc., to observe, but never hosted one.
    I see from the posts that there is a little larceny in some seniors. It's free so why not take advantage and lie about your name while at it.
    It is sort of revenge for the bad apples out there trying to scam us, I I sort of agree. But, some of these seminars offer legitimate products from quality issuers and offer valuable information, so try and separate the wheat from the chaff.
    If you find a good financial adviser, you should be buying Him/her lunch.
    As far as spying on a seminar, I have less of a problem if either the spy makes no comments and also fills out the form as a spy, or identifies him/herself in the beginning. (Can I get a doggy bag?)
    Of course, it still is inherently sneaky”
    Posted: June 20, 2009 6:02PM EDT

    Here is the interesting prior post by flyer574:

    “AARP was founded for the specific purpose of selling insurance and financial products to seniors. What you may not know (or remember) is that AARP in 1997 signed a $51,000,000 settlement with IRS. This was because AARP was considered a for-profit organization, and was forced to split AARP-the lobbyists from AARP-Services. And they are forever saying how their medigap supplements are the only ones ENDORSED by AARP. Well, which AARP? The for-profit or the lobbyists??? And for this group to set up a gestapo-like organization is stupid, unconscionable and should be ignored. And yes, I am an insurance broker, do indexed annuities, and occasionally seminars on reverse mortgages.. I am completely compliant with what I can and cannot do. And frankly, I wouldn't do anything to mislead seniors. Don't need to go that route. I'm 70 and still quite active with my client base. So, if you want to bring a checklist, that's fine. However, I've learned NOT to feed other senior platelickers! You want to hear what I have to say? Great! Ask you to buy something? NEVER. Meet with me in private? Of course. America is still the land of opportunity in spite of my age and barriers to success. So there.”
    Posted: June 15, 2009 2:33PM EDT

  • Alright, look. rnrnIt’s not great for seniors that benefits may decrease, however from the standpoint of making the program stomachable for investors I understand it. rnrnIn 2005, 2 bedroom homes in Compton, California were going for $500,000. If I was a smart Compton resident (well, if I were smart I wouldn’t live in Compton, but play along…) I’d sure as hell reverse mortgage or HELOC or do whatever I needed to pull the equity out before my house was only worth $80,000 again. rnrnWell, an investor can be left holding the bag there, and lest you claim that the risk has passed, what about Harlem? To my knowledge condos there are still going for $700k+ in some instances. rnrnMoreover, I’m not an actuary. I’ve met a lot of you folks who run around signing people up for reverse mortgages, and, many of you are very, very nice, but most of you certainly are not actuaries. So neither I, nor most of you reading have any idea what the prudent amount to let someone take out is… just food for thought. rnrn

  • Some further information on AARP. Recently I posted on the AARP site in response to an article on seminar spying.rnrn”AARP certainly knows how to throw rocks from within their glass house. The last post explains why. I am a retired insurance person and I’m not selling anything. I have been to free lunches/etc., to observe, but never hosted one.rnI see from the posts that there is a little larceny in some seniors. It’s free so why not take advantage and lie about your name while at it.rnIt is sort of revenge for the bad apples out there trying to scam us, I I sort of agree. But, some of these seminars offer legitimate products from quality issuers and offer valuable information, so try and separate the wheat from the chaff.rnIf you find a good financial adviser, you should be buying Him/her lunch.rnAs far as spying on a seminar, I have less of a problem if either the spy makes no comments and also fills out the form as a spy, or identifies him/herself in the beginning. (Can I get a doggy bag?)rnOf course, it still is inherently sneaky”rnPosted: June 20, 2009 6:02PM EDT rnrnHere is the interesting prior post by flyer574:rnrn”AARP was founded for the specific purpose of selling insurance and financial products to seniors. What you may not know (or remember) is that AARP in 1997 signed a $51,000,000 settlement with IRS. This was because AARP was considered a for-profit organization, and was forced to split AARP-the lobbyists from AARP-Services. And they are forever saying how their medigap supplements are the only ones ENDORSED by AARP. Well, which AARP? The for-profit or the lobbyists??? And for this group to set up a gestapo-like organization is stupid, unconscionable and should be ignored. And yes, I am an insurance broker, do indexed annuities, and occasionally seminars on reverse mortgages.. I am completely compliant with what I can and cannot do. And frankly, I wouldn’t do anything to mislead seniors. Don’t need to go that route. I’m 70 and still quite active with my client base. So, if you want to bring a checklist, that’s fine. However, I’ve learned NOT to feed other senior platelickers! You want to hear what I have to say? Great! Ask you to buy something? NEVER. Meet with me in private? Of course. America is still the land of opportunity in spite of my age and barriers to success. So there.”rnPosted: June 15, 2009 2:33PM EDT

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