Reverse Mortgage Subsidy or Principal Limit Factor Reduction?

On a daily basis, we hear about the economic crisis and the hardships plaguing our country, from the loss of jobs, to high unemployment rates, crashing property values and companies closing up shop. It’s disconcerting to say the least. What I find to be more disturbing is that our lawmakers would reject a $789 million dollar subsidy to FHA for the HECM product, a product which actually helps our seniors during such tough times to get cash from the equity in their homes and maintain independence. Instead, the House recommends FHA reduce the principal amount a senior can borrow.

In these tough times, it is bad enough that our aging population has lost astronomical amounts in sustainable income through investments, to now have appropriator’s in the House rejecting the subsidy and offering up recommendations that only add to the hardship. What message does that convey to the people of our country? That our government is willing to hand out stimulus monies to companies or to other subsidy requests that have no bearing or impact on our current crisis, but not to a program designed to help our aging population, a protected class.

Since the inception of the HECM product in 1989, FHA has operated on a negative (positive profit) subsidy until now. Perhaps as an alternative solution, offer up a recommendation that would help our seniors during such hardships. For instance, paying the $789 million subsidy and recommending that FHA come up with a plan thereafter to conduct any necessary annualized analysis that would decrease the principal limit factors based on any economic shortfalls with the HECM product for sustainability.

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Let me be clear when I say that I am not opposed to a reduction in FHA’s principal limit factors for HECMs, I see value in doing so in the future. As for now, I feel this not the time to implement such a process for the aforementioned reasons.

My views are shared with many when I state that we would like to see our government take a different position and change the message they are currently sending to the public. There benefits to the reverse mortgage product are numerous, it seems however, this understanding has not been fully embraced by all members of the Legislative Branch. I feel it would be a great discredit to our senior population to have uninformed decision making and comments result in repercussions adversely affecting perspective reverse mortgage borrowers who could truly benefit from the product.

Shawna James is the Executive Vice President of Legacy Home Financing

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  • I agree 100%…my grandmother lost 40% of her mtual fund and could not affoprd her house payment, we found she not only kept het home but replaced almost $20,000 that was lost in the market back to her, without the fear of her ever losing her home.

  • JP Van Dyke,

    It is always with amazed disbelief when I read someone claim that with a reverse mortgage she/he was able to “replace almost $20,000 that was lost in the market….”

    Please do not misunderstand. I believe the reverse mortgage really helped your grandmother. What is unbelievable is the claim it replaced something that was lost.

    Insurance proceeds allow one to replace a loss but loan proceeds may allow the borrower to replace assets that were lost it does not replace the loss itself.

  • I absolutely agree with Ms. James. This is no time to withhold a subsidy from the HECM program. I also agree that if later on MIP or principal limit factor adjustments are needed so be it. What is abominable is that in the same calendar year HECM proceeds are subject to reduction by both higher adjustable rate margins and reductions in the principal limit factors.

    What is a Democratically dominated government doing to a program that brings hope and financial support to seniors who have real needs? Under the new administration more and more federal government agencies are attacking the program. It seems even one Democratic Senator who strongly supported the President at his greatest hour of need in the primaries seems bent on personally bringing the reverse mortgage industry to its knees.

    Unlike Mr. Bell, I do not believe it was letters from people within the reverse mortgage industry that caused Congress Tom Latham to assault the subsidy; I believe it was the publicity that the press gave to the courteous exchange between Democratic Senator Patty Murray and President Obama appointed HUD Secretary Shaun Donovan on what could be done to reduce or eliminate the HECM subsidy. Only if Senator Murray had withheld her question during that hearing and only that hearing, Secretary Donovan’s response never would have received such wide publicity.

    Speaker Pelosi is no Speaker Rayburn and Senate Majority Leader Reid is certainly no LBJ. Like many others are asking: Where is the leadership in the Administration and even more so in Congress? This is not the Democratic Party of FDR, JFK, or even LBJ. Let’s hope they quickly return to their roots and do one of the many things they have historically done best — provide care for seniors in need.

  • I absolutely agree with Ms. James. This is no time to withhold a subsidy from the HECM program. I also agree that if later on MIP or principal limit factor adjustments are needed so be it. What is abominable is that in the same calendar year HECM proceeds are subject to reduction by both higher adjustable rate margins and reductions in the principal limit factors.

    What is a Democratically dominated government doing to a program that brings hope and financial support to seniors who have real needs? Under the new administration more and more federal government agencies are attacking the program. Even it seems one Democratic Senator who strongly supported the President at his greatest hour of need in the primaries seems bent on personally bringing the reverse mortgage industry to its knees.

    Unlike Mr. Bell, I do not believe it was letters from people within the reverse mortgage industry that caused Republican Congressman Tom Latham to assault the subsidy; I believe it was the publicity that the press gave to the courteous exchange between Democratic Senator Patty Murray and President Obama appointed HUD Secretary Shaun Donovan on what could be done to reduce or eliminate the HECM subsidy. Only if Senator Murray had withheld her question during that hearing and only that hearing, Secretary Donovan’s response never would have received such wide publicity.

    Speaker Pelosi is no Speaker Rayburn and Senate Majority Leader Reid is certainly no LBJ. Like many others are asking: Where is the leadership in the Administration and even more so in Congress? This is not the Democratic Party of FDR, JFK, or even LBJ. Let’s hope they quickly return to their roots and do one of the many things they have historically done best — provide care for seniors in need.

  • Ms. James,

    I agree this article was needed. I hope the NRMLA Board can bring about change. I hope you and Mr. Bell will keep us informed on how we can help.

  • I agree that this is no time to cut the potential benefits a revere mortgage gives a senior. But there is little talk of what will likely happen to thousands of jobs held by people in the industry if as a result fewer reverse mortgages are written.

  • I have been Counseling for a little over two years and have noticed lately that the% of value to Principle Loan amount apears to have alredy dropped. If you are 62 it's about 48% and for some Home owners this is not enough to justify the cost

    • Mr. Hodgson,

      You should not be seeing any drops in principal limits on fixed rate HECMs from any major lenders. However, as to adjustable rate HECMs you should be seeing less proceeds than with fixed rate HECMs or even principal limits of adjusting rate HECMs from just nine months ago.

      Some of the current drop may be due to index changes but most of it is due to margin increases due to Fannie Mae policies.

      When the budget changes occur they will affect both fixed and adjustable rate HECMs. So when you look at the same expected interest rates you will see that those impacted by the budget reduction will be lower. If HR 3288 passes as is, those changes should go into effect something in the fourth calendar quarter or as of the first of the new calendar year.

  • This administration intends cut costs by eliminating as many benefits as possible to seniors, including denying health care under the new government-run health program. So don't plan your day waiting for any help from Washington.

    • Scoutman,

      You've got it all wrong. The Administration supported the subsidy. It was Senator Patty Murray (D-WA) who was first quoted as saying one way to cut back on the proposed subsidy was through higher MIP or lower principal limit factors. HUD Secretary Donovan agreed those were options but he did not offer those as suggestions or endorse them in any way. The HUD Secretary merely acknowledged Senator Murray's suggestion as being ways to lower the subsidy but he also volunteered to speak to her in private about her suggestion. I do not believe he was pleased to entertain those cutbacks in this area at all, let alone in a Senatorial hearing.

      It was Representative Tom Latham (R-IA) who went after HECMs in the House Committee on Appropriations; however, it was the House Democrats (with few Republican votes) that ultimately passed the bill and sent it to the Senate. If you need to blame someone for the legislation blame Rep. Latham and the House Democrats. But let's move past the blame game to how can this bill be amended to get rid of the reduction. We may need House Democratic support in the conference committee if the bill gets amended in any way. Other than some in the Appropriations Committee, this bill was passed so fast in the House (not even 40 hours after its introduction into committee) that I do not believe there were many Democratic Representatives who had any inkling that the HECM subsidy was taken out by Representative Latham's amendment.

  • Scoutman, 100% right! Do you think these morons in Washington care about our seniors. They don't blink when it comes to throwing billions at a thieves like AIG
    while they kick the “Greatest Generation” to the curb.
    We have a long 3 1/2 years to go. Let's hope we are not bankrupt by then!

  • Ms. James has it spot on in her analysis. This action on the Hill is especially egregious in view of not only the economic hardships many senior now face but also in light of the drop in home values. For many, the viability of a reverse has now come down to a delicate balance of dollars.

    The calculations put many very close to the line and for an increasing number of homeowners, it leaves them in need of a reduction in their remaining principal balance to offset the drop in values and the available principal limit. For many that is not possible. We are looking at a brewing national scandal in which many seniors will find themselves foreclosed upon and homeless.
    Write to your Senators.

  • Will a letter campaign to our senators make a difference and should we approach this with a certain amount of organization among the community of reverse mortgage loan originators? After all, we are dealing with the government of a community activist. Who should lead the charge?

  • If memory serves me right it was Claude Pepper, a Democrat Congressman who asked Ronald Reagan for help in aiding seniors with the Reverse Mortgage. Be aware that on the high end FHA still gets the full Mortgage Insurance Premium of $12,000 while mortgage companies have to slice down origination fees to $6,000. So they could have paid the subsidy out of their earnings.FHA and HUD should stop crying and should not tax the poor senior borrowers who are innocents. The federal government is spending trillions for socalled medical insurance while cutting the senior Medicare program designed for seniors and now with Obama care will ration their benefits. This plan is being pushed with AARP failing to lobby for seniors as they are charged. The Democrats are supposed to be for seniors and working families.Its time they stand up for seniors by helping the reverse product be more available to their needs. Seniors need not be short changed. Medicare should stay as a reliable insurance product for the elderly.Enough power building on the backs of seniors.The HECM has been approved twice by Congress during Reagan and Clinton administrations. It has been tweaked enough.

  • This article is more of a marketing piece not real commentary. In today's world of business networking, blogs etc., this piece is getting attention. There is absolutely no new information or much of value in it.

    This is the marketing phrase, the political posturing phrase:

    “Let me be clear when I say that I am not opposed to a reduction in FHA’s principal limit factors for HECMs, I see value in doing so in the future. As for now, I feel this not the time to implement such a process for the aforementioned reasons.”

    Now, here's a quiz. Who does this sound like? Close your eyes and listen closely: “Let me be clear when I say that I am not opposed to a Reverse Mortgage Subsidy, I see value in doing so in the future. As for now, I feel this isn't the time to implement such a process for aforementioned reasons”.

    Also, the “cut and paste” use of comments and then sending them to ANYONE is exactly why the RM industry is fighting this perception issue. When was the last time you read an original, well researched article in any media outlet, or saw such a piece, or heard such a piece, dissing the RM Industry? Maybe once in the past ten years. Let's not use the same tactic.

  • I appreciate the support and comments to my commentary. I would welcome you to use this information should it prove to be helpful.

    Ashjon – you are correct in your statement that I have not provided any new information in my commentary, it is simply my views. I had contemplated elaborating further on my comment supporting the reduction of principal limit factors in the future, but felt it diluted the “not right now” point I was trying to make. The reverse mortgage industry essentially has one investor and one insurer right now, by reducing or adjusting the principal limit factors based on actual shortfalls in the mortgage market, it counteracts some of the associated risks and allows the private sector to possibly enter or reenter the market. My biggest apprehension with not having alternatives for sustainability of this product centers on the fear should FHA or Fannie Mae ever exit the reverse market. I would really welcome alternatives beyond the reduction of principal limit factor if it offered up a stable continuance at the same time. Perhaps there are many options available that I am simply not aware of. I strongly believe in the good this product offers for those who need it. As such, if my comment or commentary is viewed as a marketing piece, then I am most certainly marketing to keep this product around for many, many years to come for seniors who need it. Thank you for taking the time to share your comments and views. I hope this clarification explained the intent behind my comment.

  • What happens to all the seniors who are on Fixed incomes, and have a mortgage payment? They come in just to get rid of the mortgage payment but do to the low values in homes today, we just can't make it work. I have more that could do better, if they could just save their monthly payment. This new idea would just kill that all together.

    • Although many seniors will still be helped at lower levels of proceeds, those with the greatest need will be hurt. Certainly the borrower that Mr. Smaldone was so widely publicized as helping probably would have lost her home at the estimated reduced levels this bill would cause. Let's help to get it defeated.

  • shawnajames

    Marketing, smarketing, who cares. I loved your piece and it expressed my views so I don't reinvent the wheel when yours is better. But I also added an introductory sentence first.

  • This was a great article, and I understand Shawna’s point. Doing nothing is not an option. The need for a credit subsidy is not going to go away. This is a necessity today, however industry participants will need to work diligently with the regulatory agencies and Congress to address any future projected shortfalls. There needs to be a great deal of thought and consideration put behind the long term solution in order to ensure the ongoing viability of FHA-Insured reverse mortgage products.

  • Shawna..please don't take my rants personally and don't think for a moment that I question your integrity.

    So when you close you eyes and imagine who it might be that would just swap the terms of the sentence I highlighted in your original comment, who do see?

    In your follow up comment you say:

    “by reducing or adjusting the principal limit factors based on actual shortfalls in the mortgage market”

    What actual shortfalls are you talking about and what brought them about? My understanding is that by far the leading cause of RM default and subsequent hit to HUD is property tax and insurance non payment. If more RM advisers and lenders actually read the Loan Agreement, Note, and Mortgage and therefore understood the contractual obligation of the homeowner, the lender and HUD, then properly disclosed the homeowner's obligations most of the need for any “subsidy” would go away. If you are not aware, the new counseling protocol will help in this regard.

    And who coined the phrase “subsidy” anyhow? And why are some in the industry lending it credibility by repeating it? The $900 million is not a subsidy. As I understand it it's a shortfall in HUD's RM insurance pool. If looked at in terms of HUD's overall insurance pool this amount is drop in the bucket. And wouldn't it make way more sense to increase the MIP while eliminating State and Local Taxes and Stamps on RM's rather than, or in conjunction with changing the factors?

    There are some huge changes taking place right now and they will continue. The major lenders are realizing that to avoid killing the golden goose it is they that must reign in on advisers and correspondent lenders that have no clue about the inner workings of the RM and no clue about their role in it's value to homeowners. The lenders know the score and where the problems lie. It's like anything else, if you control the production but not the distribution, you are in for trouble. They are wisely gaining control over distribution. Lenders are tightening up on correspondent relationships. Recent regulatory changes at the state and federal levels that are not only supported but strongly lobbied for by the big lenders have made it more expensive to be a correspondent lender or broker, and there is more to come. Look at the endorsement statistics closely and you will see the trend is to more production by the bigger lenders and less by correspondents and brokers. You must know that the cost of generating a closed loan has soared over the past two years or so. The well capitalized lenders that do not rely on outside sources of capital will survive and others won't. See SLN and 1st Reverse. There will be more departures in the coming months. A few smart lenders are investing in proven advisers and their marketing efforts to a greater extent than ever before. This is atwo pronged attack designed to squeeze out the poorly capitalized and or problem lenders. It is obviously working. To some extent Ms. McCaskill's charade is helping the industry. I am not suggesting that there is any direct involvement by industry players, however I learned long ago that there is always more going on beneath the surface then above. I have heard barking from the industry but not sensed all that much conviction.

    In terms of FHA or FNMA leaving it's only a matter of time and not much at that, that FNMA will no longer be a player. It's a fact. GNMA will take up the slack. We recently saw the CMT go away and we will soon have just the fixed product. Get used to it. If you want to see the future of the RM in the U.S. go down under to Australia. The RM is an insurance product, a financial product best understood by insurance companies and financial service companies (who was it that owned Financial Freedom 10 years ago?). Within 5 years FHA will not be needed and we had better be working for a major insurance/financial services company or have another source of income because they will control the production and ALL the distribution.

  • I wonder what percentage of the foreclosures due to non payment of taxes/insurance, were borrowers that opted for lump sum/term payment. At least with tenure, there would be a slight incentive to pay T&I so the payments could continue. Or, am I way off base?
    I agree with ashjon, there seems to be a bias towards “getting rid of the old clunkers”.

  • Not to be off topic, but above, lewishodgson wrote:rnrn”I have been Counseling for a little over two years and have noticed lately that the% of value to Principle Loan amount apears to have alredy dropped.”rnrnAfter two years of providing people with advice on this program for a living, Mr. Hodgson knows approximately nothing about the actual mechanics of the program. Anyone else see a problem with this? rnrnThis is a big part of the problem. Everyone who is making decisions about this program, from those in government making the rules, to people like Mr. Hodgson who is entrusted to determine suitability, is totally and utterly clueless! rnrnMr. Hodgson, what you have witnessed in terms of “the% of value to Principle Loan amount” is a function of interest rates. There are three things that contribute to the amount of money that can be received from a reverse mortgage: The home’s value, the expected interest rate, and the FHA loan limits.rnrnSHAME ON YOU, SHAME ON YOU, SHAME ON YOU for giving people advice without knowing the basics of the program you are advising on. SHAME ON YOU. rnrnrnrn

  • I wonder what percentage of the foreclosures due to non payment of taxes/insurance, were borrowers that opted for lump sum/term payment. At least with tenure, there would be a slight incentive to pay T&I so the payments could continue. Or, am I way off base? rnI agree with ashjon, there seems to be a bias towards “getting rid of the old clunkers”.

  • This has article has gotten a lot of attention.The original article really only offers a view of some in the industry towards the manner in which the government is handling the changes in the laws since last year that affect the HECM program. What we really need is to provide alternate solutions to the proposed bill. I will start first with a little bit of history for those who like to play the blaming game and then a proposal to keep the program without the subsidy while still helping our seniors.

    For those that want to understand the roots to how we got here I would recommend that you review the post in the following article:

    http://rmdaily.wpengine.com/2009/05/07/obam

    It all started when both AARP and NRMLA and the politicians agree to tranfer the HECM program from the GI fund to the MMI fund as part of the Housing and Economic Recovery Act of 2008 which also brought us higher max claim amount limits and capped orignation fees, among other things. According to the statute, sec 2118. MUTUAL MORTGAGE INSURANCE FUND, paragraph 4:

    ANNUAL INDEPENDENT ACTUARIAL STUDY- “The Secretary shall provide for an independent actuarial study of the Fund to be conducted annually, which shall analyze the financial position of the Fund. The Secretary shall submit a report annually to the Congress describing the results of such study and assessing the financial status of the Fund. The report shall recommend adjustments to underwriting standards, program participation, or premiums, if necessary, to ensure that the Fund remains financially sound”

    As you can see, the White House has no option but to report EACH year, the status of the fund. Since now the HECM program is under MMI then its shortfall is visible to everyone, especially congress. I dont recall that the GI fund had similar language or requirements. So if you want to blame someone then ask the question to the lobbyst and politicians who were involved in those negotiations. Like the saying goes: dont fix what it aint broken. Sometimes when negotiating a bill, you better know what you are getting into. Let this be a bitter lesson to those involved in the past legislation.

    Now as for the current bill: The HECM insurance program is based on a break even analysis (see the reference post) over the life of each loan statiscally speaking. My concern is that the proposed bill doesnt specify how the reduction or change in principal limit factor will be carried out. Is the change or reduction going to be applied as a fixed percentage change accross all age ranges, is it going to a function of the distrubion, by age, of existing population of HECM loans, or is a new floor going to be applied to the expected rate? Hmmm…. many questions. The devils are going to be in the implementation details. Each of these possible solutions would penalize a certaing segment of the borrowers depending on their needs.

    Now as for an alternate solution: Why not take a “balanced load approach”? That is, have a bi-model or hybrid approach where borrowers would have the choice of obtaining their loan with the reduced PL factors and the current MIP premium profile (2% of MCA Upfront + .5% periodic yearly ) or get obtain the loan with the existing PL factors at a modified (increased) MIP premium schedule. This way, the borrower has the choice of obtaining smaller loan proceeds with same closing cost profile as today or getting same loan proceeds as today with a corresponding higher premium costs. This way in fact you would eliminate the subsidy, keep the pools of propective borrowers intact (including HECM refis) and keep the relevance of the program. By the way, the same act of 2008 authorizes the Secretary of HUD to change the premiums accordingly as follows in paraghaph 6:

    “ADJUSTMENT OF PREMIUMS- If, pursuant to the independent actuarial study of the Fund required under paragraph (4), the Secretary determines that the Fund is not meeting the operational goals established under paragraph (7) or there is a substantial probability that the Fund will not maintain its established target subsidy rate, the Secretary may either make programmatic adjustments under this title as necessary to reduce the risk to the Fund, or make appropriate premium adjustments.”

    The above proposed solution will still involved the same and more, implementation issues than in the current bill but it will be a fair approach.

    Thus there you go, not just complaining about our government or our industry but suggesting solutions. NRMLA better get active and I mean ACTIVE about this bill if we want to keep helping our seniors.

  • This has article has gotten a lot of attention.The original article really only offers a view of some in the industry towards the manner in which the government is handling the changes in the laws since last year that affect the HECM program. What we really need is to provide alternate solutions to the proposed bill. I will start first with a little bit of history for those who like to play the blaming game and then a proposal to keep the program without the subsidy while still helping our seniors.rnrnFor those that want to understand the roots to how we got here I would recommend that you review the post in the following article:rnrnhttp://rmdaily.wpengine.com/2009/05/07/obama-administration-requests-798-million-to-aid-reverse-mortgage-program/rnrnIt all started when both AARP and NRMLA and the politicians agree to tranfer the HECM program from the GI fund to the MMI fund as part of the Housing and Economic Recovery Act of 2008 which also brought us higher max claim amount limits and capped orignation fees, among other things. According to the statute, sec 2118. MUTUAL MORTGAGE INSURANCE FUND, paragraph 4:rnrnANNUAL INDEPENDENT ACTUARIAL STUDY- “The Secretary shall provide for an independent actuarial study of the Fund to be conducted annually, which shall analyze the financial position of the Fund. The Secretary shall submit a report annually to the Congress describing the results of such study and assessing the financial status of the Fund. The report shall recommend adjustments to underwriting standards, program participation, or premiums, if necessary, to ensure that the Fund remains financially sound”rnrnAs you can see, the White House has no option but to report EACH year, the status of the fund. Since now the HECM program is under MMI then its shortfall is visible to everyone, especially congress. I dont recall that the GI fund had similar language or requirements. So if you want to blame someone then ask the question to the lobbyst and politicians who were involved in those negotiations. Like the saying goes: dont fix what it aint broken. Sometimes when negotiating a bill, you better know what you are getting into. Let this be a bitter lesson to those involved in the past legislation.rnrnNow as for the current bill: The HECM insurance program is based on a break even analysis (see the reference post) over the life of each loan statiscally speaking. My concern is that the proposed bill doesnt specify how the reduction or change in principal limit factor will be carried out. Is the change or reduction going to be applied as a fixed percentage change accross all age ranges, is it going to a function of the distrubion, by age, of existing population of HECM loans, or is a new floor going to be applied to the expected rate? Hmmm…. many questions. The devils are going to be in the implementation details. Each of these possible solutions would penalize a certaing segment of the borrowers depending on their needs.rnrnNow as for an alternate solution: Why not take a “balanced load approach”? That is, have a bi-model or hybrid approach where borrowers would have the choice of obtaining their loan with the reduced PL factors and the current MIP premium profile (2% of MCA Upfront + .5% periodic yearly ) or get obtain the loan with the existing PL factors at a modified (increased) MIP premium schedule. This way, the borrower has the choice of obtaining smaller loan proceeds with same closing cost profile as today or getting same loan proceeds as today with a corresponding higher premium costs. This way in fact you would eliminate the subsidy, keep the pools of propective borrowers intact (including HECM refis) and keep the relevance of the program. By the way, the same act of 2008 authorizes the Secretary of HUD to change the premiums accordingly as follows in paraghaph 6:rnrn”ADJUSTMENT OF PREMIUMS- If, pursuant to the independent actuarial study of the Fund required under paragraph (4), the Secretary determines that the Fund is not meeting the operational goals established under paragraph (7) or there is a substantial probability that the Fund will not maintain its established target subsidy rate, the Secretary may either make programmatic adjustments under this title as necessary to reduce the risk to the Fund, or make appropriate premium adjustments.”rnrnThe above proposed solution will still involved the same and more, implementation issues than in the current bill but it will be a fair approach.rnrnThus there you go, not just complaining about our government or our industry but suggesting solutions. NRMLA better get active and I mean ACTIVE about this bill if we want to keep helping our seniors. rnrn

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