HUD OIG Reiterates Faith in Reverse Mortgage Program

During the “Keeping HECMs Honest – The Inspector General’s Point of View,” session at the National Reverse Mortgage Lenders Association Annual Conference in San Diego last week, Assistant Special Agent in Charge, Office of the Inspector General (OIG), U.S. Department of Housing and Urban Development (HUD), Michael Stolworthy, explained the role of the OIG and what the task force investigating mortgage fraud was looking for.

OIG is the law enforcement branch of HUD, with the authority to make arrests and execute search warrants. With the FHA now having a 30% market share in the mortgage market, with over 5.5 million mortgages with a total insurance in force of $696 billion dollars, single-family mortgage investigations are a priority for HUD and the OIG. To this extent, the National Mortgage Fraud Team (NMFT) was created in December 2008.

Stolworthy made a point of pointing out that the NMFT is pulling out and examining all early defaults and early claims, financial institution complaints and information, and all HECM cash outs. He also pointed out that the cash outs were being investigated because one of the leading indicators of fraud is that all the money is taken out up front. However, after being informed that the fixed rate reverse mortgage product requires all the money to be taken out up front, Stolworthy noted that he would keep that in mind.

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The NMFT is looking for commonalities, where the same appraisers and lenders are popping up repeatedly. In one case involving the forward mortgage industry cited by Stolworthy, the same appraiser appeared 4400 times in suspected files.

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  • The potential for fraud is far more prevalent where all remaining proceeds are required to be taken at closing than when proceeds can be left in a guaranteed line of credit or paid out as tenure payments. What difference does it make if the HECM is open or closed end? Reminding the OIG representative that we have closed end HECMs not only sounds childish but also makes us look fiscally unaware.

    Seniors are much more at risk of making bad decisions when they must take all of the proceeds and invest them to offset the accruing interest on their HECMs and to mitigate shrinking their overall estate. Many feel under mounting pressure to accomplish this. If we will not acknowledge the higher risk for what it is then it is time for the OIG to monitor the situation for us.

    Some of those who designed closed end HECMs want us to believe that there is no greater risk to seniors in having a closed end versus an open end HECM but that is utter nonsense. If the “investment savvy” middle aged were ill prepared from keeping their 401Ks from becoming 200.5Es, how will the majority of seniors fare in volatile markets? ERISA has mandated minimum investment education rules for all qualified plan participants but little good did that do in the current investment market environment.

    While the closed end HECM is a godsend for those who need the vast majority of their proceeds to bail themselves out of a devastating forward mortgage, the opposite is true for seniors who only need a small percentage of their proceeds and are in undetected investment decision skill decline. Cross selling is not an evil practice in itself but it is a repugnant practice when the customer is in the age range of declining investment making decisions skills combined with little experience in such matters.

    A fixed rate mini HECM would be a welcome addition especially if it lowers MIP costs.

    • It would be nice to see innovative products come out. I would especially like to see a product with only tenure. A product that lowers the interest rate if the interest is paid each year, would also be nice. And any strategy to lower the MIP is welcome.

      • Either you are financially savvy or you are a senior? Maybe you are both?

        Please explain your tenure only idea. The adjustable rate HECMs already provide a tenure option. Are you looking for that option in a fixed rate product? Why would it need to be tenure only?

        Why would the interest have to be paid each year? Why not make the test at the end of every 48 months instead? Of course this really means that all of the accrued MIP and servicing fees would have to be paid off as well. Esssentially the loan could only grow between measuring dates by the amount of proceeds taken. It should also be required that the test by for any three month period within the 48 month period.

        I do not know how it could be justified to lower the MIP. It certainly could be restructured to shift more of the cost on those who have higher percentage loan balances to the maximum claim amount. Hopefully the new risk management outlook at HUD will spark some change in the MIP structure.

      • (1) Tenure only would silence some of the critics (not McCaskill) that see the RM as a honey pot for crooks and sleazy insurance people.
        (2) I am an insurance guy and I like reliable monthly income for clients and personally, and yes I am a senior with a coop.
        (3) I read somewhere that tenure and LOC people have a lower rate of default, or whatever, and hence don't use up as much of the MIP reserve as lump-sum payout RMs.
        (4) The Canadian product (Chips) in an above topic, says they will give a lower interest rate for those paying their interest each year.
        So at least in that product I guess you need to pay in each year.
        (5) As mentioned by Mr. Veale, in the Chips article comments, the opportunity to do tax-deduction bunching is available, even now.

    • I am sure that is the general situation. But there also could be a broader market out there if more people felt that the RM had reasonable fees/costs versus potential benefits. If a product designed for the more affluent to release equity for financial/estate planning purposes was available, I think it would find a niche market. And there are plenty of “financial planners” out there. Unfortunately, there are also many crooks, so perhaps better controls, not necessarily more regulations, could change the erroneous perception many regulators and planners have of the industry.

  • There is one obvious (to me) way to lower MIP but is less broad, now, with the uniform 625,500 max claim amount. Why is the premium the same for a home valued at $800K as it is for a home valued $625.5K? Which loan, on its' face, has more risk?? The same premium for a house valued at 78% of the other house? We would all be certain their Home Owners Insurance premiums are not identical.

    There should be a calculation done of max claim/appraised value and the corresponding percentage applied to both the initial premium as well as the annual.

    In this example, the initial MIP be would .78 x 2.00,
    or 1.56% = $9,757.80 and the annual would be .78 x .50=
    .39%.

    Or, if home is valued at 1,251,000 (2x max claim amount) the first year premium would be 1% and the annual would be .25%

    And yes, I addressed it in the first line of this post, it was much more of an issue when you had the much lower county limits, but the “fairness doctrine” should apply at any home value above the max claim amount, whatever the max claim amount ends up to be.

    Unless the HECM is really a “social program” designed strictly for lower income/lower net worth individuals……..or to overweight risk cost to higher nnet worth individuals?…hmmm??

  • The elephant in the livingroom is the increase in originations of fixed rate HECM's. I believe the yield spread is a major factor.
    If these loans were investigated I believe there would be a large number of seniors who didn't need all the funds up front but were the prey of greedy mortgage brokers being paid on the back end.
    The YSP needs to be eliminated and quick before this industry gets another black eye!

    • treverse – You are blaming mortgage brokers for being greedy by pushing people into fixed rates. Do you have factual evidence that their originations are comprised of a higher percentage of fixed rate HECMs than non-brokers?

      What about the non-brokers (banks and mortgage bankers closing on warehouse lines) that earn significantly higher YSP than a broker on both fixed and ARM HECMs, and are not required to disclose it to anyone.

      Eliminating YSP to brokers will significantly reduce competition for banks and mortgage bankers. This will hurt homeowners by allowing them to charge higher fees and rates than they already do, while continuing to collect undisclosed YSP that will increase with higher rates.

      By allowing wholesalers to share in their back-end revenue and provide brokers with YSP, brokers are able to reduce origination and servicing fees, offer choices to consumers, and bring significant value to seniors and society.

      Homeowners should only withdraw the cash that they need in order to avoid unnecessary interest charges, so fixed rates are not a good choice for everyone.

    • You are accusing brokers of being greedy by pushing homeowners into fixed rates and thereby earning YSP.

      What about the non-brokers (banks and mortgage bankers closing on warehouse lines)? They earn significantly higher YSPs than brokers on both fixed and ARM HECMs, and are NOT REQUIRED TO DISCLOSE IT to anyone. Do you have evidence that non-brokers originate a lower percentage of fixed rate HECMs than brokers?

      Eliminating YSP to brokers will significantly reduce competition for non-brokers. This will allow the banks to charge higher fees and rates than they already do, while collecting even higher YSP due to higher rates.

      By wholesalers sharing some of their back-end revenues with brokers in the form of YSP, brokers are able to offer lower origination and servicing fees (and sometimes lower rates)than non-brokers. Brokers help to ensure a healthy competitive business landscrape. Their existence improves service levels and lowers costs, and brings significant value to homeowners and society.

      Homeowners should generally withdraw only the cash they need from a reverse mortgage, so fixed rates are not the best choice for everyone.

  • lancejackson,

    Sorry to make a blanket statement about all mortgage brokers. The only thing I can go on are the seniors I have come across who were comparison shopping.

    Since Met life initiated the fixed rate I have pesonally met with several seniors who were being steered towards a fixed rate when they were the inappopriate product.

    In each case it was by a mortgage broker. If I personally came across that many I can only wonder about how many are being done. In conclusion the only reason would be the money earned on the back end. You would be naive in thinking this is not going on.

    If not discontinuig the YSP another review or safeguard has to be put in place on the fixed rate product to insure it is the correct option. Possibly a disclosure signed by the borrower during counseling as to why they are taking the entire amount.

    • It sounds like you have some competition in your marketplace. While it would be easier for all of us without competition, it's good for homeowners.

      There may be some salespeople that steer borrowers towards fixed rates when an ARM may be better, but if that is occuring it certainly isn't limited to brokers. What does the struture of the business have to do with that?

      As some of the readers have stated below, there are several reasons why a homeowner might select a fixed rate over an ARM. Defining “correct option” is impossible.

      The amortization schedule for a fixed rate HECM (that all applicants must sign)clearly shows the rate at which equity is consumed by interest. The amortization schedule for an ARM applicant isn't as accurate, since it is often unknown when advances will be made and the interest rate may increase. For this reason, disclosure on a fixed HECM is already much better than on an ARM without any added forms. Applicants know exactly what their loan balance will do over time.

  • YSP needs to be eliminated?? Greedy Mortgage brokers? Did someone let Senator McCaskill in here?
    Try out the fact that most seniors are scared of adjustable rates because of all the news about them being the root of the mortgage crisis as well as the risk of them going as high as 13% and that the difference in the money they are eligible for between the 2 is substantial.
    Why is it that the originators are always the ones blamed for everything? I am not against looking into the numbers, but lets actually SEE them before we throw the baby out with the bath water!

  • On the fixed rate the client, without penalty, could “dump, pay back, return” any unwanted funds to the lender the day after receiving the money-

    Also, at this point, every loan I do is a fixed rate BUT I tell the client about fixed AND variable and THEY choose fixed because it allows for a larger loan AND they want a FIXED rate instead of a variable rate.

    • Mark,

      If the senior attempts to save costs by paying back proceeds, what does the senior do (if and) when more more funds are needed? That is why fixed rate HECMs are classified as closed end. They will need to get a new HECM with additional upfront costs. Not a great situation.

      In 2008, we did many adjustable rate HECMs. After a year and one-half, many are still accruing interest at less than 2%. Several of them have annual rate HECMs and are accruing interest at less than 3% (and some slightly more). The latter group will never see their rates exceed 8.5% and in some cases less.

      Too many overlook the annual rate HECM as a reasonable compromise. Most borrowers who take this option do not need even 50% of the proceeds over the next five years and by then, they will have more proceeds available in their line of credit. I think more originators need to spend more time with the seniors looking into their options rather than taking the easiest route to a HECM.

  • The_Critic

    Yes, I am familiar with the closed ended Fixed rate HECM. I only offered that info in regards to this statement

    “Seniors are much more at risk of making bad decisions when they must take all of the proceeds and invest them to offset the accruing interest on their HECMs and to mitigate shrinking their overall estate.”

    just giving another option, and yes, I explain to the senior that if they do deposit unwanted funds back in to the equity of their home and then need that money later on, that they will need to refinance. Ultimetly it is up to them. I don't try to be a financial advisor when I am counseling them. I believe that it is my job to make sure that they understand exactly how this loan works, both fixed and adjustable, all of the benefits, so that they can make a decision on what is best for them.

    I should also clarify, all of the loans that I am doing now and in the last 6 month have been the fixed rate due to the senior choosing that plan, in all of 2008 every loan I did was the adjustable rate. Each one provided the greatest principal limit for the customer and due to their choices I would say that maximizing their loan amount was their greatest priority. Of course over 70% I would say would have had to bring money to close had they chosen any loan but the one with the greatest pricipal limit.

    • Mark,

      You paint a picture many of us know by experience. Like you, I really wish seniors had other practical solutions but we play the hand we are dealt without becoming what we aren't — financial advisors.

  • Mark,rnrnYou paint a picture many of us know by experience. Like you, I really wish seniors had other practical solutions but we play the hand we are dealt without becoming what we aren’t — financial advisors.

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