Reverse Mortgage Legislation Update: April 8, 2010

Although Congress remains in recess over their Easter break this week, that doesn’t mean it has been a dull week in the reverse mortgage world.

A study by First American CoreLogic indicates that “underwater” borrowers may remain that way for longer than previously thought. While some had speculated that home values would rise in the next few years, the study indicates that it could take until late 2015 or early 2016 for the typical underwater borrower to have positive home equity. Even worse, some of the nation’s hardest hit markets could take even longer to return to positive equity. The report, which examined 10 real estate markets across the country, did not expect the typical Detroit homeowner to have positive home equity until 2020.

Former Federal Reserve Chairman Alan Greenspan testified in front of the Financial Crisis Inquiry Committee today (FCIC). His testimony came in the first of three panels during the first of three days of testimony into “Subprime Lending and Securitization and Government-Sponsored Enterprises.” Greenspan’s remarks contain some interesting comments on the future of the financial system. He writes:

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In closing, let me reiterate that the fundamental lesson of this crisis is that, given the complexity of the division of labor required of modern global economies, we need highly innovative financial systems to assure the proper functioning of those economies. But while, fortunately, much financial innovation is successful, much is not. And it is not possible in advance to discern the degree of future success of each innovation. Only adequate capital and collateral can resolve this dilemma.

Greenspan also noted that the Federal Reserve is not an enforcement agency, but a rule-making agency. It cannot implement the kinds of reforms HUD could implement. Finally, he added that the “extraordinary changes” in the marketplace as well as the actions of Fannie Mae and Freddie Mac prevented the actions taken by the Fed to prevent the crisis from being effective.

The Federal Reserve also stopped purchasing mortgage securities on March 31, the end of a $1.25 trillion program and its largest effort to prop up the American economy. The program had been credited with helping keep mortgage rates low and slowing the decline in home prices.

Finally, Florida’s proposed reverse mortgage bill, SB 1532, passed the Florida Senate by a unanimous vote and now waits to be considered by the House of Representatives. The House version of the Bill, HB 845, is on the agenda to be reviewed by the Policy Committee on Friday.

Written by Reva Minkoff

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  • Reva highlights the difficulty of looking at home appreciation on a national level. Real estate markets are local. The HECM principal limits and thus originations are being horribly hampered by a national approach.

    To offer the same HECM product to a home owner in Detroit is hardly the same risk as offering one to a home owner in San Francisco. A hundred thousand dollar loss on one home must be offset by the premiums of several homes which suffer no loss at termination — just for FHA to break even.

    Lowering the principal limits on all deals does not provide any more revenue to FHA with which to lower the risk of loss on any homes other than those which FHA would otherwise lose money on. It certainly adds no additional revenues for homes which would have suffered no loss to begin with.

    What would be far more effective would be to lower principal limits in those areas where risk is greatest and retain principal limits at higher levels where it is likely that risk of loss is reasonably low. The number of originations in the less risky areas should be higher, providing more premiums to the program while risk of loss in the markets where loss is more likely, would be less. This would require some additional analysis but would be far more effective than the situation we are all experiencing.

    The HECM program was intentionally designed to ignore risk on a market-by-market basis but maybe it is time that it is redesigned to take risk on this basis into consideration. While the HECM program was classified in the General Insurance Fund category, the present system was far more reasonable. When the program shifted into the Mutual Mortgage Insurance Fund category, the underlying financial support for the program shifted from the government to the insurance program itself. This Congressionally mandated shift should have resulted in a fundamental change in the manner that FHA looks at risk but so far, only OMB has adjusted its risk assessment approach but unfortunately that approach is detrimental to all seniors in all real estate markets, a miserable result.

  • The problem of negative equity highlights the need for training in this area and publicity at a nation level of the plight of senior homeowners facing foreclosure and how the reverse mortgage saved their homes. In the last year I have saved numerous senior homeowners from foreclosure by negotiating principle reductions. All of the knowledge I have gained came from trial and error. Unfortunately there was no manual to reference or guru to consult. Many loan officers I have spoken with have expressed the same frustration in trying to negotiated principle reductions. We are like midlevel warlords all trying to protect our turf. We need a way to share our knowledge with one another and get the word out to homeowners that this is a viable option to avoid foreclosure. The largest obstacle I have faced is convincing homeowners this is legitimate. The support of NRMLA would be helpful. If you want to present the reverse mortgage industry in positive light testimonials from senior homeowners that were saved from foreclosure would be the way to do it. We can take the issue of negative equity and turn this into a positive provided we get the support from the reverse mortgage industry at a national level and help each other avoid the pitfalls associated in trying to get the lenders to reduce the principle balance.

    • gciungan,

      It is one thing to get a lender to write down a loan to the market value of the home. It is totally another to get the lender to agree to write off positive equity (except to the extent of the loss that would be incurred in a foreclosure) that would otherwise be due them. Who can blame them?

      For example, if the home is worth $350,000 and the amount due is $425,000, it is one thing to get them to agree to a $75,000 writedown which they have probably already been forced to write this loan down to. But then turning around and asking them to only accept $200,000 in net proceeds from a HECM is a whole separate proposition. That would require an additional $150,000 more in writedowns.

      If you could demonstrate that they would lose the $150,000 in foreclosure anyway, that is one thing but if you can't what is their motivation? If the expected additional loss due to a foreclosure would be $60,000 in foreclosure and other costs, then you are asking the lender to writeoff $90,000 beyond the loss that was anticipated. How can that be justified?

      Yeah it is for a senior. Another writeoff might be for a young widow with small children, another to an unemployed auto mechanic with 5 kids, etc., etc. If I were a shareholder, I would find the $90,000 a difficult result to swallow. As the queen of hearts would say, “Off with their heads” or some other trite statement.

      Last I checked, lenders are not in the business of giving away loan proceeds to borrowers. Lenders also have fiduciary responsibilities to their shareholders.

      But I agree we should still try!!!!

  • gciungan,rnrnIt is one thing to get a lender to write down a loan to the market value of the home. It is totally another to get the lender to agree to write off positive equity (except to the extent of the loss that would be incurred in a foreclosure) that would otherwise be due them. Who can blame them?rnrnFor example, if the home is worth $350,000 and the amount due is $425,000, it is one thing to get them to agree to a $75,000 writedown which they have probably already been forced to write this loan down to. But then turning around and asking them to only accept $200,000 in net proceeds from a HECM is a whole separate proposition. That would require an additional $150,000 more in writedowns.rnrnIf you could demonstrate that they would lose the $150,000 in foreclosure anyway, that is one thing but if you can’t what is their motivation? If the expected additional loss due to a foreclosure would be $60,000 in foreclosure and other costs, then you are asking the lender to writeoff $90,000 beyond the loss that was anticipated. How can that be justified?rnrnYeah it is for a senior. Another writeoff might be for a young widow with small children, another to an unemployed auto mechanic with 5 kids, etc., etc. If I were a shareholder, I would find the $90,000 a difficult result to swallow. As the queen of hearts would say, “Off with their heads” or some other trite statement. rn rnLast I checked, lenders are not in the business of giving away loan proceeds to borrowers. Lenders also have fiduciary responsibilities to their shareholders.rnrnBut I agree we should still try!!!!rnrnrn

  • gciungan reply to The_Critic

    I agree the lenders have a fiduciary to their shareholders. The senior homeowners I work with all are in eminent default. For the foreclosing investor it comes down to where they will net the most amount of money. For the short payoffs that were approved I was always able to net the investor more money than they would receive by selling the home as an REO.

    It is a win-win for everyone involved.

  • gciungan reply to The_CriticrnrnI agree the lenders have a fiduciary to their shareholders. The senior homeowners I work with all are in eminent default. For the foreclosing investor it comes down to where they will net the most amount of money. For the short payoffs that were approved I was always able to net the investor more money than they would receive by selling the home as an REO.rnrnIt is a win-win for everyone involved.rn

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