Principal Limit Reductions Force Reverse Mortgage Lenders to Innovate

As reverse mortgage volume continues to slide and the possibility of another principal limit reduction in October, reverse mortgage lenders have been forced to innovate and bring down costs to ensure seniors have access to the HECM program.

The drop in home values across the country has played a big role in the decline in volume, but the principal limit reduction from last year hurt even more. “I don’t think many people understood exactly what the impact of the 10% principal limit factor cut was going to be, but it certainly has been much worse than most of us thought,” said Craig Corn, Vice President of MetLife Home Loans.

For the first quarter of 2010, overall volume fell 32% versus Q1-09 and if the industry experiences another principal limit reduction there is little doubt we will see an uptick in volume anytime soon. During March volume slid even further to 5,822 units, down 17% from February and the lowest month since December 2006 according to Reverse Market Insight.

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Luckily for the industry, interest from investors in Ginnie Mae’s HMBS has drastically improved the secondary market execution for lenders. Issuance of HMBS was up over 600% in 2009 and a new report from Barlcays Capital said it expects to see even greater investor interest as the demographics from the demand side remain very favorable considering how quickly the US population is aging.

This increased interest has allowed lenders to offset some of the pain from the principal limit reductions by eliminating the servicing and sometimes origination fee for the first time in the 20 year history of the program. “By increasing how much older Americans can receive in proceeds, at a lower cost, we have likely increased the number of older Americans who can now qualify for a HECM, and also improved the value proposition of the HECM product,” said Corn. “Hopefully, these changes will result in more older Americans considering the product.”

The increased competition among lenders has helped to drive down the costs of the loans and while it doesn’t cancel out the principal limit reduction, it certainly helps. The changes have also generated some positive coverage from the media, specifically the New York Times and Wall Street Journal, who both reported on how lenders are lowering costs for borrowers.

The changes have been well received by the US Department of Housing and Urban Development as well. “You as an industry have taken it upon yourselves, to help drive the costs of the program down,” said Erica Jessup, HECM Program Specialist at HUD during her speech at the National Reverse Mortgage Lenders Association Road Show in Philadelphia. She told attendees that lenders lowering margins and Bank of America’s decision to pay half of the MIP for the borrowers are, “all positive signs and is the direction we want to go in.”

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  • Critic,rnrnI know this is a little late but I never said that HUD literally removed the subsidy request. I said “in essence” which meant that by applying the PL reduction there was no need for the subsidy. Subsidies are very unpopular in congress and the sad reality is that if a susidy is requested for a program such as the HECM the request most likely would not be granted. I agree that congress would not support subsidies, but I also see that HUD would not risk the program either.rnI hope that not all you read in my comments is frustration. I would like to think that I contribute at least different ideas and from a different background.rnrnThe $10k reduction is not proactive at all, it just a result of competition and supply and demand between origination and secondary markets. The good PR happens to be a “spinoff”. If and when interest rates go up, then lets see if we get the same type of positive coverage. I guess my definition of proactive is different than yours.As far as new ideas, well that is is a job for NRMLA and the lobbying organizations. I do have a few ideas but would not want to post openly in a forum.rnLets us just agree to disagree.

  • Abel Torres,rnrnThe current Congress is the 111th Congress. There are two open bills named HR 3288. The House passed its version in July 2009 and the Senate in September 2009. The Senate version provides some HECM subsidy; the House, none. The two versions of HR 3288 were NEVER reconciled because of the time involved in Health Care Bills. That is why to this day, HUD operates on Continuing Resolutions rather than under HR 3288.rnrnHUD never removed the subsidy request. Where do you get that from? Even though they have never relinquished their request, they never received it so how can they act as if they did? They did not receive anything nor do they have the expectation of receiving any!! HUD merely made the appropriate and prudent decision based on the Continuing Resolutions they are operating on.rnrnI was also a civil servant many years ago. Yes, there is a real significance to the issue over whether HUD supports subsidies. It is Congress who would not support it last year. Both HUD and the Administration have supported it last year and to a much lesser extent this year.rnrnDefending one’s self is a reactive position by definition. Proactive means taking steps before one is in a defensive posture or a very offensive position while in a defensive one. If you saw the members of Goldman Sachs facing a mild Congressional reaction, I do not know how you can equate it to a “proactive” posture.rnrnMr. Torres, all I read in your comment is frustration. You do not describe in detail any proactive measures you want to see implanted. Yet you complain about NRMLA.rnrnQuite frankly the $10K reduction per loan is a proactive measure. It is also good PR for the industry. Just look at the positive press reaction from the WSJ and the NYT. I think they provide a pretty good measure of the positive impact these moves have been for our industry. You have every right to disagree and should if you feel otherwise.rnrnrn

  • Critic,rnrnYou are saying that there would not have been any HECM subsidy in HR 3288. Assuming that was the case, then why did HUD take the step to, in essence, remove the subsidy request from the budget by applying the PL reduction?? The viable answers are that either the administration ordered HUD to apply the change or that the Secretary of HUD acted independently to exercise its righ as is writen on the statute. Bottom line is that whoever was the decision maker did not agree with your conclusion (for the right or wrong reasons). Being myself a civil servant in the past, I wouldnt be surprised if it was a combination of both. It really doesnt matter now, doesnt it? The damage was done and we all have to deal with the consequences.rnAs for my comments about reactive vs proactive I would say I dont necessarily agree with your presumption that the banking industry is “reactive”.I wasnt referring to the banking industry at large, rather at the small part of the industry represented by NRMLA. Take a good look at the financial reform battle going on and see what kind of effort has been invested by the banking/financial industry to defend itself. This is not reactive at all, it is pretty good proactive effort. One thing that I dont understand as well, how come it was so difficult for NRMLA to get a perhaps a few dollars per loan to organize a good campaign and pay for a good study to counteract the assumptions made by the administration in the quest to put a subsidy on the budget, and now we see the industry giving away almost $10k per loan??? Talk about reactive vs proactive!!! Dont get me wrong it is a great deal for the borrower albeit the price paid with the PL reduction.rnBottom line is that we need results! It doesnt matter how much insider info is available. If no actions are taken then we will see defeat after defeat in the horizon.

  • Mr. Torres,rnrnA u201cnormal costu201d of a HECM is FHA MIP. Please note interest is one of the last costs that I stated will be reduced although some lenders have already dropped their interest rates to 4.99% rather than reducing FHA MIP.rnrnYes, we are all aware that markets are dynamic and like Treasury Notes, HECM MBS resale prices will vary over the time based on market conditions. And, yes, HECM MBS prices have their unique price issues. Relatively free markets will adjust prices for various factors, like ours do right now.rnrnWhile NYC has a high population concentration, the highest proportion of volume in HECMs to the local general population are concentrated in regions of two states much further south than NYC. There is little question from a pure risk analysis viewpoint that the drop in home values in the states where HECMs are most highly concentrated in volume and balances due (on a trend basis) should have a weighted impact on HECM risk analysis.rnrnYour points on regional home value issues are well taken. That is why the validity of the use of national demographics and criteria has to be questioned when HECM origination is concentrated in some markets more than others.rnrnWe are all too familiar with the problems that lower proceeds have presented us. Those who are not, are not aware of market conditions. However, there is also the case where proceeds are abundantly greater especially for current appraised values above $530,000 where the related HECM was funded before ARRA was enacted in February 2009; however, depending on the date of funding, the value could be much lower.rnrnNow as to Congress, we totally disagree. Even in reconciliation Congress could have provided full subsidy. If they had fully funded the subsidy before October 1, 2009, HUD would not have reduced principal limits after September 30, 2009. As I stated in an article published by RMD entitled u201cDonu2019t Blame HUD,u201d I did not and do not believe there was any chance for any substantial subsidy in reconciliation. In fact there has been no reconciliation of HR 3288. rnrnComplaining about the reactive nature of the industry may be instructive but hardly fruitful. After all, mortgage lending is generally viewed as part of the banking industry which in most cases is notoriously reactive. While the engineering industry may be more proactive, generally bankers are less so. But as stated, that is a matter of opinion and some believe the industry should remain primarily reactive.rn

  • Mr Veale,rnrnI am not sure if I follow some of your comments.rn”If all normal costs other than interest are being borne by the lender, reducing interest rates is the obvious next choice” –> Although this is true for the forward mortgage market, for the reverse HMBS lowering interest rates increases interest risk significantly, especially when you consider the macro economic environment of today (ie, the recession is technically over, demand for commodities and services is starting to pickup, at which point the feds will have to consider an interest rate hike to curb inflation). If that happens then these HMBS generated with lower interest rates will have a diminished value as this type of investment (fixed interest rate) does not have inflation protection (unlike the adjustable rate notes). This why you see an diminished upb on the lowest rate fixed rates. I would expect to rather see the lenders eliminating cost (MIP) elsewhere before touching the rates further more since this will affect the demand on the secondary market side.rnrnAs for your comments on Refis: I agree that this is a highely geographic and even demographic dependent problem and perhaps I should have phrased my observation differently. No doubt that in states like California, Nevada and Florida the home devaluation of the last 2 years is even a major driver, even more than the 10% reduction in PL. However, in the New York city area, we havent seen that type of drop in property values and in this case the 10% PL has been a stronger deterrant to refis. If you look at the numbers and talk to the top LO’s here, many were making a nice living on refis and since the 10% reduction went into affect the volume has dropped to almost nothing. I would say that if home devaluation was the primary culprit you would have seen a decrease before since this property value decline has been going on for the last 2 yrs and the decrease in volume has been observed only for the past few months. I would say that for refis to happen the borrower originated the original loan way back when the MCA county limits were lower than todays home values and the borrower either had a ternure or term payment or had a significant loc which had to be used rather quickly at some recent point. Here in NYC the pl reduction resulted in bet $20k-40k reduction in proceeds and for the folks who had max out in their current loans and needed the money, it was a devasting blow (the deal would have worked with the old pl and not the new pl).rnrnAs for your comments on HUD, I think we do agree on the fact that it was the OMB that came out with the subsidy numbers initially. What I said is that HUD had no choice but to make the changes in PL as the statute stipulates, otherwise, the program would have been at the mercy of congress (even with a reconciliation bill there would have been the need for a subsidy which would have resulted in scaleback or elimination of the program). rnAs for the NRMLA comments: The association has been operating in a reactive mode for a long time. Even if they had discussions about it, what was done about it???rnWe need a more proactive approach and we are seeing some of that now, albeit a little too late. However something proactive could have been done, for example: our industry has been battered in the press for the loans being too costly for the last few years. Why wasnt some of the measures used today (no orig fee and ssaf) not implemented say after GNMAE started the HMBS. That would have been innovation and would have given credit to the industry. Obviously the margins were there to do this at the time. Unfortunately, it took an economic trigger (lower demand on the origination side) for this benefit to happen to the borrower and thus the industry is still on a reactive mode (both politically and economically) and political capital can not be realized (ie voluntary reduction in cost issued by the lenders to help borrower type of comments). You do see the articles now in the ny times and wall street journal but it would have been better to be an initiative coming from the industry at one of the best times to do such a thing.rnPerhaps I will attend this year. I was tempted to attend last year. Thanks for the sugestion.

  • Mr. Torres,rnrnWhile you make some interesting observations, there are several that also do not seem to be born out by the current environment. rnrnIf all normal costs other than interest are being borne by the lender, reducing interest rates is the obvious next choice. This is nothing new. As you know it has been done in the forward mortgage world for some time.rnrnSeveral lenders are offering lower fixed rate HECM note interest rates as an alternative to lower upfront costs and no reductions to principal limits for servicing fee set asides. The latter option is there for those who need or just want higher net principal limits and those who are adverse to higher upfront or ongoing costs. If nothing else good comes from this period of lower principal limits, this may be THE one good that comes out of a very poor decision on the part of OMB. As to the HECM market these are innovations; however, we saw no upfront cost reverse mortgages in the proprietary reverse mortgage product side a few years ago.rnrnHECM-to-HECM refis are very viable in certain segments. The real problem for HECM-to-HECM refis is property values are in most cases flat or still falling. It does not seem to be the 10% principal limit reduction that is the culprit but rather home appreciation rates. If home values were near their historical averages in their respective real estate markets, many homeowners with HECMs would be refinancing by now. It is depressed home values that keep HECM-to-HECM refis so low.rnrnFor example, as to pockets of activity, yesterday a daugher of an 88 year old woman called because they needed more cash. Her home was appraised in late 2008 at $1.2 million but the lending limit at the time her mother acquired a HECM was $417K. She was thrilled when I let her know that she could get a refi with over $100K in additional net proceeds at a much lower upfront cost and no servicing fee set aside. There are pockets of refi activity as attested to by the recent HECM-to-HECM refi application numbers.rnrnIn my area in California historical home appreciation rates for the last sixty years still hover at over 6% on an annually compounded basis. If we had experienced anything near those rates over the last two years, we would begin seeing HECM-to-HECM refis at near record levels in a year or two. Even if principal limits returned to their pre October 1, 2009 levels tomorrow, HECM-to-HECM refis would not be substantially higher in our market than they are right now. rnrnAs to your observation about the timing of the warning about the 10% principal limit reduction, it was openly being discussed at the NRMLA Policy Meeting in DC last June. NRMLA was gathering estimates of the impact lower principal limits would have from various lenders at that time. There were rumors last summer that one major lender was already writing software to reflect the 10% reduction.rnrnI fully disagree with your depiction of HUD as having any real choice as to the 10% reduction. By late July 2009 the House had already passed a bill (HR 3288) that provided no subsidy and requiring that the principal limits be adjusted accordingly. The Senate passed its version of HR 3288 in mid September 2009, with a partial subsidy but still demanded adjustments to the principal limits to absorb the difference. If Congress had provided a full subsidy, HUD would not have adjusted the principal limits at all. The real issue is, why was there an indicated positive credit subsidy to begin with? That was an OMB decision and only an OMB decision as attested to at the NRMLA Policy Conference last year and as reported by the GAO last July on page 31 of its GAO-09-836 report.rnrnAs to insight into the HECM budget process the NRMLA Policy Conference last year was second to none. You really should try to attend it this year.rnrnrn rnrn

  • Mr. Jackson,rnrnI also believe there is now room in the market for a full fee, full reduction fixed rate HECM at a lower note interest rate and one with less fees at a higher rate. It would be good for the industry especially when dealing with seniors who have a strong aversion to higher upfront costs. I do not believe it hurts lenders to offer two such products.

  • I am glad to finally see a post addressing some of the underlaying causes of the recent trend in the RM market.rnIn my opinion the original post could have expanded on some of the cause/effect of the changes that have been made over the last year:rnrnMr. Corn indicates in the article that not that many people knew or understood the impact of the 10% reduction in PL. I would say we saw this coming last year see this post:rnhttp://rmdaily.wpengine.com/2009/12/03/fha-management-report-shows-414-million-positive-value-for-hecm-program/#comment-25148244rnrnThere is no doubt that the Administration decided that a reduction in risk in the FHA portfolio (for RMs) was needed and the best way was to ask for a subsidy but FHA rather took the action to reduce the PL instead of risking the whole program. However, the unintended law of consequences applies here: In any of the studies presented by FHA or the OMB, there was no mention of the negative impact on the projected demand for the product as a result of the PL reduction. In fact, had they considered the reduction in the projected demand as one of the variables in the stress test, I would say that not such a high PL reduction was needed BECAUSE the subsequent reduction of loan volume indeeeds reduces the size of the potential losses in the portfolio (this in fact is what FNMAE did when they increased the margins on the adjustable product a while back). Now the question is: with the reduced volume currently in place, is the FHA portfolio still under such a high risk exposure that it warrants a further PL reduction and increased periodic MIP???? I dont think so if the analyis is done correctly.rnThe other consequence (unintended or not) is that unlike the case in the past with FNMAE being the single investor of the product, now you have GNMAE and their federally backed HMBS with a tremendous demand on the secondary market (after all where else do you find such a nice deal now a days???). So it is not that lenders are “innovating”, it is rather a simple supply and demand curve issue. A huge demand on the secondary market coupled with a reduced supply on the origination side and there is no other choice (this analogous to the situation when troubled municipalities or corporations keep increasing the yield on their bonds to attract investors to keep there revenues going in spite of the higher borrowing cost) than to decrease the cost to the borrower. This last consequence I dont think the Administration saw comming, is that in reality what is being attempted to do is to mitigate the lack of demand of the product which in fact does mitigage the reduction of volume of loans, hence not reducing (as much) the risk to the FHA portfolio as originally intended. It is a balancing act. You can also say that yes, there is a great reduction in borrowers cost of a RM, but at what price? The borrower is still getting less money than if there had been no PL reduction (even with the no closing cost except for MIP option with current PL), plus HECM to HECM refiancing is not longer viable and there are quite a few folks who could have benefited with a HECM refi. So even on the outside it may politically look great, it may not necessarily be a great solution.rnAnother question: if the trend continues would we see enough upb compensation eliminating the complete MIP?? There is no question that reducing the PL makes the product much less risk adverse to the secondary market investor so if there is a second PL reduction then I can see the MIP being paid by the lenders to keep the business going. After that what else can be done???rnAs a previous comment points out most of this trend applies to fixed rate (lump sum) loans that require no money setside for credit line draws in the HBMS trust, so for the exception of one big lender you dont see the no orig fee, ssaf around for adjustable rm loans because the secondary market demand for this type of cash flow HMBS is not as high as for the fixed rate HMBS pools.

  • Adequate overall volume and revenue/production cost are critical for HECMs to remain a viable program. Reductions in closing costs generally only apply to fixed rate HECMs as a result of their execution in the secondary market (higher rebates). If rates are forced down and back end revenue is reduced, closing costs will go back up. This, along with another principal limit reduction and reduced overall HECM volume, will cause HECMs to be even more economically difficult for lenders to maintain on their product menu.

  • It is interesting to see and hear the divergent opinions of those like Mr. Jeff Lewis and Mr. Craig Corn. On one hand we have views that drive innovation in product refinement and on the other, those which cater to familiarity and transparency for the sake of those who find change difficult. Both sides make very valid points. rnrnIt seems Ms. Erica Jessup (i.e., FHA) agrees with the approach that provides more proceeds versus the approach that reduces the note interest rate. (By using “we” it appears Ms. Jessup was speaking on behalf of FHA.) If the total balance due will differ little for most borrowers and more seniors can participate in the program as a result of lowering upfront costs and other principal limit reductions, perhaps the approach taken by MetLife is better. It is primarily a matter of perspective.

  • It is interesting to see and hear the divergent opinions of those like Mr. Jeff Lewis and Mr. Craig Corn. On one hand we have views that drive innovation in product refinement and on the other, those which cater to familiarity and transparency for the sake of those who find change difficult. Both sides make very valid points.

    It seems Ms. Erica Jessup (i.e., FHA) agrees with the approach that provides more proceeds versus the approach that reduces the note interest rate. (By using “we” it appears Ms. Jessup was speaking on behalf of FHA.) If the total balance due will differ little for most borrowers and more seniors can participate in the program as a result of lowering upfront costs and other principal limit reductions, perhaps the approach taken by MetLife is better. It is primarily a matter of perspective.

  • Adequate overall volume and revenue/production cost are critical for HECMs to remain a viable program. Reductions in closing costs generally only apply to fixed rate HECMs as a result of their execution in the secondary market (higher rebates). If rates are forced down and back end revenue is reduced, closing costs will go back up. This, along with another principal limit reduction and reduced overall HECM volume, will cause HECMs to be even more economically difficult for lenders to maintain on their product menu.

    • Mr. Jackson,

      I also believe there is now room in the market for a full fee, full reduction fixed rate HECM at a lower note interest rate and one with less fees at a higher rate. It would be good for the industry especially when dealing with seniors who have a strong aversion to higher upfront costs. I do not believe it hurts lenders to offer two such products.

  • I am glad to finally see a post addressing some of the underlaying causes of the recent trend in the RM market.
    In my opinion the original post could have expanded on some of the cause/effect of the changes that have been made over the last year:

    Mr. Corn indicates in the article that not that many people knew or understood the impact of the 10% reduction in PL. I would say we saw this coming last year see this post:
    http://rmdaily.wpengine.com/2009/12/03/fha-

    There is no doubt that the Administration decided that a reduction in risk in the FHA portfolio (for RMs) was needed and the best way was to ask for a subsidy but FHA rather took the action to reduce the PL instead of risking the whole program. However, the unintended law of consequences applies here: In any of the studies presented by FHA or the OMB, there was no mention of the negative impact on the projected demand for the product as a result of the PL reduction. In fact, had they considered the reduction in the projected demand as one of the variables in the stress test, I would say that not such a high PL reduction was needed BECAUSE the subsequent reduction of loan volume indeeeds reduces the size of the potential losses in the portfolio (this in fact is what FNMAE did when they increased the margins on the adjustable product a while back). Now the question is: with the reduced volume currently in place, is the FHA portfolio still under such a high risk exposure that it warrants a further PL reduction and increased periodic MIP???? I dont think so if the analyis is done correctly.
    The other consequence (unintended or not) is that unlike the case in the past with FNMAE being the single investor of the product, now you have GNMAE and their federally backed HMBS with a tremendous demand on the secondary market (after all where else do you find such a nice deal now a days???). So it is not that lenders are “innovating”, it is rather a simple supply and demand curve issue. A huge demand on the secondary market coupled with a reduced supply on the origination side and there is no other choice (this analogous to the situation when troubled municipalities or corporations keep increasing the yield on their bonds to attract investors to keep there revenues going in spite of the higher borrowing cost) than to decrease the cost to the borrower. This last consequence I dont think the Administration saw comming, is that in reality what is being attempted to do is to mitigate the lack of demand of the product which in fact does mitigage the reduction of volume of loans, hence not reducing (as much) the risk to the FHA portfolio as originally intended. It is a balancing act. You can also say that yes, there is a great reduction in borrowers cost of a RM, but at what price? The borrower is still getting less money than if there had been no PL reduction (even with the no closing cost except for MIP option with current PL), plus HECM to HECM refiancing is not longer viable and there are quite a few folks who could have benefited with a HECM refi. So even on the outside it may politically look great, it may not necessarily be a great solution.
    Another question: if the trend continues would we see enough upb compensation eliminating the complete MIP?? There is no question that reducing the PL makes the product much less risk adverse to the secondary market investor so if there is a second PL reduction then I can see the MIP being paid by the lenders to keep the business going. After that what else can be done???
    As a previous comment points out most of this trend applies to fixed rate (lump sum) loans that require no money setside for credit line draws in the HBMS trust, so for the exception of one big lender you dont see the no orig fee, ssaf around for adjustable rm loans because the secondary market demand for this type of cash flow HMBS is not as high as for the fixed rate HMBS pools.

  • Mr. Torres,

    While you make some interesting observations, there are several that also do not seem to be born out by the current environment.

    If all normal costs other than interest are being borne by the lender, reducing interest rates is the obvious next choice. This is nothing new. As you know it has been done in the forward mortgage world for some time.

    Several lenders are offering lower fixed rate HECM note interest rates as an alternative to lower upfront costs and no reductions to principal limits for servicing fee set asides. The latter option is there for those who need or just want higher net principal limits and those who are adverse to higher upfront or ongoing costs. If nothing else good comes from this period of lower principal limits, this may be THE one good that comes out of a very poor decision on the part of OMB. As to the HECM market these are innovations; however, we saw no upfront cost reverse mortgages in the proprietary reverse mortgage product side a few years ago.

    HECM-to-HECM refis are very viable in certain segments. The real problem for HECM-to-HECM refis is property values are in most cases flat or still falling. It does not seem to be the 10% principal limit reduction that is the culprit but rather home appreciation rates. If home values were near their historical averages in their respective real estate markets, many homeowners with HECMs would be refinancing by now. It is depressed home values that keep HECM-to-HECM refis so low.

    For example, as to pockets of activity, yesterday a daugher of an 88 year old woman called because they needed more cash. Her home was appraised in late 2008 at $1.2 million but the lending limit at the time her mother acquired a HECM was $417K. She was thrilled when I let her know that she could get a refi with over $100K in additional net proceeds at a much lower upfront cost and no servicing fee set aside. There are pockets of refi activity as attested to by the recent HECM-to-HECM refi application numbers.

    In my area in California historical home appreciation rates for the last sixty years still hover at over 6% on an annually compounded basis. If we had experienced anything near those rates over the last two years, we would begin seeing HECM-to-HECM refis at near record levels in a year or two. Even if principal limits returned to their pre October 1, 2009 levels tomorrow, HECM-to-HECM refis would not be substantially higher in our market than they are right now.

    As to your observation about the timing of the warning about the 10% principal limit reduction, it was openly being discussed at the NRMLA Policy Meeting in DC last June. NRMLA was gathering estimates of the impact lower principal limits would have from various lenders at that time. There were rumors last summer that one major lender was already writing software to reflect the 10% reduction.

    I fully disagree with your depiction of HUD as having any real choice as to the 10% reduction. By late July 2009 the House had already passed a bill (HR 3288) that provided no subsidy and requiring that the principal limits be adjusted accordingly. The Senate passed its version of HR 3288 in mid September 2009, with a partial subsidy but still demanded adjustments to the principal limits to absorb the difference. If Congress had provided a full subsidy, HUD would not have adjusted the principal limits at all. The real issue is, why was there an indicated positive credit subsidy to begin with? That was an OMB decision and only an OMB decision as attested to at the NRMLA Policy Conference last year and as reported by the GAO last July on page 31 of its GAO-09-836 report.

    As to insight into the HECM budget process the NRMLA Policy Conference last year was second to none. You really should try to attend it this year.

  • Mr Veale,

    I am not sure if I follow some of your comments.
    “If all normal costs other than interest are being borne by the lender, reducing interest rates is the obvious next choice” –> Although this is true for the forward mortgage market, for the reverse HMBS lowering interest rates increases interest risk significantly, especially when you consider the macro economic environment of today (ie, the recession is technically over, demand for commodities and services is starting to pickup, at which point the feds will have to consider an interest rate hike to curb inflation). If that happens then these HMBS generated with lower interest rates will have a diminished value as this type of investment (fixed interest rate) does not have inflation protection (unlike the adjustable rate notes). This why you see an diminished upb on the lowest rate fixed rates. I would expect to rather see the lenders eliminating cost (MIP) elsewhere before touching the rates further more since this will affect the demand on the secondary market side.

    As for your comments on Refis: I agree that this is a highely geographic and even demographic dependent problem and perhaps I should have phrased my observation differently. No doubt that in states like California, Nevada and Florida the home devaluation of the last 2 years is even a major driver, even more than the 10% reduction in PL. However, in the New York city area, we havent seen that type of drop in property values and in this case the 10% PL has been a stronger deterrant to refis. If you look at the numbers and talk to the top LO's here, many were making a nice living on refis and since the 10% reduction went into affect the volume has dropped to almost nothing. I would say that if home devaluation was the primary culprit you would have seen a decrease before since this property value decline has been going on for the last 2 yrs and the decrease in volume has been observed only for the past few months. I would say that for refis to happen the borrower originated the original loan way back when the MCA county limits were lower than todays home values and the borrower either had a ternure or term payment or had a significant loc which had to be used rather quickly at some recent point. Here in NYC the pl reduction resulted in bet $20k-40k reduction in proceeds and for the folks who had max out in their current loans and needed the money, it was a devasting blow (the deal would have worked with the old pl and not the new pl).

    As for your comments on HUD, I think we do agree on the fact that it was the OMB that came out with the subsidy numbers initially. What I said is that HUD had no choice but to make the changes in PL as the statute stipulates, otherwise, the program would have been at the mercy of congress (even with a reconciliation bill there would have been the need for a subsidy which would have resulted in scaleback or elimination of the program).
    As for the NRMLA comments: The association has been operating in a reactive mode for a long time. Even if they had discussions about it, what was done about it???
    We need a more proactive approach and we are seeing some of that now, albeit a little too late. However something proactive could have been done, for example: our industry has been battered in the press for the loans being too costly for the last few years. Why wasnt some of the measures used today (no orig fee and ssaf) not implemented say after GNMAE started the HMBS. That would have been innovation and would have given credit to the industry. Obviously the margins were there to do this at the time. Unfortunately, it took an economic trigger (lower demand on the origination side) for this benefit to happen to the borrower and thus the industry is still on a reactive mode (both politically and economically) and political capital can not be realized (ie voluntary reduction in cost issued by the lenders to help borrower type of comments). You do see the articles now in the ny times and wall street journal but it would have been better to be an initiative coming from the industry at one of the best times to do such a thing.
    Perhaps I will attend this year. I was tempted to attend last year. Thanks for the sugestion.

    • Mr. Torres,

      A “normal cost” of a HECM is FHA MIP. Please note interest is one of the last costs that I stated will be reduced although some lenders have already dropped their interest rates to 4.99% rather than reducing FHA MIP.

      Yes, we are all aware that markets are dynamic and like Treasury Notes, HECM MBS resale prices will vary over the time based on market conditions. And, yes, HECM MBS prices have their unique price issues. Relatively free markets will adjust prices for various factors, like ours do right now.

      While NYC has a high population concentration, the highest proportion of volume in HECMs to the local general population are concentrated in regions of two states much further south than NYC. There is little question from a pure risk analysis viewpoint that the drop in home values in the states where HECMs are most highly concentrated in volume and balances due (on a trend basis) should have a weighted impact on HECM risk analysis.

      Your points on regional home value issues are well taken. That is why the validity of the use of national demographics and criteria has to be questioned when HECM origination is concentrated in some markets more than others.

      We are all too familiar with the problems that lower proceeds have presented us. Those who are not, are not aware of market conditions. However, there is also the case where proceeds are abundantly greater especially for current appraised values above $530,000 where the related HECM was funded before ARRA was enacted in February 2009; however, depending on the date of funding, the value could be much lower.

      Now as to Congress, we totally disagree. Even in reconciliation Congress could have provided full subsidy. If they had fully funded the subsidy before October 1, 2009, HUD would not have reduced principal limits after September 30, 2009. As I stated in an article published by RMD entitled “Don’t Blame HUD,” I did not and do not believe there was any chance for any substantial subsidy in reconciliation. In fact there has been no reconciliation of HR 3288.

      Complaining about the reactive nature of the industry may be instructive but hardly fruitful. After all, mortgage lending is generally viewed as part of the banking industry which in most cases is notoriously reactive. While the engineering industry may be more proactive, generally bankers are less so. But as stated, that is a matter of opinion and some believe the industry should remain primarily reactive.

  • Critic,

    You are saying that there would not have been any HECM subsidy in HR 3288. Assuming that was the case, then why did HUD take the step to, in essence, remove the subsidy request from the budget by applying the PL reduction?? The viable answers are that either the administration ordered HUD to apply the change or that the Secretary of HUD acted independently to exercise its righ as is writen on the statute. Bottom line is that whoever was the decision maker did not agree with your conclusion (for the right or wrong reasons). Being myself a civil servant in the past, I wouldnt be surprised if it was a combination of both. It really doesnt matter now, doesnt it? The damage was done and we all have to deal with the consequences.
    As for my comments about reactive vs proactive I would say I dont necessarily agree with your presumption that the banking industry is “reactive”.I wasnt referring to the banking industry at large, rather at the small part of the industry represented by NRMLA. Take a good look at the financial reform battle going on and see what kind of effort has been invested by the banking/financial industry to defend itself. This is not reactive at all, it is pretty good proactive effort. One thing that I dont understand as well, how come it was so difficult for NRMLA to get a perhaps a few dollars per loan to organize a good campaign and pay for a good study to counteract the assumptions made by the administration in the quest to put a subsidy on the budget, and now we see the industry giving away almost $10k per loan??? Talk about reactive vs proactive!!! Dont get me wrong it is a great deal for the borrower albeit the price paid with the PL reduction.
    Bottom line is that we need results! It doesnt matter how much insider info is available. If no actions are taken then we will see defeat after defeat in the horizon.

  • Abel Torres,

    The current Congress is the 111th Congress. There are two open bills named HR 3288. The House passed its version in July 2009 and the Senate in September 2009. The Senate version provides some HECM subsidy; the House, none. The two versions of HR 3288 were NEVER reconciled because of the time involved in Health Care Bills. That is why to this day, HUD operates on Continuing Resolutions rather than under HR 3288.

    HUD never removed the subsidy request. Where do you get that from? Even though they have never relinquished their request, they never received it so how can they act as if they did? They did not receive anything nor do they have the expectation of receiving any!! HUD merely made the appropriate and prudent decision based on the Continuing Resolutions they are operating on.

    I was also a civil servant many years ago. Yes, there is a real significance to the issue over whether HUD supports subsidies. It is Congress who would not support it last year. Both HUD and the Administration have supported it last year and to a much lesser extent this year.

    Defending one's self is a reactive position by definition. Proactive means taking steps before one is in a defensive posture or a very offensive position while in a defensive one. If you saw the members of Goldman Sachs facing a mild Congressional reaction, I do not know how you can equate it to a “proactive” posture.

    Mr. Torres, all I read in your comment is frustration. You do not describe in detail any proactive measures you want to see implanted. Yet you complain about NRMLA.

    Quite frankly the $10K reduction per loan is a proactive measure. It is also good PR for the industry. Just look at the positive press reaction from the WSJ and the NYT. I think they provide a pretty good measure of the positive impact these moves have been for our industry. You have every right to disagree and should if you feel otherwise.

  • Critic,

    I know this is a little late but I never said that HUD literally removed the subsidy request. I said “in essence” which meant that by applying the PL reduction there was no need for the subsidy. Subsidies are very unpopular in congress and the sad reality is that if a susidy is requested for a program such as the HECM the request most likely would not be granted. I agree that congress would not support subsidies, but I also see that HUD would not risk the program either.
    I hope that not all you read in my comments is frustration. I would like to think that I contribute at least different ideas and from a different background.

    The $10k reduction is not proactive at all, it just a result of competition and supply and demand between origination and secondary markets. The good PR happens to be a “spinoff”. If and when interest rates go up, then lets see if we get the same type of positive coverage. I guess my definition of proactive is different than yours.As far as new ideas, well that is is a job for NRMLA and the lobbying organizations. I do have a few ideas but would not want to post openly in a forum.
    Lets us just agree to disagree.

  • Critic,rnrnI know this is a little late but I never said that HUD literally removed the subsidy request. I said “in essence” which meant that by applying the PL reduction there was no need for the subsidy. Subsidies are very unpopular in congress and the sad reality is that if a susidy is requested for a program such as the HECM the request most likely would not be granted. I agree that congress would not support subsidies, but I also see that HUD would not risk the program either.rnI hope that not all you read in my comments is frustration. I would like to think that I contribute at least different ideas and from a different background.rnrnThe $10k reduction is not proactive at all, it just a result of competition and supply and demand between origination and secondary markets. The good PR happens to be a “spinoff”. If and when interest rates go up, then lets see if we get the same type of positive coverage. I guess my definition of proactive is different than yours.As far as new ideas, well that is is a job for NRMLA and the lobbying organizations. I do have a few ideas but would not want to post openly in a forum.rnLets us just agree to disagree.

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