An FHA rule change that would preclude independent FHA eligibility approval for so-called “TPOs,” or “third-party originators,” has reverse mortgage originators – particularly small- and medium-sized ones – scrambling to form alliances in order to survive.
“Brokers need the shelter of a lender,” says Mike Gruley, vice-president of reverse mortgage operations at First Financial Reverse Mortgages, Northville, Mich., which became a division of Success Mortgage earlier this year.
”I can speak for many brokers when I say we feel a little targeted” by the new FHA regulations, Gruley says. “All this new regulation…will create a tremendous number of challenges for brokers,” he went on. “If they’re not willing to navigate [those challenges] it could be tough. The timing,” adds Gruley – who has been in the lending business for 25 years – the reverse space since 2001, “is perfect to execute a merger with another company.”
Nikolay Ratajczak, president, Advent Financial, Inc., Bel Air, Md., agrees. “It’s going to be challenging for small- and medium-sized companies to function” in the new environment, predicts Ratajczak. “Either they will have to merge [with another company] or migrate towards working with banks.” He reports that Advent has “developed a niche” in providing [reverse mortgage] services to banks and credit unions; originating the loans for them in the mid-Atlantic area of Pennsylvania, Maryland and Virginia mostly. “We see the writing on the wall,” Ratajczak remarks, likening current market conditions to “stepping back into the 1980s, when loans were done through savings and loan institutions and credit unions.”
Under new FHA regulations, mortgagees “will assume responsibility for their sponsored TPOs,” and the housing agency will no longer approve new applicants as loan correspondents. Those correspondents already approved will be authorized to continue to originate FHA-insured loans through the end of the  calendar year as normal. However, effective January 1, 2011, their origination authority will end.
Meeting all these changes will require more resources on the part of banks, lenders, and brokers, according to Mike Gruley.
“As HUD stops regulating loan correspondents, wholesale lenders will be forced to take on the expense of ‘regulating’ their broker partners and assuming additional liability for them. This added oversight and liability will come to the wholesalers at a cost and at least part of that expense will be passed on to their broker partners in the form of worse pricing.” For some small firms, he worries, “the cost of managing all of these expenses and liabilities (and who knows what may be next from state and federal authorities) is simply not cost effective in most circumstances and it is detrimental in many others.”
As a result, says Ratajczak, “from now till the end of the year everyone is kind of holding their breath.” In more critical wording, Mike Gruley said the new regs are “bad timing” given the current economic environment. “The whole lending industry is in trouble and the government says ‘Hey, this would be a great time to make major changes’. We could have done without that,” declares Gruley.
Written by Neil Morse