Fundamental Question About Impact of the HECM Program Remains Unanswered

As the Home Equity Conversion Mortgage (HECM) enters its third decade, one of the reverse mortgage industry’s leading experts and often referred to as the “Godfather” of the program says the most fundamental question about the consumer impact of the HECM has yet to be answered.

Ken Scholen, Director of the National Center for Home Equity Conversion tells RMD the program was created on the statutory premise that it would “reduce the effect of economic hardship… at a time of reduced income.”  Now, 21 years after the first HECM was closed, Scholen wants to know if the HECM product is serving the long term financial interests of borrowers.

While the Department of Housing and Urban Development is required by the Housing and Economic Recovery Act of 2008 (HERA) to conduct a study to determine “appropriate consumer protections and underwriting standards” for the HECM program, Scholen says it fails to address the bigger picture of the product.

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Even though surveys by organizations like AARP have found the majority of current HECM borrowers say the product has had a positive impact on their lives to date, Scholen says these surveys have not included substantial samples of former borrowers.

“We don’t know how many former HECM borrowers see these loans as a positive financial tool that helped them through a time of financial distress, and left them with sufficient equity to meet their ongoing needs,” says Scholen.  Additionally, there is no data on whether borrowers spent a lot of their equity in their 60s to mid-70s, “only to regret such spending after they have paid back their loans, and then finding themselves needing their already-spent equity in their later 70s and 80s.”

As the average age of borrowers with reverse mortgages continues to drop, the need to survey borrowers who have terminated the loan couldn’t be more important.  “The youngest borrowers may have the greatest risk of depleting their equity too soon,” he says.

Scholen stresses that he is ardent supporter of the HECM program, but believes a substantial survey of former borrowers would create confidence that the industry is seriously concerned about the products overall impact on consumers.

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  • Why would it be important to “reduce the effect of economic hardship… at a time of reduced income.” OR make sure its serving the long term financial interests of borrowers??

    : ) only kidding!

    Its really amazing that this has not been tracked. What is more important than knowing if the product is actually working as it is intended? Although, I think its a given that it does help some sort of report or tracking would certainly be very important.

  • While I laud the high-level intent of further study, what would transpire if it was found that some Seniors did spend their equity too quickly? The first question is at what percentage level of total respondents would such a finding be deemed to unacceptable, such that “corrective action” would be first proposed and then required? The second question is what would (or should) be changed about the HECM program as a result?

    Would we see a requirement for more education of HECM Borrowers, despite the fact that there are a tremendous number of City, County, State and Federal resources already in place? Would we see more disclosures, despite the fact that today’s requirements already produce “information overload”? Would we see regulatory limitations about how Seniors might be able to access their funds?

    At the end of the day, I don’t think we need more taxpayer dollars spent to re-state and re-prove what is common sense : HECMs are a needs-based product that cannot help but better the lives of Seniors, but not all people are wise and not all people take advantage of the wisdom available from others.

    • My Opinion,

      Please define “needs-based.” The best way to close a HECM is to find what the prospect perceives is a need and sell to that “need.” What is a need to one senior advocate is a luxury to another. For example, a recent prospect told us that when she told a counselor that she could never acquire a home by the beach in Orange County again if she gave up her house, the counselor told her to downsize and avoid a reverse mortgage. When she told the counselor all she had was an 800 square foot home on a 3,100 square foot lot and was in good health, the counselor repeated his advice. She then exasperatedly cried out: “Well then where should I live.” He then told her about Hemet and Sun City.

      The prospect told us that for years her income had been this low but she had managed before and now her mortgage would be gone. She would sacrifice to live where her friends were and she could rise up and sleep with the wonderful pounding of waves in her ears. She loved sitting out in the sun year round and not face the extreme heat of the desert or wild winds. The value of her home had just gone up 10% in the last year and the value of homes in the communities the counselor was suggesting were still going down.

      The prospect is Hungarian and lived under Communist rule throughout the fifties and sixties. She called me worried that the counselor could stop her from getting the loan. The counselor told her that based on his own evaluation and her FIT and BCU scores, she needs to downsize into a more affordable area. Nothing he heard changed his view.

      The prospect got her HECM late last month. Now is this HECM needs-based? Would Ken Scholen consider it an appropriate use of a HECM? Does it matter?

      Last year a senior advocate told me that he would rather see a senior spend proceeds on a vacation and improving quality of life than spending it on family needs or long-term care insurance. He believes that when these “needs” go unmet, seniors suffer.

      So what is “needs-based” advertising? Is it telling a senior that the senior has spent their life paying for a home and now it is time the house pays the senior? Is it having a wealthy celebrity standing next to a very nice home and a classic auto telling the senior to get a CD?

  • Ken is a consumer advocate. During the HERA hearings it is rumored he was the face of the AARP position that origination fees should be limited to 1% of the principal limit.

    It is more important to understand and document why a senior goes into the loan at the time the loan funded than trying to make that determination years later. Buyer’s remorse is a tricky thing. Who would not have some remorse when looking at the total principal utilized and the total balance due years later? Reading how some complaining children relayed the story of the need of their deceased parents at the time of HECM funding has been an interesting exercise. They paint a far different picture than the originators who dealt with their parents. Personally I know of very few people who took out negatively amortized forward mortgages, only made minimum payments, and did not regret their actions later. Yet if you had asked these borrowers at the time they took out those mortgages (whether or not their decision was truly necessary), they would have answered affirmatively – “Do you think we want to do this?”

    Some did not “need” a HECM have taken the proceeds and, much like lottery winners, spent them unwisely only to regret it later on. Unfortunately some of these borrowers were egged on by aggressive originators declaring that home values along with lending limits go up regularly so spend what you have now because more will be available in a few years. I have met some of these originators as well as some of the negatively impacted borrowers. A few months ago at a memorial service for a mutual friend I overheard a high producer pine out loud for the days when churning was easy.

    Just today a borrower called to let me know he was going out of his fixed rate HECM to take an adjustable rate HECM from a big bank. The first hurdle he was facing was a lower appraised value despite his knowledge that realtors were telling him the value of his San Fernando Valley home was worth at least 5% more than when he got the fixed rate HECM last year. Since I could not compete with that particular loan, I began probing how the loan was explained to him in mid October when he had completed his application. He was shocked when I told him his marginal ongoing borrowing rate was not going from the interest rate of 5.56% to 2.29% but rather the total of his interest rate plus ongoing MIP of 6.06% to 3.54%. While the originator gave this borrower amortization schedules, etc., she had failed to tell him his ongoing MIP would be going from 0.5% to 1.25%. She also failed to point out the LIBOR index was only 0.29% rather than the total 2.29%. It bothered him to learn that the actual index was that low. He said the originator had told him that the bank was saying the index will stay that low for years to come. I wish my crystal ball showed that.

    While no doubt we have all helped many seniors in need, there are also some who encourage seniors to use proceeds unwisely or lead them down the primrose lane. It is my concern that someone like Ken or some other advocate will zero in on the situations where things might appear to be inappropriate and use those cases to discredit the entire industry. It would not be the first time that has happened.

  • Reducing financial hardship in a potentially very long old age (longevity risk) is indeed a structural and statutory mission of HECM that both regulators and the industry seemed to have forgotten in the euphoria of new products and new product features’ introduction recently.

    The essential question is this: How can regulators and the industry reconcile HECM’s critical public purpose with the legitimate private needs of investors who pay more for product features that seem to negate HECM’s broader societal mission? Viewed from this angle, the phenomenon of fixed-rate HECM (and the market rationalizations for it) is extremely disturbing.

    For good reasons, as a society, we attach significant disincentives to early withdrawal of retirement funds in financial assets such as stocks, bonds, CDs, or mutual funds. Any financial planner or adviser who encourages his clients to liquidate their portfolios of retirement financial assets for immediate needs would have their professional competence and ethics called into question.

    Similarly, the army of 63-year-olds blissfully liquidating their reverse capacity for short-run needs via fixed-rate HECMs in recent months should cause regulators and industry leaders to pause for reflection: How does the fixed-rate HECM serve the statutory mission of HECM and the reverse mortgage industry?

    Thank you, Ken, for reminding us, once again, of HECM’s unique societal mission. Understanding and remaining faithful to HECM’s statutory mission will be essential in securing public support for the HECM program and the reverse mortgage industry it built in the years ahead.

    • Mr. Agbamu,
      As usual your comments are hard hitting and insightful.
      I must, however, disagree with the following observation: “Any financial planner or adviser who encourages his clients to liquidate their portfolios of retirement financial assets for immediate needs would have their professional competence and ethics called into question.” To have such a standard would cripple the ability of financial consultants to provide the advice needed to avoid potential detriment to clients in specific situations.
      Here is where the parallel applies. Financial consultants, who recommend courses of action which have reasonably higher risk for greater 1) loss, 2) cost, or 3) other detriments to a client than other less risky but available courses of action AND the recommended course of action results in higher compensation to the adviser, must be called into question in regard to independence, ethical behavior, and civil and criminal liability. That is a fiduciary standard.
      In California and Minnesota, most loan originators are subject to a fiduciary standard already. For those who are subject to that standard, it seems the general concepts expressed in the immediately preceding paragraph apply. These rules may have been written so as to exclude employees of FDIC insured banks . If that is the case and based on the change to state law preemption under the Dodd-Frank financial reform act, the fiduciary standard should now be extended to all mortgage originators in those states where that standard is being applied to other mortgage originators.
      Since The_Critic has stated in the past that she/he is a California real estate broker and mortgage originator, the bank employee discussed in the Comment by The_Critic above may not be subject to the fiduciary standard so that the modus operandi at that bank may be to only disclose increases to ongoing MIP to their HECM-to-HECM refinance prospects through printed disclosures. If The_Critic has the facts right, the behavior described is deplorable.
      HUD should consider requiring a disclosure signed by the borrower as to why a senior selects a closed end HECM.

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