Leaked Wells Fargo Email Provides More Info on Reverse Mortgage Exit

The reasons behind Wells Fargo’s decision to exit the reverse mortgage continue to trickle out and late Friday afternoon, an email confirmed a rumor that had been spreading throughout the day.

An email obtained by American Banker shows that Phil Bracken, an executive vice president of Wells Fargo Home Mortgage, was worried that the Department of Housing and Urban Development would force it to foreclose on senior citizens with delinquent reverse mortgages insured by the Federal Housing Administration.

“The last straw in our decision was the recent HUD decision to require servicers to initiate foreclosure on the Senior Reverse Mortgage customers [who] could not pay their taxes and insurance,” the email says. “When a product or program creates more reputation risk than value … well … you get the picture.”

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Several individual loan officers at the bank told RMD this was the main driver behind the decision on Friday and the email seems to back up the claims.  However, it does seem strange that such an email would be leaked to the press showing the company in a positive light and pointing the finger at HUD for the reason it’s leaving.

When RMD spoke with Wells Fargo last Thursday, the bank’s spokesperson stressed it had more to do with the inability to asses seniors ability to maintain the requirements of the loan.

HUD has been working on developing some kind of financial assessment for HEMC borrowers, to provide lenders a better tool at preventing taxes and insurance defaults.  Vicki Bott, former deputy assistant secretary for single family housing at FHA told RMD it was expected to be released in May.

The hope was that the assessment would help limit the number of seniors who fall behind on their taxes and insurance payments.  Current estimates put the total number at around 5% of the outstanding HECM loans according to Reverse Market Insight.

HUD hasn’t provided any update for when the assessment will be published and has declined to comment on Wells Fargo’s exit.  However, the National Reverse Mortgage Lenders Association said it anticipates HUD will be issuing a rule change in the future to provide HECM lenders with the discretion to make these necessary underwriting changes.

The loss of large institutions like Bank of America and Wells Fargo means there are fewer options for consumers, but other companies are looking to step up in their place.

“As our financial system gets concentrated into a smaller number of larger and larger institutions, many niche markets will be underserved or not served at all by these mega-institutions,” said Jeff Lewis, chairman of Generation Mortgage on Friday.  “Independent, entrepreneurial companies like Generation Mortgage will do everything we can to fill that void, but we can only do so with the continued cooperation and participation of the Federal Housing Administration, Ginnie Mae and other arms of the federal government.”

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  • There is rarely a single issue which causes a Forbes 100 company to abandon a successfully operating unit like the WF reverse mortgage division.  Loss of reputation is a reason to sell off the unit with adequate warnings, not to abandon it.  But in a litigious society selling an entity which is generating its originations in an environment where the seller has concluded that contingent liabilities could exceed the profits from origination plus loss of reputation from foreclosures as well is another matter.
     
    So far HUD has done absolutely nothing to allow lenders to mitigate their potential liabilities from T & I defaults.  The idea of allowing all applicants who currently qualify to get a HECM and then deal with the issue of T & I defaults through foreclosure is hardly the solution most lenders desire or deserve.  Worse, HUD seems to be dictating when foreclosure must occur, if ever.
     
    The current policy of having well over ten thousand foreclosures occur at the one of the worst possible points in the current home market decline is not just ridiculous, it is irresponsible to the affected borrowers. Requiring foreclosure to occur as defaults mature into becoming eligible for foreclosure or trustee sale would have been preferable to a large group of foreclosures occurring at one time, this time.  It is clearly unfair for a homeowner who has been in default for two years to be treated the same as one which has been in default for ten.
     
    If foreclosure had been occurring as early as permitted by the terms of the loans and state law, a few would have occurred in times when home values were lower than now.  A significantly larger percentage would have occurred in years when home values were higher than now.  There is a reason why most of us were taught delay in dealing with a problem only makes the problem worse.
     
    The email leaks are interesting but it is allowing lenders the right to mitigate contingent liabilities which is an important step to making the program more desirable to lenders.  If some lenders are overly stringent, marginal or unqualified prospects will gravitate to those who are less so.  The services of brokers will once again become distinct and valuable and the HECM market will be functioning like other mortgage markets.  After all a HECM is first and foremost a nonrecourse mortgage.  It is still being treated like an equity release or equity conversion product which it is not.

    These two issues are not the only reasons for the pending abandonment but they are the ones which allow WF to bow out of the industry gracefully.  What those other reasons actually might be would be nothing more than mere speculation by me.  Goodbye to WF in this industry and wishing the best to its employees.  

  • Seniors will have a harder time going through the traditional retail channel locally with Wells and BOA exiting – the web still has many resources for seniors who are considering a reverse mortgage, and we encourage seniors to shop around online

  • If the T&I default issue is that significant, then we need to be underwriting for income and expense ratios similar to a traditional loan.  Frankly, why we haven’t been is surprising, but this has been HUD’s direction to us (not trying to point fingers).  Traditional loans require adequate sustainable income to cover PITI, RM’s need to do something similar for TI.  This is not the first time I’ve said that on this blog.  By the way, I operate a brokerage.

  • James brings up excellent points like only James can. As far as Wells Fargo, I do not believe the rumor! I can’t accept the reason for the number one giant of the industry pulling out of the market is because of not wanting to foreclose on those seniors that are defaulting on their taxes and insurance? As far as I am concerned, the reason is the fear of the unknown, plain and simple. Wells has a lack of confidents in our government, our financial system, the stability of the economy and the new emerging of over regulations on the industry.The Consumer Financial Protection Bureau has lenders around the country re-analyzing their positions. Banks and mortgage bankers are seeing the irrational moves by committees like the CFPB. Lenders are also in fear of the security markets. They see the strong possibility lurking around the corner that they will have to retain a portion of securities they sell in the market place.They are questioning if they will have to take a participation interest or have to guarantee a percentage of the security to the buyer? I feel many factors went into the decision making process for Wells to exit the market. Wells has many other profit centers to focus on, the reverse market is not a priority for them any more. I feel they have measured the risk and reward, consequently in they feel the risk was not worth taking. That is my take on it. John A. Smaldone

  • The author took the following words from my mouth/mind: ” However, it does seem strange that such an email would be leaked to the press showing the company in a positive light and pointing the finger at HUD for the reason it’s leaving.”

    As Mr. Veale commented, rarely is a decision this big based on one factor.

  • Two sides of the same coin.  Financial assessment is aimed at preventing future problems, while direction from HUD on foreclosing current/past T&I defaults is a result of the present/past policy.

    Wells seems to be arguing both were important in its decision to exit, which makes sense.  The line that didn’t make any sense (at least in the press release context) was the first reason cited as uncertain home values going forward.

    We’ve heard consistently that financial assessment is the top issue for many lenders in the industry.  We’ve found ourselves in a T&I default hole, the first thing to do is stop digging.

  • It could be Wells Fargo suddenly realized that a major movement in the
    younger seniors,aka Baby Boomers( a term not embraced by many seniors
    in that age group]has taken place over the past four or more years.

    It is the wide spread use of Home Equity Loans and excessive credit cards that get reduced by periodic pay down or payoff with the Home Equity Loan,which
    just as an after thought has been and continues to be Income Tax Deductible.
     
    My summary evaluation is a basic factor of financial life,no matter where one
    lives is “There is no substitute for EQUITY. With average available funding
    of (HECM) for Senior Homeowners (age 62) available today running atl
    around 40 % of Appraised Value, it leaves little room for financial relief,if
    the encumbrances surpass the loan availability.

    I concur there is a great future in FHA (HECM) for seniors, whom possess
    two immutable profile factors(one is advanced age and secondly adequate
    equity in the subject property.

    Bob LaFay, Reverse Mortgage Consultant

    • Mr. LaFay,

      The income tax definition of home equity indebtedness is very specific and the statute limits the deductible interest to the interest related up to $100,000 of that debt.  The timing of the deduction is based on the method of accounting of the taxpayer but is normally the cash basis, i.e., it is deductible in the year paid.

      You are probably aware of the issues but many are not. 

      • Hi James ,
        It is very nice of you to take time to respond to my observation of the Clouds hanging over the Reverse Mortgage programs. Yes, I am
        aware of the tax deduction liability issues. Thanks for focusing my attention to that aspect of the code. I appreciate it.

        I feel the (HECM) program will continue to serve admirably for Seniors with adequate equity in their homes . My unsupported view is
        a myriad of so called Sandwich or Baby Boomers do not possess the equity-valuation of their homes. It is pointless to keep appealing
        to this group with a magic wand to upright their upside down position in their homes.

        The emphasis has to be to the somewhat older Senior Homeowners, of which there are many,to consider their equities and corresponding
        abilities to utilize a future with potential to achieve Net Mortgage Relief.
        The TV blitz seems to focus on an unattainable blitz of promising unobtainable net mortgage relief.
        Thanks for taking your time to correspond with me. I appreciate your time and knowledge. I read you every day.Great insight.
        My Very Best Regards,Bob LaFay

      • Mr. LaFay,

        I wish the discussion over marketing was a free exchange of ideas in the industry.  Unfortunately most view their marketing strategies as company secrets.  In many ways it holds the growth of the industry back.

  • why do they not include the taxes and insurance being paid ,so the seniors do not have to worry about that since the ltv is low there is room to create a program to do that

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