FHA: Reverse Mortgage Program Changes on Six-month Horizon

The Department of Housing and Urban Development is actively seeking meaningful change to its Home Equity Conversion Mortgage program in an effort to protect its mortgage insurance fund and sustain the program long-term, a HUD representative told reverse mortgage professionals Monday. 

To provide long term stability for the reverse mortgage program, FHA is considering change in three areas to be expected in “short order,” the Administration’s Deputy Assistant Secretary Charles Coulter told attendees of the National Reverse Mortgage Lenders Association annual conference in San Antonio Monday. 

“We’re going to look at the financial assessment side of the business to make sure we put constructive policies in place, and the tax and insurance issue in general, and see how to create a set-aside or escrowing for borrowers so they are not hit with large tax payments they are not positioned pay,” Coulter said. “Those changes are vital, we’re focused on them and will continue to work with the industry and NRMLA to reach a point to make sure products are viable.” 

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Among the current concerns of HUD on the use of reverse mortgage products today versus the intention of the product when it was designed, Coulter said, is the high percentage of fixed rate loans taken at a full, upfront draw. The percentage to date hovers around 69% fixed rate versus adjustable, according to HUD data. 

“Very few are using the product as an annuity,” Coulter said. “Most are using it to capture cash upfront. That is somewhat inconsistent with what you’d expect for product designed to help seniors age in place.”

The timeframe for change can be expected to be around six months, without a hard deadline in place. In the past, FHA has stated the intention to implement a financial assessment, but without putting any concrete guidelines in place. In 2011, HUD representatives told NRMLA conference attendees they were allowed to conduct an underwrite of reverse mortgage borrowers toward the prevention of tax and insurance default, and encouraged lenders to begin doing so. After a false start by MetLife, other lenders failed to follow in the process. 

“We’ve been talking about making appropriate changes to this program for some time. Now is the time to make those changes on product side.”

When asked about the time frame, Coulter responded without a set date, but a short term outlook. 

“It will take six months to see meaningful change,” he told RMD. 

Overall, the message was one of support for the program and maintaining it. 

“We need to make sure we are managing this product in efficient, effective way, so at end of day we have a viable product and program for the long term,” Coulter said.  

Written by Elizabeth Ecker

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  • Now is the time to eliminate the fixed rate product through the addition of a hybrid (fixed and adjustable), only permitting draws in excess of 80% of all available proceeds in the first year following funding on a lenient exception basis only.  Fixed rate Standard endorsements of  69% of all endorsements and 73.6% of all Standards endorsed are simply too high.

    As to financial assessment, set asides should be the result, not escrow accounts unless HUD will be mandating or voluntarily allowing monthly prepayments of taxes and insurance and other property charges from borrowers.  If prepayments become mandatory, they should be limited to those who have taken more than 80% of available proceeds.

    • I disagree witht limits on the intial draw. This is un-American. The asset it theirs and if a senior wants to maximize their benefit that should be his/her choice. I agree whole-heartely with a hybrid product and this is an obvious solution that should have been implemented years ago.

      • Not limiting initial lump sum draws will likely cause the advance rates on all HECMs to be lowered.  It’s not a matter of personal rights, but a matter of MIP fund risk management.

      • HUD has every right to insure what it wants to.  Remember HUD is an insurance company, not a primary lender.

        Lenders have the right to create whatever loans they want.  So let the lenders who believe this is un-American offer a different mortgage.  That is very American.  Who says that cannot be done.

        The loans creating the greatest liquidity and nonpayment default risk for lenders are those which take a full draw in the first year following funding.  Since lenders are very reluctant to adopt formal financial assessment “bright lines,” then HUD should.In 2006 HUD was demanding all loan officers must be employees.  One group of loan officers rose up to declare that such action was a restraint of and strike against free trade.  They were vainly declaring they wanted to take the matter up as a class action against HUD.  To that I replied that this was a requirement of an insurer and all the requirement really meant was that these loan officers needed to decide is if they were going to offer HECMs and proprietary reverse mortgages or proprietary reverse mortgages alone.  At that point the declarations for class action died.

        Mr. Jackson is also right on point.  It is the full draws in the first year following funding that are considered the riskiest HECMs by HUD.

        I am not calling for an end to a 100% draw at funding, just a very LENIENT requirement to show why it is necessary.  Before the introduction of the current fixed rate product, there were few 100% draws at funding.  Now it is the rule rather than the exception.  HECMs are not risk free products to either lenders, US Taxpayers, or even other MMI Fund program participants.

    • I do not agree with eliminating the fixed rate alltogether or capping the draw at 80%. Like Alias Bob I would like to know what is behind the 60% figure. Doing business in So Cal I have done about 69% fixed rate loans because I am paying off high mortgage amounts. Let’s peal back the onion before we start making wholesale changes.
      As for the hybrid product, sounds great to me byt not being an export on such things, how would it work for the secondary markets, is this a product that would be appealing? I am all for adding new products, taking away one that has been very useful, not so much.
      At the end of the day CUSTOMERS make the decisions on what they want and what they need. Let’s not go down the road that they are not capable of making the right decision so we will make it for them. BTW, I understand the troubling problem of defaults, and having an escrow account being one solution but I do not think it is a total solution. After all how many American’s had forward mortgage’s that included escrow accounts and still went into forclosure?

      • EricSD,

        Thank you for your honesty.  

        A hybrid could still be a 100% fixed rate product so in declaring that the product should be eliminated, this is but saying that the only way it would be available is if the senior gave a reasonable idea why they wanted it but all available proceeds would be required to be taken at funding as is the case today.  

        For example, It could be as simple as a borrower will need all of the funds in the next few years and fears  having any of his/her monies at risk in an adjustable rate product.  In that case, an underwriter would be required to verify the reasoning and as long as  lender overlays have no restrictions and the loan otherwise qualifies, the loan should be closed and funded.

        When it comes to insurance, lenders are the customers but the insurer needs to at least break even.  I do not believe a product which REQUIRES all available proceeds to be taken at funding reduces any risk to the insurer.

        Since fiscal 2009, HUD has taken over $2.2 billion from other MMI Fund programs (through the MMI capital reserve fund) to sustain the HECM program.  No longer is there a question of loss; they are clearly actuarially determined and are enormous but covered by the allocation HUD wisely made.

        The secondary market question must be addressed.  It would seem it should be acceptable since default requiring foreclosure should be lessened and earnings on outstanding balances due would be unchanged.  It would seem investors at the HMBS level would be able to deal with a bifurcated product.  But who knows?  After all the secondary market is the secondary market.

    •  Eliminating the fixed rate would leave a large percentage of seniors out of the market. A large number of seniors have loans against their homes and the fixed rate is the only program that solves their situation. In my market I estimate it;s about 80% of the seniors have existing loans. William Turner Loan Originator

      • Hotwater65 (aka Mr. William Turner),

        Do you know what the term “hybrid HECM” means?  If not, I advise you read other RMD articles on the subject.

        Although there are variations in structure, the suggested structures of hybrid HECMs share a common theme.  They all have a fixed rate component and require that any difference between the proceeds taken at funding and the net principal limit (i.e., the principal limit minus all financed closing costs) be set up as an adjustable rate line of credit available for tenure, term, as requested, or some combination of those forms of payout.  The variation which I personally support would allow the borrower to choose what portion of the proceeds taken at funding is held in the fixed rate portion of the HECM.

        The fixed rate portion of the hybrid product would be structured the same way it is today, as a closed end mortgage.

        So please explain why seniors would not get one?  The hybrid option provides greater flexibility without losing the fixed rate feature.

  • Hopefully we will have a new administration before changes are made that will hurt the seniors who need this program.  What we do not need is more paperwork.

  • I agree that 69% Fixed is a high figure. My question is …what is behind that 69% figure? Of that 69%, how many were used to pay off a high mortgage balance….to take advantage of today’s real estate opportunities….How many are 62,63,64, that were laid off after 30 years of service and now can’t find a job……

    • Bob makes a good point about measuring the use of the fixed-rate full-disbursement program to pay off a current mortgage balance…which is, in effect, creating an “annuity” in the form of the cash flow from the avoided monthly payments.

    • Alias Bob,

      There are over 22 years of history in this industry and just five of fixed rate HECMs.

      The first fixed rate HECMs were endorsed during fiscal 2007.  It is one of three of our years when endorsements were greater than 100,000.  Total fixed rate HECMs endorsed were 120.  In fiscal 2009, our best endorsement fiscal year on record, fixed rate HECMs were less than 12% of all endorsements.  So we had fixed rate HECMs in all three of our best fiscal years for endorsements but they did not constitute a large percentage of those endorsements.  Out of 318,300 HECMs endorsed in that three year span (fiscal years 2007, 2008, and 2009), just 16,000 were fixed rate.  

      It was not until fiscal 2010 that more than 50% of all HECMs endorsed during any fiscal year ended up with all available proceeds drawn at funding.  Do you believe that was because all of sudden in a very down year all new borrowers suddenly realized they had large mortgages to pay off or some other factor?

      The average age of the youngest borrower has been trending down since the program began in fiscal 1990.  Reaching for answers makes us look desperate.  There is a reasonable solution if the secondary market will accept a hybrid product.  

      • James what I believe is that in fiscal year 2010 the
        recessions impact was fully felt by the vast majority of borrowers. They saw
        their 401K’s reduced to 101K’s….their portfolios decimated,  they lost
        jobs that they worked at for 30 years, savings depleted in
        order to live, and absolutely
        no job prospects.

        So is it worth it to look behind that 69% Fixed number….ABSOLUTELY. Is it a desperate attempt to look for answers……ABSOLUTELY NOT.

      • Alias Bob,

        As to focusing on 2010 as the year when borrowers realized they had problems from losses, I will not try to guess what you mean since both TARP was put into place in 2008 and the first Stimulus Package was enacted in February 2009.  Also the word “decimated” (a term used by the Roman army to describe the action of killing one in ten) hardly describes what happened to portfolios or retirement plan values far beyond the rather limited 401(k) pension asset base; “devastated” might be a better description.

        Your comment/response shows little understanding of what a hybrid HECM is.  It also shows distrust about the use of the word “lenient” in describing any enforcement of a 80% cap on  payout of available proceeds at funding within the first twelve months following funding.  The suggestion is not to prohibit such practices but rather to place a more meaningful caution sign on them.

        If you want to perform the study you propose please do so; no doubt you will find at least marginal resistance from lenders.  Forgive me for viewing it as a total waste of time.  The hybrid change proposed would allow payoff of mortgages since that is required by HUD edict but it would also mean seniors could avoid the loss from the arbitrage between the earnings they may see on proceeds in excess of those needed at funding and the interest and MIP accruing on such proceeds.  If they wanted the proceeds anyway, the “lenient” policy being proposed would generally accommodate such requests.

        Making imagined assumptions has its risks.

  • What will happen to borrowers who need all available loan proceeds to pay off an existing mortgage?  Financial assessment simply misses the point and will do nothing to “protect” the MMI Fund.
    The basic underlying assumptions made 23 years ago are no longer valid and we must wake up to this fact once and for all.  The program is too generous given property appreciation rates and increasing loan durations coupled with Lump Sum withdrawals.
    Financial assessment will dramatically change the profile of an eligible hecm borrower and will no longer meet the needs it was intended for.
    Then comes action by Congress.
    The HECM standard needs to go away
    The HECM Saver needs to become the new Standard
    A HECM SUPER SAVER needs to be introduced that is 30 % less generous than the current Saver.

  • Gee, what a novel idea.  Let’s consider requiring escrow accounts for property taxes and insurance.  (Please read this with dripping sarcasm.) 

    I would expect the vast majority of our 40,000 technical defaults are people who have lived with an escrow arrangment most of their adult lives.  We then place them in a reverse mortgage and expect that they will suddenly develop the budgeting and financial skills to pay these large payments annually.

    We have kicked around different ideas for multiple NRMLA conferences now.  Let’s develop an escrow process for those that need it.  We should get this done sooner than later to stop jeopardizing the future of the great senior program. 

    • Shwatson,

      Are technical defaults just 40,000?  If the rate is 9.4% (as of early this calendar year and probably worse now) and 591,000 HECMs are active, your estimate seems at least 25% too small and probably much more by now.

      Why do you support an escrow system except for voluntary or mandated payments from borrowers funded outside of the mortgage?  Why not set asides?  They are far less costly to borrowers.

  • Once again this lawsuit is brought up as something positive. In fact, it is lipstick on a pig. Sure, go after Wells for fraud, but please don’t ignore the complete and utter lack of criminal prosecution of any major financial executive or institution for the mortgage frauds from 1998-2007 which caused the crash. This suit is political imaging, not substance. Its timing is despicable, and its predictable result, some sort of financial settlement/payoff, an insult to anyone who knows anything about mortgage fraud.  See, http://www.wallstreetmortgagefraud.com

  • Underwriting guidelines to ensure borrowers can pay for ongoing T&I is long overdue.  Large lump sum payments are not a good idea in many cases, so some form of cap on that is prudent.

  • The prospects/clients with whom I interact tend tp be fearful of the adjustable rate products (after all, which direction are rates likely to go from here? obviously “up”) and, therefore, they choose the fixed rate which is only available as a lump sum distribution. And, it’s also true, that many of them have an existing mortgage they want to see go away.

  • There is a HUGE need for a hybrid program and its a shame anyone has to wait 6 months for it.  In addition, even though I think I’ve done a pretty good job at explaining how the LOC works, our oldest seniors see the word adjustable and can’t get the thought out of their head.  In all the efforts NRMLA makes to help educate and correct, may I suggest a campaign to better explain the ins, outs and potential strengths and benefits of the LOC as it pertains to cash flow.

  • Underwriting for T&I payments is long overdue. 

    Large lump sum advances are often not a good idea for the borrowers from a financial perspective, and they put strain on the MIP fund so they could cause a reduction in advance rates for all HECMs.  I like the hybrid product mentioned by Jim above.

  • Many of the borrowers I have done fixed rate loans DO NOT want all of the cash upfront but in order to get a fixed rate, that is what they HAVE to do.  They simply DO NOT want the risk of an adjustable rate.  We need to devise a loan whereby they can get the fixed rate AND have a line of credit available for their use if needed an an option.

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