Change Coming to Reverse Mortgages, Here is Hoping They’re the Right Ones

The reverse mortgage industry is never short on change, but it looks like the pace of that change is about to pick up.

Speaking before a packed room at the National Reverse Mortgage Lenders Association annual conference in San Antonio, Charles Coulter, Deputy Assistant Secretary for the U.S. Department of Housing and Urban Development said what most in the industry knew was coming.

“We’ve reached a point in the [reverse mortgage] industry where we do need to make some changes,” he said.

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When asked about when changes to the product and financial assessment were coming, Coulter said he hoped they would be here within six months, but in true government fashion, he was vague on what exactly what those changes would be.

“The HECM program is a valuable product and we’re committed, but need to make changes to ensure they’re valuable over the long term,” Coulter said.

All eyes seem to be focused on the fixed-rate reverse mortgage product, which has become the choice for roughly 70% of borrowers over the last couple years. The product is also being looked at closely by the Consumer Financial Protection Bureau, which is concerned that if borrowers use most of the proceeds at a younger age, they might not have any left to deal with issues later in life.

Coulter specifically said that changes need to be made to the fixed product, especially since the majority of taxes and insurance defaults are coming from seniors who are taking out larger draws at closing.

The timing of Coulter’s statements came only a few hours after the New York Times published an unfortunate story detailing how non-borrowing spouses can lose their homes if one is removed from title before getting a reverse mortgage.

While the story failed to mention any of the protections the program provides—counseling has been required of non-borrowing spouses since August 2011— seeing such an article in print is another reminder that HUD and the industry needs to move quickly on making changes.

“The article in the New York Times is serious,” said Jared Bernstein, senior fellow at the Washington, D.C.-based Center on Budget and Policy Priorities during another presentation at the event. “It’s not the end of civilization as we know it, but take these messages to heart and let the investment community know it’s not the next bubble.”

There have been plenty of articles like the recent New York Times piece and the industry is very sensitive to them. No one wants those type of things to happen, but the industry is also hyper aware that it’s incredibly challenging to create a product that works for every person and every situation.

It’s easy for consumer groups to say that non-borrowing spouses should be able to remain in the home, but they also need to consider the the financial reality. If Hugh Hefner takes out a reverse mortgage and passes away, is his 22 year old wife allowed to stay in the Playboy Mansion until she passes away? How are the investor and HUD supposed to price that factor into the loan?

While the “Hugh Hefner scenario” might be rare, so are the stories cited in the New York Times article.

The industry knows that change is needed, but exactly what type of change isn’t clear. Conversations with people involved in the discussions with HUD indicate that all sorts of potential changes are on the table. A new report from Bloomberg shows that FHA could be in some financial trouble and require the first draw from the U.S. Treasury in its history to shore up its financial losses. If true, this means more drastic changes could be required. 

At the end of the day, it will be a tricky balance between the government and the industry to make sure those changes don’t cut off access to the product.

“I urge you to take the steps necessary, so that the important role of reverse mortgages helps solve [the retirement problem]… and can be a true solution to a real American problem,” said Bernstein.

Well Mr. Bernstein, the industry and HUD are doing just that. Let’s just hope we come up with the right solution that makes everyone happy.

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  • Mr. Yedinak,

    Great op-ed.

    The non-borrowing spouse issue goes away as to lenders and investors with a fixed rate HECM since the longest holding period for all but a few of these HECMs can be easily computed.  Where it lies is with adjustable rate HECMs.  As to HUD the issue is much great than Hugh and a young wife.  When that wife gets the house and at 88 is married to the 22 year old, the house still is in the mix under the law as “properly” interpreted by AARP.

    The law as stated in 12 U.S.C. 1715z-20 simply states:

    (j) Safeguard to prevent displacement of homeowner
    The Secretary may not insure a home equity conversion mortgage
    under this section unless such mortgage provides that the
    homeowner’s obligation to satisfy the loan obligation is deferred
    until the homeowner’s death, the sale of the home, or the
    occurrence of other events specified in regulations of the
    Secretary. For purposes of this subsection, the term “homeowner”
    includes the spouse of a homeowner. Section 1647(b) of title 15)
    and any implementing regulations issued by the Board of Governors
    of the Federal Reserve System shall not apply to a mortgage insured
    under this section.”Here is what the referenced law states (15 U.S.C. 1647(b)):

    “(b) Grounds for acceleration of outstanding balance
    A creditor may not unilaterally terminate any account under an
    open end consumer credit plan under which extensions of credit are
    secured by a consumer’s principal dwelling and require the
    immediate repayment of any outstanding balance at such time, except
    in the case of –
    (1) fraud or material misrepresentation on the part of the
    consumer in connection with the account;
    (2) failure by the consumer to meet the repayment terms of the
    agreement for any outstanding balance; or
    (3) any other action or failure to act by the consumer which
    adversely affects the creditor’s security for the account or any
    right of the creditor in such security.
    This subsection does not apply to reverse mortgage transactions.”I wish the answer were as simple as the non-borrowing spouse is not a concern but from a law standpoint, it seems they are!!! HUD should have dealt with this years ago but it certainly is not a lender issue since there were following what HUD mandated.

  • Raymond,

    How is that?  What if the nonborrowing spouse is not the same spouse as the spouse at the time of funding?  What if the couple are not living together and are legally separated but reconcile after funding?

    There is simply NO cure which will work other than a retroactive change in the law OR funding by Congress to ensure that their intent is carried out.

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