Potential Changes Stir Debate on Fixed Rate Reverse Mortgage Use

On the heels of an announcement by the Federal Housing Administration that changes are on the way for the agency’s Home Equity Conversion Mortgage program, many in the industry are wondering just what those changes will look like.

In his address of reverse mortgage participants during the National Reverse Mortgage Lenders Association annual meeting in October, FHA’s Deputy Assistant Secretary Charles Coulter didn’t let on as to the exact changes, but he did indicate they will address a rising issue of concern: the majority of fixed rate reverse mortgages versus adjustable rate loans in the marketplace.

“Among the current concerns of HUD on the use of reverse mortgage products today versus the intention of the product when it was designed, is the high percentage of fixed rate loans taken at a full, upfront draw,” Coulter said. Addressing HUD data, Coulter recalled a 69% fixed rate versus adjustable.

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But originators say the balance has less to do with loan uses and more to do with borrowers’ fear of adjustable rate loans given the housing market crash.

“The majority of people are scared of the adjustable rate. A cultural misconception has led to a common belief that variable rates are bad,” said Brian Cook, an advisor from Alpine Mortgage Planning, a division of Pinnacle Capital Mortgage.

Cook, however, still sees the vast majority of his reverse mortgage business of the adjustable rate variety.

“One or two applications out of nine are fixed rates,” says Cook.

Other lenders see the balance is closer to 50/50 or varies by month.

Citing monthly figures varying from 50% to 30% fixed depending on the month, iReverse Home Loans also does not see its numbers aligning with the national average, according to Ken Klawans, company president.

“Our production does not seem to follow the 70% fixed industry-wide pattern,” he says. “If the imbalance between fixed and adjustable rates is due to the consumers uninfluenced decision to go with the fixed rate product, then the FHA’s potential changes could have a detrimental effect on the consumer and the industry,” Klawans continued.

As for the changes to the program, originators say they are in favor of a safer product but hope FHA does not go overboard in its restrictions as to deny those who need loans the most. Restrictions on the fixed rate product, though providing the market with a form of stability, would ultimately hinder borrowers’ product options for reverse mortgages, they say.

“This is a mortgage that you dictate how you want to receive it,”’ says Cook. “Adding restrictions constrains the homeowner because if you are going to require them to use the money [a certain way], then who determines that use?”

Adding to the list of borrower disclosures and documents also may not be in their best interest, says Klawans.

“More regulation, restrictions and/or obstacles is not the answer, nor is adding additional disclosure to the existing book of documents that requires borrower signatures,” said Klawans.

Written by Jason Oliva

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    • Mr. Mastromatto,

      That is one form of a hybrid which HUD clearly stated is ideal but is not prepared to implement in the near term.  You might want to read the article at the following link:

      http://rmdaily.wpengine.com/2012/10/25/fha-dont-expect-reverse-mortgage-hybrid-product-any-time-soon/

      However, your concept of a hybrid is very questionable.  Why do you give preference to mortgage debt over other types of liens or other uses of the proceeds?

      • I was only addressing fear of adjustable rates. I really think lowering principle limit for seniors with low mortgage debt and escrow for taxes and insurance would solve most of our problems.Where have you gone Alan Turing …….

      • Mr. Mastromatto,

        It is generally those who need the full draw of the entire proceeds to pay off debts who have a higher propensity to default for nonpayment of property charges.  So why reduce the principal limit on those who are less likely to default?

        A HECM is a collateral based product, not a credit based one.  It seems you want to make the program into a government home ownership support program.  This is a mortgage based solely on collateral and should remain such UNLESS the homeowner shows a significant propensity to default when it comes to timely payment of property charges. 

        By the way, your first comment starts by addressing fixed rate HECMs and neither your comment nor your response “address” any fear of adjustable rates other a brief mention of the issue.

      •  If default problem is the need based borrower that needs full draw then it must be T&l problem because their habits are to make monthly payments.A HECM is a collateral based product, not a credit based
        well one.  It seems
        you want to make the program into a government home ownership support
        program.
        That may be true but it needs adjustments NOW.

  • I feel the biggest issue is having an adjustable rate of interest tied to these lines of credit. By eliminating the fixed option will only create more uncertainty and risk associated to this product. When rates go back up, which they eventually will, we will have a considerable amount of unpaid interest that will be accumulated on their existing equity. If this is the case then just give each borrower 100% of the equity remaining in the property as a line of credit, because in most cases that additional equity; when rates do rise will be non-existent.

    Facts are 10,000 Americans turn 62 each day and the brunt of the population feel an adjustable rate which adjusts each month is an incredibly risky option for a senior planning to retire.

    • Mr. Parsells,

      Interest does not accrue on equity; it accrues on debt.  A HECM is a nonrecourse mortgage whose only collateral is the property to which the lien attaches.

      No lender would permit a fixed rate of interest to apply on a line of credit.  That is sheer financial madness.  The risk to the note owner would make HECMs all but non-transferable and a slow but steady arbitrage death to the owner (the death of a thousand interest rate increases).

      Why would FHA insure a negatively amortizing option pay nonrecourse mortgage where the available proceeds equal the Maximum Claim Amount at funding?  That is financial suicide.

      Perhaps others find value in suggestions.  All I read is frustration with NO practical suggestions on how to fix the real issues facing HUD and this industry.

  • Mr. Jackson,

    Based on the sheer percentages of those taking fixed rate HECMs today, this lack of presenting the information you described is a much bigger issue than trying to sell annuities to seniors.  How not discussing this issue is being pawned off today as “education” is astounding and disgraceful.

    Is making a sales presentation on just the products a TPO provides or a lender prefers to provide eductation?  It seems this is sales promotion at its worst.  This is not like going to a Ford dealership and expecting them to recommend a Honda.  This is like going to someone who advocates that Social Security benefits can be increased by using HECM proceeds but without any information on the related risks despite the originator knowing that the individual is 62, not married, and has a health problem which doctors have described as stripping live expectancy at that point by 50%.

    Recently, someone who claimed to be the biggest producer at one of the Big Six lenders declared that presenting the information you described above as an act of “manupulation.”  

  • Mr. Mastromatto,

    It seems you are addressing defaults from the nonpayment of property charges, but is that the primary or even secondary issue underlying this article?  It does not seem so. 

    What FHA is primarily concerned about is the continuance of the HECM program as it presently is.  The concern is over the HECMs accounted for in the MMI Fund.  As to those HECMs, FHA will soon no longer be able to project out that revenues will be able to offset losses.  It is the mandate of the full draw of all available proceeds at funding at the PL factor level which is creating the most difficult obstacle for FHA to overcome.  So how is it that prepaying real estate taxes and insurance through impound accounts will help?

    It seems you are talking about a solution for nonpayment defaults while FHA is worried about the survival of the HECM program due to MMI Fund requirements.

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