HUD Secretary Seeks Authority to Prevent Sweeping Reverse Mortgage Changes

Housing and Urban Development Secretary Shaun Donovan today asked members of Congress for more authority to manage the Federal Housing Administration’s reverse mortgage product to avoid making blunt changes to the program.

Following FHA’s independent audit revealing the reverse mortgage portfolio has an estimated value of negative $2.8 billion, the agency said it has no intention of suspending the program to shore up funds, Donovan told the Senate Committee on Banking, Housing and Urban Affairs during a congressional hearing on Thursday.

Though pressed by a few committee members that a suspension of the reverse mortgage program would ultimately save taxpayers money, Donovan explicitly expressed that a potential moratorium on reverse mortgages would heighten the economic crisis for seniors who can benefit from the program.

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“Frankly, we did make changes [to the reverse mortgage program]. We introduced a safer alternative through the Saver program,” Secretary Donovan said. “We could do what you said, which is to create a moratorium. But we are concerned about the economic crisis seniors will go through if we are eliminating an option that helps some of those seniors.”

Donovan responded by asking again for more authority for FHA to manage the Home Equity Conversion Mortgage program, as noted in the FHA’s audit report.

“Our preference would be to change the structure of the program if we can get authority from you,” he said, noting FHA’s desire to make the changes in the upcoming session of Congress.

Senator Bob Corker (R-TN) responded that gaining such authority seemed possible. “Most would support that,” he said.

Donovan stressed the majority of the impact on the insurance fund stems from the fixed rate HECM, which requires a full draw at closing and comprises an estimated 70% of new FHA reverse mortgages.

Written by Elizabeth Ecker and Jason Oliva 

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  • Despite its “popularity,” the fixed rate Standard should be terminated now and replaced as soon as possible by a very flexible hybrid Standard product including flexible caps on draws during the initial year following funding.

    The HECM is not the purchase by the lender making the proceeds the unrestricted property of the borrower.  This is a nonrecourse mortgage where lenders must follow the directives of their insurer, FHA if they hope to be reimbursed by HUD in case of covered losses.  Those who claim that the proceeds belong to the borrower address the product as if a sale occurred and the proceeds somehow belonged to the borrower.  This is a nonrecourse mortgage like any other nonrecourse mortgage.  There is absolutely no reason why proceeds should not be restricted if the insurer believes misused proceeds put its business at risk.

    It seems we have truly lost our vision about what the HECM program is supposed to achieve.  It is not about homeowners keeping their homes, bailing seniors out of certain foreclosure or other social welfare program objectives.

    The HECM program is about liquidity and liquidity alone. As the National Housing Act itself states as codified in 12 USC 1715z-20 (a) states: “Purpose
    The purpose of this section is to authorize the Secretary to
    carry out a program of mortgage insurance designed –
    (1) to meet the special needs of elderly homeowners by reducing
    the effect of the economic hardship caused by the increasing
    costs of meeting health, housing, and subsistence needs at a time
    of reduced income, through the insurance of home equity
    conversion mortgages to permit the conversion of a portion of
    accumulated home equity into liquid assets; and
    (2) to encourage and increase the involvement of mortgagees and
    participants in the mortgage markets in the making and servicing 
    of home equity conversion mortgages for elderly homeowners.” 

    What safer program is there to preserve liquidity than in the HECM line of credit?  Fixed rate HECMs totally defeat this safeguard to the extent that proceeds beyond those needed to meet the requirements of the program or the purposes laid out in the statute are mandated to be taken at funding.  Not only do those funds place the senior in jeopardy of economic erosion due to earnings (net of income taxes) arbitrage but also due to loss from investment.

    The statutory view is the program was designed to produce liquidity, for meeting the special health, housing, and subsistence needs of seniors.  Anything outside of that is outside of the scope of the program.  The program places no restrictions on the three categories of needs but specifies they are special needs not luxuries such as motorhomes, houseboats, vacations, or second homes.

    If one looks at the percentage of fixed rate Standards used in the HECM for Purchase program, it is clear we have lost our vision in regard to what this program is supposed to be about.  Of 1,613 HECMs for purchase last year less than 4% were adjustable rate HECMs.  Why? 

      •  Thats the sort of scare tactic that has everyone going fixed. When has it ever hit 12%?

        However I do agree with your above comment. What is to stop anyone from going lump sum on the line of credit.

      •  That`s the sort of scare tactic that has everyone going fixed.That`s a strong statement. Are you saying all seniors want to do adjustable and all loan officers use Psychology of Fear to turn 96% of seniors into fixed rates.

      • Tom,

        Please point to one time in the history of the HECM program that the adjustable rate has jumped 10%.  Nothing close to that has occurred in three decades and when it did, it did not last long at all.

        Many of these same seniors expect their HECMs balance dues to exceed the value of their homes at termination.  So since this is a nonrecourse debt, where is the risk?

        This is what some call playing off the fears of seniors when the logic just makes no sense.  We effectively dealt with that fear for almost two decades when our only product was adjustable rate HECMs.  

      • Hey Cynic facts:
         In the early 1970s, rates hovered in the 7-percent range and spiked
        up above 9 percent in late 1975, late 1976 and most of 1978. At the end
        of the decade and throughout the 1980s, mortgage interest rates rarely
        dipped lower than 10 percent.In the early 1980s, mortgage
        interest rates brushed the stratospheric highs of 18 percent and even 19
        percent. Imagine trying to get a home loan with an interest rate of 18
        percent. At that rate, the mortgage interest deduction would be a very
        lucrative income tax perk, but the monthly payment on a loan would be far more painful than a typical mortgage payment today.
        During
        the 1990s, mortgage interest rates ranged from around 7 percent
        to roughly 9 percent for many years. It was only in 2000 that rates
        began to fall to earth. They held at less than 9 percent in 2000, less
        than 8 percent in 2001 and less than 7 percent in 2003

        Read more: http://www.bankrate.com/finance/mortgages/history-of-mortgage-interest-rates.aspx#ixzz2EOcCL0sk

        Follow us: @Bankrate on Twitter | Bankrate on Facebook

      • Mr. Mastromatto,

        Most years have never reached beyond 10% and even then those years that did are not many. 

        When it comes to mortgages, it is not the interest rate which should drive the transaction but rather the total costs.  For example, the MIP portion of a HECM today at 1.25% cannot be overlooked.  Yet if the HECM will simply be used as a Standby Reverse Mortgage, what real difference is there?  The expected mortgage charges will be incidental to the value of the strategy which can only be provided through a Saver.

        But the rational is true with all mortgage planning.  The risk of the adjustable rates is that the interest rate will be high when the balance due is high.  If the balance due is expected to be low throughout the loan, fixed rate Standards will cost a lot more in mortgage costs than an adjustable rate HECMs.

        Knowing the purpose of the loan and the expectations of the unpaid balance due throughout the loan period is more critical to a mortgage plan than merely reciting historical interest rates.

    • Well said. Thank you. The evidence is in: As presently structured, the fixed-rate standard, left unchanged, could damage the long-run actuarial health of the HECM fund, the backbone of the industry. Any responsible insurer, private or public,cannot accept that risk.

    • I recently saw a deal go through where a senior took a fixed rate HECM out of their existing primary residence, to use the cash to purchase a new primary residence condo… So they essentially end up owning the new condo free and clear…. they move out of their house with the new HECM, and the HECM becomes due in 1 year…. I know that they are simply going to “walk away” from that property, and leave FHA holding the bag… (their story is they’re going to renovate and sell the property, and maybe if we’re lucky they’ll do that, but I doubt it)…. And why wouldn’t they…. They have a nice new condo, owned free and clear that they leave to their children…. They figure, so what if the former residence gets sold in foreclosure, but what do they care, they’re not living there anymore… and so what if it damages their credit this late in life… since they own their new condo free and clear, they’re not likely to need any additional credit anyways. I’m sure there’s lots of seniors taking advantage of the fixed HECM for exactly this sort of purpose…. and the result cannot be anything less than financially devastating to the FHA fund.

      • John,

        Are you saying that the senior NEVER intended to live in their existing residence, the collateral for the loan, as their primary residence?

        Question e. on Form 1009 asks: “Do you intend to occupy the property as your primary residence?” Please note that the borrower signed the following on Page 5 of that same form: “I/We fully understand that it is a federal crime punishable by fine or imprisonment, or both, to knowingly make any false statements concerning any of the above facts as applicable under the provisions of Title 18, United States Code, Section 1001, et seq.” While I am no expert that seems like a SERIOUS crime.

        Why lose the home to foreclosure? Why not gift the old home to the kids (or even me) once the move is final and let them (or more importantly me, LOL) get the remaining equity net of selling expenses. The costs of accruing mortgage plus the costs of foreclosure would wipe out most of the equity then add in all of the selling costs and the equity is all but gone unless there is a significant rise in home value.

        So unless there is something missing, why do what it is you are describing?

        Yeah, what I describe is still wrong and HUD could still prosecute or sue over using a HECM as a bridge loan but where is the potential loss to HUD? AND it seems a judge would throw out the case as frivolousness in today’s mortgage environment. But knowingly not preserving the position of the lender for over a year, seems very risky and in HUD shoes, I would consider making an example of this case for any actual financial loss.

  • Full cash draws at closing will soon be a thing of the past, unless for a purchase or to extinguish mortgage debt.

    In many cases, there is no reason based on sound financial logic to take a large up front cash draw at closing in order to fix the rate (very expensive rate protection).  It sure creates a nice rebate though.
     
    Allowing either tenure, or line of credit with available draws that “accrue” annually might be the way to go for ARMs.  A fixed / ARM hybrid would be a good idea too, and eventually to fixed the rate on chunks of past draws if that works for the secondary market. 

    • Lance,

      The only thing I question is your first sentence.  If the payoff of  liens against the home will not result in sufficient cash flow subsequent to payoff, then the application should be declined.  We are not in the home saving business.

      Also why should a full draw ever occur in a purchase transaction?  Could the senior be purchasing more house than they can afford?  The standard should be no different for a purchase than for a traditional transaction.

      We hear originators telling purchase prospects and Realtors all of the time that seniors will keep their more of their cash through the full draw.  BUT why?  What is it so important about keeping the cash after the purchase?  It is a psychological ploy to drive up the balance due (a fixed rate rather than a adjustable) so that the revenue is higher as Richard Williams so pointedly makes clear.

      Whether the transaction is a purchase or a traditional refi, the financial issues are all the same.  The difference is people who get cash from any transaction get a rush of feeling wealthier and want to hold onto that feeling which is tied to that cash.  The percentage of fixed rate HECMs used in purchase tranactions show that we feed into that psychological attitude.

    •  It creates a nice rebate but now everybody is a reverse mortgage loan officer. Its annoying that I have to pass tests in different states, pay fees to nmls, continuing education but if you work for a credit union you can have zero experience, be licensed in 50 states and start selling reverse mortgages after a day. Talk about a broken system. What program do you think those loan officers are selling?

  •  Fighters fight Singers sing ..I
    get paid to educated seniors on Reverse Mortgages and then wait for
    them to act. I don`t steer them into anything. I don`t give them a
    Volcker education or don`t pretend to be a American economist.That`s not what Peddlers do.

  • From everything I am hearing, it confirms what I have felt and have been saying all along. We should have kept the industry where it was 5 years ago. We never should have gone to the fixed rate product in the way it was structured, we never should have gone to live pricing, we never should have allowed the enormous gain on sale premiums to go where they have today and we should have just enforced the laws and regulations that we had on the books, rather than create the over regulated industry environment we are in today!

    We have created this mess, the Feds, the agencies and the a lot of the new element coming into the industry today. Many of these sales people have taken the new programs, utilized them to there own advantage and have taken brutally advantage our seniors in a way that has hurt them beyond resolve.

    I support Senator Bob Corker in his support of Housing and Urban Development Secretary Shaun Donovan to receive more authority to manage the Federal Housing
    Administration’s reverse mortgage product to avoid making blunt changes
    to the program.

    This may take away a lot of the authority away from the CFPB, which in my opinion is long over due!

    John A. Smaldone

    • John,

      No one can get five years back.  We are where we are and we have to do the best with what we have and can get.  

      In the last five years Osama Bin Laden has died, Bernie Madoff has gone to jail, and I have a granddaughter.  Some of us prefer not going back to what was true five years ago.

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