HUD: Reverse Mortgage Program Changes Coming Early 2013

Government insured reverse mortgages are changing in 2013 and the agency that manages the program says there are two directions that change can take.

The agency prefers to make “refined” changes that would limit the amount borrowers can withdraw upfront, implement a financial assessment, and possibly establish some type of escrow account.

The hope is such adjustments would limit the number of defaults caused by failure to pay taxes and insurance, which stand at an estimated 9%, according to a study from the Consumer Financial Protection Bureau this year.

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In order to make those changes, HUD needs additional authority from Congress. Without such authority the agency would be forced to make “blunt” program changes that could end the HECM Standard fixed and seriously limit the amount borrowers can withdraw.

“We are in the process of drafting policies against both of those alternatives,” HUD Deputy Assistant Secretary Charles Coulter told RMD in a phone interview. “We are going to take a wait and see attitude to [determine] whether we get the flexibility to take the more refined approach.”

If the agency isn’t provided such authority, it will move forward with more significant program changes, Coulter said. That second approach, which is not preferred by HUD, would be a moratorium on the fixed standard product.

HUD needs to move relatively quickly after an independent audit of the Federal Housing Administration found the Home Equity Conversion Mortgage (HECM) insurance fund has a negative economic net worth of $2.8 billion. The Department of Housing and Urban Development needs to shore up the program to cover projected losses.

“We are working toward having drafts prepared for very early next year and we believe we will need to make a determination on which path to take by early in the first quarter,” Coulter said.

To address the near 70% proportion of fixed rate loans in the marketplace as well as the higher likelihood of those borrowers to enter into tax or insurance default on their loans, HUD is considering several measures including a financial assessment of borrowers, a cap on the full draw amount that can be taken, changes to principal limit factors and an escrow or set aside for tax and insurance.

Last week, HUD Secretary Shaun Donovan fielded questions from members of Congress on what is being done to shore up the reverse mortgage insurance fund and asked for the authority to implement the changes that have been discussed.

Senator Bob Corker (R-Tenn.) responded that the authority sounded reasonable, but a decision is pending the next term of Congress.

“We’re not suggesting that a fixed rate HECM loan is a bad loan,” Coulter said. “What we are suggesting is that the way the loan is being used today is not consistent with the intent of the overall program.”

HUD had stated that it prefers to make the calculated changes with these specific goals in mind rather than face more drastic program changes that would limit the product’s availability to seniors who need it.

“We all have a strong vested interest in ensuring this program serves borrowers consistently over the long term and having a program that is seniors to seniors and is economically viable,” Coulter said. “We need to work together toward that outcome.”

Written by Elizabeth Ecker

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  • Limiting the Reverse to those Seniors who need it would transform it into a discriminating welfare program which would be a drastic change.
    Reverse Mortgages are the only one not offering “MONTHLY”escrows for Taxes and Insurance.  Most borrowers aren’t financial diciplined to setaside money for the bi-annual payments.  If you took away monthly escrows for other mortgages, I suspect you’d have a similiar default rate.
    Joe D.

    • unclejoe1,

      There is no such thing as “escrows” for Taxes and Insurance outside of the context of mortgage payments.  Many mortgages do not require payment of taxes and insurance as part of the mortgage so it would seem you could easily test your hypothesis.  Please let us know how that project is coming.

  • I doubt my comment here will change anything that is to come – but unclejoe1 – you just gave me an epiphany.  (Although, actually it is more of a reminder of what I had already thought before, but just forgot!)

    This really seems all very simple now!  If we were to perform an income/debt analysis that confirms a client’s ability to pay taxes and insurance…AND THEN…require the clients send in a monthly check to the escrow account (yes – still have a monthly payment – but JUST T&I – the bills you have to pay ANYWAY!)…well problem solved, eh?

    I mean – if I tell the client that they will be in jeopardy of LOSING THEIR HOME TO FORECLOSURE if they don’t get that monthly escrow payment to the bank – what do you think would happen to the default rate?  I would suspect, as unclejoe1 put it, the ratios would come back in line with any other type of mortgage!

    So why make this more difficult OR discriminating (as joe put it) than it needs to be?  Just assess an acceptable ‘risk tolerance’ for a client’s ability to pay monthly escrow (for T&I) and leave it at that!  No other ‘acceptable use’ or ‘deeper than necessary’ credit analysis…just look at their likely ability to maintain the REQUIRED monthly escrow payments to the bank and everyone will once again be happy!

    (And who knows – maybe the market would become even MORE LIQUID because the investors see the HMBS as even that much more of a safe investment!)

    • Mr. Rosengarden,

      Since FHA does not permit such escrows with HECMs, you and the others in this thread have a long uphill fight.  We disagree on the theory as mentioned to unclejoe1.

  • Uncle Joe is right. No reason to ruin the program when it can be fixed with a simple escrow account. Let’s fix it — not destroy it. This debate is a distraction and getting more so day by day.

    • wstrycker,

      What evidence can you provide that this will fix the problem?  One could argue that the system works on the forward side because of its far greater financial assessment.  Are you suggesting that those same standards apply to HECMs?  I hope not.

      No, the NRMLA suggestions some time ago seem best perhaps supplemented by a voluntary prepayment system at some time in the future.  

  • We are happy to hear that HUD is working on implementing refined changes as opposed to a complete product overhaul.  As stated, there are some good program changes that should be given the opportunity to be put into practice which will curb against the issues at hand.  However, the cure to control the mismanagement of funds to avoid running out of money too soon lies primarily with the borrower and perhaps their financial planner, family and other personal advisers.  We can put good measures into practice (which we should and will), but the borrower and his/her estate must also do their part to act and manage responsibly.

  • Panic, why now? Many of the things that are being talked about was suggested months ago but ears were deaf. $2.8 Billion dollars of projected losses, projected mind you!

    The uncertainty of our agencies and committee people becomes more scary by the day. Being consistant with what the program is supposed  to be about means rolling the clock back 5 or 6 years ago. That is when the program worked for everyone. Not only did it work but it was more controlled and regulated. I mean regulated the way it was supposed to be.

    I remember almost 2 years ago I was preaching about escrow accounts for T&I, I heard more why not’s than you can imagine and now what, it is on the agenda for the feds!

    They blame everything possible for what is the cause of the problem except getting prepared 8 or 9 years ago for what happened in 2008. It was as plain as the nose on your face what was rolling down the track but no one listened and know one prepared for it.

    Congress, HUD, the agencies and you name it should have taken action to change things in the HECM program but they chose to do nothing!

    Now the senior will pay plenty and those who have spent years in carving a career out of the reverse mortgage industry. We will all pay dearly and suffer for it! We need people who know how to solve the problems at hand put on committees and advisory boards, not political puppets!!!

    John A. Smaldone

    • Hey John,

      As you know I do not oppose escrow accounts on prepayments but fully oppose mandatory escrow accounting funded at the time of funding.  I do not like mandatory set asides for taxes and insurance but would not oppose them if they are not for more than a few years.

      Rolling back is too late.  Tweaking things to match some of the better points of yesteryear is possible but unlikely.

      As to the escrow accounts you promoted, I am not so sure HUD is talking about post funding.  You could be right but that is not apparent from what Ms. Ecker wrote.

      I am not so sure there are easy answers at this point.  A program with a $2.8 project negative equity position and that position reflects HUD pumping it up by over $2.2 billion during fiscal years 2010 and 2011 does not sound like a program which is on the right track.

  • In my opinion, mismanagement of the insurance pool is one of the biggest reason changes have been proposed to the HECM.  I haven’t heard anyone talking about this factor.  Also, hearing the Senators on the Banking Commission question Shaun Donovan during his recent testimony, was very revealing.  The Senators do not appear to understand the many indirect benefits HECMs create in the BIG picture. 

  • Does anyone know why HUD does not allow escrow accounts with HECMs?  What was the history behind that decision?  Assuming HUD removed that one sentence from their policy, and permitted escrows, how do the servicers feel about the possibility they would have to handle escrow accounts?  Even now, I hear that some are unwilling to handle the T&I set-asides, which seem a lot simpler than escrows would be. 

  • While I have not heard of the HECM making any provisions for an Escrow Account, there are the Tax and Insurance “Set Asides” which could be made “mandatory”.

    But then what happens when the proceeds are “Just Enough” to pay-off the existing mortgage? What if there are not sufficent proceeds to do the Set Asides?  For how many years will the Set Asides be required.

    Many more Seniors will not be able to do the HECM.

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