FHA Willing to Suspend Fixed Rate Standard Reverse Mortgage Product

December 18th, 2012 | by John Yedinak | FHA, News, Reverse Mortgage | 46 Comments

The Federal Housing Administration said it’s willing to make several changes to the programs it offers, one of them being a moratorium of the Standard Fixed Rate Reverse Mortgage. In a letter published Tuesday to Senator Bob Corker (R-TN), Acting Assistant Secretary Carol Galante said the FHA is willing to make the changes by January 31, 2013.

“FHA is preparing a policy directive that will result in the immediate cessation of the use of the Standard Fixed Rate HECM product,” said Galante in the letter. “This product currently represents a large majority of the loans insured through the HECM program, with the Variable Standard Rate Standard product and the HECM Saver products representing the balance.”

The HECM fixed rate program is one of the reasons the program is showing an estimated economic value of negative $2.8 billion according to an independent actuarial analysis published earlier this year.

“Eliminating the use of the Fixed Rate Standard program is an immediate stop gap measure,” said Galante.

In addition, the agency plans to make several other important changes including establishing formal guidelines for conducting financial assessments of borrowers and the creation of set asides for payments of taxes and insurance.

As a result of agreeing to the changes requested by Corker, he is now agreeing to support Galante as the Commissioner of FHA.

“I’ve been working closely with Secretary Donovan and Acting Commissioner Galante over the past few weeks on ways we can put FHA on sound financial footing. While this is only a first step, I am encouraged that Acting Commissioner Galante has committed to structural reforms that we both believe put FHA in a much stronger position. Given the reforms she is committed to, I believe that having an accountable commissioner with her resolve and expertise will be in the best interest of the taxpayer,” said Corker.

Exactly how the changes could be implemented isn’t clear. When asked whether they would need to be added to legislation, a spokesperson for the Department of Housing and Urban Development declined to comment.

View the letter here.

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Thomas A. Mastromatto

What will that do to Adjustable Rate Margins?
reverseguru1

I can’t wait to get that phone call in 5 years from a client that took out 400K today at 3.2% extinguishing their forward loan…only to find out their interest is accruing at 8% in the year 2018. Thanks for pushing the fixed rate on all your borrowers Mr. Broker.

What a great way to sweep up any and all equity out of someone’s home.

I remember 82’….do you?
lancejackson

They apparently represented 70% of the market. Some of those will now go ARM, while others will elect not to get a RM. This change will have a big impact on industry revenues, profitability, and marketing budgets.
reverseguru1

How will this affect the companies we work for or with? Do they need that the standard full draw to stay afloat? Is that what keeps them profitable? What will happen to your compensation without this product? Look at your last 12 months and realize how many of these loans you originated and what do you believe could have funded fix saver or adjustable…40%, 60%, 90%? We are all making less and helping less in 13′. The strong will survive.
James_E_Veale_CPA_MBT

Based on the commitment Ms. Galante avows at the end of the letter, the end of fixed rate Standards is near. Such a move has been warranted since the introduction of fixed rate HECMs in late fiscal 2006.

A few things were surprising and are areas of concern such as her short remark on longevity. Will that mean lower PLFs for next fiscal year?One would expect that applications for fixed rate Standards will skyrocket in the next 45 days. This early winter may spark a sharp rise in case number assignments in what has otherwise been a very lack luster fiscal year.As to some genuine financial assessment, let us hope HUD will do something similar to what NRMLA recommended. While set asides should be available to lenders, neither their required usage for all borrowers nor a specific number of years or payment amounts should be mandated. Lenders should make such determinations on a case by case basis.It is good FHA has rejected escrows (or impounds) of all forms. If borrowers really want to make monthly prepayments of taxes and insurance, then let them get them through entities such as PayPal, depository banks, and real estate companies (through trust fund accounts) provide them. Those who desire them can then foot the bill fairly and appropriately. This would also allow all HECM borrowers have them, not just new borrowers.HUD now more than ever needs to focus its attention to introducing and implementing a Hybrid Standard in the near future.
James_E_Veale_CPA_MBT

reverseguru1,

But can you cite 5 years or 10 years of such rates? What the industry needs and has needed since 2006 (if not longer) is a very flexible Hybrid HECM.

But please do not blame just brokers. I have corresponded with those at major lenders who have stated they have not done an adjustable rate HECM, ever.
James_E_Veale_CPA_MBT

Mr. Jackson,

The question becomes, will the secondary market revive the fixed rate Saver?
Richard William

What about credit unions? At the very least a broker passed his fed and state. These originators are coming off the streets with no experience and are exempt from licensing. What program do you think they are selling?
Thomas A. Mastromatto

Do not blame anyone.Lots of loan officers buy leads and seniors that send them in are using 75%-90% of funds to get rid of their mortgage.
This move will crush Reverse Mortgage business unless market gives fixed saver rates that compare to forward market.
aliasBob

I’ve worked for lenders….I’ve worked for Brokers….I’ve been in the industry long before the Fixed rate and will continue in the industry without the Fixed Rate. I’ve seen Lenders demand Fixed Rate loans….I’ve seen Brokers demand Fixed Rate loans…..Bottom line here is by doing the right thing for your client, by being knowledgeable about your product, you will always prosper.
Thomas A. Mastromatto

Why not keep the fixed rate and lower the principle limit.
If everyone does a saver, FHA is losing massive amounts of dollars in upfront MIP.
ReverseGal2

Brokers??? I didn’t know that brokers could make loans. I thought they could only offer what lenders made available. Now, if you want to say there is a problem with folks offering fixed full draw reverses that are not trained specifically with them and do not offer what is best for the borrower. Well, that is a different story. But that is not a problem because of “Brokers.”
jstults

Frankly I believe we simply need stronger leadership at FHA. Where are the numbers? What percentage of the all FHA insured mortgages written between 2007 and 2009 were fixed rate reverse mortgages? How much in actual dollar amounts has FHA paid in losses claimed by lenders for fixed rate reverse mortgages written during this time period? What percent of the current $16.3b deficit do these claims represent? Of the fixed rate reverse mortgages originated during this time how many would have resulted in foreclosure but not for the reverse mortgage? What would the costs have been by allowing those homes to foreclose? Numbers don’t lie and to suggest that suspending this program is the answer without the data to back it up is ridiculous. It’s like putting a tourniquet around your neck to stop a nose bleed.
Scott E. Heggs

Its not the fixed rate that is the problem, it is that in order to get a fixed rate, you must take the lump sum. Why don’t they add a fixed rate product to the LOC ? Most seniors prefer a fixed rate, now they will have to take the SAVER if thats enough money for them.
Richard William

I am hearing FHA is going to limit draws on the arms too. Borrowers will no longer be walking away with 100k cash outs. If originators get paid by the amount the borrower draws then we are always going to have a problem. Borrowers will just start choosing lump sum on the arm and a lot originators will push them that way too. Eventually the am schedule will look similar to the fixed.
The_Cynic

Richard,

But seniors will not be REQUIRED to take a full draw and even if irresponsible originators do as you say, seniors can always pay down their HECMs with no loss in cash available to them. Paying down a fixed rate HECM means permanent loss of those funds unless they can be recovered through refinancing, a costly choice. But again if rates went up and/or home value is lower, could they recover the prepayment at refinancing? That is a matter of actual facts at the time of refinancing.
Thomas A. Mastromatto

Now its the Loan Officer fault seniors refuse to pay taxes and insurance ?
Woode568

Precisely! Since the fixed rate programs were rolled
out requiring full draw I have approached each and every customer with the
choices, benefits, and costs, both initial and long term with sensitivity to adjustments
in the ARM index. Some customers prefer
fixed rate loan options from a remembrance of traditional forward mortgage
horror stories but when presented all the options and the associated risks many
changer their preference to ARM loans.

An across the board moratorium on fixed rate standard
loans without deeper consideration appears to me to be the “kill the cow remedy
for weedy milk”. Yes, I believe the full
draw requirement is the primary cause of this apparent “knee jerk reaction”.

Consider this too.
One of the causes, and likely the weightiest behind the full draw
requirement is simply the fact that the down turn in the economy. Had not the economy slowed as much this would
not have been on the radar. Since our
economy is heavily influenced by the continuous stalemates in Washington on
finding remedies to put the nation’s workforce back to work which drags
confidence down the housing markets will continue in a soft and slow
recovery.

I read and fumed at reading the “Consumer Union Says…”
article of December 13 and the letter to Mr. Donovan. Why?
Simply because the facts are obscured or colored so negatively anyone
without a sound knowledge of the programs would classify these as “another
reverse mortgage horror story”.

PLF reduction combined with modest MIP increases,
reducing maximum claim amount and financial assessment would be a more
reasonable course of action. Then too,
look at a Hybrid fixed rate program.

Then again here is another observation. Pricing and compensation… Few lenders offer fee reduction on ARM loans yet
some deep reductions on fixed rate loans.
And again, I have observed many who provide incentives for loan officers
writing and closing fixed rate loans over ARMs. Wouldn’t you imagine the loan officer being
aware of compensations would weight favorably to customers fixed rate loans
over ARMs under those circumstances?

Bob is quite correct. “Bottom line here is by doing
the right thing for your client, by being knowledgeable about your product, you
will always prosper.” The trouble I see
coming is the reaction may be harsh and counterproductive to FHA and MMIF as
well as to lenders.

My focus will remain on doing what is right. In doing so, you never go wrong. Except when you have poor policy decisions
made without sensibility to the dynamics of economics and human character.
Thomas A. Mastromatto

Well Said
reverseguru1

Many do Cynic. We will be better off!
reverseguru1

I have Ed. When I get through with them and get down to details they embrace the LOC and the growth rate. They embrace preserving their equity and taking only what they need. It’s our job to explain so they are better informed. Paint the picture my friend. Paint the picture.
reverseguru1

Who said Arms only? Fixed Saver looks like an option?
The_Cynic

Thomas,

Please explain. As of 2/1/2012 will be more like the situation was in February 1, 2006. We were helping seniors then as well as now. The difference is there will be no more fixed rate product and the MMI Fund will not be in as much jeopardy on each new origination as it is now.
The_Cynic

hecmvet,

Ms. Galante is doing THE most responsible thing. She did lower the PLFs on the fixed rate product by not touching the fixed rate Saver.
The_Cynic

14yearsrevmtgexperience,

Where do you get the idea HUD will close down what you incorrectly call the “Fixed Rate Program?” Ms. Galante did not mention eliminating the Fixed Rate Saver. It is also fixed rate.
The_Cynic

TrustButVerify,

What is wrong with the adjustable rate Standard in those circumstances?
Thomas A. Mastromatto

How`s bout that libor rate, think seniors do not read
UBS to Resolve LIBOR Scam with $1B?

December 17, 2012
reverseguru1

or Origination fees will go up
reverseguru1

Your right ReverseGal2 they offer whats available. With a twist very often b/c they make ALOT of money compared to little at the opposite end (variable loan).
reverseguru1

Where did you hear Richard? Anyone credible?
Sam Lochamy

The details used to arrive at this decision would be interesting to examine. What is causing this loss? Is it because of the decline in home values due to the bubble in 2007 and 2008? Are the actuarial methods faulty? Does the HECM Fixed need a higher UFMIP?. If it can be tweaked so as to be acceptable, why kill the program?
Richard William

Good point
Richard William

This is true
Richard William

Not sure where I wrote this?
ReverseGal2

If we had a crystal ball we could help borrowers figure out the very best plan but we do not. So all we can do is talk to them about what is likely to happen and how things might look down the road. Let’s face it, the fixed rate is easier to understand and project. Many seniors simply like that better than any ARM. But I do not like the part of our industry that pushes the fixed and does not even try to explain or help a borrower understand the options. If the originators and lenders that just push the fixed were to find it too costly to stay in this business, that would be a good thing. Unfortunately, the borrowers will lose a good option and those of us in the industry, even doing the right thing, may have a hard time holding on. Less business of less business is a problem.
wealthone

so you don’t think that 8% credit line growth doesn’t help their cash flow?
The_Cynic

Thomas,

No one disagrees with you. BUT FHA CANNOT provide the fixed rate Standard to us any longer so you are making an argument we cannot win.
Fred Jefferson

It is my understanding that before a person can refi or even do a reverse mortgage they have to be given a booklet that explains it, as well as talk about the different options. It is also my understanding that the FHA counselor is suppose to go over the different option as well. Such being the case it appears to me that the client is the one who makes the decision as to which program best suits their needs. Maybe I am wrong but that how it seems to work on this end
Thomas A. Mastromatto

I agree on the point that phone rooms with 20 something college grads that jump up and down when a deal is done may be a real bad thing. Only looking at numbers and sales revenue and not putting the senior first. Maybe Reverse Mortgage Loan Officers need 8 hours in cont ed in Reverse Mortgages and Reverse Mortgage Ethics instead of the general classes.
reverseguru1

Not if there isn’t anything left my friend. I believe most tap out within 36 months. Most.
Thomas Mastromatto

That`s true if they are desperate but many intelligent seniors on the fence know interest rates from 1970-2000 were 7%-9% and with a 3 point margin and 1.25% MIP hate adjustable rates.The Party is almost over for low rates.
Thomas Mastromatto

Any why would this be safer for FHA? 200K adjustable rate loan can default as easy as a 200k fixed rate loan etc.THEY NEED ESCROWS
Thomas Mastromatto

This is very true.I never sold a senior anything he did not want
The_Cynic

Thomas,

That is correct; however, with most adjustable rate HECMs there is still an available line of credit to pay those defaults. With fixed rate there is no hope of such a possibility.
The_Cynic

Thomas,

Your crystal ball is much better than mine. I remember the same things being said five years ago. Remember that even at 13% the accrued interest on a $30,000 balance due is much less than a fixed rate of 4.5% on a $200,000 balance due. So your idea is all HECMs end up at maximum. My view is that fewer than 60% of adjustable rate HECMs will end up that way.
Thomas A. Mastromatto

Yes That`s why its best for seniors to make a choice

FHA Willing to Suspend Fixed Rate Standard Reverse Mortgage Product

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