Walter: FHA Reverse Mortgage Changes Won’t Impact Loan Volume

Walter Investment Management Corp. (NYSEAMEX: WAC) last week commended the Federal Housing Administration on its plans to implement a moratorium on fixed-rate full-draw reverse mortgage loans and said the changes are unlikely to have an adverse impact on loan volume.

“We had anticipated this week’s announced moratorium on the Full-draw HECM Reverse Mortgage product and have already begun moving customers towards other FHA HECM products,” said Mark O’Brien, Walter chairman and CEO. “We applaud Commissioner Galante and the FHA for taking actions to reduce risk to both the FHA and borrowers and believe these actions will, in fact, help improve and sustain what is a very important mortgage product. We believe the reverse mortgage sector remains a very attractive growth opportunity for Walter Investment.”

Walter, which recently purchased Reverse Mortgage Solutions (RMS) for $122 million indicates roughly 90% of RMS’s loans in 2012 were of the full-draw fixed-rate type. The company expects loan volume will not be impacted as borrowers shift from the fixed rate standard to the other reverse mortgage types that are still available.

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“While the Company expects the transition of borrowers to the HECM Variable Rate Standard and HECM Fixed Rate and Variable Saver products will likely result in a reduction to the average size of the initial draws for these borrowers, it anticipates that the impact to Reverse Mortgage Solutions’ overall origination volume will not be significant, as demand for the reverse mortgage product is largely needs-based and less driven by the product’s interest features,” the company stated.

Walter executives made similar statements of support during a call with investors and analysts on Friday.

“We believe the transition of the product from the full draw HECM to the fixed and variable rate saver and adjustable rate will be an easy one,” O’Brien said. “History will demonstrate the consumer has made this transition in the past and will do so again in the future. The economic future of the product will be as good as past of the product.”

The executives also stated their support for additional program changes currently under discussion by FHA including a financial assessment of borrowers and the creation of set-asides for tax and insurance payments.

Written by Elizabeth Ecker

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  • If the fixed rate now accounts for 70% of the market and they are putting a moratorium on it how can anyone make a statement that it will not have an adverse affect on volume? This is nothing but wishful thinking. .

    I speak to many loan officers who state that many seniors needed the full draw to payoff their existing mortgages or were just opposed to anything with an adjustable rate. Only time will tell but I believe it is going to have a negative impact on volume.

  • I am sorry, I do not fully believe this is the rout to go. I feel our seniors should have a choice between an ARM and a Fixed rate product that is not the saver. A moratorium on a fixed rate loan will not accomplish anything. The Feds and FHA is trying to reduce the amount of principle limit that can be borrowed by our seniors.

    Why not retain the fixed rate loan, give the product all the options the ARM has, from tenure, lump sum, line of credit, an amount certain for a number of years or a combination thereof?

    Retain the 2% up front MIP fee but do not reduce the principle limit. By reducing the principle limit, many homeowner seniors will not be able to obtain a reverse mortgage, just like they can’t with the saver.

    The other subject has to do with the taxes and insurance. Instead of a set aside fee, establish an escrow account. Treat the escrow account the same as a traditional loan. Collect a 3 month reserve to establish the account and to have the funds there to take advantage of early tax payment discounts.

    This can be done on the fixed rate product as well as the ARM. If we see the establishment of a set aside fee along with a principle limit reduction on a fixed rate loan, you will not need a moratorium, the loan will disappear on its own!

    Issue a coupon book each year to our seniors, let them make monthly payments and have the service r pay the T&I when due. Our seniors can handle monthly budgeted payments much easier than a lump sum at the end of the year. Many foreclosures will be avoided if this approach will be taken!

    We in the RM industry seem to have to continue to fight the Feds in order to save our industry and a valuable retirement tool for our seniors.

    Walter investment management is right in one way but what I have outlined is the saver without the low principle limit and adding the 2% MIP to the loan. This is the only difference. Yes, I did ad the escrow account for T&I. Cogitate on my proposal, see if it does not make sense. I hope my friend John Yedinak will send my proposal to those concerned parties.

    Thank you and Happy New Year,

    John Smaldone

      • Mr. Mastromatto,

        I am assume when you use the phrase “principle Limit” you actually mean HECM Principal Limit Factors (“PLFs”). But what makes 10% a viable reduction and are you suggesting all PLFs be reduced by 10%?

    • John,

      The only way a reasoned lender will supply a fixed rate HECM is closed end.

      Think of it this way. The borrower starts with a balance of $3,000 and a line of credit of $100,000. The borrower can get lines of credit for far less than the current total accrual rates for fixed rate interest at 4.5% plus 1.25% MIP for a total of 5.75%. Later the interest on those sources rises to 6%. The HECM borrower now takes $50K out of the HECM line of credit to pay off the personal lines.

      Now look at the lender/investor. The loan must be funded but here they will only be earning at 4.5%, how much will they have to borrow at or lose earnings on to fund the $50,000 obligation? Imagine if the draw came when adjustable rate sources are charging 10%.

      FHA does not protect against this arbitrage loss. If there is no protection against this kind of loss, why would lenders ever provide an open end fixed rate product?

      To say I disagree with your position is a gross understatement.

  • I can’t imagine anyone thinking the mortatorium on the fixed rate Hecm WILL NOT have an adverse affect on the reverse mortgage volume! I agree with John Smaldone completely. Those of us that have been dealing directly with the Seniors fully realize that the reason they choose the fixed rate is for the comfort of knowing that their rate is not going to change over the life of their reverse loan. I totally agree with John’s solution and changes to the fixed rate product.

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