Reverse Mortgage Industry Faces New Challenge

Upcoming changes to federally-guaranteed home equity conversion mortgage program will change not just the product itself, but the type of borrower using it, said panelists during a Wednesday webinar on the topic, and there are opportunities amid the overhaul.

“The reality is, we need to change how we do this business,” said John Lunde, founder and president of Reverse Market Insight, during the webinar, hosted by ReverseFocus. “There are several big opportunities out there that our industry has not really attacked, and effectively gotten a lot of volume out of. The HECM for Purchase is probably one of the biggest ones… Financial planners [present] an enormous opportunity, even bigger than Purchase.”

Pursuing those opportunities will be imperative, he said, considering how the new HECM rules could affect future loan volume.

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RMI took a look at funding activity from July and August to see how those loans would have been impacted had the new rules already been in place.

For the July/August book of funding, the total impact from the upcoming October changes—lower principal limit factors and restrictions on initial utilization—but ignoring the January financial assessment implementation would have seen a 49% unpaid principal balance reduction.

“That’s a shocking number,” said Lunde. “It’s bigger than any other changes we’ve seen. This underlines that we need to go out and change everything, from marketing to how we approach business. It’s going to be a different business going forward. That’s the bottom line.”

However, the changes are essential for the program to continue, said Michael Kent, president of mortgage lending at Reverse Mortgage Solutions, not only from the MMI Fund standpoint, but also to help prevent the seniors taking out a reverse mortgage from running into issues.

“We can look at the changes as the class being half full, or the glass being half empty. I’m an eternal optimist,” Kent said. “I see a lot of opportunities that exist in working with financial planners… Hopefully this will move us away from ‘I need the money now’ and move [reverse mortgages] into a piece of the person’s retirement planning.”

The HECM of 2014 is going back to its roots, said Jeffrey Taylor, president of Wendover Consulting, Inc. The original intent of the HECM program, he says, was envisioned as a line of credit for emergencies, or seniors who wanted to supplement their monthly income with periodic or tenure payments.

“In my view, [reverse mortgages] are going back to the original intention of the line of credit. Pure and simple, this is a competing product to go against home equity lines of credit,” he said. “That’s the borrower we want; that’s the market to go after.”

Compared side by side, with compounding growth on the unused portion of LOCs and the fact that origination costs can be financed into the loan, along with no monthly requirements for repayments, Taylor believes that the HECM will beat bank-funded HELOCs “every time, hands down.”

Ultimately, HUD’s rationale for overhauling the HECM program comes down to two considerations: risk management, and program preservation, said Dan Mooney, Lender Compliance Monitor specializing in HECM compliance for the Quality Assurance Division out of the agency’s Santa Ana, Calif. Homeownership Center.

“The whole reason this program was conceived in the mid-80s revolved around the phrase ‘age in place,'” Mooney said during the webinar. “That was the driving force behind these changes, especially in regard to initial disbursement limits: the preservation of accessible equity within the loan model itself, for borrowers down the road to be able to actually age in place.”

Written by Alyssa Gerace

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  • There you go – a good glimpse of the 6 different “pay cuts” I had mentioned in the POLL post on this site a few days back. 49% reduction of the loan amount drawn at close???!!! Take the income that banks and lenders make at closing and CUT IT IN HALF. (Not even including Financial Assessment yet!) My sincere question is, (besides the question of how to ACTUALLY find a REAL way to fill that income gap now) does FHA/HUD even have any place in this space anymore? Everyone is touting “the financial planner, the financial planner!” They use terms like MASS AFFLUENT (you know, the people richer than most of us could ever dream to be!) And don’t get me wrong, the concept of Standby Reverse Mortgage is great and is a solid technique. But, FHA’s stated motto is to, “Serve the under-served!” What part about the “mass affluent” target client fits the term “under-served?”

    • David,

      The mass affluent are not the wealthy or super-wealthy but they are wealthier than most people in the world today. They fear running out of money during retirement. If HUD can them survive retirement at no cost to the MMI Fund, why not? That certainly meets the test of the purpose clause found in the HECM law.

      If seniors are not under-served who is?

      • But I think you miss that HUD helping them out is taking from me (the less wealthy than our new subject client) and giving to them (the wealthier than most.). This is thievery at best, if in fact the new client has become “wealthier than most” and to serve them we will tax the rest of the “most.”. This is a tax payer subsidized program. The tax payer should no longer be involved if we target those who have more means to care for the rest of us vs. The rest of us taking care of those who have more means.

      • Lance,

        If you look at who pays for HECM operating, administrative, and other costs, the HECM program has always been and continues to be taxpayer subsidized. Those costs are paid through the budgetary process.

        Those industry leaders who went on and on about the HECM program being self-sustaining either did not know what they were talking about or had an awfully strange way of defining “self-sustaining.”

      • Lance,

        Where do you suppose all the GOVERNMENT employees get their paychecks, benefits, and other perks of monetary value? Where do you suppose all the operations, materials, assets, etc., of the GOVERNMENT company get their funding?

        And you still miss the point! The program coming to a “doomed to fail” position one day has the promise of unlimited, endless supply of the governments “funny munny” backing.

        If the target client is MASS AFFLUENT (again – richer than you an me) why have ANY government effort WASTED on a program that no longer fulfills the stated mission of the government entity that uses tax payer money to run the operation?

        If the program is so strong and the investment such a stable risk – why don’t the private companies take over with better production and better pricing?

      • I don’t disagree with some of your points, although you (David) have no basis for your statement on my financial position. My comment was based on the understanding that MIP is used to cover all program costs (administrative overhead, loan losses, etc). I may be a CPA, but I don’t pretend to know anything about the FHA budget. Based on The Critic’s statement above, it appears that MIP covers loan losses only, which would mean the program is being re-designed in an attempt to be self-sustaining with regard to loan losses only.

      • That is exactly how I understand the program works. All direct HECM operating and administrative costs of running the program have always been paid from the annual budgetary allocations to run HUD. That is exactly how the HECM program was designed to work. Industry leaders who have promoted the idea that the HECM program has ever been self-sustaining have been misleading their audiences for decades; it has never been self-sustaining even from day one.

        How is it even possible for any private lender to compete with HECMs without doing so at a loss? Quite frankly, it is not.

      • David,

        Here you go on again about “the stated mission of the government entity” which you cannot cite. You know what they say insanity is, “doing the same thing over and over, while expecting different results.”

        Please prove your previously acknowledged (and I mean by you personally) misstatement. You have every right to express your opinion and argue its merits but your tirades, rants, and abusive and misleading attacks do absolutely nothing to prove your points or convince others of their merit. They seem to help you vent but far too many times they lack sense and do harm to the image of our dinky industry.

      • Lance – not to uncover sour grapes – but you DID see the $1.7 billion tax payer subsidy today, correct? (For those silent readers who wagged their heads…told ya so!)

    • David,

      Where do you find this motto? Mottoes are great slogans but as in this case, they have little to do with fulfilling legal responsibilities. Mottoes are very important when they state what the responsibilities of an organization are.

      Here in part is what HUD states FHA is:

      “What is the Federal Housing Administration?

      The Federal Housing Administration, generally known as “FHA”, provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals.”

      http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/fhahistory

      If FHA is not providing insurance in compliance with the law as interpreted by HUD then FHA is not providing insurance as directed by HUD. So if serving the under-served conflicts with the FHA responsibility to provide insurance in compliance with the law again as interpreted by HUD, is FHA fulfilling its legal duties? Absolutely not. If the law permits a qualified borrower (even the mass affluent) to obtain a loan and the loan meets FHA requirements, FHA must insure it.

      So I am a little confused by your last two sentences. Can you clarify your point? By being in one paragraph it seems you are tying future lost compensation with “serving the under-served.” Is that correct? If so, it seems you are grasping at straws

      • No, it was a mixed bag of thoughts. Yes…big pay cuts, and the reason for the cuts is understood, to a point. However, looking at the result of the cuts creates a product that, in my opinion, no longer needs the social welfare system of tax payer subsidized loans. If the target client has become the “wealthier than most” (as the critic puts it), then why the taxpayer being involved at all? I, for one, am not anywhere near “wealthier than most,” and I have a hard time accepting that I am being taxed to help those wealthier so their income lasts longer? What about my income lasting longer by not being taxed for this program? (Again, assuming the new client for this resulting product has now become that “mass affluent, wealthier than most.”)

  • This was a good article and summed up much what was said on the webinar, which I attended.

    Some points here to mention that Jeff Taylor brought up. Jeff stated that the HECM of 2014 is going back to its roots. He also said the original intent of the HECM program was envisioned as a line of credit for emergencies, or for seniors who wanted to supplement their monthly income with periodic or tenure payments.

    I agree with Jeff, however, going back to the days of the original intent of the program, we were not facing some of the constraints we will be facing now.
    First off, we are going to be dealing with much lower principle limits, T&I set aside fees and the financial assessment ruling.

    This will by itself eliminate many seniors from qualifying for the HECM. Sure, we have the managing of risk factor that has become a major problem.

    Taking this into consideration, we can’t say we are going back to the roots of the program, especially in everyway.

    I do agree with the article and John Lunde. We are going to have to approach the industry completely different, we will need to profile clients differently than we have in the past and we can’t rely on the HECM program as a fill the need program for everybody any more.

    Sure, we will be sill be taking care of those seniors in need and those that need to relieve there monthly financial burden’s to improve their quality of life. The difference is, we will not be able to take care as many seniors in this way as we once did.

    I also agree, we need to look at the glass of water being half full. We have a large market out there, such as the home purchase market that we have not even scratched the surface of it as of yet. We need to go after the more affluent senior and sell the product differently than we used to.

    The financial assessment change will concern me the most. To many openings for going overboard on the controlling of risk. I can vision lenders and their underwriters taking things to extreme just to protect themselves. I see a lot of confusion in this area, I also see a slow down in the processing and closing time period because of the financial assessment ruling.
    Time will tell but for now, we have no choice but to except change.

    The shining light in all of this is that we could have seen the death of the HECM product if these changes did not come to fruition!

    John A. Smaldone

  • NRMLA is proud to announce that Michael Kitces, writer of the financial planning blog “Nerd’s Eye View” at Kitces.com, Practitioner Editor of the Journal of Financial Planning to the next event in November. He states in his blog “Unfortunately, though, in practice the application of the new rules may also make reverse mortgages less appealing or feasible for some financial planners, for two primary reasons. The first is the new 0.50% upfront MIP cost (in addition to other closing costs); in the past, financial planners were often wary to use reverse mortgages because of the hefty 2% upfront MIP, and the introduction of the HECM Saver a few years ago with virtually no upfront MIP (a charge of only 0.01%) had made the loans far more appealing, as detailed in the October and November 2011 issues of The Kitces Report. He is a great speaker though.

    • Yo,

      What is wrong with what Mr. Kitces is saying? Perhaps you like him to ignore facts? I would rather have someone tell the hard to hear results than try to be overly optimistic about what has happened. It seems you prefer otherwise.

  • Microeconomics:the unit price for a particular good or service will vary until it settles at a point where the quantity demanded by consumers (at current price).NO WAY YOU CAN STOP BIG BUSINESS AND ADVERTISING.

    • Microeconomics don’t fully control revenues in this business, because Origination Fees are regulated. To complicate matters, when rates are raised to allow for higher gain on sale revenues, loan amounts are reduced. Per loan revenues need to be adequate to cover costs (including advertising) and to allow for a reasonable profit, and that relationship is about to change.

  • I think the major point we are missing is that there are lots of seniors under the new program that will qualify and NEED a reverse mortgage but will not do a Reverse Mortgage because of the daily bad press.and myths etc etc etc.It will be a tough 1st 12/24 months but with 10,000 seniors turning 62 daily and the the younger ones caring less of what older seniors thought about the so called cons of doing a reverse mortgage………it will bounce back

    • You think it is only the older generation with a negative view of this program? Over 12 years in this business and the perception has never been worse. The subprime mortgage industry did not help the last 5 years. The program changes will not help this perception. We are many years away before a reverse mortgage is considered the norm. Maybe in 10 years when the boomers are in their 70’s which is who this program is meant for.

      • The real Pity Party is not the LO or the scared misinformed senior brainwashed by Myths its the poor senior that now has to look at Rent.com

  • C,
    Just do a search on FHA mission. It’s pretty well known, published, and understood. I’m surprised you haven’t heard this before.
    As for the rest – I would only respond with this….The law says, “blah, blah, blah…” Ok, really? How does that work out for what Social Security is supposed to do? You know, the law that forced us to save for our retirement with the likelihood that it won’t be there without major cuts (if at all?)
    No, when the government is involved: there are “fake money” bailouts, decision to “change the law” for the WELFARE of the majority (translation – the welfare of the majority of law makers who see it benefiting them), etc., etc
    I don’t care about what the law says. If the government is involved in conducting business, it is with SOCIAL WELFARE (so called) in mind, period. (Just like the published, stated mission of FHA – serving UNDERSERVED markets.) This mean government (translation: TAX PAYER!) subsidies, PERIOD!
    If the product (HECM) is now meant to target the MASS AFFLUENT, and the product is now “so stable from risk of loss,” then why is government involved at all? They should not be. If the product is so strong then there should be private competition that takes over the production and provides even better pricing. But I suppose (only suppose) that the product is not that stable for private business to actually see a solid, low risk ability to make money on the investment. (Without the promise of the tax payer bailout, you know…even if the MMI were to fail.)
    No – it’s a welfare program – no matter how you spin it. And now, it doesn’t seem to serve those underserved so much anymore than it does those who are well served and with more means to serve others.

  • Other C,
    Yeah, I can’t really take your response seriously because it is you who seems to misunderstand the techniques being suggested. I’ve personally spoken with Mr. Sacks and I’ve also read his article in the Journal of Financial Planning several times. I understand his concepts quite well. And in Mr. Sacks’ approach, using the reverse mortgage FIRST, before anything else, for retirement “income” is what his article suggests as the conclusion. Of course, I’m sure your adept enough to understand that if I draw all the reverse mortgage first, then that means I will spend the rest of my lifetime (after exhausting draws) sitting on a principle balance owed that is compounding interest and MIP charges.
    Now, had you mentioned Mr. Salter or Mr. Evensky then yes, I’ve read that article as well many times. And their approach is much more a “cash flow manager” technique. No different than having a pile of cash off to the side which is to be used if drawing from investments would result in a loss.
    The point sir, I get it, I get it very well, I get it better than most who teach it. I’m not sure why you would be quick to assume otherwise.
    As for responding as reaction vs. reason – whatever, you miss the point and so reason escapes you.
    The point is made clearly in your last paragraph (and reiterated in my response to C above). The program is not viable enough without the promise of a government bailout in the back pocket. And even the government itself sees this and so they “shore up the program” just like a private business would. But in doing so, they cut out more of the “underserved markets” which is their primary purpose to begin with. So why is government involved at all? I suggest they should not be. If the program is so profitable and stable for investors, why the need for the guaranteed, limitless supply of insurance backing? (And don’t quote me the garbage about laws regarding MMI – we ALL know that bailouts do and will happen, especially when another government agency cries poor!) This is TAX PAYER subsidized. That makes it a SOCIAL WELFARE PROGRAM and it has no place as such anymore with a target client being those who are wealthier than you and me.

    • David,

      I am not the Other C but The_Critic.

      No one guarantees that the HECM program will not change with time. It must fit within the parameters of the law and as economic realities significantly change so generally must the HECM program. Nothing has been as significant an economic change to the American housing related industries in the last century plus as the Great Recession.

      The HECM program has always been subsidized by American taxpayers. After all the HECM operating and administrative costs of HUD are paid through the budgetary process not HECM MIP. However, the MIP is supposed to be used to reimburse all note holders losses on interest and principal and subsidize counseling. (By the way monies actually borrowed are referred to as “principal,” not principle. It is ridiculous that licensed mortgage residential originators get this wrong over and over again. This will be proven by simply going to http://www.investopedia.com/terms/p/principal.asp).

      Not long ago I remember seeing in Linked In where you went after a lot of other originators for calling you on your premise that all seniors should have a HECM. Now you are saying that the mass affluent should not have access to them as long as the seniors you are supporting cannot. So what will your position be tomorrow?

      If the mass affluent will provide far more MIP than their HECMs will consume in note holder reimbursements, why not welcome them their participation? As to excluding more seniors, your argument is with HUD. Forgive those of us who are so un-lightened that we support the changes in Mortgagee Letter 2013-27.

      It is time to move on.

      • Ok, then move on.

        Yes you are correct that I jumped on that bandwagon of everyone should have one. And I still believe that as the concept of the product is good. But with experience comes wisdom. And the realization that government doesn’t belong in the business, especially when they no longer fulfill their true mission, it has changed my point of view a little.

        What the program can do for people, how it has changed lives, there is no doubt that it has been helpful. And if private company wants to take over, again, now that the target client is well outside the scope of FHA’s mission, I’ll be happy to sell that. But for the tax payer to be covering the costs…time to move on indeed.

  • Interesting thought Yo. Do you think that the cost of advertising in general is affected by the dynamics behind reverse mortgage revenues (a tiny market)? Will the cost of a TV for reverse mortgages be less expense than an ad for another industry?

  • Yo,

    Really? You were responding to Lance who was talking about the impact of the changes on his business. His point about advertising was its costs would impact larger HECM lending entities; it was not his focus.

    If you think advertising is a perfect market, you do not understand it either. Larger entities get a very different price than smaller ones. So how you get it is a perfect market is odd at best. The closest thing we have to a perfect market is certain stock exchanges such as the NYSE.

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