Mortgage Professor: Reverse Mortgage Changes, The Good and the Bad

The Federal Housing Administration-insured reverse mortgage program is getting a comprehensive makeover as the agency attempts to stanch past losses and prevent future ones to its Mutual Mortgage Insurance Fund, writes Jack Guttentag—aka the Mortgage Professor—in a recent column.

“Sweeping changes” have arrived in response to a large number of borrowers taking all of their loan proceeds upfront, leaving them with no borrowing power down the road and going against reverse mortgages’ intended use, says the column.

“The home equity conversion mortgage, or HECM, program was originally intended to help senior homeowners remain in their homes indefinitely, not to meet short-run financial needs,” writes Guttentag. “Borrowers who cashed out early, furthermore, had less incentive to stay current on their property taxes and insurance, which increased losses to the FHA.”

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Now, the FHA has limited how much of their principal limit borrowers can access up front and throughout the life of the loan, with the size of the mortgage insurance premium dependent on the initial draw amount.

“The bad news is that the HECM program is now even more complicated than it was,” he writes. “While it is not clear whether or not the new rules will succeed in discouraging early cash draws, it is very clear that these rules have made it more difficult for seniors to sort out their cash draw and options for mortgage insurance, or MI.”

Read the full column here.

Editor’s note from Jack Guttentag: “My recent article on the makeover of the HECM reverse mortgage program has a mistake in it. I said that the borrowing limits had been increased when in fact they have been reduced. My deepest apologies to seniors, industry people and other readers.”

Written by Alyssa Gerace

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  • How did he come to this conclusion? This must be a misquote. There is a slight growth in the remaining unborrowed funds during the 1st year hiatus but it isn’t anywhere near the shortfall created by the new PLF’s of HECM Lite..
    I suppose if you let the line of credit grow for 5 or six years you would exceed the amount you could draw initially under the old program so long as you’re willing to ignore the interest and mip accrual on the initially drawn funds.

  • I don’t understand his statement about higher PLs unless he’s limiting his comparison to Savers, which were a small percentage of the market. That certainly appears to be a misleading comment.

    • Lance,

      Jack seems to miss how the new PLFs were derived. There is no consistent way of deriving the new PLFs from the Saver PLFs. They were based on 85% of the Standard PLFs.

      Ignoring Standards in the paragraph you refer to shows the weakness of Jack’s background in HECMs. He was focused on the least known and utilized product type we offered last fiscal year, Savers and did not realize he should reference to what he was comparing the new PLFs. It was most surprising when he stated that he was surprised that the new PLFs were greater than the ones he was comparing them to. The surprise to most of us in the industry was that the new PLFs were about the same as Saver PLFs. Most of us thought they would have been larger, closer the midpoints between Saver PLFs and Standard PLFs.

      The worse thing is that Jack’s depiction makes what we told seniors last month look like we did not know what we were talking about. After all Jack is recognized as the mortgage professor, not HECM originators.

  • I neglected to acknowledge that he is correct if he is comparing the new Hecm Lite to the old Saver Adjustable Rate product. But I wouldn’t consider that an earth shattering revelation at this late date.

  • Dr. Guttentag has been a positive supporter of our industry for decades. In the last year, he and I have been initiating emails back and forth related to various issues about HECMs.

    I just sent off an email this morning telling Dr. Guttentag about our general reactions to his presentation on the change to PLFs. I urged him to run his articles on HECMs by Mr. Peter Bell before publication to get a sense of how the industry views the contents.

    Unfortunately as I stated to Dr. Guttentag there really is not much way to change the article since it has already been published. Although not stated in the email, subsequent separately published corrections to an article rarely help.

    The article certainly does not help with our collective image among seniors who were aware of our message about lower PLFs after 9/29/2013 and who are also followers of articles written by Dr. Guttentag on HECMs.

  • Here is the reply I just got back from Dr. Guttentag: “Jim: Yes, I goofed, I inadvertently compared the new limits to the old saver limits. I will do my best to correct it wherever I can. Jack”

    I hope that answers the questions on that subject.

  • Here is the latest email from Dr. Guttentag:

    “Jim: Just to keep you in the loop, I left a correction at 17 web sites that had run the article, and Monday a corrected version will go out to other sites and hard copy papers that have not run it yet, including the Washington Post. Thanks for letting me know. Jack”

    What is surprising to me, is that no one else in the industry contacted Dr. Guttentag before the email I sent him the next day after the original post by Ms. Gerace. I thought my email was “a day late….”

    What I learned from this and a prior experience with two CPAs, who wrote a very inaccurate story on HECMs in a prominent financial planning annual issue of a flagship CPA magazine that reaches hundreds of thousands of CPAs and thousands of CFPs, is that there are some who really want our help as long as it is constructive and not some kind of “tongue lashing,” vitriolic condemnation, or rant over simple misstatements, mistakes, misunderstandings, or errors.

    I never expected the response Dr. Guttentag has given.

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