The ‘New’ New Reverse Mortgage

A month following the implementation of new rules for reverse mortgage borrowers, the industry is welcoming the change.

So, too, are other stakeholders involved in the reverse mortgage process. The changes were twofold: first,making more proceeds available to older borrowers in the near term due to principal limit updates, and second, alleviating a long-held problem associated with risks among non-borrowing spouses of reverse mortgage borrowers. In tandem, the changes are for the best, industry members say.

They may even serve better than expected from an originations standpoint, sources tell RMD.

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PLF changes

Contrary to PLF cuts that borrowers experienced in 2013, the changes this time around made more proceeds available for the vast majority of reverse mortgage borrowers at today’s low interest rates.

Rather than rush to close a reverse mortgage, this led to a delay in originations pending the changes taking effect on August 4 and a following surge in loan volume.

“Most decided to wait for implementation,” Joe Morris, senior vice president of reverse lending for Austin, Texas-based Open Mortgage, told RMD following the August 4 implementation. “They were able to get more proceeds, so they went for new case numbers and have now proceeded toward closing.”

Volume numbers should reflect some pent up demand for reverse mortgages, says Reverse Market Insight President John Lunde.

“It seems as though there was a hiccup in application activity while people waited for the new PLFs to go into effect,” he says. “I wasn’t really thinking about that hiccup factor before, but we started seeing it show up pretty quickly after PLFs were released. It’s the inverse of what we’ve seen with past PLF reductions where there was a big rush to get in before PLFs go down; now there’s a lull as borrowers wait for higher PLFs.”

The transition from a borrower education standpoint as well as a processing standpoint has been relatively smooth, with the exception of a hangup in Texas on interpretation of the rule change there that is causing a delay for non-borrowing spouse loans.

“It went really smoothly,” Morris says. “We were concerned it wouldn’t, but we had very few issues.”

Non-borrowing spouse protections

From a public perception standpoint, an answer to the lingering questions about non-borrowing spouse rights is finally in place.

The change bodes well for those who are considering reverse mortgages today, says Ramsey Alwin, vice president, economic security, for the National Council on Aging.

“NCOA applauds HUD’s leadership in putting forward these changes and guidance,” Alwin told RMD. “We feel this strengthens the product and puts it back to its intended purpose as a long-term financial planning tool. It will make the product less attractive to certain borrowers, but it moves the product away from crisis management and toward long-term planning. This will narrow the borrowers for which it is a good fit.”

The counseling system will need to adjust, however.

“We do need to build the capacity of the counseling network to address the policy changes,” Alwin says.

“We have to look for opportunities from the industry to reinforce each other and support the consumer in the world that they are entering.”

Mainstream media has begun to pick up on the non-borrowing spouse changes, as well. Recent headlines in national news outlets have responded to the changes as a positive in terms of improving protections for borrowers. But the non-borrowing spouse rule has also presented some challenges, particularly in Texas.

As the rule was taking effect, a hurdle emerged in the Lone Star state: A past ruling in a Texas court of appeals regarding loan repayment deferral is leading to uncertainty in interpretation of the rule, which has led to a halt on non-borrowing spouse loans until the issue is resolved. A resolution has yet to be accomplished, though Texas reverse mortgage stakeholders expect all loans to resume within several more weeks.

In other states, the non-borrowing spouse changes have raised additional questions about certain cases where a borrower has been married multiple times.

“The NBS issue, while theoretically solving one problem, has also created problems for those who may be in a second or third marriage,” says Ed O’Connor, regional manager for FirstBank. “In this scenario the spouse may not have any claim at all to a property and can solidify that with a valid prenuptial agreement, but we must still take them into account. Also problematic is the couple going through a divorce, but not yet finalized. We must still include the NBS even if they will shortly be out of the picture legally, unless the divorce is finalized prior to closing.”

The lasting impact

Despite getting accustomed to the changes—on the borrower, lender and counseling fronts—the impact to the industry looks to be a net positive, industry participants agree.

“We see changes such as these actions by HUD to continue to increase the stability of the HECM program,” FirstBank’s O’Connor says.

From a business standpoint, the changes are opening the market to more borrowers, but importantly a more targeted borrower.

“With the definitive answer on non-borrowing spouses, finally there is a stake in the ground,” Morris says. “So far, the youngest [non-borrowing spouse] we have seen is in her 50s. Every time HUD creates a new rule, there are wrinkles, but our pipeline is now larger than it has been since the first of the year. Everyone has had a breath of fresh air.”

This edition of the RMD Report is sponsored by national appraisal management company Landmark Network.  

Written by Elizabeth Ecker

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  • At the moment, the buzz around our reverse mortgage industry is as positive to me as I have ever felt in the 10 years being in this space. Though current endorsements may not necessarily reflect that opinion, the recent changes to the HECM program and the commitment from the industry as a whole to pursue alternative products/options is very exciting. In addition, I think the Extreme Summit Campaign will be positive overall for the industry in spite of concerns that certain lenders will benefit more than others.

  • I feel Elizabeth wrote a very good article and covered a lot of fronts.

    I agree about the counseling agencies, they will need to get up to speed on the changes, especially the NBS change.

    The other change counselors need to be well informed with is the new 60% rule. There are a lot of component parts to this change and one needs to know how it works in conjunction with the initial MIP fees.

    I agree with the industry pulse, it appears the changes will have more pro’s than con’s.

    However, the jury is still out on the Financial Assessment Ruling. This is one change that I wish would go away. This ruling could be the one that breaks the Camel’s back. I say that only because of the uncertainties with the ruling and the fact that each lender may have to set their own underwriting guidelines. This means one lender could underwrite differently than the other, I feel this could spell trouble?

    As far as the present day goes, the changes seem to be tolerable and positive in many ways.

    John A. Smaldone

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