HUD ‘Very Pleased’ with Reverse Mortgage Changes

Reverse mortgage changes are having a positive impact on the Home Equity Conversion Mortgage program, as intended by the Department of Housing and Urban development, agency officials said this week.

The changes most recently include the implementation of a financial assessment for all borrowers, which took effect in April 2015, as well as non-borrowing spouse protections that also took effect over the course of the last year.

“We are very pleased,” said Karin Hill, senior policy advisor for HUD’s Office of Single Family Housing. “[The program] has stayed very stable and the changes resulted in the outcome we had hoped for.”

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Specifically, HUD has noted several changes for the better among the composition of current borrowers. The shift comes along with an overall decline in reverse mortgage volume directly following the Financial Assessment rollout, although monthly volume is along the pace of its previous-year totals, Hill noted.

In 2015 and 2016, there was a significant change in draw patterns at closing among reverse mortgage borrowers that HUD calls “very positive.” According to the department’s data, 63% of borrowers draw 60% or less of their proceeds at closing.

There has also been a marked shift away from fixed rate reverse mortgages; a trend which began prior to the financial assessment rollout, but has settled at 89% adjustable rate loans as a proportion of overall loan production.

“This has had a very positive impact on the risk profile [of the program],” Hill said.

HUD is currently working on a new HECM rule that will include many of the program changes that have taken place of late; a rule that is expected to be proposed in the coming weeks and will seek comments from the public. Within those changes, lenders can expect to see some clarifications of Financial Assessment details as well as a subsequent publication of the new HECM handbook, HUD’s officials said.

Among several concerns expressed by the Department are the proportion of HECM-to-HECM refinance transactions being closed currently, borrowers who are making large repayments shortly after closing, as well as possible steering issues relating to reverse mortgage counseling.

“Out in the field, we have to monitor how people are selling the program,” Hill said. “Some things may not seem to be risk issues, but they are in fact risks.”

Overall, however, HUD praised the program changes, noting the positive impact they have had to the Federal Housing Administration’s Mutual Mortgage Insurance Fund.

“We aren’t at the end of the road yet, but we are very dedicated to this program,” Hill said.

Written by Elizabeth Ecker

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  • “…although monthly volume is along the pace of its previous-year totals, Hill noted.”

    If that paraphrase is reasonably accurate, it is somewhat surprising as the drop in endorsements in the first 7 months of this fiscal year is 9.7% when compared to the same period last year. That is more than the 3,190 endorsements that RMS/S1L produced in that seven month period of fiscal 2015. At the time RMS/S1L was the third largest endorser of HECMs in the country on a fiscal year to date basis.

    There is anecdotal information that perhaps 20% of the endorsements came with less than 30% Unpaid Balances. Unless there are substantial tails from this segment of endorsements, there seems to be little profit to lenders in them. That means that those endorsements with “normal” profits could be as low as 80% of the already low endorsement count experienced fiscal year to date. This in part explains some of the losses we currently see in the HECM operations of publicly traded lenders.

    There is no question that the actions taken on 9/30/2013 by HUD have greatly reduced the HECM risk to the MMI Fund. These changes also resulted in many cash poor borrowers not finding the funds from a HECM they need as they need them, no longer making HECMs a feasible solution for their financial needs.

    On April 27, 2015. HUD heeded the long standing and continuous request of lenders for HUD to create a uniform means for lenders to qualify applicants based on their ability (after obtaining a HECM) to meet their ongoing property charge payment obligations on the collateral by creating qualification testing HUD called financial assessment. It also permitted limited modifications to the loan so that the borrower can still qualify. It also provided an additional means to obtain a HECM through a somewhat draconian means to ensure payment through withholding proceeds from the loan called LESAs.

    While HUD may be very pleased with the changes, it would seem that HUD could significantly reduce the negative magnitude of most of these changes to borrowers without significantly increasing the current HECM risk to the MMI Fund. Despite the changes, as of September 30, 2015 there was a cumulative operating loss of $684 million in the HECM portion of the MMI Fund ending balance. If the value of the HECM collateral rises in areas where home value recovery is still low (but at a rate significantly greater than 4%) the cumulative operating loss could go down substantially more before this fiscal year is out.

    HUD is right to be concerned about “the proportion of HECM-to-HECM refinance transactions being closed currently, borrowers who are making large repayments shortly after closing, as well as possible steering issues relating to reverse mortgage counseling.” Over the last decade HUD has shown reluctance to pursue mortgagees and TPOs steering prospects to particular counseling agencies. For those mortgagees with wholesale operations this could become particularly problematic if they have not been properly supervising their TPOs.

  • On a whole I agree that the changes with the HECM product is and will have a positive impact on the product and how it is perceived in the industry.

    I also feel the clarity on many issues pertaining to FA is long over due in coming to us! Underwriting questions have been numerous and in many incidents the staff within HUD don’t even have some of the answers.

    I do agree, with FA alone, it will enhance the credibility of GMA pools in the market place as well as within the financial communities and seniors alike.

    However, in one area, like the article points out as well as my friend Jim Veale, HUD needs to be concerned about HECM-to-HECM refinance transactions being closed currently! When we see borrowers making large repayments shortly after closing, we have to ask ourselves, does this mean we have possible steering issues on the part of some originators?

    However, all in all, the article is positive and it is great to see and hear positive vibes coming from HUD. I know I am optimistic about the future and stability of our industry and the HECM product, due to the changes that have been made!!

    John A. Smaldone
    http://www.hanover-financial.com

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