What Consumer Groups Are Saying About FHA’s Reverse Mortgage Proposals

Three weeks have passed since the Federal Housing Administration closed the public comment period for its latest proposed changes to the Home Equity Conversion Mortgage (HECM) program and everyone from reverse mortgage industry members to consumer trade organizations voiced both their support and concerns for the proposals.

While RMD has brought light to some of the comments issued by reverse mortgage industry stakeholders in the days leading up to the commenting deadline, taking note of the remarks submitted by consumer advocacy groups is equally important.

Both consumer groups and reverse mortgage lenders ultimately aim to serve the best interests of seniors, however, their objectives in achieving this sometimes clash. This is evident after reviewing the public comments of certain prominent consumer groups serving the senior population.

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Perhaps one of the most hotly contested proposals is FHA’s plan to cap the lifetime interest rate increases on adjustable-rate HECMs to 5%. FHA also proposes to reduce the cap on annual interest rate increases on HECM ARMs from 2% to 1%.

The opinion among industry participants has been largely unanimous that capping interest rate increases on adjustable-rate HECMs will have a negative impact, particularly in making reverse mortgages more expensive for borrowers and less attractive for secondary market investors.

But some consumer groups disagree, suggesting that an interest rate cap will have a positive effect for borrowers.

“Placing a cap on the interest rate on an adjustable product generally has a positive effect for borrowers,” wrote Amy Ford, director of home equity initiatives at the National Council on Aging, in a public comment submitted to HUD on the recent FHA proposals.

In the comment, NCOA also encouraged HUD to be conscientious that cappingthe interest rate on adjustable-rate HECMs may lead lenders to increase margins, thus making reverse mortgage loans more expensive.

“Therefore, some potential borrowers may select alternative products, when a HECM would have been a good fit,” Ford wrote. “Additionally, capping the rate could impact the credit line growth feature of a HECM adjustable rate product.”

Capping the lifetime interest rate increases to 5% would also protect consumers from “dramatically increasing” loan costs over time, according to AARP, which also voiced its support for the proposal.

“An additional benefit of the interest rate cap is that it will limit the credit line growth feature of HECM adjustable-rate mortgages,” comments AARP Legislative Counsel and Legislative Policy Director David Certner. “

More than 90% of reverse mortgage borrowers establish a “standby” line of credit strategy that they access only when the need for funds arises, according to the consumer website reversemortgage.org, which is maintained by the National Reverse Mortgage Lenders Association.

But while many consumers have utilized this type of reverse mortgage to support themselves in retirement, the line of credit feature, according to AARP, presents significant risk to FHA.

“The growth is determined by the interest rate, lender margin, and mortgage insurance premium and borrowers have access to increasing amounts of funds even if home prices fall,” Certner writes. “This leads to greater risk for the Mutual Mortgage Insurance Fund. AARP policy supports the elimination of the credit line growth feature of adjustable-rate HECM loans.”

It is unknown whether AARP has considered the variety of research demonstrating the financial planning effectiveness of using a reverse mortgage line of credit, but it appears the organization is the only one calling for the elimination of this feature that an increasing number of financial planners have recognized as an effective tool for retirement income planning.

But while AARP and the reverse mortgage industry have sparred in the past, most memorably on non-borrowing spouse issues, the organization ultimately voiced its support for the long-term sustainability of the HECM program and the HUD proposals that it believes will foster such longevity.

“We support making changes to the HECM program to ensure its long-term sustainability and to protect both borrowers and taxpayers,” Certner writes. “AARP supports the continuation of the HECM program and we look forward to working with you [HUD] to ensure that older Americans can tap their home equity with safe, affordable, government-insured reverse mortgage loans that enhance their ability to age in place.”

Written by Jason Oliva

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  • Many argue points that they do not seem to understand. For example, Mr. Certner of AARP forthrightly argues: “‘The growth is determined by the interest rate, lender margin, and mortgage insurance premium and borrowers have access to increasing amounts of funds even if home prices fall…. This leads to greater risk for the Mutual Mortgage Insurance Fund.'”

    Yet does Mr. Certner understand that the interest rate being spoken of is the note interest rate and that it is composed of the lender margin and an interest index? The way Mr. Certner words his comment, the monthly growth rate would be one-twelfth of the sum of the margin plus the margin plus the interest index for the note that month plus the ongoing MIP rate. Mr. Certner has one too many lender margins in his computation.

    Then Mr. Certner correctly asserts that the impact of the growth in the line of credit means borrowers have more proceeds available even when home prices fall and this potentially puts more pressure on the MMI Fund. Yet isn’t the whole HECM actuarial concept in establishing principal limit factors centered around not allowing the balance due to get out of control when considering all mortgage insurance premiums expected to be collected over the life of the HECM? When HUD found that the current modeling did not sufficiently encompass what happened in 2008 did it not take money out of the US Treasury while at the same terminate all Standards so that the amount available to borrowers would be less likely to create such problems in the future? It seems he has forgotten the actions taken not only on April 1, 2013 but also on September 30, 2013 by HUD. He also seems to forgotten the adjustments to MIP both on October 4, 2010 and again on September 30, 2013 which give us the MIP rates on all new HECMs.

    Lenders and investors are smart enough to figure out how to safely gain the same amount of potential interest compensation on lowered interest caps through increased margins. Yes, this will hurt both consumers and lenders and could even subject the MMI Fund to greater pressure by increasing interest for no fundamentally sound purpose. If HUD is right that characteristically borrowers who draw lower amounts up front are less likely to have the largest balances due, then does the position of AARP in relation to the growth of the line of credit even make sense in the current HECM model?

    Rather than acknowledging that AARP was wrong in considering HECMs as loans of last resort, it seems their hubris would rather destroy the one feature that makes the HECM unique among all mortgage programs available to seniors in creating potential cash flow throughout retirement. If this is how AARP justifies the way it helps seniors, I would hate to see what they are promoting outside of HECMs (including fee splitting arrangements on sponsored insurance products with the related insurance carriers).

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