Reverse Mortgage Industry Braces for September Surge

With less than a month to go until the Department of Housing and Urban Development’s new reverse mortgage rules come into effect, many in the industry have predicted a scramble to the finish as potential borrowers attempt to lock down loans before limits narrow and insurance premiums rise.

On the ground, as early as two days after the mortgagee letter came down from HUD on Tuesday, counselors were seeing increased volume.

“Yes, I am swamped,” said Frank Kautz, a housing counselor and staff attorney at the Massachusetts-based Community Service Network, which serves residents in multiple northern suburbs of Boston.

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By Thursday, Kautz had filled up almost two weeks of counseling sessions, with prospective Home Equity Conversion Mortgage borrowers attempting to claim “emergency” slots. Kautz has been prioritizing the ones who stand to lose the most from the new regulations, which will generally lower principal limits by 20% and change the insurance premium structure to a flat upfront rate of 2.0%; previously, borrowers seeking less than 60% of their claim amounts would pay 0.5% upfront, while those looking for larger loans would pay 2.5%.

“This is going to hurt a lot of people, because that change in what they can get out of it makes a big, big difference,” Kautz said, placing particular emphasis on borrowers who use HECM proceeds to pay off existing mortgages. Some of those clients, Kautz said, won’t be able to accomplish that goal with the new principal limit guidelines.

At Housing Options Provided for the Elderly — or HOPE — in St. Louis, director Buz Zeman said it was too early for a major rush, but that his team fully expects a major increase in September. The flat initial premium rate will take away one of the major topics he counsels potential borrowers on: the difference between the initial insurance premium for smaller and larger loans.

“It’s moot now, I guess,” Zeman told RMD. “A lot of lenders wouldn’t bring that up, and it’s an important part.”

Like Kautz, he also expressed concerns about the effects the new regulations will have on borrowers who are in the application process.

“It’s just that people get less money, and the people who used to get a big break for taking out less money in the beginning — that’s a real jump from 0.5% to 2%,” Zeman said.

Too soon to see application bump

It may also still be too soon to tell the scope of the application bump ahead of the new guidelines. Megen Lawler, president of reverse mortgage document-management and software firm BayDocs, LLC, said she hasn’t seen a “huge surplus” of applications yet, but anticipates a pick-up during the next few weeks.

“I think the industry is still digesting it, but it’s kind of all at once with the final rule implementation and then with this new change,” Lawler said, referencing the separate set of program updates — which, unlike Tuesday’s announcement, have been long anticipated — set to take effect September 19. “There’s just concern out there right now.”

In response to the perceived wave ahead, the National Reverse Mortgage Lenders Association on Friday issued an alert reminding its members that originators can’t order a Federal Housing Administration case number until the borrower completes mandatory counseling; the new rules apply to all case numbers issued on or after October 2.

“Violating this regulation may jeopardize the insurance on the loan,” NRMLA warned in the message to members, adding that a premature request would constitute a violation of its ethics code and could result in sanctions from the trade group.

Timing frustration

Kautz expressed disappointment with HUD’s decision to give the industry only one month to process the news. The entire point of counseling, Kautz said, is to provide detailed information and then give time for potential applicants to think about it — a luxury they no longer have.

“I hate to tell people that they have to rush to think about doing this. I like to give people a really long time to think about it,” Kautz said. “But right now, they can’t.”

HUD should have given lenders, borrowers, and counselors at least until November to sort out all of the implications, Kautz said — though he also admitted that he still would have found that to be too short a timeframe.

“Why so soon? You gave us less than a month,” Kautz said. “This has been talked about for ages.”

Written by Alex Spanko

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  • Let’s not go crazy. It is time to come down to earth.

    First, it is not up to borrowers how much they will take at closing. We all still must deal with the mandatory obligation rules found in Mortgagee Letters 2013-27 and 2013-33. It may mean a little more in the way of draws for the 10% available beyond any mandatory obligation but only up to the lesser of 1) mandatory obligations plus all set asides and then 10% of the principal limit or 2) the principal limit. It may impact a few H4P decisions on some adjustable rate H4Ps that are few and far between in comparison to fixed rate H4Ps.

    It is hard to believe that if the LIBOR 10 year swap rate is the same on 10/2/2017 as it is today, that the margins on adjustable rate HECMs will not drop at the end of the next 29 days. So some of this 20% drop in principal limit factors is misplaced. There will be some drop but 20% seems unlikely.

    As to the short period to reflect from announcement to implementation, remember the changes that took place on October 4, 2010. They were announced on September 21, 2010. The first PLF change was announced on September 23, 2009 and went into effect on October 1, 2009. There are yet other examples but if you look at the August 4, 2014 changes, they announced on June 27, 2014 or about 38 days before implementation. The current announcement was made on August 29, 2017 giving us about 35 days to incorporate the related changes. In comparison, this is one of longest periods from Mortgagee Letter announcement to implementation of new PLFs.

    The industry has done what has been asked for in the past in much less time. I doubt if the industry will not comply now.

  • Hi all,

    Interesting side note to the above discussion. Given the continuing mess in Texas, and the upcoming hurricane in Florida, I am curious if there will be any time extensions for those states. Not that it affects me, I am just curious.

    Oh, I agree with Jim Veale on the time being actually a bit longer this time than previously, that was not my point. From a counselor’s perspective, I just wish HUD would give people a lot more time for these major changes. There will always be those who make their first call a week before the change, but that is what it is. I am more concerned about the folks already thinking about it. (Oh, my last quote should have had the word “probably” in it prior to “been talked about for ages.” HUD usually does not change things like this over night, they think about them and vet them carefully. However I do not know how long this has been talked about.)

    Frank J. Kautz, II
    Staff Attorney

    Community Service Network, Inc.
    52 Broadway
    Stoneham, MA 02180
    (781) 438-1977
    (781) 438-6037 fax
    FrankKautz@csninc.org

    • Mr. Kautz,

      I was a little harsh about your criticism of the timeline but HUD is getting a little better. BUT like you, HUD could get these kinds of changes to us much earlier than their required date of implementation.

      I understand that part of the reason for these changes is what is seen in the interim field work that the actuaries have been performing in the last month or so. No doubt, the loss from the book of business is most likely much worse than estimated in the actuary report on the HECM portion of the MMI Fund as of 9/30/2016. The short time frame for implementation is more because HUD wants to avoid similar losses in the new book of business for fiscal 2018.

      Understand my comment was not just about your quotations but also those of the others. Your comments and quotations are among the very best on RMD. I appreciate your point of view especially as a counselor.

  • Yes, this is a blow for the low PLU Borrowers such as those putting the “standby” LOC in place for future use, but for those borrowers whose initial (or subsequent) draw is a larger PLU, the reduced annual MI of 0.5% is the silver lining. Compare that to Forward FHA mortgage annual MI of 1.35% (or even the rolled-back 0.85%) and one can easily see that HECM’s are no longer “expensive” by comparison.
    After a few short years, the borrowers with the higher PLU will come out ahead vs. the current MI structure. Let’s don’t let this fact get lost in the mayhem.
    A lower “accrual rate” will also result in a more attractive projected Amortization Schedule, especially if 4% continues to be the assumed appreciation rate. This should help the heirs or other parties who are interested in the retained equity over time.
    So, there will be those who actually benefit more from the new structure vs. the current structure, if not the Originator’s LPBC.

    • AZCactus,

      In the future, if you want people to read your comments, PLEASE note on each FIRST use of an abbreviation what that abbreviation means.

      Your second to your last paragraph justifies the condemnation currently afoot regarding displaying anything on that schedule other than the estimated costs of borrowing. At this point not even HUD believes that the 4% is the national average for home appreciation. It just is not realistic as now reflected in the last three principal limit factor tables. HUD needs to revise this schedule.

      • Fair Enough.
        PLU (Principal Limit Utilization)
        LOC (Line of Credit)
        LPBC (Lender Paid Broker Compensation, aka Premium Pricing or Yield Spread Premium)

      • AZCactus,

        Thanks.

        Now to your last sentence in your first comment as stated: “So, there will be those who actually benefit more from the new structure vs. the current structure, if not the Originator’s LPBC.”

        Focusing on just the last phrase, whom is the Originator you are referring to?

  • I brought this up about a year ago or so, but with these new PLF’s, it may be time HUD implements a temporary HECM Streamline Program. This would provide a surge in MIP revenue for the MMI Fund to recover some of the losses (definitely not all). However, it will put the HECM in better position in the future with reduced accrual rates on UPB’s and the LOC growth.

    HUD should consider allowing all HECM borrowers to reduce their accrual rate without an appraisal or FA requirements. The amount of financed closing costs should be based on the reduction of the accrual rate, as the savings in monthly charges will be recovered very quickly. Maybe they can put in place a recoup of 36 months maximum for financed closing costs.

    HUD is already insuring these loans. Does it really make a difference to HUD if a borrower is upside down on the new loan if they are upside down on the old loan? Would it benefit HUD if that same borrower had less interest accrue on the balance and slow the growth of negative equity?

    If a borrower already has a line of credit based on an old PLF table or inflated home value, wouldn’t it be in HUD’s best interest to reduce the growth of that line of credit even if it means that line of credit balance stays the same?

    Let borrowers keep their current available PL (line of credit, tenure, LESA, service fee set-aside, etc), reduce their accrual rate, all while making a killing on the IMIP. Call me ignorant, but I don’t see how this is not a win for everyone…

  • I had my biggest one-day surge of new clients ever last Wednesday, just a day after the changes were announced. Almost all of them had heard about the changes and were being hurried along by loan officers. As a counselor, I’m happy that it will only be a few weeks of insanity before things settle down again. I am anxious to learn what will happen with interest rates — until we know that, it’s hard to evaluate whether the changes are bad news or good news for a given client, so it’s hard to do really good counseling about the alternatives.

  • I do agree with Frank, it is very disappointing that only one month was given before the effective date. I would have thought at least 60 or maybe even 90 days for a notice for our senior borrowers and to the industry as a whole would have worked!

    This is a shock to absorb for the entire industry as well as all the borrowers cogitating taking out a HECM and making plans for the future!

    I am confident we will all recover from the effects of the new ruling and how it was implemented. Many of us for the first time read it in the Wall Street Journal! What happened to good old common sense, I guess that died as well?

    As I had said in another article, the good news is that the HECM is kept alive. On the other hand, I still don’t agree with the reduction of the principle limit calculations.

    I know my focus is on different markets, I want to help all I can but I have to be a relist, all can’t be helped anymore. I do know this, we have trillions of dollars in equity out there in the homes of seniors who qualify for reverse mortgages.

    That is the market to concentrate on, utilize the HECM for a retirement planing tool, it is a great one to use. The affluent can recognize the HECM as a great hedging tool for their existing investments. The line of credit and life time income are always ways to improve the retirement quality for our seniors.

    I am optimistic for the future, we need to overcome immediate hurdles but we have been given an opportunity to recover, maybe stronger than ever!

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

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