Carson: New Reverse Mortgage Rules Will ‘Stop the Bleeding’

Speaking at a hearing before the House of Representatives on Thursday, Department of Housing and Urban Development Secretary Ben Carson directly addressed recent changes to the reverse mortgage program.

“When the reverse mortgage program was initiated, I think it was done with very good intentions, but without really looking down the pike, and people were taking out much larger amounts of their equity in the beginning than was sustainable,” Carson said, “and this was leading to a lot more problems than it was helping.”

Carson was responding to a question from Rep. Brad Sherman of California, a Democrat who represents Los Angeles County, about the effects of adjustments to mortgage insurance premiums and principal limit factors.

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“How will the recent reverse mortgage changes impact the Mutual Mortgage Insurance Fund, the FHA insurance fund, and do you expect additional changes to the reverse mortgage program?” Sherman asked.

Carson didn’t comment on any potential future changes, but echoed HUD and FHA’s rationale for the new Home Equity Conversion Mortgage guidance.

“It’s also resulted in a much higher default rate, and that’s been a big drain on the MMIF, so the changes that we’ve made will sort of stop the bleeding in terms of [new reverse mortgages],” Carson said.

“The forward mortgage program is doing extremely well, so we’re doing some draining from the reverse mortgage [program],” the secretary continued.

When introducing the updated regulations in Mortgagee Letter 2017-12, the FHA painted the move as necessary to avoid a bailout from Congress, citing the reported $7.7 billion drag that the HECM caused on the MMI fund in 2016. But in a later follow-up call, HUD officials admitted that moves would not erase losses incurred by previous loans, and only help put new loans on a more solvent track.

Sherman’s line of questioning was one of multiple HECM-related inquiries thrown at Carson during the hearing before the House Financial Services Committee.

Rep. Denny Heck, Democrat of Washington, said he’s considering asking the Government Accountability Office (GAO) to either remove the HECM program from the MMI fund or change the forecasting assumptions to smooth out the significant changes in value from year to year.

“It’s always been hard to get a good sense of how the reverse mortgage program is doing, because the actuarial numbers swing so wildly from year to year,” Heck said. “In addition, although the program is small compared to the FHA forward mortgage program, the swings in reverse mortgages are so large that they’re pushing around the capital ratio.”

The secretary was amenable to Heck’s proposed changes.

“I think that’s a very worthy thing to pursue,” Carson said. “We’re looking at, just over the last year, $7.7 billion out of the MMI because of HECM. The changes that we’ve made as of this month, and all the [loans] that will be going forward from this point, I don’t think we’ll have that problem.”

“But we’ll still have that residual problem. So yes, I believe that would be a worthy pursuit,” Carson continued.

A little later on, the secretary also expressed approval for New York Rep. Carolyn Maloney’s request to allow co-op owners to participate in the reverse mortgage program.

“This is the type of housing I represent, and right now co-op owners are unfairly excluded from FHA’s reverse mortgage program — I would say for no real reason,” said Maloney, whose constituents include the urban denizens of Manhattan and Brooklyn.

“I certainly don’t see any reason why we shouldn’t engage in that conversation with you, and let’s look at the numbers, and let’s see what works, because I’m doing things that make sense,” Carson replied.

Carson also reinforced his desire to focus HUD’s efforts on first-time and low-income homebuyers, which he had characterized as the primary role of the department in announcing the new reverse mortgage rules.

“Housing finance reform should be built on shared goals of ensuring a well-functioning housing finance system that provides access for credit-worthy borrowers that are ready to own a home, expands the role of the private sector, and reduces overall taxpayer exposure,” Carson said in his opening remarks.

Written by Alex Spanko

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  • There is no question that the goal of Mortgagee Letter 2017-12 is to reduce the amount of bleeding that the HECM as constructed as of April 28, 2015 EVEN WITH financial assessment was hemorrhaging. Do not believe the nonsense that financial assessment has or will have any material impact on the HECM losses in the MMI Fund. That is what its sponsors want you to believe. It is anything other than fact.

    While caring that default rates on property charge payments be materially reduced, the issue is a reputation matter, not a material MMI Fund loss matter.

  • There needs to be some common sense to dealing with seniors who have huge amounts of equity in their homes. A 75-year old with a $600,000 home can only borrow as much as a 75-year old with a $2,000,000 home. Remind me the logic of that approach?

    • Did you mean that a senior who has a $2 million value home can only borrow as much a senior with a $600K value home?

      The one who last set the HECM lending limit was President Obama and a Democratic controlled Congress. Ask them.

      • The last set HECM lending limit was a BOON to many people in my area. Prior to that, my lending limit was $216,000. HUD does not want to be insuring $2 million homes. The limit as it is covers the majority of seniors 62 and over that need the program. There is the jumbo reverse for the larger homes as I feel it should be. We probably need an expansion in that jumbo market, but not as a part of HUD.

      • Melinda,

        Chris wants not to know why the principal limit is the same for a $2 million value home as for a $636,150 value home.

        However, it is nonsense that HUD does not want to be insuring $2 million homes but it is highly unlikely that a person with a $2 million value home would want a HECM since the principal limit is no different than for a $636,150 value home. HUD would love all HECMs to be valued at $2 million value homes since they would have so little risk to the MMI Fund.

        Yet I have no idea why you are addressing me since Chris brought up the issue. If this were the first time you have replied to the wrong person, I would not be writing this reminder TWICE.

  • HUD has tried to stop the bleeding in this way many many times. How many times will they do the same thing for the same horrible outcome? Ignoring the real issue of selling reverse mortgages without any suitability standard, consumer financial plan, already determines the outcome from the start. HUD has to be willing to make the program safe for the consumer first so it will be sustainable for the MMI fund.

    • Sandy,

      Financial assessment was INTENDED to stop seniors who cannot afford property charges from getting HECMs. Are you saying this is not the case?

      As to suitability, that is why there is counseling. Originators are there to answer product questions and issues, not decide whether it is best for the senior. For originators to fulfill this responsibility is a horrible suggestion since their commission is based on making the sale. Originators are neither unbiased nor independent.

      Perhaps seniors should be required to also be counseled by financial professionals with a legally required fiduciary standard of care; however, their fees must be paid whether the HECM closes or not. It could cost several thousand dollars if done properly. Further, these advisers should have some credential or license that requires extensive education and they should be unbiased and independent. Asset/cash managers and financial services salespeople should automatically be disqualified.

      Rather than being so vague, please either join in with my suggestions or make your own.

    • What’s best for the consumer and what’s best for HUD/FHA are often mutually exclusive, at least in the eyes of the consumer.

      Why do you think the majority of reverse mortgage consumers are unable to make their own decision on suitability or with the assistance of a HECM counselor?

      If I’m reading between the lines, it sounds like you are suggesting a mandated tenure option, as consumers should be told how they can spend the funds and in what manner they can spend them. Otherwise, I don’t get how any of this relates to the health of the MMI fund.

  • As I read this article and the comments made by the secretary (Ben Carson) and the proposal Rep. Denny Heck made, I am frankly disgusted!

    Rep. Denny Heck, said he’s considering asking the GAO to either remove the HECM program from the MMI fund or change the forecasting assumptions to smooth out the significant changes in value from year to year. This is like asking for a complete overhaul to the HECM program!

    Then to add insult to injury, Heck said. “In addition, although the program is small compared to the FHA forward mortgage program, the swings in reverse mortgages are so large that they’re pushing around the capital ratio.”

    To top things off, The secretary was amenable to Heck’s proposed changes, this in itself shocked me! Maybe I am looking at it all wrong but I don’t think so. I am open to comments from anyone that feels I need corrected on the way I am viewing this!

    IF the Fed’s and all the know it all’s would stop messing with the HECM in adverse ways like the last one we just experienced, maybe the program would accelerate.

    There was NO reason to mess with the PLF tables, I can buy the stabilization of the MIP percentages but that is far as it should have went!

    Our seniors need the HECM, the financial industry and the fiduciaries out their need the HECM to aid their senior clients in restructuring their assets to improve their retirement years.

    I am sorry, I am not happy with how the government, the secretary along with HUD are viewing the importance of the HECM to our senior population.

    I feel we need to take a stance on this, we need to fight for maintaining the stability and keeping the HECM under the FHA MMI fund and keeping the HECM alive, pure and simple!

    We need NRMLA to take a strong position on this and represent all of us in the reverse mortgage space without waiting forever to do it!

    I don’t mean to vent out my frustrations on this Friday the 13th to all of you but I would like to think I am not alone in my feelings toward this whole political game being played!

    Try and make it a good weekend all,

    John A. Smaldone
    hanover-financial.com

    .

    • John,

      On one point we agree, the MIP structure needed to be changed. The Principal Limit Factor Table needed to be toned down in a manner close to the way it was.

      What also needs fixing is financial assessment. As presently constructed, it is terribly cruel, unnecessary, and draconian in nature.

      I find myself agreeing with both former Commissioner Montgomery and former FHA executive Burns. Both have argued that the HECM program should have stayed in the General and Special Risk Insurance Fund. Ms. Burns has made exactly the correct case that since HECMs are not capacity based but collateral based mortgages, why is financial assessment even necessary? On financial assessment, there needs to be some lender input but not to the extent we have it today. It is clearly overkill.

      Actuarial forecasting assumptions should not be changed as the OMB has made clear on several occasions but is it necessary for the program to be an impairment on forward mortgages as it is in the MMI Fund.

    • John,

      Sometimes it seems you are a fiscal Republican and at others, a FDR and LBJ Democrat. If anything, I am a fiscal Conservative. I do not like a translucent fund like the General and Special Risk Insurance Fund. I think like you, I believe in transparency.

      But transparency is best when we are willing to sacrifice the programs that are not critical to the defense of the country or entitlements. Even with entitlements, all fat and waste need tending to as do the programs that are vital to our defense.

      HUD is barely accountable for its Community Block Development Grant program. The program is riddled with problems. While left wing liberals hail its success, they rarely say anything about its corruption and graft. President Trump was exactly right to exclude its $3 billion cost from the budget. That cost needs to be negotiated as the program needs to be cleaned up.

      Those now out of HUD claimed that the HECM program was tested as if all borrowers took full lump sum draws at closing. That being the case, Carson’s statement that larger draws at closing than expected has led to many of the losses we see today makes absolutely NO sense. It is and continues to be a problem with the appreciation rate used in the model. National averages rarely work on a product whose value is overwhelming dependent on three very simple factors: LOCATION, LOCATION, and oh yeah, LOCATION.

      HECMs have helped about 1.4 million borrowers (including co-borrowers). Its stated cost will be $7.7 billion without stripping it of its “window dressing” (what it “stole” from other programs) of about another $7.5 billion. It is not self-sustaining (its promise) but rather it will cost US taxpayers about $15,000 for every traditional, purchase, and refinanced HECM ever endorsed.

      If HECMs as they were structured on 10/1/2017 are a needed program, then get the program transformed by law into a social welfare program. The only other logical choice is to permanently stop its bleeding by doing what HUD did in Mortgagee Letter 2017-12. Of course that Mortgagee Letter does absolutely nothing to fix the losses of the past. I would be happy if the losses of the past could be frozen and funded but they cannot be frozen.

  • I’ll just leave this here:

    In July, Congress considered its funding bill for the Department
    with language stating that:

    During fiscal year 2018 the Secretary may insure and enter into
    new commitments to insure mortgages under section 255 of the National Housing Act only to the extent that the net credit subsidy cost for such insurance does not exceed zero.

    In other words, the HECM program would be put on hold if the
    next annual report were to project a deficit.

    • Ed,

      You are incorrect.

      A net (normally positive or negative) credit subsidiary has nothing to do with fiscal year end reports. It is a term of art within the Federal Budget.

      Reports are based on a historical book of business just completed (or nearly completed). On the other hand the budget is based on the expected book of business within the next fiscal year.

  • Let us be clear. If Dr. Carson is right it is only for new book of business (meaning new endorsements) for fiscal years after this fiscal year (2018). The reason is that the first four to five months of endorsements will primarily be HECMs that are not subject to Mortgagee Letter 2017-12. For some this may not look right but it is fact.

    Like many of us, Dr. Carson speaks in terms other than endorsements when talking about new business but the actuaries are correct in putting HECMs into cohorts by the fiscal year they were endorsed. If things go as expected (a 25% drop in demand because of Mortgagee Letter 2017-12 per John K. Lunde), this fiscal year will be a mixture of HECMs of which over 40% will be HECMs with case numbers assigned before 10/2/2017.

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