Reverse Mortgage Industry Leaders Emphasize Need for Program Stability

It was the one question that Joe DeMarkey, strategic business development leader at Reverse Mortgage Funding, had to repeatedly answer at the National Reverse Mortgage Lenders Association’s annual conference in San Francisco last week: Did some industry leaders know about the lower principal limit factors before they were announced in August?

“No one knew,” DeMarkey said in a speech with other industry heavyweights, including American Advisors Group founder and CEO Reza Jahangiri and Finance of America Reverse president Kristen Sieffert. “No one knew that this was going to happen. It was a confluence of events that took place that started a year ago, when the actuarial review took place.”

Department of Housing and Urban Development officials indeed cited that review, which showed the Home Equity Conversion Mortgage program had an economic value of negative $7.7 billion, when rolling out the new PLFs and adjustments to mortgage insurance premiums. That number also paled in comparison with the negative $14.5 billion value from the fiscal 2017 review, released after DeMarkey and the other leaders spoke at the conference.

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No matter the actual number, DeMarkey pointed a finger at the Federal Housing Administration’s backlog of loan assignments as a reason for some of the HECM program’s financial woes.

“The back-end problems that FHA has as more of these loans are being assigned to them has created a financial strain, and without a HECM program that is fiscally sustainable, we don’t have an industry,” he said. “So we have to solve this problem.”

DeMarkey also cited the historically slow appointment of key industry officials at both FHA and HUD under President Trump, noting that FHA had sought NRMLA’s assistance in reacting to last year’s grim actuarial report — but that there were few officials seated to hear their suggestions.

Historically, FHA had pulled what DeMarkey called the “easy levers”: changes to PLFs and mortgage insurance premiums. 

“We didn’t want them to do that,” he said. “We wanted them to be more thoughtful, more responsible, and take a look at other program changes.”

But without a strong team in place, in DeMarkey’s telling, the FHA resorted to its old moves.

“They ran out of time. They had to make changes, so they made the easy changes,” he said. “They pushed and pulled the levers.”

Still a path forward

DeMarkey — along with fellow panelist Michael Kent, president of Liberty Home Equity Solutions — insisted that a path forward exists for the federally backed reverse mortgage industry.

Kent, for instance, echoed other voices in the industry by pointing out that the average borrower won’t necessarily know that he or she stands to access a smaller amount of cash than before October 2.

“Do you sell something you have, or do you sell something you used to have?” Kent asked. “We can’t do that anymore. We’ve got to sell what we have to sell. There are some very significant benefits to the borrowers under this new construct.”

For instance, the fact that borrowers preserve more equity over time under the new PLFs can be a selling point, provided originators emphasize the long-distance view when working with potential clients.

“Above and beyond that, we probably need to look at new avenues to create customers,” Kent said, suggesting developing deeper connections with community banks and credit unions.

He concluded his comments with an upbeat view for the future of the program, even amid a predicted short-term downturn.

“I anticipate volume and unit fundings will drop, and we’ll kind of get our bearings again — we’ll find solid ground,” Kent said. “I think the best days of the HECM program still lie ahead.”

Written by Alex Spanko

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  • Financial assessment has done little to nothing at all in reducing the net present value of cash flows. Yet none of the lenders address this fact in their analysis. This comment presents this problem as exposed in “the numbers.”

    In fiscal years 2011 through 2015, a questionable claim was perpetuated on the industry that mitigating T & I defaults through a form of financial assessment (so draconian that it drove down new business in fiscal 2016 by at least 15% and most likely more) would substantially mitigate losses on future endorsements in the MMI Fund. We now have evidence that shows those claims were at best well intended.

    Just look at Page 13 of the fiscal 2017 Actuary Review of the HECM portion of the MMI Fund. The net present value of projected cash flow as estimated by FHA and than again by the actuaries is shown below as follows:

    FYE FHA Actuaries

    2016 -$1,293 billion -$1,048 billion
    2017 -$1.961 billion -$1,144 billion

    So how is it that financial assessment is preventing losses to the MMI Fund? Will someone please explain? The answer is that out of the negative $15.467 billion that FHA is expecting from the HECMs still active as of 9/30/2017, over 21% of that loss is estimated to come out of HECMs that have underwent financial assessment. Using the actuaries’ projections, over 15% of that loss comes from HECMs that were subjected to financial assessment. Now remember fiscal 2016 total endorsements were the lowest such total in 11 years and fiscal total endorsements were the fourth lowest such total in 12 years. So it is not a large number of endorsed HECMs that are producing these kinds of results but just those that have undergone financial assessment.

    The vast majority of the HECMs endorsed during fiscal years 2014 and 2015 generally differed from HECMs endorsed in 2016 and 2017 in one material way; they had NO financial assessment applied to them. Yet their losses for both years totaled a negative $,1,680 per the actuaries and a negative $1,773 per FHA. The projected losses from fiscal years before 2014 were even greater, in several cases MUCH greater.

    HECMs which were subjected to financial assessment are only piling on to the expected net present value of cash losses expected to come out of the HECMs still active today. If that says that even FHA considers financial assessment as a means to stop the bleeding then I need to surrender my CPA license; only lenders and one vendor profess how effective financial assessments has been.

    You might ask: “This subject seems so out of place why is this issue being brought up here and now?” The fact is what this shows is perhaps the levers HUD pushed in late 2013 and 2014 were far more effective than it is being given credit for in the quotations and statements provided in the article above.

  • Interesting, Joe DeMarkey has brought to light a lot of truth, especially where the FHA is concerned on the backlog of loan assignments.

    This in fact is a reason for many of the HECM program’s financial woes.

    The lack of having the ability to administrate properly on the part of FHA as more of these loans are being assigned to them has created a major financial strain.

    As Joe DeMarkey stated, without a HECM program that is fiscally sustainable, we don’t have an industry, the problem must be solved, period!

    I personally am confident with the Trump administration, the problem will be solved. At least it is not being hidden away under some table in a closet. It is being talked about and the problem is being brought to the forefront!

    There are pluses as the article points out. We as an industry have to stop emphasizing this problem to the point that it will be uncontrollable.

    We are going through a horrible period right now, the industry is still trying to close loans that were pushed in prior to October 2nd. Underwriters are so pressured that many mistakes are being made. Unnecessary missed conditions are occurring on the first go around, creating condition after condition coming back to processors on the same file. It is taking an unusual amount of time to get a CTC but this will not last forever!

    This nightmare will end and stabilization will return, we as an industry must work with one another, restrain the frustration and get through it, we have no choice for now!

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

    • John,

      Time has exposed the lack of preparation for the financial consequences of fixed rate Standards as well as the increase in assignment processing caused by fixed rate Standards. Not only were there abnormally large transfers of funds from forward mortgage programs in the MMI Fund to the HECM portion of that fund throughout the fixed rate Standard originating time period and shortly thereafter, but now it is also very clear there was inadequate preparations being made for the huge increase in assignments that resulted from and continue to result from fixed rate Standards’ balances due reaching 98% of their MCAs.

      Many in the industry turned against those in the industry who warned of what was occurring at both the borrower level as well as the FHA level due to fixed rate Standards. After all, fixed rate Standards were generating great revenue and cash flow streams for lenders and their originators so what was there to worry about.

      Now lenders are impatient with the speed of the assignment process due to the temporary loss in cash flow during the time cash is expended by HECM issuers to acquire assignable HECMs from HECM security holders and then wait for repayment from HUD as the assignment process has seemed to hit what lenders deem as unnecessary bottlenecks.

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