Reverse Mortgage Originators Offer a Wish List for Reform

Allowing homeowners to access more equity and changing the face of life expectancy set asides (LESAs) — those stand as some of the main changes that loan originators would like to see in the reverse mortgage program.

The reverse mortgage industry, already complex, exists in state of near-constant reform and revision as the Federal Housing Administration and the Department of Housing and Urban Development continually tinker with the rules governing the financial tool. Reverse mortgage originators, of course, have their own ideas about the how to improve the industry.

A common theme in those wish lists involves removing some of the barriers between borrowers and their equity.

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“An increase in the principal limit factors, allowing the senior to access a little bit more in equity, would be a big help to those seeking a Home Equity Conversion Mortgage,” John Leer, a reverse mortgage banking officer with KleinBank, tells RMD.

Such an increase would open the market to more borrowers, says Lisa Nass, a reverse mortgage originator with Gersham Mortgage.

“The recent decrease to the principal limit has really affected potential customers. Some who once qualified just six months ago do not anymore,” Nass says.

LESA guidelines and requirements also need significant changes, reverse mortgage originators agree.

“Oftentimes borrowers with good credit history, but perhaps a bump or two in the road, are required to have a full LESA,” says Alina Passarelli, director of reverse lending at Peoples Home Equity Mortgage Lending, echoing an idea common among loan originators contacted by RMD. “We’d like to see more widely used partially-funded LESAs and clear guidelines for underwriters to follow.”

Passarelli and many of her peers also would like to see changes to the relationship between PLFs and HUD’s Mutual Mortgage Insurance Fund (MMI), which has undergone significant fluctuations in recent years. Department officials cited the HECM program’s drag on the MMI as a specific driver of the recent PLF declines; in fiscal 2016, HECMs had a net economic value to the fund of $7.7 billion, a deficit that ballooned to $14.5 billion in fiscal 2017.

Multiple leaders — including HUD secretary Ben Carson and Mortgage Bankers Association president David Stevens — have advocated for the complete removal of HECM insurance from the MMI fund.

“If the value of the MMI fund is measured on HECMs alone and this value was used in conjunction with the existing PLF variables, we feel the MMI fund health would be consistently maintained (rather than retroactively) and also create HECM options for more borrowers,” Passarelli says.

Written by Thad Rueter

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  • Sometimes the ignorance within the industry rears its ugly head. This is one of those times. Much of that is from how few ever read through the FHA Annual Report and fewer still, the Independent Actuaries’ Report.

    During the period that former FHA Commissioner Galante oversaw the HECM program, an outside reporting practice was established of hiding how badly the HECM portion of the MMI Fund was performing. That was done with a simple peeling off of the accumulated net earnings from forward mortgage programs in the MMI Fund and “transferring” them to the HECM portion of the MMI Fund for Congressional reporting purposes; for some unknown reason even though the $1.686 billion that was taken because the whole MMI Fund was negative, the full amount was transferred to the HECM portion of the MMI Fund. For some unstated reason, the actuaries reporting on those fiscal years allowed this practice to flourish.

    Thank goodness Secretary Carson stopped such practices. He required the HECM program to be reported on a stand alone basis only. That brought to us what looked like previously unimagined cumulative loss picture. The industry was ready to lynch the offender except that the problem arose and flourished during the rose colored glasses period of fixed rate Standards.

    Due to all of the attempts to hide the growing magnitude of HECM losses in the MMI Fund, no one is clear what losses should have been reported since even assumptions had been geared to favorable reporting of the HECM portion of the MMI Fund.

    One thing is true, the lower the PLFs, the lower future losses will be. When it comes to HECM “profits” and losses, HUD’s goal is that the HECM program will break even. The question is whether PLFs are sufficiently low? Yet FHA does not want to penalize current and future borrowers due simply to the excesses of the fixed rate Standard era and questionable reporting of prior years. I am actually pleased PLFs are as high as they are.

    Don’t expect the magic reporting practices of the past. No one is going to find magical fixes unless some accounting practices need to be changed. There may be one but as of today, HUD has not opened its door to how it accounts for HECM assignments. With Secretary Carson, there is hope.

  • I wish it was pre 2007, and I still had access to Financial Freedom’s Cash Account. I didn’t know how to market it properly back then, but I sure know how to market it today. We could do Gentlemen Farms, and Mattress Money, no valuation or lending limit … the good ole days.

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