Bottom Falls Out of HECM Market with Just 3,345 Loans in April

After a March that saw significant declines in reverse mortgage originations, April brought a shower of more bad news for volume.

Federal Housing Administration-approved lenders generated just 3,345 Home Equity Conversion Mortgages in April, according to the most recent stats from Reverse Market Insight — or a drop of 22.2% from March.

“In case you haven’t been paying attention these last few months, HECM volume is seriously hurting after the October 2, 2017 changes from the FHA,” RMI observed in its data release.

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The Dana Point, Calif.-based firm tracks HECM lending trends in part by geographic area, and all 10 regions saw double-digit declines last month; the New York/New Jersey metropolitan area suffered the worst losses, with a 17% dip, though even the usually robust Pacific region endured a volume drop from 1,204 to 964.

Industry leader American Advisors Group went from 1,158 loans in March to 890 last month; Nationwide Equities Corporation, which had originated as many as 140 loans in a single month during the trailing year, had just 43 in April, the lowest of any top-10 lender.

The post-October 2 hangover carries over into another month, as the surge of borrowers looking to land higher principal limit factors gives way to the anticipated dearth of demand for the “new” product with lower PLFs and a restructured mortgage insurance premium system. RMI founder and president John Lunde predicted a volume drop of anywhere from 25% to 30%, and this strikingly low month may not be as far as the HECM market sinks before things turn around.

“The question now is whether this is the bottom for endorsements, and based on funding data collected through our industry data repository, I’d suspect we’re close — but might not be there yet,” RMI observed. “Applications appear to have bottomed in December, but with fundings continuing to make lower lows in March, it’s too early to definitively say we’re on the road to recovery yet.”

RMI’s data comes the day after New View Advisors released a similarly bleak set of statistics about HECM-backed securities, in which depressed production was classified as “the new normal.”

Written by Alex Spanko

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  • I believe we all expected this and there may be more to come. However, it will turn around.

    It will turn around if we put October 2nd behind us, until that is, we as an industry can change things with HUD! Until then, we will survive if we work harder, network with realtors, financial planners, elder law attorneys, long term health care providers and any other professional entity that deals with seniors.

    Buying leads, advertising, waiting for the phone to ring, is not going to cut it in today’s environment. Be smart, work harder than you did before and look at new ways to get business!

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

  • It seems pretty much inevitable that congress will have to deal with this again, and all those concerned should have all their ducks in a row for repealing the “October Change.”

    Argue that the Financial Assessment addressed the inherent problems in the program, because it helps to stop continuous losses, but the October Change does nothing but deteriorate the integrity of the product itself.

    • Mr. McSherry,

      You say: “…congress will have to deal with this again.”

      Congress has never dealt with this. There has been no bill passed by Congress directly dealing with HECMs in the MMI Fund since HERA (the Housing and Economic Recovery Act) of 2008, except for the RMSA (Reverse Mortgage Stabilization Act of 2013) which was a very small bill and is codified at 12 USC 1715z-20(h)(3). All HERA did was require that all HECMs endorsed three months following the enactment of HERA be placed into the MMI Fund and that the actuaries provide a review of the HECM portfolio in the MMI Fund annually.

      The full RMSA provision as codified states the following:

      “The Secretary may … (3) establish, by notice or mortgagee letter, any additional or alternative requirements that the Secretary, in the Secretary’s discretion, determines are necessary to improve the fiscal safety and soundness of the program authorized by this section, which requirements shall take effect upon issuance.”

      Moving on to financial assessment, please show how financial assessment has stopped or mitigated any losses since implementation on April 27, 2015? In fact it has only exasperated such losses. Just a little research in the 2017 Annual Report should dispel this myth. Hearsay and anecdote is worthless in this regard.

      • Unfortunately for you, you have no idea what you’re talking about.

        Congress appropriates funds. That’s the law of the land. Government agencies can’t operate without funding. What HUD does is directly influenced by funding. Congress continuously makes recommendations to the various agencies and HUD/FHA is no exception.

        If you think that congress hasn’t had a hand in the HECM changes, then you know even less than we think you do.

        Also, with the new Executive Branch Administration, the proposal is for congress to directly oversee the consumer bureau, which will additionally have an affect on HUD/HECM financial matters.

        To state that congress won’t have to deal with this, the very existence of the HECM program at stake, is laughable.

      • Veal wrote:

        “Moving on to financial assessment, please show how financial assessment has stopped or mitigated any losses since implementation on April 27, 2015? In fact it has only exasperated such losses. Just a little research in the 2017 Annual Report should dispel this myth. Hearsay and anecdote is worthless in this regard.”

        I didn’t say the FA was successful in it’s stated intention. In fact, I’ve posted in the past that the small effect it could have won’t come anywhere near being able to save the insurance fund.

        The reason they instituted the FA was to stop losses, they believe it, and they want to keep it. I’m saying, as a compromise, argue that they keep the FA because the -intention- of it is to stop losses, but the “October Change” has no such quality about it, is a disaster all around, and should be cancelled.

        Congress calling for this (recommending that HUD cancel the October Change) has a lot better chance of success than just industry representatives appealing to HUD.

        I’m saying, lobby congress, not Hud.

      • Mr. McSherry,

        Your quotation is entirely false. Veal (without an ending “e”) wrote nothing. James E. Veale, CPA, MBT (or Veale) wrote the quotation.

        Since HUD writes the Annual Report and that report is now the official report for MMIF results, it is HUD who is telling us that financial assessment exasperates losses in the MMIF. Can you point to where you get the idea that HUD believes that financial assessment stops losses in the MMIF? Financial assessment was never designed to stop losses in the MMIF.

        HUD designed financial assessment to bring early defaults on HECMs due to nonpayment of property charges to its knees; they did that at great expense to the growth of endorsements. Yet we have nothing to complain about since the industry did little to help HUD design financial assessment even though we were asked.

        As to lobbying Congress, while that might be effective, I want no part of it. Last time we relied on Congress to get the job done was HERA and that ended up with us in the MMIF. You are, no doubt, familiar with Section 2118(b)(2) of Public Law 110-289. Our industry did not lobby for that provision. Some in Congress decided that we needed the change.

  • I’ve said it before but will say it again. HUD really should consider a hecm streamline that will put the program on a better financial footing. HUD should welcome and encourage lower accrual rates so the risk of being underwater and a claim being made is substantially reduced. HUD already insures these loans so they should allow seniors to reduce their accrual rate without FA or an appraisal. The PL on the current loan can stay the same and carryover to the new loan. To alleviate any investor remorse, HUD could require a seasoning of 18 months but also require a reduction in the accrual rate of at least 0.5%. You can even do a required 36 month closing cost recoup to avoid high costs with not much benefit. It could work if designed properly and would be a boom to the industry.

    I know some may think it’s a terrible idea but the way you get the rules changed to increase the PLF and reduce the UFMIP is by reducing losses on these loans. The secondary market could figure it out on their own. Maybe you make Post October 2nd Loans excluded from this type of program. Lots of possibilities for the industry to increase volume for this type of program.

    If FHA and VA have similar programs, why can’t it work for the HECM?

    • ravens9111,

      Have you read the HUD Annual Report on the MMI Fund for fiscal 2017? The worst losses per HECM were not the fiscal 2009 cohort of HECMs but those from fiscal 2017.

      If you are somehow disillusioned into believing that the losses before fiscal 2017 are hitting the program the hardest, then you have no idea how really bad HUD tells they were last fiscal year.

      HUD needed to stop the potential losses for fiscal 2018 first. The 10/2 changes were not wanted but were a necessity. You will have to do a little work but after doing that work you will be surprised what it is HUD is saying.

      On top of all of that, your idea sounds completely unworkable. Investors should pay for none of what you are proposing. It should be paid for by lenders.

      • The report states that claims were $5 billion, but it does not state when those loans were originated. Most likely, they are from many years ago prior to FA and the PLF reduction in 2014. Claims can be made for many reasons. One of the goals needs to be for the MIP collected by HUD to exceed the claims being paid out so cash flow is positive.

        It will be difficult to reduce claim type 21 prior to FA. After FA, this should be reduced substantially and put the HECM in a better financial situation. However, you can substantially reduce claim type 22 and 23 simply by reducing the accrual rate. This could be applied to all HECM’s prior to Oct 2nd.

        There is no reason for HUD to not want the reduction in the accrual rate. They are already insuring these HECM’s. It’s not the lenders who pay for this. It is the investors when they buy the new pool. It would work the same way as a VA IRRRL or an FHA Streamline. The secondary market would figure out the pricing on this, but it would still be a boom for the industry and put the HECM back on track for better days in the future.

        Once HUD realizes the benefits of reducing the accrual rate, maybe they would be more willing to increase the PLF in the future.

      • Ravens9111,

        As a separate topic, this comment discusses your very imperfect idea about what HECM cash flow is. Here is what you state: “One of the goals needs to be for the MIP collected by HUD to exceed the claims being paid out so cash flow is positive.” First, the goal of the HECM program is that as close as possible all cash received into the program be equal to the cash paid out of the program when (if ever) the HECM program is terminated. To be certain that is happening, HECMs are divided into cohorts by their fiscal year of endorsement and then looked at to see if projections are proving that eventually both on a cohort by cohort basis as well as in total that will occur. Right now the answer is NO.

        As to your statement about one of the goals for HECMs, it is all but impossible that MIP could ever exceed the cash outflow for claims. This goes back to an incorrect understanding of what cash inflow includes. That misunderstanding is exactly why most HECM originators called HECM proceeds income for so many years. Yet cash flow can be far more than just income (or specifically MIP in this case).

        In the case of HECMs, amounts are paid out to acquire HECMs that lenders submit for assignment. Those amounts are generally recovered through recoveries which occur when the HECM is terminated. If you look at the chart (Exhibit I-25) on Page 44 of the HUD annual report to Congress on the MMIF for fiscal 2017 you will note that for every dollar paid out of the $5 billion total, there were $6 paid out for HECMs going into assignment. While the losses of about $700 million are permanent, the $4.3 billion paid out for the assigned HECMs will be recovered through future terminations. Remember the balances due on those HECMs that produced the $700 million in losses were far greater greater than $700 million while the balances due on the HECMs assigned that resulted in claims of $4.3 billion were equal to the $4.3 billion paid.

        If you want to discuss cash flow accounting issues as it pertains to HECMs, please memorize the concepts and formula on Pages 182 and 183 of the HUD annual report to Congress on the MMIF for fiscal 2017. Learn that recoveries are NOT income but as recoveries are cash inflow to the HECM portion of the MMIF. They are one of the most important aspects of HECM cash inflow in discussing HECM cash flow.

      • Veal wrote:
        “HUD needed to stop the potential losses for fiscal 2018 first. The 10/2 changes were not wanted but were a necessity. You will have to do a little work but after doing that work you will be surprised what it is HUD is saying.”

        And you can read HUD’s mind…how?

        Veal wrote:
        “On top of all of that, your idea sounds completely unworkable. Investors should pay for none of what you are proposing. It should be paid for by lenders.”

        That’s merely your opinion.

      • Mr. McSherry,

        Again your quotations are a fabrication. There is no Veal who wrote them; James E. Veale, CPA, MBT did.

        Anyone is free to read the annual report HUD wrote. Did you read it yet?

        As to opinion, it is my opinion. Biting the hand that feeds us does not seem very workable.

        Since you know this area, what are type 21, 22, and 23 claims? HUD in its annual report only speaks of type 1 and type 2 claims along with supplemental claims.

      • The way it would work is there would be a new pool of hmbs specifically for this proposed program, just as there are separate pools for fha streamline and va irrrl. Investors will buy the new pool of loans. Reducing tie accrual rate slows the PL growth and would reduce claims. At the same time, hud could generate billions in new ufmip that could make the hecm cash flow positive.

        Please tell me what downside there is other than price premiums being cut due to an increase in supply? You can still have current pricing on traditional hecm.

  • The drop-off in HECM business could be helped if HUD would get going on Spot-Approvals for condos. Our builder says “I am selling these condos before I break ground. Why would I want to be FHA approved?”

    Bob Krowas

  • I got this question during a presentation to a group of CPAs and wonder if someone knows the answer, or can direct me to a discussion/source which might provide some insight:

    “While it was a residence in the hands of the original borrower, the accruing interest on the HECM is home equity interest I presume. When the resident dies and the home passes to the heir(s), it becomes investment property (unless one of the heirs converts it to personal use.)

    “So if the home is now an investment property, does the accrued interest on the HECM become investment interest? It matters a lot with the new tax law, as home equity interest is no longer deductible whereas investment interest is deductible to the extent there is investment income. That could, potentially, render the interest deductible over time, whereas there would be no deduction for home equity interest.

    “The investment income does not have to come from the same property as the investment interest, by the way”

    Thanks for any help.

    • Mr. Parker,

      I wish the interest deduction rules were that simple. One must follow the use of the proceeds. You should become very familiar with the rules at 26 USC 163(h)(3) if you are going to direct your talks to those who have (some) tax skills.

      The person asking the question does not understand the use of proceeds by the vast majority of borrowers. The primary use is to pay off a mortgage. The tax law is quite clear that the interest on those proceeds are classified for deduction purposes as on the loan being paid off. For example, let us say that 90% of the loan is acquisition indebtedness and 10% is home equity interest. Then let us say that 80% of the HECM proceeds were used pay off the mortgage and 20% were used to buy a new car.

      In the case above, 72% of the acquiring interest would be attributable to acquisition indebtedness and 28% to nondeductible home equity/personal interest indebtedness on interest deductible after 12/31/2017 but before 1/1/2026.

      The interest does NOT change its nature because of the use of the property by the heirs until after they own the property. All interest accrued through date of death is the same as it would have been in the hands of the decedent. This comes under 26 USC 691(b)(1) and the related regs. Also the interest deduction rules following the date of death of the decedent is not quite as simple as that unless the property is directly inherited without passing through an estate or a trust.

      Other rules may apply, especially if the election rules of 1.163-10T(o)(5) was employed by the decedent but to know if that is true, prior year income tax returns of the decedent would need to be looked into.

      However, all of this is a useless discussion if the use of proceeds is not traced and documented by the decedent before death. So planning and increased bookkeeping is critical along with the information needed to find those records. If any special elections were made, those income tax returns would need to located along with info on how the election was made.

      None of this is easy but for some may be worth far more than the effort needed to get these things done as it is also true for proprietary reverse mortgages as well.

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