Amid Reverse Mortgage Uncertainty, Originators Share Top Ideas for Change

In a landscape fraught with declining origination figures and new rules, reverse mortgage lenders have more than a few suggestions for improving the product central to their business.

Many would start with at least some reversal of the program changes from the Department of Housing and Urban Development, which last fall inaugurated an overall reduction in principal limit factors and an updated insurance premium structure.

For Rick Sweeney, a reverse mortgage specialist in Nevada and northern California, the loan’s new standard upfront premium is just part of the problem: “Worse is the lower limit factors, which result in far less dollars available to senior borrowers,” he said.

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Sweeney says one “house-rich” potential borrower who would have qualified for a reverse mortgage a year ago is now in danger of losing her home. Even though she is employed, she can’t afford the $25,000 down payment, and she would be charged under HUD’s current criteria.

He agreed with a recent report from the Brookings Institution, which argued that low-risk borrowers with smaller relative borrowing amounts shouldn’t have to subsidize higher-risk borrowers. He believes a reversion to a multi-tiered system could attract a wider range of borrowers by enabling them to take out a smaller initial amount at a lower cost while maintaining access to a larger line of credit for future needs.

While Harlan Accola, director at Fairway Reverse Mortgage, agrees that fees are expensive, he doesn’t think they’re the main problem. “When other companies have given away HECM loans with very low or no upfront costs, that didn’t increase industry volume,” Accola said.

But he notices a need for more private proprietary products when he trains reverse mortgage lenders throughout the country. “It’s a dramatically different client we’re working with now than 15 years ago,” he said, one that would benefit from a broader diversity of offerings.

The industry has already heeded that call: Reverse Mortgage Funding rolled out a new proprietary loan product at the beginning of June, while Finance of America Reverse recently announced additional options for its private HomeSafe loans. Longbridge Financial has also hinted at the upcoming release of a new non-HECM reverse mortgage loan, joining the wave of proprietary options hitting the market in the wake of HUD’s October changes.

It’s not just the loan that could be improved but the method of delivering it. Even simple upgrades in technology could streamline the borrowing process for seniors burdened with paperwork. During both the application and closing process, Christine Jensen, a Fairway branch manager in Denver who specializes in reverse mortgages, said that older clients sometimes take breaks from signing paperwork to give their wrists a rest.

“I think the electronic signing process is long overdue,” Jensen said.

Reverse lenders have their own struggle: a lack of consistent and clear guidelines. In the forward mortgage world, a clear handbook exists, Jensen said.

Federal Housing Administration guidelines function like an operating instruction manual for originators on the forward side. When questions arise, “the handbook tells us what is acceptable and whether documentation meets certain criteria,” she said. “On the reverse side, we have only a collection of mortgagee letters we’ve been using to cobble together guidelines about what we think the FHA is telling us. We’re left to guess in far too many situations.”

That lack of clarity is yet another reason industry professionals would welcome more proprietary offerings not beholden to HUD. A year ago, most senior homeowners in discussions with Sweeney told him a HECM loan made economic sense for them. “Now eight out of ten people I talk to say it’s not a good choice,” he said.

“There needs to be competition in the marketplace to better service more people who can benefit from this product,” he said.

Written by Clare Curley

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  • Technology has nothing to do with this.This program got destroyed last October, I will never forget that email from HUD. Been doing loans for 30 years and I have never seen anything like it. These ridiculous changes slammed the brakes on everything. Now that stupidity combined with rising rates will kill it for now.
    It blows me away, this product is worse than hard money deals. Hugh MI upfront plus a monthly component. 5% cap on the HECM . Financial assessment and hold backs for taxes and insurance. Crazy low principle limits and very little risk AS THE PAYMENTS ARE MADE INTERNALLY. Shame on everyone and please pray for the poor originator as he/she scrambles to “generational lending” to try and catch a forward loan to survive! P.S.

  • The number one change for me has to be to revert back to a dual option upfront MIP depending on principal limit utilization (whether that be 60% or another number). I’m okay with that resulting in an ongoing MIP increase. We can sell this product with low PLFs with 0.01 upfront MIP or 0.50% upfront MIP, but it’s really tough to sell at 2%. You can talk about how we did that for a number of years, but the original PLFs were 62.5% for 62 year olds to 90% for 95 year olds. I still strongly disagree with many other changes HUD has made in the past few years, but this would be the first baby step I’d ask for back in the other direction.

  • (How will electronic signing increase HECM volume?)

    Some highly respected members in the industry believe that no changes will come this fall. Some of these believe that the Commissioner and HUD Secretary do not want to make changes until it is clear what the projected net profit or loss will be for the cohort of HECMs endorsed this fiscal year when compared to the projected losses for the HECMs endorsed last fiscal year.

    Other highly respected members in the industry in the “no change this fall” group believe that HUD now has a two year ritual to making changes. So forget about changes this fall. This belief sounds superstitious although it has a strong basis with three changes every other year during the five years of secular stagnation.

    Due to a larger and growing senior population segment with higher valued homes and the influence of a group of the highly respected in the industry, there is a growing belief that proprietary reverse mortgages will create a very strong reverse mortgage market.

    No doubt there are even more ideas, wishes, and superstition with no evidence as to their impact on the MMIF. For most, uncertainty is worse than downturns. Yet the very worst is uncertainty COUPLED with downturns, our history since fiscal 2009.

  • First off, I disagree with poi boy, respectively! Yes, last October was a blow to the industry. The 2% IMIP is not the worse thing that happened, remember, prior to that we had a 1/2% IMIP as well as a 2 1/2% IMIP.

    The major problem is in the PLF calculations but that does NOT destroy the HECM!

    Sweeney said in the article, one “house-rich” potential borrower who would have qualified for a reverse mortgage a year ago is now in danger of losing her home. Even though she is employed, she can’t afford the $25,000 downpayment, and she would be charged under HUD’s current criteria.

    I don’t quite understand that statement. If the woman is “House Rich”, she must have either a very low debt on her property or none at all! If that is the case why would she need a $25,000 down payment?

    In short, yes, we have problems with the new structure of the HECM, we hope some positives can be corrected by Brian Montgomery?

    however, no way is the HECM destroyed, it is only destroyed if one wants it to be and if one is so negative about the changes, they can’t adapt or find new ways to make it work for our seniors!

    As I said over and over, we may not be able to help the senior that is close to foreclosure with a high debt percentage on their home, low income along with a lot of other debt.

    However, what about the senior that has a low percent of debt on their property and is looking to reduce their debt in order to maximize their income? Remember those type of borrowers!

    What about the senior that has a $550,000 home, an existing mortgage of $68,000 and wants to hedge or improve their retirement plan?

    What I am getting at is there are so many ways to keep the HECM alive, I can go on and on but many of you have heard my opinions and philosophy many times before!

    Look at what Harlan Accola said about the proprietary programs, you get my point, those who are thinking positive and are being creative in their thinking as well as adapting to change, will succeed!

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

  • For me the biggest change was the lowering the floor from 5.06 to 3. When you add this to the 2% MIP AND the lower PLF’s that was huge. It is a race to the bottom now for margins with little to no profit. While true that it reduced the long term cost to the borrower because the interest rate will be lower, it increased the upfront cost because with lower margins comes lower profits which often time where used to help credit the up front fees such as the MI and origination. So now the cost of the loan has potentially increase dramatically is some cases.
    The reduced margins along with the lower PLF and lower floor have also reduced the potential LOC growth. All of these changes where to reduce the burden on the MMI fund, no doubt a problem. But as what usually happens, the pendulum swung to far and cut off to much. Like slamming the breaks on in a car in the middle of the freeway causing a major pile up, carnage everywhere, and a lot of people stuck behind with no place left to go!

    • Eric SD,

      Wow! Very vivid.

      There is no question that the changes on 10/2 were drastic as to demand. Demand has yet to recover. Some have tried to find the point of recovery but it seems to slip away just when it looks like it is within grasp.

      Predictions are being made that fiscal year endorsement recovery will be delayed until the end of the decade. Seven straight years of secular stagnation? Very likely.

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