Reverse Mortgage Players Suggest Back-End Fixes to FHA’s Systems

Earlier this month, new Federal Housing Administration commissioner Brian Montgomery laid the blame for troubles in the reverse mortgage industry on back-end issues at his own department.

The new commissioner, confirmed in May, inherited a Home Equity Conversion Mortgage program that caused a $14.5 billion drag on the Mutual Mortgage Insurance Fund (MMIF), according to the most recent analysis. Department of Housing and Urban Development officials explicitly cited those numbers when discussing the lower principal limit factors instituted last fall, and Montgomery indicated that his department isn’t done attempting to root out the issues behind those bleak numbers.

“We are digging deep in the portfolio to find out of the problem is on the front end or the back end,” Montgomery said on a call with reporters. “My sense is that it’s more on the back end in terms of the losses we are experiencing. Part of ‘triaging’ is [determining] why that is happening.”

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But Montgomery, a longtime defender of the HECM program, also emphasized that he wanted to find a “tipping point” between taking further actions that could hurt reverse mortgage volume — which is currently at its lowest monthly level since 2005 — and ensuring that the HECM portfolio returns to a more stable footing within the MMIF.

With that focus in mind, RMD set out to ask reverse mortgage industry professionals how they would rectify FHA’s back-end issues to bolster the Home Equity Conversion Mortgage program without further principal limit factor cuts.

Christopher Mayer, CEO of lender Longbridge Financial, said the FHA and the Department of Housing and Urban Development could start by providing more Cash-for-Keys options, which allow lenders to speed up the foreclosure process by offering cash incentives for homeowners in default to vacate their properties.

“An expanded Cash for Keys program would offer the potential to lower losses by avoiding costly foreclosures while giving seniors facing financial or health troubles the resources to move elsewhere for a fresh start,” Mayer told RMD.

National Reverse Mortgage Lenders Association executive vice president Steve Irwin placed a similar emphasis on Cash for Keys, which officially came to the reverse mortgage program with the introduction of the HECM Final Rule last fall.

“In our ongoing conversations with HUD and the Hill, we continue to emphasize the need to improve property disposition efficiencies, post-assignment,” Irwin told RMD. “One change that we believe would be within the agency’s power to make fairly quickly would be to extend the cash for keys program to the entire book of HECM loans, as opposed to only loans closed after the new HECM rule went into effect.”

Concerns about what happens to loans once they are assigned to HUD have been a primary theme in the reverse mortgage space, especially amid sharp rises in the number of loans reaching 98% of their maximum claim amounts (MCA). Once those seasoned loans are handed off to the FHA and its contract servicer, Mayer said, they tend to “lose substantial value.”

“It may be possible to develop programs to utilize current servicers who now cost-efficiently service existing loans to continue servicing beyond the 98% threshold,” Mayer said.

Mayer also pointed to suggestions from the Urban Institute on how to streamline the FHA loan assignment process, including the expansion of alternative disposition methods such as third-party or pre-foreclosure sales, and updating the FHA’s foreclosure rules to ease the burden of costly penalties for missing deadlines.

“The FHA’s foreclosure timeline and property conveyance processes result in avoidable delays, costs, and losses for HUD and servicers,” the Urban Institute researchers concluded in their report on FHA improvements, released in February.  “These costs are eventually passed on to neighborhoods and consumers in the form of slow property resolution, depressed property values, and reduced access to credit for future borrowers.”

It’s not just an academic issue: Irwin noted that the Senate Appropriations Committee called on HUD to update its post-assignment process in its fiscal year 2019 report.

“Brian Montgomery and Congress have now both acknowledged that reforms to the back end of the HECM loan process can improve program performance and mitigate losses to the MMI Fund,” Irwin said.

David Peskin, president of Reverse Mortgage Funding, said it’s also up to players in the reverse mortgage space to work on the issue with government officials.

“We do believe that there are some issues on the back end, and that the industry is going to be working closely with FHA to develop solutions that will hopefully fix this product once and for all,” he told RMD.

Written by Alex Spanko

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  • Alex,

    I have a very hard time imagining how keys for cash will turn things around for the HECM loss for fiscal 2017 which as a single cohort of endorsements was almost $2 billion per last year’s estimate. There was 55,000 plus endorsements but I can hardly believe that all 55,000 will end in foreclosure. Maybe 16,000-22,000 might but not much more. Somehow the cash for keys would have to save about $90K to $125K per home at termination.

    I guess I am a novice on this stuff but unfortunately it does drive doubts, lots of them. By the time that the reduction in loss can be reasonably verified, many of us will be in assisted living or six feet under. It is always hard to believe claims when numbers do not seem to get us to that result.

    Can you verify with Chris, David, Steve, or the Commissioner how much savings there is on a per home basis in cash for keys? However, this is not a challenge as to whether there should be a cash for keys program but a request for the estimate on loss savings to the MMIF. It just seems the overall savings is rather meager to the overall savings that is needed.

    It is hard to believe that reducing penalties on nonperformance of key deadlines by servicers will in any way reduce the MMIF losses. That seems nuts. Perhaps you can explain how that would help the MMIF.

    Everything else was vague and nonspecific. Yet NRMLA tells us that they have been working on this for the last year. Rather than seeing this as getting a wild fire under control it looks like a committed group that is willing to fight to the end with few specific objectives. I am old enough to remember the same kind of feeling under LBJ and RMN.

    What I am asking for is some assurance that the things in the article will allow FHA to return to a more generous HECM.

  • As I understood the basic situation, there were allegedly deep problems with the assumptions used in making the HECM loss projections, not the actual losses incurred. Ultimately the two will be different but by how much and by what percentage?

    Perhaps “cash for keys” will reduce the size of the projected losses but by how much? But then how many folks will voluntary participate? If the home is owned by uncooperative heirs who live in another state with little interest in the home other than a few heirlooms and documents, will they come and do all that is necessary to get the cash? Standard cash for key programs have requirements but then again most of those homes are owner occupied while well over 35% of HECM foreclosures involve heirs, many of whom do not live nearby.

    The root cause for the projected and most likely actual losses is more likely in using the same PLFs for St. Joseph, MO as are used for Bellevue, WA. Their home appreciation rates are not the same yet the assumption in the PLF structure is that they are the same. While the HECM reimbursable losses are restricted to the MCA, there are no gains that HUD shares in when the homes are sold at a gain. It would seem if things are going to change, those assumptions are critical to that change. I have heard Shannon Hicks discussing that more and more recently.

  • There is a lot to consider in this article and the comments made. No doubt that the lowering of the PLF’s have created a major drop in origination’s. Lowering the PLF amounts and calculations again will only hurt the industry much further!

    However, I still feel and have felt right along that the physiological impact it has had on most in the industry is what is causing a great deal of the continued low origination numbers!

    I have expressed my opinions on many occasions in the past that the industry can’t dwell on what occurred with the new ruling in October of 2017. Instead, we must go after a different targeted borrower, one that has lower debt or no debt on their property and seniors with a higher valued property.

    Talk to those seniors about their retirement planing strategy, show them how the HECM or propitiatory product will fit into their plan! There are many different ways to approach the new reverse mortgage space of today that is not being done!

    Christopher Mayer expressed Concerns about what happens to loans once they are assigned to HUD and reaching 98% of their maximum claim amounts?

    As Mayer pointed out, once these seasoned loans are handed off to the FHA and its contract servicer, they tend to “lose substantial value, which he is right!

    Mayer also suggested to develop programs to utilize current servicers who now cost-efficiently service existing loans to continue servicing beyond the 98% threshold! In my opinion, this is a very common sense suggestion and should be seriously considered.

    One thing is certain, resolving of many issues is not an option it is a must in order to keep the HECM alive. There are to many pluses to the HECM and to many reasons to keep the HECM alive and well!

    Hope is that Brian Montgomery has the common sense and where with all to this!

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

    • John,

      You say, “One thing is certain, resolving of many issues is not an option it is a must in order to keep the HECM alive.” Not long ago you aligned yourself with the optimists in the industry, calling us back to the demographics which seemed to indicate great demand for HECMs (over 10,000 Baby Boomers turning 62 daily, seniors with more ever and ever higher home equity, and Baby Boomers retiring with too little in the way of retirement savings).

      I believe that the HECM can stay alive despite low endorsements. What I do not believe is that we can entertain the current level of Ginnie Mae investor interest in HECMs without increased endorsements.

      But then again living by others’ beliefs is futile. Evidence is key. Worry and stress is not. If you find your pipeline growing and interest in HECMs growing, ignore the rest. If they are not, find someone whose business is growing and follow their approach as long as it is legal, ethical, and moral.

      No one, I repeat no one in this industry has seen a time or situation like this. Those who declare they know what they are doing were doing that a decade ago with no control over the painful losses of fiscal years 2010, 2011, and 2012. In secular stagnation, they plea for not using that term. Why? Others call stats, old numbers that have no meaning today.

      Next year we celebrate the tenth anniversary of our best year ever. Yet the most compelling predictions indicate that endorsements for 2019 are not likely to reach even 57,000 endorsements (one-half of the endorsements of fiscal 2009.

      Fiscal 2019 starts in less than 50 days. Are we prepared for it?

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