Former FHA Commissioner Offers Ideas on Rebuilding Reverse Mortgage Program

Following the annual release of the Federal Housing Administration’s annual report to Congress on the status of the agency’s insurance fund this year, opinions abound about the sufficiency of recent reverse mortgage program changes and the state of the fund going forward.

One opinion that emerged following the report release was that of former FHA commissioner and former Mortgage Bankers Association president and CEO David Stevens.

Stevens, who served as commissioner from July 2009 to March 2011, offered commentary in response both via LinkedIn and other outlets, including an assertion that the reverse mortgage program should be rebuilt from scratch. RMD spoke with Stevens by phone to learn more about his ideas for reshaping the program.

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For starters, Stevens said, the ideal of a credit requirement and residual income test needs to go further than it does with the current financial assessment that is required of all loans.

“The idea of being able to pull equity out of your home to live on is a great idea,” he told RMD. “The fact you don’t have to make a mortgage payment should be available for seniors without income to take advantage. How do you make it sustainable? You put a qualification process in place… I don’t think [the current requirement] goes far enough.”

During Stevens’ tenure at FHA, the agency created the HECM Saver, an adjustable rate product with lower upfront fees and a lower draw percentage, but the product eventually was eliminated.

The Saver was designed to offer an alternative to the full-draw fixed rate offering, but the execution was lacking, Stevens said.

“For a loan originator, it wasn’t in their best interest to do a partial draw,” Stevens said. “Second, because it was a new product, it [required] its own securitization and we weren’t able to create a mortgage-backed security market to have it trade as well as the regular HECMs were trading… it turned out that it was a Band-Aid.”

Where to go from here

While there may not be a quick repair to the reverse mortgage program, there is action needed, Stevens stressed in his comments.

“I’m not the end all be all person who knows what needs to be done,” he said. “But it’s plain to see when the review comes out that the program is losing billions and it’s proven that HUD has never been able to project it accurately.”

Recent changes have been effective, he said, crediting the work of Commissioner Brian Montgomery, who took the post in May. Most recently, Montgomery has spearheaded change in the form of a second appraisal required for some borrowers—a process aimed at stemming losses related to appraisals.

“We need good common sense objective rules and regulations,” Stevens said. “Not crazy ones, but we need good rules. I think we should get some good policy stakeholders—HUD could hold a summit, with an advisory panel to look at the program, gather financial expertise, housing experts, seniors and more, to analyze the numbers and write the policy to protect the program.”

Some alternative suggestions might include incorporating family members as co-signers, or setting certain requirements that would relate directly to available principal limits, he continued.

“Ultimately they should change the PLF tables so there are more variables—credit worthiness, ability to sustain payments, maybe cosigners,” he said. “When you see a loss expectancy in the amount this is expected to see, it’s not something you piecemeal. It should be a primary objective.”

As for whether additional program changes are necessary, time is needed following the most recent changes to gauge their impact, said National Reverse Mortgage Lenders Association Executive Vice President Steve Irwin in an email to RMD.

“I believe that we need to have more production experience under the FY 2018 HECM program changes, and now with the recent FY 2019 HECM changes, before it can be properly determined if any additional front-end HECM changes may be required,” he said. “With that in mind, I do believe that expanding the Cash for Keys program to cases that were originated prior to the issuance of the Final Rule would help improve the program performance, as would other servicing related program changes.”

Written by Elizabeth Ecker

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  • Is it possible, for the benefit of the originators, to move these continuing negative discussions about HECM to the basement where off-the-wall input can be dealt with outside the public view? Helps make the case for Obamacare development where the product was engineered outside the public view.

    The internet picks up on these stories and spreads them around in front of us where critics have a heyday at our expense. Our statement that “HECM is the solution you’ve been waiting for” falls flat in the muck of these ongoing discussions, week after week.This makes me remember the struggle of the “Tucker” which was described as the next best solution to the automobile. You may remember, it was killed by its competition before it lived.

    Give us a break now, please. We still need to make a living at this.

    • Warren,

      When Commissioner Stevens was nominated there was such praise given by the industry as a whole and NRMLA in particular, one would think that his criticisms of the HECM program should be reasonable. We need to know what he is saying in order to be armed when our prospects use them against him.

      • Hmmmmmmm. On the rate people have public input on the Reverse Mortgage these days, I guess a remark from my current client that the Gov’t itself wants to get rid of the HECM, all input is allowed. OK, let’s dance (if we still can).

  • Good comment wstrycker, you touched on very good points along with a couple of laughs to boot!

    First off, the present FA ruling is doing its job, Stevens, is dead wrong with his opinion that the ruling does not go far enough, it does!

    Other areas within Stevens comments tend to be negative as wstrycker points out.

    Also, as Steve Irwin pointed out, “We need to have more production experience under the FY 2018 HECM
    program changes, and now with the recent FY 2019 HECM changes, before it can be properly determined if any additional front-end HECM changes may
    be required”!

    I agree 100% with Steve on his statement, a great deal more time is needed to determine if any changes are needed.

    We need to leave the HECM alone, let it try and make its comeback on its own!

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

    • John,

      Financial assessment has been great at reducing property charge defaults in the first five years or so but at what cost? The first known cost was endorsements. The second is the massive losses it is producing in the MMIF. The average loss per HECM from the HECMs endorsed in fiscal 2014 is the substantially less than that same loss for any fiscal year that precedes it and smaller than any year that follows it since fiscal year 2015 is the first year at least some endorsed HECMs were subjected to financial assessment.

      As stated many times before, this is the wrong kind of financial assessment for our industry and it still is. The 10/2/2017 changes were the direct result of the ugly impact of financial assessment in the MMIF on an average loss per HECM endorsed by fiscal year. For example, the loss already projected for the HECMs endorsed in fiscal 2017 would have been close to half of the amount estimated if there were no financial assessment. How can that be claimed? The losses generated by the HECMs endorsed during fiscal 2014 are less than half of the losses generated by the HECMs endorsed during fiscal 2017 on an average loss per HECM basis despite the endorsements of fiscal 2014 being 7% lower than those for fiscal 2017. Yet the same basic loss impact for financial assessment was seen in the fiscal year 2018 endorsed HECMs where the endorsements were 6.4% less than they were for fiscal 2014.

      So no matter if the endorsements are more or less in a fiscal year than they were in fiscal 2014, we are seeing the same basic loss pattern due to financial assessment in all years following fiscal 2014. As to fiscal years 2015 and 2016, the average loss per HECM endorsed in those respective years were lower mainly because most HECMs endorsed in fiscal 2015 were not subjected to financial assessment thus the average loss per HECM for fiscal 2015 was lower than later years but greater than fiscal 2014. Fiscal 2016 saw a majority of its endorsed HECMs subjected to financial assessment, but not all so its average loss per endorsed HECM is smaller than the average loss for fiscal 2017 (but larger than the average loss for fiscal 2015). So as the percentage of HECMs endorsed that were subjected to financial assessment began to rise in fiscal 2015 so did the average loss per HECM for the HECMs endorsed in that same fiscal year.

      Fiscal 2018 was a breath of fresh air in that the average loss per HECM due to financial assessment was slightly reduced from what it was in fiscal 2017 per HUD. That means that the changes on 10/2/2017 at least capped the loss per HECM. Let us hope that we see even further inroads in fiscal 2019 since the majority of the endorsements in fiscal 2018 determined their principal limits by using the principal limit factors that go back to 8/4/2014.

  • after reading the Epistle from Mr. Stevens, it is obvious wherein lies the problem with the Reverse. The lack of leadership at the policy making level, not being able to determine the state of the markets, and getting caught up in the minutia of the day serving only a small segment of the market. When did we first start hearing abut the deficits of the MMI fund? I believe during his tenure when the fixed rate became the bell-cow, and brokers who were mostly just passing thru until the forward world kicked in again, were maximizing their paydays by doing full draws, not to the advantage of the Senior, but of their paycheck.
    If the product was taken back to the original concept, with some FA rules in place,,residual income positive, using the most current actuarial available, lowering the age to 55 and using the most relevant appreciation number for a specific MSA, the program will be self sustaining.I believe. We must not be allowed to do forward and reverse. One license for each, and you can do one or the other. As a good friend of mine always states, Figures do not lie, but Liars can figure.

    • Bill,

      I cannot agree with all you present, but substantial changes to the HECM are needed so that at least its loss reimbursement and assignment operations are overall financially without some gain so that it can help support counseling as allowed by federal law.

      Like you, one of those changes needs to be geocentric PLFs. Another excellent point is separate licensing of forward and reverse mortgage originators. How can reverse and forward mortgage originators have the same requirements and tests? That alone shows how little NMLS and other regulators understand reverse mortgages. Finally let us get rid of the federal registration status for originators. A forward mortgage originator should have the same requirements and exams as all other forward originators and the same is true for all reverse mortgage originators.

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