Congressmen, Housing Experts Weigh HECM Program Pros and Cons

In a rare assembly of reverse mortgage stakeholders, housing experts and members of Congress, a hearing convened Wednesday before the The U.S. House of Representatives Financial Services Subcommittee on Housing, Community Development, and Insurance to discuss the merits and areas of improvement of the federal Home Equity Conversion Mortgage (HECM) program.

Newly drafted legislation, a recent Government Accountability Office (GAO) report on the program and several new product improvements were at the core of the discussion, which largely agreed on the value of government-sponsored reverse mortgage program, as well as some of the program’s shortfalls. The legislation specifically seeks geographic lending limits and more protections to prevent reverse mortgage foreclosures.

The hearing was led primarily by subcommittee chairman Rep. Lacy Clay (D-Mo.), and called on four primary witnesses to offer testimony concerning the potential merits and detriments that the program represents for American seniors. Witnesses and legislators alike debated ideas in which the program can be improved, with most lawmakers agreeing with witnesses on the need that the program fulfills for American seniors.


Proposed legislation

The first piece of proposed legislation, co-sponsored by Rep. Maxine Waters (D-Calif.) and Rep. Denny Heck (D-Wash.), is called the ‘‘Preventing Foreclosures on Seniors Act of 2019’’ and aims to revise the HECM program to add safeguards designed to prevent the displacement of homeowners, further bolstering protections for non-borrowing spouses (NBS).

It would also mandate that the Department of Housing and Urban Development (HUD) report each year to Congress the number, percentage and reasoning behind reverse mortgage foreclosures caused by defaults related to delinquent tax and insurance payments.

The second piece, currently unnamed and sponsored by Rep. Clay, acts as a codification of a recommendation from the White House, which would conform the maximum loan limit for reverse mortgages insured by the FHA to be consistent with the area maximum loan limits for FHA-insured mortgages.

More protections needed

With many of the assembled representatives focused on issues related to reverse mortgage foreclosures, the testimonies of the witnesses all aligned in a united recognition of the necessity for additional consumer protections in the HECM program to minimize foreclosures on seniors which result in displacement from the home.

“Reverse mortgages provide an important safety net for older adults to allow them to remain stable in their homes,” said Sarah Mancini, an attorney at the National Consumer Law Center (NCLC) in her opening statement. “The reverse mortgage foreclosure crisis we are facing now was caused by problematic origination practices that largely have been addressed for new HECM loans through HUD’s requirement that lenders evaluate the borrower’s ability to pay property charges before making the loan (the Financial Assessment requirement) and its 2014 policy that creates some protections for non-borrowing spouses.”

Still, she recommended additional protections including making loss mitigation mandatory for new HECMs that go into default due to unpaid property charges; an expansion of loss mitigation options for existing HECMs that provide for an extension of foreclosure deadlines as servicers evaluate loss mitigation; and the improvement of servicer communications with borrowers.

The Urban Institute’s Laurie Goodman provided testimony and substantiation to her assertion that the tapping of home equity will become increasingly important over time due to an increasing number of seniors in general, and higher numbers of seniors entering retirement with an existing mortgage. To improve the status of affected reverse mortgage borrowers, Goodman recommended increasing financial literacy surrounding reverse mortgages, enhancing HECM counseling by requiring it to be a first step for borrowers after initial contact with a lender, simplifying the HECM program to get rid of little-used features, and streamlining the conversion of a forward mortgage into a reverse mortgage.

Core to the discussion at the hearing were two newly-drafted pieces of proposed legislation: one from Financial Services Committee Chairwoman Maxine Waters (D-Calif.) and co-sponsored by Rep. Denny Heck (D-Wash.) aimed at the prevention of mortgage foreclosures on seniors, and another from Rep. Clay which proposes the imposition of geographically-based lending limits for the reverse mortgage program which would more closely align it with the lending limits observed in the traditional, forward mortgage program.

Servicing issues

One of the major issues that needs to be addressed in the HECM program revolves around insufficient time given to borrowers by servicers before instituting a foreclosure action, said Alicia Puente Cackley, director of financial markets and community investment at the Government Accountability Office (GAO). The government watchdog released a HECM program report Wednesday detailing its recommendations for program improvements.

“Certain features of the HECM program can help borrowers delay and, in some cases, avoid foreclosure,” Cackley said. “If a borrower falls behind on property charges, servicers must generally temporarily advance property charges on a borrower’s behalf (known as servicer advances). However, servicers may initiate foreclosure proceedings if the borrower does not catch up.”

There is also insufficient data from FHA in 30% of documented loan terminations due to insufficient detail in the agency’s data, Cackley said. The report also found that servicers’ employment of foreclosure prevention options for HECM borrowers was either limited, but was also obfuscated by additional lack of detail in FHA HECM foreclosure data that prevented GAO from “assessing the extent of use” for servicer foreclosure prevention options, she said.

The GAO also advise that FHA interact more directly with consumer complaint data from the Consumer Financial Protection Bureau (CFPB), “which could improve its ability to detect and respond to emerging consumer protection issues regarding HECMs,” Cackley said.

Separating the HECM program from the MMIF

The cross-examination of witnesses by committee members contained few moments of contention, however one instance arose when committee member Rep. Joyce Beatty (D-Ohio) questioned the witnesses concerning whether or not the HECM program should be removed entirely from the Mutual Mortgage Insurance Fund (MMIF).

Citing Department of Housing and Urban Development (HUD) Secretary Ben Carson’s decision to overturn an Obama Administration decision to lower mortgage insurance premiums for FHA loans and lower the costs for FHA borrowers, Beatty asked the panelists if 30-year FHA mortgage borrowers were effectively subsidizing the FHA’s reverse mortgage program, specifying her preference for only a “yes” or “no” answer.

“It’s not simple enough for a yes or no,” Bell said, before being pressed by Beatty about whether or not the HECM program should be separated from the MMIF. Both Bell and Goodman agreed that it should.

“I think HECM should be moved out of the MMIF, and leaving them in does a disservice to both programs,” Goodman answered. “As you point out, they’re very, very different, and each program should be advised on their merits.”

Shifting stances

Co-sponsor of Rep. Waters’ proposed foreclosure bill, Rep. Denny Heck (D-Wash.), effectively summarized how the debate among lawmakers has shifted when compared with discussions had in the immediate aftermath of the 2008 financial crisis.

“You all said that this is a good program, [and offered] some things we need [for it to] do better,” Heck said. “But, I want to contrast that positive predicate with what we went through several years ago when had the privilege to lead the effort to modernize the HECM program, in which there was a lot of debate around the question of whether or not we should even have a reverse mortgage program. We’ve come a long way.”

Coming that “long way,” Heck says, is attributed to the recognition of the HECM program’s value in part due to legislative changes, along with being partially due to program advocates recommending additional changes to strengthen consumer protections within it. Also sharing a change in perspective was Rep. Waters herself, who did not shy away from her previous issues with the HECM program, while relating her recognition of its importance.

“Like I said, there were years where I have been concerned about the program,” Waters said. “But I do recognize that it has value that must be protected and extended so that we make sure we’re providing the kind of safety and security our seniors need and deserve.”

Industry response

Shortly after the conclusion of the hearing, the reverse mortgage trade association expressed encouragement at the statements of support exhibited by legislators for the HECM program, while looking forward to the process of making further HECM program improvements in concert with legislators on the subcommittee.

“NRMLA greatly appreciated the opportunity to testify at today’s hearing and to continue to advocate on our member’s behalf, and on behalf of the seniors our members serve,” said Steve Irwin, EVP of NRMLA in an email to RMD. “There was genuine support for the HECM program from the members of the Subcommittee on Housing, Community Development and Insurance, and all of the witnesses and subcommittee members explored possible paths toward continual improvement of the HECM program. We look forward to working with the members of the subcommittee, and with the other witnesses, to further explore some of the ideas put forth today.”

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    • Scott, Laurie Goodman spoke in her testimony about the abundance (and in her view, perhaps overabundance) of HECM features. She talked about how a borrower can choose either a fixed or adjustable rate, while distribution options include lump sum, line of credit, term annuity, tenure annuity or a combination of other payment options. The timing and pace at which the funds can be withdrawn can also be chosen. Contrasting that with the options available in a typical mortgage, Goodman sought to emphasize the complexity of the HECM.

      She ended that statement by saying,

      “This plethora of options makes the program more difficult for the borrower to comprehend, and puts the institution making the loan at more risk. I actually think that program simplification and getting rid of some of the less-used options would make a big difference.”

      • Thank you sir!!! I kinda thought that’s what was being indicated. Although I find all those things easier for clients to understand than the Expected Interest Rate. Especially when I hear about 3 ( two wrong) different explanations of the EIR depending on who they talk to.

        Personal opinion here, removing any of those so called less used options would not serve our seniors better. Hope they don’t do that.

  • I am really wondering if what is being proposed is an improvement to the HECM. In fact, reading over the actual proposal, there are many pro’s and con’s, I see more con’s?

    As far as Clay proposing the imposition of geographically-based lending limits for the reverse mortgage program which would more closely align it with the lending limits observed in the traditional, forward mortgage program, why?

    Remember years past how the lending limits were determined. Sorry, I have many doubts as to the benefits of the new proposal, sorry!

    John A. Smaldone

    • Could not agree more, John. All the higher lending limits allow HECMs do is provide a loan that is compatible with what is available from FHA forwards. My hope is that the proprietary market will fill the hole… though clearly they are not near compatible products nor as advantageous to current HECM borrowers.
      But, I have to be careful that I say In My Opinion, or I Think, or I will get a doctoral thesis from some commenters with a great number of letters after their names and way too much time on their hands… ahem.

      • Thank you Richard, I agree with what you say as well. I guess I better watch out as well:)

        You and your family make it a good weekend my friend

        John A. Smaldone

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