Mortgage Professor: Reverse Mortgage Misuse Protections Have Resulted in ‘Disaster’

The various rules that the Federal Housing Administration (FHA) has put into place in the Home Equity Conversion Mortgage (HECM) program have been very problematic, resulting in HECM reverse mortgages serving primarily as a standalone financial product as opposed to a single component of a larger retirement plan. This is according to Jack Guttentag, aka the “Mortgage Professor,” in a new column at Forbes.

“HUD created this ingenious and multi-faceted reverse mortgage program, but its well-intentioned effort to protect it against misuse has been a disaster,” Guttentag writes. “The disaster has stemmed from HUD’s requirement that the HECM be a stand-alone product, as opposed to being part of integrated retirement plans.”

Citing FHA Mortgagee Letter (ML) 2008-24 which bars HECM lenders from “involvement with any other financial or insurance product,” Guttentag contends that this rule stemmed from some abusive transactions early in the history of the reverse mortgage program which saw HECMs being combined with annuities in order to generate two separate streams of cash.


“The stand-alone rule prevents synergies that would benefit retirees, generates excessive loss rates, and is not needed to prevent market abuses,” Guttentag says. “The mortality-sharing feature of annuities allows retirees taking a HECM to draw larger amounts over their lifetimes if they combine it properly with an annuity.”

This is an approach that would be particularly beneficial for seniors who are “house-rich/cash-poor,” who otherwise have negligible financial assets, he says. Were HECMs more readily integrated into retirement plans, current rates of HECM losses would be much lower.

“The program has been subjected to a great deal of bad publicity, for reasons I can’t explain, but the effect has been to subject it to adverse selection,” Guttentag writes. “The HECM client pool has been heavily weighted by borrowers with low credit scores, many in desperate financial condition, who turn to a HECM as their last resort. Many such borrowers fail to pay their property taxes and maintain their properties in good condition.”

On the other hand, HECMs which are integrated into a larger retirement plan have a better chance of drawing borrowers who maintain better payment habits, he says.

“Further, a borrower who obtains a rising payment for life is better positioned to meet home ownership charges than those who exhaust their HECM borrowing capacity in the first few years,” Guttentag writes.

Read the full column at Forbes.

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    • Steve,

      Please explain how rescinding Mortgagee Letter 2008-24 would have any impact on the underlying law at 12 USC 1715z-20(n)(1) and (n)(2). The only thing that the Mortgagee Letter 2008-24 did was provide for a rather weak implementation of the law. Most HUD approved Mortgagees already follow 12 USC 1715z-20(n)(1)(A). So unless Dr. Guttentag and you are advocating that Congress rescind all of 12 USC 1715z-20(n), it seems that the industry is already complying with the law.

  • With all due respect to one (Dr. Jack Guttentag) of the few individuals who saw the need for, supported, and positively influenced the creation of HECMs, the article above is improperly slanted against HUD. What the article misses is that the cited Mortgagee Letter was strictly limited to implementing what Congress passed in HERA (explained later).

    Mortgagee Letter 2008-24 does not mean insurance or securities cannot be sold with a HECM. It restricts approved Mortgagees and their employees from selling non-casualty insurance and financial products generally. The ONLY thing that Mortgagee Letter 2008-24 does is provide a partial implementation of 12 USC 1715z-20(n)(1) and (n)(2) which appears as Section 2122(a)(9) in HERA (Housing and Economic Recovery Act of 2008, Public Law 110-289). In fact, HUD has yet to fully implement 12 USC 1715z-20(n)(1) and (n)(2). Those provisions are intended to prohibit any who is licensed to sell insurance or qualified to sell financial products (including Securities Registrants) from also working in any aspect of originating HECMs.

    Neither HERA nor the cited Mortgagee Letter prohibit the employees of a HECM approved Mortgagee from working with insurance salespersons or securities registrants to sell the additional products as long neither the approved Mortgagee nor its employees receive compensation of any kind from the sale of anything other than the HECM (neither may those who did not originate the HECM receive any compensation from the origination of the HECM). Rightfully or not, at least for now, many interpret 12 USC 1715-z20(n)(1) and (n)(2) and thus Mortgagee Letter 2008-24 as not applying to TPOs [Third Party (HECM) Originators] or their employees or contract employees.


    What Mortgagee Letter 2008-24 does not include is the prohibition of 12 USC 1715z-20(o) which states: “(o) Prohibition Against Requirements To Purchase Additional Products.–The mortgagor or any other party shall not be required by the mortgagee or any other party to purchase an insurance, annuity, or other similar product as a requirement or condition of eligibility for insurance under subsection (c), except for title insurance, hazard, flood, or other peril insurance, or other such products that are customary and normal under subsection (c), as determined by the Secretary.” —- Yet not even subsection (o) prohibits HECM approved Mortgagees or their employees from working with financial advisors as long as there is 1) no compensation paid to either the HECM approved Mortgagee or its employees for the sale of the “additional products” and 2) the “additional products” are not required to be acquired by the borrower as part of the HECM transaction.


    Under federal law, other than Mortgagee 2008-24, the Mortgagee Letter that makes selling a HECM with insurance and financial products difficult is Mortgagee Letter 1999-02. One thing it does is implement 12 USC 1715z-20(d)(11). This subsection was added in Public Law 105-276, as subsection 593(e)(1)(D) of “The Quality Housing and Work Responsibility Act of 1998.”

    In a HUD response to a comment to the latest HECM regs (cited as 12 CFR 30 and 206 and finalized on 9/19/2017), HUD states:

    “Comment: HUD should not restrict financial professionals from helping borrowers seek professional money management advice. The commenter stated that HUD should not ask the homeowner if they plan to use the HECM proceeds to purchase life or annuity products. The commenter also stated that almost all HECM lenders are trying to tie the product more closely with the financial and estate planning communities.

    HUD Response: The language in the rule is consistent with the statutory requirement in § 255(d)(11) of the NHA.”

    The comment is the last comment of Section 30, titled “Housing Counseling” under — Subpart B., titled “Specific Public Comments” of — Part IV., titled “Public Comments and HUD’s Response to Public Comment” under — the “Supplementary Information” part of the last HECM regulations cited as 12 CFR 30 and 206.


    The Dr. Guttentag’s article states: “The disaster has stemmed from HUD’s requirement that the HECM be a stand-alone product, as opposed to being part of integrated retirement plans.” — I am unaware of any such requirement. The only place that I am aware that HUD uses the term “stand alone” is in its reporting of specific aspects of the MMIF in its annual report to Congress on the financial status of the MMIF. The first use of that term is found in the HUD annual report to Congress on the financial status of the MMIF for September 30, 2017. It would have been better if Dr. Guttentag had cited where HUD requires that the HECM be a stand-alone product or who is responsible for the use of that term in his article.


    I know of nothing that HUD has done that stops a borrower from buying an annuity or other financial product after the HECM closes even though if the intent to buy is known to the lender before closing; it will generally be discouraged. HOWEVER, California law is different and prohibits insurance producers from selling to reverse mortgage borrowers in Section 785.1 of the California Insurance Code (or CIC):

    (a) (1) An insurance broker or agent shall not participate in, be associated with, or employ any party that participates in, or is associated with, the origination of a reverse mortgage, unless the insurance agent or broker maintains procedural safeguards designed to ensure that the agent or broker transacting insurance has no direct financial incentive to refer the policyholder or prospective policyholder to a reverse mortgage lender.

    (2) Except as provided in subdivision (b), individuals transacting insurance shall not receive compensation, commission, or direct incentive for providing reverse mortgage borrowers with a noncasualty insurance product that is connected to or a result of the reverse mortgage.

    (b) This section does not prevent an agent or broker from offering title insurance, hazard, flood, or other peril insurance, or other similar products that are customary and normal under a reverse mortgage loan.

    The same prohibition on insurance producers does not currently exist under federal law!!

    Why the emphasis in the article is against HUD, is not explained. Perhaps Dr. Guttentag believes that HUD should ignore new law Congress passes impacting HECMs if they in any way prohibit HECM originators from obtaining a commission from selling insurance or other financial products as part of the origination of a HECM. However, since Mortgagee Letter 1999-02, HUD has made it clear what its position is on the purchase of annuities and other insurance and financial products with HECM proceeds over nine years before posting Mortgagee Letter 2008-24. Even if HUD could rescind Mortgagee Letter 2008-24, how would things change since the related law would not be rescinded.

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