We knew that reverse mortgage applications were likely to jump to new levels in September, but we did not know how much- until now. September’s FHA Outlook report shows a 72.4% increase in HECM applications in September versus August.  19,055 HECM applications were submitted in September, versus 11,051 in August.

Therefore, while only 9,473 reverse mortgages were endorsed by the FHA in September, up from 8,933 in August, the number appears poised to climb in October and November, as those who applied before the principle limit factors fell 10% on October 1st complete their applications. It is also interesting to note that the number of purchases and refinances made up a very small percentage of the reverse mortgages endorsed, with 137 HECMs for Purchase and 790 HECM Refinances endorsed in September.

Finally, as the fiscal year ended, it is good to see that the FHA’s predictions were fairly in line with the actual results.  162,619 HECM applications were filed, as opposed to the 165,000 projected in FY 2009. Of those, 114,691 HECMs were endorsed in FY 2009. This is an increase of 2.3% from last year, though still below the projected 119,700 endorsements. Nonetheless, it appears that the reverse mortgage industry grew in FY 2009, despite the recession, and appears poised for a strong beginning to FY 2010.

NRMLA President Peter Bell testified in front of the House Subcommittee on Housing and Community Development today as part of a panel of witnesses on the future of the FHA. While Commissioner Stevens’ statements were written up in the New York Times, Bell’s comments provided a number of interesting anecdotes on the state of the reverse mortgage industry.

Bell talked about the risks to both borrowers and lenders. Borrowers risks include finding out they do not have enough money to remain in the home due to property taxes and insurance. These issues, which we have covered extensively in the past few weeks, only effect 2% of borrowers, and efforts are underway to help mitigate those risks.  Lenders risks include being stuck funding a loan that is unable to get a certified by HUD.  HUD is reducing this risk, by decreasing the Principle Limit Factors last week, and eliminating the need for a credit subsidy to the reverse mortgage program.

However, Bell’s main purpose in his testimony appeared to be to convince the House Subcommittee to extend the current reverse mortgage limits and to ultimately return to the prior Principle Limit Factors.  HECMs have had a net gain of 7 billion dollars in the course of the program, and Bell argues that reverse mortgages have not played a role in the FHA’s recent capital reserve problems.  Reverse mortgages are expected to operate on a break even or better basis in the future.

Furthermore, recent changes to the program will impede the ability of seniors to get a reverse mortgage. Over 20% of reverse mortgage borrowers in the last year would not have qualified if the Principle Limit Factors had been reduced to their current levels when they applied for the loan.  New technology has reduced costs for lenders, and Bell maintains that the numbers used by the Office of Management and Budget (OMB) are not realistic, since the average lifetime of a reverse mortgage loan is 7 years regardless of the age of the borrower. Older borrowers average the same length of time with a reverse mortgage as younger borrowers.  Bell was passionate that the reverse mortgage program has been self-sustaining and will continue to operate as such.

The President of NRMLA, Peter Bell, is currently testifying about reverse mortgages for the Subcommittee on Housing and Community Opportunity. His testimony (as well as the rest of the hearing) can be viewed at:

http://boss.streamos.com/wmedia-live/financialserv/16489/300_financialserv-qwertyuiop_070131.asx

As the committee chairwoman said earlier, without the FHA, there would be no mortgage market right now. We will have more coverage of the testimony as it occurs later, for those of you who are unable to watch live.

The hearing appears to be more about the health of the FHA and the amount of reserves remaining, but so far contains interesting information for those interested in the business side of reverse mortgages, wholesaling, and the mortgage industry as a whole.

With the principal limit factor decreasing by 10% tomorrow, the number of reverse mortgage case numbers assigned has surged in the last few days. A letter from Peter Bell, President of NRMLA, announced that 60,784 case numbers had been requested in “the last few days.”  That is more than half the number of HECMs endorsed in all of FY 2009.

The good news is that, so far, the system seems to be working. Of the 60,784 case numbers, 58,631 were issued in less than two seconds, and an additional 1,800 were issued in less than 10 seconds. These turnaround times are a good omen for those concerned about the FHA Connection system’s ability to handle the increase in demand. However, with about 12 hours until the deadline, it’s too early to alleviate all concern.

HUD just announced today that effective October 1, 2009, the principal limit factor (PLF) on reverse mortgages will be reduced by 10%. The new PLF table can be found at:  http://www.hud.gov/offices/hsg/sfh/hecm/hecmhomelenders.cfm.  This PLF table will go into effect for all loans taken on or after October 1, 2009.

These changes to the principal limit are not a large surprise, given the appropriations bills now going through Congress.  The reverse mortgage program was not designed to be supported by a credit subsidy, and since the appropriations bill is also unlikely to grant a subsidy, program changes are the only way to keep the reverse mortgage program operating in the new fiscal year (which begins October 1, 2009).  Nonetheless, these changes are not likely to be embraced by the reverse mortgage community, as they will prevent some seniors from receiving the amount of money from their homes necessary to be eligible for the program.  A reverse mortgage was designed to help as many seniors as possible. This is likely to reduce their ability to do so.

The mortgagee letter can be found below:

Mortgagee Letter 09-34

The FHA released four new mortgagee letters late last week that will have a significant impact on the way appraisals will be conducted in the future.  Although the mortgagee letters will not go into effect until January 1, 2010, they will cause some of the following significant changes to occur:

- Reduce the amount of time an appraisal remains valid to four months from six months.

- Clarify rules regarding what happens to an appraisal when the borrower changes lenders.

- Reaffirm rules regarding appraiser independence, while adding some new requirements, including the lender’s responsibility for ensuring the correct appraiser is listed in FHA connection, and preventing the lender from using any appraiser who is selected, retained, or compenstated in any manner by the mortgage broker or any member of the lender’s staff who is tied to the loan on a commission basis.

The fourth mortgage letter, while not directly relating to reverse mortgages or appraisals, requires all FHA mortgagees to submit an annual audited financial statement.

Copies of all the letters can be found below. While reducing the amount of time an appraisal is valid to four months from six months could add an expense to borrowers when a loan gets held up in processing, hopefully the change will add some urgency to processing reverse mortgage loans in a timely fashion and will allow borrowers to get a more realistic appraisal in a rapidly changing housing market.

Mortgagee Letter 09-28

Mortgagee Letter 09-29

Mortgagee Letter 09-30

Mortgagee Letter 09-31

Meg Burns

The FHA Director of the Office of Single Family Program Development, Meg Burns, started a commotion at the MBA Conference in San Diego last week when she mentioned that the FHA was looking into making some changes to the reverse mortgage product.  Some of the proposed  changes include introducing new products such as the HECM Mini. While the HECM Mini has yet to be officially released, and there are certainly some kinks and details to be worked out, the gist of the product seems to be as follows:

Right now, the HECM is a one-size-fits-all product.  Borrowers are not able to choose how much of the home’s equity they would like to use or how much income they would like to receive from the home.  The HECM Mini would enable a borrower to borrow against smaller amounts of their home equity to obtain the funds they need at a given period of time. The fees for the loan would be lower, so that it might well serve those with 1-3 years remaining in their home.

While no specific numbers were floated for the FHA’s HECM Mini, I have a feeling it may resemble MetLife’s proposed HECM II in fee structure.  This would mean that there would be no upfront mortgage insurance premium, with the mortgage insurance premium instead being paid/assessed annually. The product would also feature lower LTVs than a traditional HECM. MetLife’s HECM II assumes 3% annual appreciation.

Now obviously the HECM II is not the same as the HECM Mini, but again, since no finite details for the HECM Mini have been announced, the HECM II provides a structure for thinking about what the HECM Mini might look like.

The HECM Mini could vastly benefit seniors, enabling them to choose a smaller principal limit if they would like it.  Right now a reverse mortgage is a longer term product, but the idea of seniors being able to borrow against their home as needed with lower fees is one that will likely be agreeable to many seniors. Let’s hope the HECM Mini comes out soon.

Also, if anyone knows anything more about the proposal, please feel free to comment below.

The FHA released a final rule today that made the new HECM counseling standards official. The rule goes into effect on October 2, 2009.

Among the new standards, the rule establishes standards for certification testing for HECM counselors and a national Roster of HECM counselors. The final rule establishes that:

1. HECM counselors who have passed the exam by October 2, 2009 will be automatically included in the HECM counselors Roster.

2. HECM counselors who have been removed for the Roster may apply for reinstatement by explaining in writing how the deficiencies that were the cause of their removal have been addressed and how their program has been improved so as to warrant reinstatement of the counselor.

3. To be eligible for the HECM counselor Roster, counselors must not be listed on any of the following lists: General Services Administration’s Suspension and Debarment List, HUD’s Limited Denial of Participation List, or HUD’s Credit Alert Interactive Response System.

4. Counselors have a 30 day period to submit a written appeal of their proposed removal from the Roster.

5. A counselor may be removed for a maximum period of one year.

Counselors will be tested every 3 years to remain on the Roster and must complete continuing education requirements.

The final ruling can be read in its entirety as it appears in the Federal Register. Hopefully the ruling will help improve the HECM counseling process.

UPDATE: The FHA HECM counseling protocols have yet to be released. An update will go out when it is published.  The Final Rule published today only covers the HECM counseling Roster and the standards that accompany it.

Representatives from many of the mortgage industry’s leading mortgage servicing companies met with members of the Obama administration in Washington on Tuesday.  The meeting was called to discuss ways to improve the administration’s housing rescue plan and loan modification program. It was called in light of the fact that the program, while launched in February to great fanfare, has only completed trial modifications on over 200,000 loans so far. The administration’s goal remains 500,000 trial mortgage loan modifications by November 1st.  In what is perhaps an effort to increase the pressure on mortgage servicers to modify more loans, the Obama administration also announced that it remained on track to release a report on the individual mortgage servicing companies by August 4th. The report will contain the number of trial modifications offered to eligible borrowers and the number of trial modifications currently under way.

Some seem to fear that adding additional pressures to the mortgage servicers will cause banks to take additional losses on the loans. However, it is commendable for the administration to push for the loan modifications–especially in a program that has had so many complaints over the past few months.  I’d argue that while the losses taken by the banks will in aggregate certainly be larger than that taken by the homeowner whose loan was not modified and gets foreclosed upon, the significance of the foreclosure is greater for the homeowner than for the bank. Furthermore, it is perhaps easier for the administration to then aid the bank, rather than aid each of the millions of homeowners whose homes have been pushed towards the brink of foreclosure as a result of the economy-the people who this program was designed to help.

As the House continues to debate their appropriations bill, much recent reverse mortgage news has covered speculated and proposed changes in the bill, including questions as to whether the increased property value limit ($625,500) will be extended, and how the FHA will avoid the $798 million taxpayer subsidy requested for the program.  The bill approved by the House Appropriations committee on last week instructs HUD to reduce the principal amounts borrowers can receive through the program.

However, the most important point at this time in the bill’s process is that nothing has been finalized. The bill must be approved by the House, then the Senate, then a Conference Committee made up of members from both houses of Congress meets to reconcile changes in the bill, and then the President must sign it for it to become law.  This whole process will likely not be completed until well into the fall.   I therefore think that at this time, the best course of action is not to panic or react to proposed changes before they become a reality. Obviously lobbying has its place in the legislative process, but at an early draft stage, it seems to be unnecessary for the industry to sit on pins and needles reacting to every change (or proposed change) to the bill before it is in front of the whole Congressional body.  And even if a change passes the House or the Senate that is unfavorable, it is still likely that it might not pass through a conference committee in tact. Let’s give the complexity of the legislative process its due.

After falling from 11,660 HECMs endorsed in April to 8,396 HECMS endorsed in May, HECM volume increased slightly in June to 8,633 HECMs endorsed.  As the graph indicates, HECM volume for the year still looks like it is on track to be higher than last year.  However, one wonders if the number of HECMs endorsed will be as high as was previously thought. While the trend through April might have led one to believe that the industry would see a 144,000 HECM volume year, these trends show something more like 120,000.

Once again, the volume of HECMs is concentrated in the top few lenders, decreasing dramatically on down. Wells Fargo, the top lender, has endorsed more than twice as many loans as the number 2 lender, Bank of America. Many other lenders  have only endorsed one HECM last month.

The FHA’s complete HECM volume report for the month of June can be found here.

HUD Secretary Shaun Donovan

HUD Secretary Shaun Donovan said in a Congressional hearing on Thursday that the Government could raise insurance premiums to avoid the nearly 800 million dollar influx of taxpayer money necessary to offset all the FHA losses given the current housing market, the Wall Street Journal reported on Friday.  It would be the first time taxpayer dollars have gone into the reverse mortgage program in its 20-year history.  Donovan argued against raising the premiums, on the grounds that increased premiums or heightened restrictions could lower participation in the program.

Secretary Donovan’s fear of increasing fees and lowering participation ought to be heeded by Congress. The reverse mortgage program is a program that can help a lot of individuals remain in their home and avoid foreclosure, as we have already seen.  By adding more roadblocks, limitations, and/or costs, the government risks making the program inaccessible to the very people they wish to help the most.

John Dugan

In a story that made headlines yesterday, top US bank regulator John Dugan announced that he is concerned that reverse mortgages could be the next subprime mortgage product to experience rapid growth.  Like subprime mortgages, reverse mortgages are complicated loans that appeal to a vulnerable segment of the population.  However, Dugan’s concerns are not centered on the 90% of loans secured by Fannie Mae. Rather, he is concerned about proprietary products, sensing an opening for those who wish to prey on seniors.  

The Regulator’s remarks were partly to encourage other regulators to set standards for proprietary reverse mortgages. He also encouraged the regulators to be vigilant in cracking down on misleading marketing materials and lenders engaging in cross-selling. Dugan added that the Office of the Comptroller and Currency, where he is the top regulator, is prepared to step in should additional measures be needed.

As a result, Dugan’s comments should not be viewed in such a negative light. His point was that by acting early, regulators can hopefully prevent the next subprime crisis.  His comments are in line with much of the state legislation that we have seen in recent months.  Therefore, rather than scare people away from reverse mortgages, the Regulator’s fears should help skew prospective borrowers towards the FHA products, and otherwise help ensure that the proprietary market is regulated so that all reverse mortgage borrowers are protected.

Jumbo reverse mortgages can work well for highly valued homes

We recently added an article on Jumbo reverse mortgages. Jumbo reverse mortgages, which can often be a good program for those with homes valued at over 2 million dollars, are a proprietary product. The fees may be higher and the percentage of the value of the home that the borrower can get is generally lower than in an FHA-backed reverse mortgage. However, for some borrowers, a Jumbo reverse mortgage can still provide a greater amount of proceeds than  an FHA-backed HECM. You can view the article at http://www.reversemortgageguides.org/reverse_mortgage/jumbo_reverse_mortgage

HUD just released a new mortgagee letter, Mortgagee Letter 2009-16, which provides guidance on the manufactured housing eligibility requirements for FHA mortgage insurance.  The changes addressed in the letter are only those that can be implemented immediately. 

The main gist of the letter seems to be that manufactured homes must now meet the following requirements to be eligible for FHA mortgage insurance/a reverse mortgage:

1. Floor area of 400 sq. ft. or more

2. Constructed after June 15, 1976 in conformance with the Federal Manufactured Home Construction and Safety Standards, with the proper certification label affixed.

3. Classified as real estate

4. Mortgage must cover both the manufactured unit and its site, and cannot have a term of more than 30 years after the ammoritization begins

5. Built and remains on a permanent chassis

6. Designed to be used as a dwelling with a permanent foundation built to FHA criteria

7. The finished grade elevation beneath the manufactured home (or, if a basement is used, the grade beneath the basement floor) shall be at or above the 100-year return frequency flud elevation.  If the manufactured home is located in a coastal high hazard area, all new constructions must meet FEMA regulations and existing constructions must have met FEMA’s elevation and construction standards as required by HUD regulations in 24 CFR 55.1. 

Additional mortgagee letter topics include the underwriting eligibility, loan closing, warehouse lines-of-credit, and data quality, again for manufactured homes.

The original letter can be downloaded here.

The Wall Street Journal is reporting today that the Obama administration is in advanced level talks to create a new regulatory agency to oversee the mortgage industry, as well as other consumer-oriented financial products. It sounds like mortgages and reverse mortgages would both fall under its discretion.  It appears likely that credit cards will not be included.  The proposed changes come as the Federal Reserve continues to be under criticism for failing to regulate the mortgage market during the housing boom.

However, it seems dubious whether a new agency will really be able to accomplish anything beyond what the government has already been trying to do.  Currently HUD and the FHA have been overseeing the mortgage and reverse mortgage market. These agencies are already under criticism for being too far removed from the market, and the time lapse and red tape in the drafting and interpretation of the McCaskill amendment potentially help signal the validity of these claims.  Adding an additional agency will only further confuse the system and red line the structure.  I question whether it could be more effective as a regulatory body given the landscape in Washington and the organizations that already exist.

Mandatory reverse mortgage counseling for seniors

The FHA mandates independent third-party counseling for all those who are interested in applying for a reverse mortgage.  While the counseling can be free, it generally costs around $125 and can take in person or over the phone. A certificate of counseling is necessary for the mortgage to close.

Few products require such education.  In fact, other than skills such as driving a car or flying a plane, it is hard to think of another product that requires the level of counseling necessary to take out a reverse mortgage.  

On the one hand, counseling is important to ensure that seniors are not railroaded through the process and not taken advantage of.  In a worst case scenario, the counseling is a waste of $125 and an hour to tell a person something they already know.  In the best case scenario, however, the counseling can prevent a senior from being forced into a reverse mortgage by a family seeking to prosper from the proceeds or a lender from committing a fraudulent transaction.  There are few downsides to preventing such scenarios. 

On the other hand, it is not hard for one to question whether it is possible for independent third party counselors to ever really be completely objective.  And time and money are valuable. Most seniors do a fairly good job educating themselves about reverse mortgages.  If they do not, no one else should be responsible.  In the same way consumers can buy a faulty car or get a bad deal when making a purchase, reverse mortgages should be seen the same way as any other product. 

While these arguments have merit,  reverse mortgages are not the same as any other product, because the stakes are higher.  There are many life events for which counseling would be or would have been useful.  Rites of passage such as buying one’s first home, opening a 401(k), and developing an investment strategy, are tasks where knowledge is power and the stakes can be high.  A reverse mortgage is the same way.  Before making a big decision about finances, knoweldge is power.  Mandatory counseling is a good way to prevent against fraud by providing prospective borrowers the same level of counseling many of us wish we could’ve received years ago when making weighty decisions.

At the end of yesterday’s post, I added a line on how government involvement in reverse mortgages was a good thing. And then I pressed publish.  However, it took only a few moments for me to realize how complex an issue government involvement in reverse mortgages is–everything from government involvement in the financial market to the real estate market to reverse mortgages in particular.  A throw away sentence is inadequate to address this issue.  Should the government be involved in regulating reverse mortgages or not?

The reverse mortgage market is a particularly interesting one because it contains two sectors.  Government insured loans comprise the  majority of reverse mortgages.  However, a smaller percentage (about 10% and growing) consist of proprietary reverse mortgages–mortgages carried out without the backing of the government.  

Recently we have seen the state governments attempt to regulate the proprietary market.  In several instances, these regulations extend some of the same protections offered to federally backed loans to proprietary loans.  These protections help protect the consumer from fraud and the lender from a lawsuit and should be considered a good thing, for example allowing a reverse mortgage to be cancelled in the 10-30 days immediately after the closing and requiring the lender to notify the borrower of all the fees involved in the transaction.  The federal government has a responsibility to help prevent fraud and protect its citizens.  In an environment that is as economically predatory as this one, carrying this responsibility into the potentially dangerous world of reverse mortgages makes sense.

However, in some of the other parts of the proposed bills, government involvement is not as intuitive. For example, some of the new recommendations include complex new rules regarding the licensing of reverse mortgage lenders and brokers.  While states have generally controlled who practices what in each state (medicine and law are the two largest examples of statewide certification; education is a close third) requiring specific reverse mortgage certification, even from lenders who are otherwise licensed to complete loans and mortgages, may seem a little extraneous.  But given that every state does have different laws regarding reverse mortgages, it seems logical that state practitioners should be knowledgable of their state’s requirements. 

So what should the state governments stay away from? Fundamentally, if a person chooses to complete a proprietary reverse mortgage, they have chosen to not receive the protections entitled to them in a federally insured HECM.  This does not mean they should not be educated to make sure they are making the right decision, nor does it entitle them to be defrauded. However, the market for third party proprietary reverse mortgages is growing, indicating the demand for something outside of the government programs. The government should allow such a program to be executed by third parties, provided it is executed in such a way that protects its citizens and does not defraud.

According to the FHA’s Outlook report, HUD expects 210,000 reverse mortgages to be issued between October 2008 and September 2009 (FY 2009).  That represents a roughly 90% increase in reverse mortgages versus FY 2008.

That would be well and good if it weren’t for the fact that recent data suggests the opposite of HUD’s projections.  

Let’s take a look at monthly volumes.  To reach the projection of 210,000 reverse mortgages, the industry would have to average 17,500 reverse mortgages per month.  In October and November, the final tallies were 10,121 and 7,771, respectively.  That means it took the industry 2 months to produce what HUD projected would happen in 1 month.

Combined with projected further declines in property values, I think most industry participants will be happy if 2009 turns out to just be even with 2008, let alone a 90% increase.

Can anyone shed light on why HUD has such a rosy view for 2009?

The original report is here: Outlook Report

HUD took a dim view of what had become the accepted practice in the reverse mortgage industry to take care of the independent HECM counseling requirement. Up until October of this year the process was:

1. Lenders would sign up for a billing account with national service such as Direct Connect
2. When a borrower had completed an application the Lender would notify Direct Connect that counseling was needed
3. Direct Connect would schedule an available counselor call the borrower within 24 hours
4. The borrower would have an average 30-minute conversation over the phone
5. Direct Connect would send out the Certificate of HECM Counseling
6. Direct Connect would bill the lender $125 immediately
7. The lender would add $125 to the borrower’s closing costs and get reimbursed at closing

HUD determined that this practice was undermining the intent of the counseling requirement – to provide borrowers with independent, unbiased education – and prohibited lenders from paying for counseling.  The HUD Mortgage Letter 2008-28 was published on September 29, 2008.

Now, two months later, lenders are beginning to see the impact of the change in the form of lower origination volume (down 6% in November from year-ago levels).

When interviewed, lenders said that paying for counseling out of pocket is an obstacle for many customers.  Services such as Direct Connect continue to schedule phone counseling appointments but reportedly require the customer to provide a credit card number at the time of the counseling for immediate billing.

The HUD Mortgage Letter provides for counselors to be able to defer receiving payment by choosing to receive payment directly from the title company at closing but lenders are reporting that the counselors who are willing to defer payment are so inundated with counseling requests that they are backlogged by weeks and sometimes months.

The likelihood of a reduction in the MIP (Mortgage Insurance Premium) upfront fee for FHA reverse mortgages become even more remote with a recent audit of the FHA’s insurance fund by Integrated Financial Engineering, Inc. 

The FHA charges a 2% upfront insurance premium to insure a HECM reverse mortgage.  This fee is often the largest closing cost in a reverse mortgage and many lenders believe that the charge is excessively high relative to the risk of loss that the FHA is taking on.

At the NRMLA conference in mid November, a team from HUD presented a very detailed analysis of how they model the underwriting risk of a HECM.  The unspoken conclusion they gave was that the insurance premium is unlikely to be reduced in the foreseeable future.

Integrated Financial Engineering’s audit made the possibility even more remote when it concluded in it’s Sept. 30 audit that the economic value of the FHA’s insurance fund has declined 39% in the last year due to a massive increase in the number of troubled loans.  

The FHA has emerged as a true lender of last resort in these troubled economic times with the FHA’s share of all mortgages originated in the third quarter of 2008 jumping to 26% versus 3% for all of 2007.

The implications for the reverse mortgage industry are clear: while reverse mortgages themselves are a low underwriting risk and are unlikely to contribute to declines in the value of the FHA’s insurance fund, if the FHA runs into financial hardship it may decide to increase the premium charged on the HECM.

Source: Wall Street Journal