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.

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.

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.

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.

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

- 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.

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.

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.

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.