HECM Volume Rebounds in June, but Leaves Predictions in Jeopardy

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 Considers Raising Insurance Premiums on Reverse Mortgages

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.

US Regulator Worries Proprietary Reverse Mortgages Could Be Next Subprime Product; Encourages More Regulation

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.

New Content: Jumbo Reverse Mortgages

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

FHA Loans Made More Difficult for Mobile Homes

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.

Obama Administration Considers Proposing a New Mortgage Regulator

: The Federal Reserve has been under fire for failing to do a better job regulating the mortgage market

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.

How Important is Counseling?

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.

Is Government Involvement in the Reverse Mortgage Market a Good Thing?

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.

FHA Outlook for HECM Volume Is Out Of Touch With Reality

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

Changes to Counseling Slows Reverse Mortgages

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:

Lenders would sign up for a billing account with national service such as Direct Connect
When a borrower had completed an application the Lender would notify Direct Connect that counseling was needed
Direct Connect would schedule an available counselor call the borrower within 24 hours
The borrower would have an average 30-minute conversation over the phone
Direct Connect would send out the Certificate of HECM Counseling
Direct Connect would bill the lender $125 immediately
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.