Debate about Contents of New Reverse Mortgage Legislation

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.

Money Management International Offers Free Counseling

Money Management International (MMI) announced that as of July 1, 2009, they will no longer charge borrowers for HECM counseling. A HUD approved reverse mortgage lender that is required to appear on all counseling lists given to borrowers, MMI believes they have enough grant funds to cover counseling through October 2009, at which point new grant funds will become available.

As counseling and the appraisal are generally the only two out of pocket fees a borrower must pay during the reverse mortgage process, MMI’s move could be great for a large number of borrowers. It will be interesting to see whether any other counseling agencies follow suit.

It is important to remember that lenders cannot steer borrowers towards a particular counseling agency. However, it is great that there will now be a no-cost option on the list.

MMI will be limiting their counseling sessions to around 3,500 a month, as well. It will be interesting to see what wait times for borrowrs begin to look like as a result.

Counseling has the potential to help large numbers of borrowers, and moves like this one will only serve to make it more accessible.

Breaking News: New HUD Mortgagee Letter Released on Refinancing Existing HECMs

Breaking News: A new HUD Mortgagee Letter was released on Tuesday, HUD Mortgagee Letter 2009-21. The letter covers the HECM refinancing of existing loans. Some important points:

- A technical correction to 73 FR 51596 and the 24 Code of Federal Regulations (CFR) Part 206 stating that the FHA will insure all loans that we originated for the purpose of reginancing an assigned loan that is not in a due and payable status for reasons that cannot be corrected, but closed on or after October 6, 1008.

- A mandatory “anti-churning disclosure” requirement as a consumer protection measure for all refinanced HECM.s. The Anti-Churning disclosure form must be signed by the mortgagor and be included in the FHA case binder. The form, designed to ensure that the HECM refinance will benefit the mortgagor, requires that the mortgagee provide the mortgagor with its best estimate of the total cost of refinancing to the mortgagor and the increase in the mortgagor’s principal limit as measured by the estimated initial principal limit on the HECM refinance less the current principal limit on the existing HECM. The mortgagee must also provide the mortgagor with the best estimate of funds available to the mortgagor minus any closing costs/fees.

- For HECM loans that are closed-end lines of credit, the Anti-Churining Disclosure Form must be issued concurrently with the Good Faith Estimate. For HECM loans that are open-end lines of credit, it must be issued with the other disclosure forms provided in lieu of a GFE.

- Mortgagors in a HECM refinance can waive/opt-out of counseling if they have received the HECM Anti-Churning Disclosure form, if the increase in the mortgagor’s principal limit exceeds the total cost of the HECM refinance by an amount equal to 5 times the cost of the transaction and if the time between the closing of the existing HECM and the application for refinancing is five years or less.

- The mortgagee letter also contains detailed instructions for servicers regarding how to treat the loan.

The complete HUD Mortgagee Letter 2009-21 can be found here.

HUD Announces $58 Million For Housing Counseling

HUD announced this week that they would be offering $58 million in grants for housing counseling in 2009. This is an increase of $11 million from a year ago. The money is especially significant in a time when many agencies and nonprofits are finding their budgets cut, and as pressure rises, both in Congress and in the legislatures, to increase protections for consumers in mortgages and reverse mortgages. As the number of foreclosures and delinquencies are at record highs, there is even more potential for housing counseling to help homeowners avoid getting into difficult predicaments and find the right solutions to get out of them while keeping their homes. Government programs are sometimes notoriously difficult to manuver, and counseling can often help consumers make their way through the forms and red tape–or avoid getting in those situations in the first place.

It is good to see the government recognize the importance of counseling and take steps to help fund this much needed avenue.

Breaking News: HUD Mortgagee Letter 2009-19 Released on Condominium Approval Process

The US Department of Housing and Urban Development (HUD) released a new Mortgagee Letter 2009-19 on Friday afternoon, detailing new changes in the condominium approval process. The letter covers the two processing options for condominiums: HUD Review and Approval Process (HRAP) and the Direct Lender Review and Approval Process (DELRAP). The letter can be found at: 09-19ml.

Check back next week for more information.

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.

WSJ Features Front Page Story on Reverse Mortgages

The reverse mortgage industry received a pleasant surprise this morning when the Wall Street Journal wrote a big feature on reverse mortgages on the front page of the personal journal section. While much of the article explains what reverse mortgages are and how they work, an interesting piece for lenders is the section on how much money the FHA has lost through reverse mortgages. HUD asked for $800 million taxpayer dollars to boost its loan-loss reserves as housing prices continue to decline. Jeff Lewis, the chairman of Generation Mortgage, mentioned that about 1/3 of the borrowers who might have closed reverse mortgages two years ago would no longer qualify today due to the declining home values. Perhaps in connection with this, the article mentions how sudden pricing changes by Fannie Mae have recently disrupted some reverse mortgage transactions, as borrowers realize they will qualify for less money at closing than they did when they began the application process, sometimes even having a shortfall.

The stresses on the industry are noteworthy, especially as interest in HECMs increases. The number of reverse mortgages being closed has proliferated in recent months, yet housing values do continue to decline. Hopefully these financial considerations will not too greatly imperil the government programs.

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.

New Cross Selling Restrictions Hurt Lenders and Borrowers?

Senator McCaskill in DC

At first, I was inclined to be in favor of the new “cross selling” restrictions. However, after learning more about them, I have changed my view.

One of the most popular and well-publicized examples of reverse mortgage fraud comes from lenders selling a senior a reverse mortgage, then convincing them to use the proceeds to buy an annuity or long term care insurance. This practice is known as “cross selling.” The annuity could perform poorly, the money could be invested for the gain of the broker, or the terms of the insurance could be highly unfavorable. And in many of these cases, seniors could be taken advantage of.

Hence the new series of “cross selling” restrictions that are passing through state legislatures and the federal government. The federal government’s restriction, in the McCaskill amendment to the Housing & Economic Recovery Act of 2008, is arguably the most stringent one. The amendment states that the mortgagee “shall not participate in, be associated with, or employ any party that participates in or is associated with any other financial or insurance activity;” This language can be extended to include tellers and savings accounts, let alone all insurance products and 401(k)s. There is an “or,” however, which states that the mortgagee can do the above if they prove to the Secretary that the mortgagee maintains firewalls and safeguards to ensure that the originator has no incentives to provide the mortgagor with any other financial product and that the mortgagor does not need to purchase any other product as a condition of the reverse mortgage. This means that, provided that it can be proven adequately that safeguards are present, other financial products may be able to be sold by mortgagee.

The principle of the law is correct. Clearly it is important to protect seniors from fraud. Cross selling can prove disadvantageous for seniors, especially when the mortgagee is being compensated for the other products–something the senior may or may not be aware of.

However, there are other instances where cross selling may be advantageous. A senior may wish to place the money in a savings account or open up a credit card with the bank behind their reverse mortgage. They may decide to purchase a long term care insurance plan. These products can be favorable, and seniors should be able to purchase them.

The current law means that reverse mortgage lenders can only discuss a reverse mortgage with their client. If the client asks them about other options, they are not permitted to answer. Many seniors have long-term relationships with their banks or financial advisors. These seniors should not be forced to go to a variety of sources, leaving the person whom they trust and have a long-standing relationship with, just because they are considering a reverse mortgage. Such a policy has a potential to cause more harm than good.

Seniors have the right to evaluate all their options. Hopefully HUD’s interpretation of the McCaskill ammendment will still enable seniors to discuss alternatives to a reverse mortgage with their financial advisors and/or discuss options for what to do with the money, if they wish to do so. Cross selling could be prevented by a more narrow law. But the McCaskill ammendment takes it too far.