We realize that this is not the freshest news, but it does have a large effect across the industry, and we wanted to make sure it didn’t fall through the cracks.
After a slow start, the number of HECM loans rebounded in March. According to the HECM volume reports, 11,261 HECMs were endorsed in March ’09 versus 9,663 a year earlier. This 16.5% increase comes after volume was down 17% in February ’09 compared to February ’08 (9,086 vs. 10,913). January ’09 volume was also down compared to January ’08 (9,858 vs. 9,957), though only slightly so.
Some interesting things to note:
– The top 10 lenders held a 44.6% market share, up from a 42% share a month earlier.
– Only 3 of the top 10 lenders (One Reverse, Generation Mortgage, and Urban Financial) are not banks or affiliated with banks.
The good news for the reverse mortgage industry is that the number of hecms appears to be on the rise again. However, the increased market share to the top 10 lenders means that the other reverse mortgage entities will have to work even harder to assert themselves and regain some of the market share. While 44.6% may be a small amount compared to other industries and indicates that there is still room for competition, any increase doesn’t speak as well for the smaller players.
Mandatory HUD Counseling and the new HECM for Purchase Program are two topics that have been significant to the reverse mortgage industry recently. Waves appear ready to reverberate again after HUD’s recent release of Mortgagee Letters 2009-10 and 2009-11 yesterday. These two letters concern HUD counseling and the HECM for purchase program respectively. Some important points surrounding the letters can be found below:
HUD Counseling
New requirements surrounding the mandatory HUD counseling include that lenders must provide a list of no fewer than ten counseling agencies to every client. Five must be local agencies within the senior’s local area or state. At least one must be within reasonable driving distance to provide the opportunity for in-person counseling if the borrower desires it. The last five must be the National Foundation for Credit Counseling, Money Management International, CCCS of Greater Atlanta, the AARP and the National Counsel of Aging. The counselor cannot assist the borrower in scheduling counseling or pressure them to complete it.
HUD counseling must now include an overview of the senior’s financial situation, including documentation of the senior’s budget. The counselor must evaluate and discuss any appropriate alternatives to a HECM with the senior. Space to record the method of payment for the counseling session has also been added to the HECM Counseling Certificate.
HECM for Purchase
The letter surrounding HECM for Purchase provides guidance to help prevent “buy and bail,” which involves the purchase of a more affordable home in order to cease making payments on the previous mortgage. One helpful correlary is that mortgagors may only have one principal residence at a time. Thus, those wishing to use the HECM for Purchase program to purchase a new principal residence must pay off the existing FHA-insured mortgage before the new HECM for Purchase mortgage can be approved.
All major property deficiencies must be repaired by the seller by closer. Borrowers cannot apply for gap financing.
Sometimes it is interesting to step back for a moment and reflect on the happenings in other countries.
Today, I stumbled across Responsible Equity Release, a UK site that specializes in lifetime mortgages, the British equivalent of a reverse mortgage.
The interesting thing about the equity release program is that while it has many similarities to the US program, some of the types of equitable releases are not available in the US. While a Roll Up Lifetime Mortgage is most reminiscent of the US reverse mortgage program, Fixed Repayment Lifetime Mortgage and Home Reversion Schemes do not exist in this country. In a Fixed Repayment Lifetime Mortgage, the amount to be repaid is decided upon before the mortgage is taken out. When the homeowner dies or sells the home, the amount due is the fixed amount that was determined at the offset. In a Home Reversion Scheme, the borrower sells all or part of the value of the property in exchange for a lump sum. When the borrower sells their home or passes away, the home is sold with the portion of the property still owned by the borrower going to the estate, and the rest going to the plan provider.
A fixed repayment lifetime mortgage program would probably be extremely popular in the states, as it avoids the interest rate calculations that borrowers must wrestle with when they choose between a fixed or an adjustable mortgage, Libor or HECM.
Many countries also have programs similar to the US reverse mortgage program. More to come.
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.
The Washington state Capitol, one of the states where a new reverse mortgage bill has been introduced.
Last week, we discussed the proposed reverse mortgage bill in Arizona. Today, we would like to highlight three other states where bills regulating proprietary reverse mortgages have been introduced in the last month. The three bills differ dramatically from each other.
The California bill aims to protect seniors from being lied to and/or misinformed, including a lot of regulations surrounding impartial HUD counseling. Some highlights of the California Reverse Mortgage Elder Protection Act of 2009 include requiring lenders to provide prospective borrowers with a list of all approved HUD counselors in the state, requiring lenders to disclose any business relationships or potential conflicts of interest with the counseling agency to the prospective borrower, and allowing the borrower to cancel the reverse mortgage for any reason within the first 30 days. This bill apparently addresses the needs of the state, where seniors have been found to be misinformed or misled regarding reverse mortgages more often than in some of their neighbors.
Minnesota’s new bill addresses the issues of fraud and double dipping. It too seeks to ensure that lenders do not provide reverse mortgages to seniors who do not need them.
One of the key facets of the bill is that it prohibits cross selling involving reverse mortgages. The bill will also require mandatory counseling for proprietary reverse mortgages. There appears to be a lot of skepticism as to whether it is possible to ever really prohibit cross selling. However, it seems valuable to state that lenders cannot also sell annuities or insurance to the borrower if the payments will come from the reverse mortgage. Trust is a crucial aspect of the reverse mortgage program, and double dipping has the potential to undermine that trust.
The Washington bill protects both the lender and the consumer from eachother. The bill appears similar in some ways to the Arizona bill by mandating counseling. It requires basic protections, ensuring that there is a right of recession and that the payments go to the correct party. However, the bill is also notable because it adds provisions for the lender, helping to confirm that the lender can afford to make the payments in the reverse mortgage and that they are held accountable if they do not. The Washington bill appears to be designed to prevent court cases and help provide guidance to the courts in determining disputes. It also is likely to serve as an important step in protecting seniors in the proprietary reverse mortgage market–especially since one only needs to be 60 to qualify for a proprietary reverse mortgage in Washington State.
These bills continue to show the increased interest the states have been taking in regulating the proprietary reverse mortgage market during the recession. Reverse mortgages can help seniors and improve their lives. On the other hand, there also instances where getting a reverse mortgage may prove to not be the right thing for the senior and their family. Taking steps to protect the senior while helping to prevent lawsuits is a good thing. It is valuable that the states have gotten involved in regulating a market that is so at risk for fraud and manipulation.
I
n recent reverse mortgage news, Financial Freedom was acquired by IndyMac last month. Or rather, One West acquired IndyMac and also received Financial Freedom as part of the deal. Regardless, Financial Freedom’s n
ame changed from Financial Freedom Senior Funding to Financial Freedom Acquisition LLC. Apparently there were also some layoffs at Financial Freedom. 
