Clarification of “non-recourse” in reverse mortgages

According to a posting from NRMLA regarding HUD Mortgage letter 2008-38, “Clarification Regarding Borrower’s Recourse for Repayment of HECM Loan Debt and Termination of  Hecm Mortgage”:

For years, FHA-insured Home Equity Conversion Mortgages (HECMs) generally have been characterized by the FHA, lenders and consumer advocates alike as “non-recourse” loans where the borrower can never owe more on the HECM loan than what the house is worth at the time the loan is paid back.

HUD states in the mortgagee letter that non-recourse only applies to situations where the property is sold to pay off the debt. If the heirs wish to retain ownership, the mortgage balance must be paid in full.
If the home is sold, “the property may be sold for at least the lesser of the unpaid mortgage balance or 95% of appraised value,” the letter adds.

The Department further clarifies that the sale of the home must be an arms-length transaction, defined as follows: (1) the absence of a relation between the buyer and seller; (2) a selling price and other conditions that would prevail in an open market environment; (3) transaction costs paid by the seller that are considered both reasonable and customary for the market in which the property is located; and (4) the adherence to ethical standards of conduct by all parties involved in the HECM short sale transaction, including the borrowers (or the estate), mortgagees and appraisers.

 

New Alternative to Reverse Mortgage: NestWorth

Rex Agreements and EquityKey pioneered the market for alternatives to reverse mortgages and now a new player is on the scene – NestWorth.  The Rex Agreement is nothing more than an agreement between the homeowner and Rex that when the homeowner sells the home, Rex gets a portion of the appreciation in property value.  In return, Rex gives the homeowner an upfront fee.

NestWorth, on the other hand, gets a percentage of the entire value of the home at sale with the range being anywhere from 20-90%.  NestWorth is essentially pre-buying the home.  Rather than paying out a lump sum up front, they structure the payouts as monthly payments that vary based on the age of the homeowner and the amount being of equity being traded.   

In the most aggressive case, where the homeowner is only keeping rights to 10% of the sale price (trading away 90%), a 72 year old homeowner with a $1M property would receive $3,125 per month.

So how does this compare to reverse mortgages?  Apples and oranges.  But one dimension you can compare is what percentage of the home’s equity is paid out to the homeowner.  

A 72-year old can receive about 65% of their equity with a reverse mortgage.  With the NestWorth product, it depends on how long the homeowner survives to receive payments.  If they live for 10 years, they’ve received a present value of $294,629 or 29.5%.  For 15 and 20 years the percentages are 39.5% and 47.4%, respectively.

Given that the average term to maturity of a reverse mortgage is only 7 years, using 20-year estimates for the NestWorth is probably aggressive.  So, a reasonable answer is that the NestWorth provides access to about 30-40% equity.

 

HECM Annual Adjustable Going Extinct?

According to a recent survey of reverse mortgage lenders, the HECM Annual Adjustable (rate adjusts annually instead of monthly) is just about extinct.  Less than 1% of all originations are Annual products.

The Annual product has never been popular because the extra interest that gets charged on that product compared to the Monthly more than outweighs the stability benefit that comes from an interest rate that adjusts less frequently.  

Plus, with the rate on the HECM Fixed product now within a few points of the expected rate on the HECM Monthly, the need for a HECM Annual is basically nill.

Given that the cost of keeping an extra program on the books at a lender is not high, the product probably won’t be done away with completely but don’t be surprised if it gets pushed off the list of programs quoted in calculators.

 

How Slow Is December for Reverse Mortgages?

One of our readers wanted to know, “How slow is December for reverse mortgages?”  So we looked at data from 2007 when things were fairly stable.  We learned two things:

  1. January is very active
  2. December is usually slightly down from November.

2007 results:

  • 2007 October: 8,417
  • 2007 November: 8,270 (-2%)
  • 2007 December: 8,007 (-3%)
  • 2008 January: 9,957 (up 24%)
2008 results:
  • 2008 October: 10,121
  • 2008 November: 7,771 (-23%)
We went and looked at 2006 numbers as well and saw the same pattern as 2007 – November and December are down a little from October but not too much then January spikes up.    The 23% drop in November 2008 from October 2008 is something new — perhaps an economy in turmoil?
 

A World With Fewer Mortgage Brokers

Over the last twelve months the number of brokers has shrunk tremendously as sub-prime lender after sub-prime lender has imploded.  Even mainstream brokers who didn’t get as caught up in sub-prime have closed down at a tremendous rate.

That trend will continue over the next two years due to a wave of legislation aimed at weeding the bad apples out of the mortgage industry, to mix metaphors.  The Housing and Economic Recovery Act’s SAFE statute requires compliance with national licensing minimums and states are free to enact tougher standards.

The effects of this change are already being felt.  States like Michigan and Kentucky have done away with their exemptions and added loan officer licensing requirements to the existing company licensing requirements.

The net effect will be to reduce the number of brokers in the industry as the cost of compliance goes up and as the minimum thresholds to do business increase.

Take Wisconsin, for example.  To apply for a license in Wisconsin requires a mortgage company to have at least $250,000 liquid assets at all times.  This threshold keeps out all but the well-capitalized and stable financial firms.

Over the next two years many more states will enact requirements such as Wisconsin’s and the number of brokers will plummet as the borderline brokers find easier careers.

 

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:

  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.

 

No Reduction to Reverse Mortgage Insurance

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

 

Wells Fargo Drops 32% in Reverse Mortgages

The top 3 lenders in the reverse mortgage market, Wells Fargo, Bank of America, and Financial Freedom posted significant year-on-year volume declines in the month of November at -32%, -8%, and -21%, respectively.  

Considering that year-on-year volume for the industry declined only 6%, this means that these large lenders gave up a lot of ground to smaller competitors.

The biggest gainer among the top ten was World Alliance, aka Senior Lending Network, who posted a 43% increase.

Full report below for the top ten.

Rank Rank change Lender Nov-07 Volume Nov-08 Volume % change
1 = WELLS FARGO 1729 1170 -32%
2 +4 BANK OF AMERICA 608 561 -8%
3 -1 FINANCIAL FREEDOM 347 275 -21%
4 -1 WORLD ALLIANCE FINANCIAL 176 252 43%
5 = COUNTRYWIDE BANK 173 201 16%
6 +10 ONE REVERSE MORTGAGE 139 119 -14%
7 = METLIFE BANK 117 118 1%
8 +7 URBAN FINANCIAL 104 111 7%
9 -5 LIBERTY REVERSE 93 91 -2%
10 +4 1ST AAA REVERSE MORTGAGE 89 77 -13%
 

Reverse Mortgage Volume Down 6%

Reverse mortgage volume has declined 6.03% year on year for the month of November.

In November 2007, HUD endorsed 8,270 reverse mortgages compared to 7,771 in November 2008.

This decline comes despite that fact that many borrowers waited until November to close because of the new higher lending limits that went into effect in the last month.

The news came as no surprise to Alesia Fisher, Vice President of Equitable Reverse, who said in an interview, “Given the overall weakness in the economy and uncertainty, I’m surprised that the decline wasn’t even larger.”