HECM to HECM Reverse Mortgage Refinancing Could be Tricky: The Industry puts up Barriers

Sometimes, it seems to me that “secondary market” compliance considerations get in the way of promulgating sensible reverse mortgage policy. Conservative approaches that may mitigate against perceived litigation could be the smokescreen that blinds the industry to alternative reasonable remedies.

Such is the case with the requirement of the 5:1 Counseling Rule. The increase in the principal limit must be at least equal to 5 times the closing cost of the new loan. (The increase is the difference between the current PL and the PL of the new loan).  When this happens the borrower does not have to be counseled again, if the new loan is obtained within 5 years.  Those reverse mortgage wholesalers that insist on following this Counseling Rule (Mortgagee Letter 2004-25) to determine whether a borrower can refinance, are in my opinion doing a disservice to our seniors and to our industry.

Clearly this ratio was directed at the counseling issue as above noted. It was not intended to be used as an underwriting/funding issue. Bootstrapping this requirement, or any other ratio, to cover underwriting and funding is unconscionable for several reasons. The reasons are noted below:

1. The industry encouraged companies to take applications once the new limit was announced so  prospective borrowers would be in a  position to  quickly take advantage of the higher lending limit;

2. Nowhere was there any suggestion that loans that met the 5:1 ratio, (or any other ratio) would be permitted and those that did not meet this ratio would not be allowed. The silence on this point was deafening;

3. The industry, therefore, based on this new requirement, has erroneously set the expectations of senior borrowers and originators throughout the United States;

4. The ratio uses the service set aside as a cost when in fact it is not a closing cost; In theory, this ratio is even wrong when determining whether counseling is required.

5. A thirty, or forty thousand dollar reverse mortgage benefit to a borrower, is rather meaningful, especially at a time when Ira’s, pensions, investments and 401ks have been decimated. Due to the underhanded way inflation is determined, Social Security benefits are less than they should be. The above noted dollar amounts roughly represent the net benefits that a typical borrower could receive (based on current rates w/ CMT margin of 175);

6. A reverse mortgage is not one dimensional. The chance that the difference between the principal limits of the two loans will provide the 5:1 ratio is slim at best.  In the recent edition of Reverse Review, Gerald  Wagner  and Ashok Shinde, of IBIS suggest that the prime loans that would meet this criterion, are loans that were originated in 2002 and earlier; 

7. Seniors are in dire need of money. The economy is in shambles. In my opinion, the recent increase in the lending limit did not go far enough. Is the industry that was created to fill this need now going to turn their back on the population we were charged to serve?  And adult children that were helping mom and or dad can no longer do so;

8. Using the Counseling Ratio as the absolute (arbitrary) number reminds me of the article that appeared in the Sunday New York Times on March 2 of this year. A number of questions were asked. One was how long should one remain in the home? The answer was at least 7 years. Again, a totally arbitrary number. Why not 10 or 6 or 2. The point is that one should have the intent to stay in the home when a reverse mortgage is obtained. Life happens. The day one can control the vagaries of life that is when a particular number will make sense. Arbitrary numbers never make sense.

9. Another question referred to whether it is appropriate to travel after getting a reverse mortgage. The answer was in the negative. My response was how anyone dare tell a senior what they can or can’t do with their money. The point is that the senior borrower needs to know that this pool of money needs to be used wisely. It is for the senior borrower to make that decision. The industry and the media should not impose their point of view.  Likewise, the use of   arbitrary numbers unnecessarily hurts the clients we are charged to serve.

10. It seems to me that the genesis of this limitation on refinancing has more to do with keeping unbridled and unscrupulous originators reigned in. So, as I see it, the industry is punishing those seniors who need money so those who should not be in this industry at all, are kept in check. (In previous blog posts I have talked about what needs to be done to those reverse mortgage companies that prey on our elders.)

Using the counseling formula or any ratio/multiple thereof to determine what constitutes a sufficient benefit is arbitrary and capricious. Making decisions for seniors, while summarily assuming there is no benefit if the aforementioned counseling threshold is not met is against the spirit of the HECM program. 

Rather, it seems to me that there are two separate remedies:

1. Require counseling anytime a reverse mortgage refinance is done. (While more conservative than the above noted Mortgagee Letter 2004-25, the industry chose to take a similar conservative stance when HUD no longer required mandatory counseling for a non borrowing spouse. Notwithstanding Mortgagee Letter 2006-25, many lenders still require that the non-borrowing spouse be counseled.)

2. Implement  a declaration that informs the borrower of  such a barrier to proceed because  they may not meet the test, yet wish to move forward. This is far better that prohibiting a class of borrowers from getting additional funds that they desperately need. Each borrower at origination and or at closing will sign a declaration. Such a declaration clearly states the intent of the borrower and may look something like this:

My(Our) name (s) is (are)____________________________________and  I (we) live at __________________________ . I (We) will be receiving approximately  $_____________ from my(our) HECM to HECM refinance. I  (We)obtained my(our) original HECM loan on____________________. The original principal limit at time of closing was_________________ and that limit is now______________. Our new loan principal limit is $____________________________. The closing costs for my (our) original loan was  $_____________. The closing costs for the (new loan) refinance is $____________________.
The additional money, in spite of the additional closing costs, and closeness in time, will come in very handy because my (our) current income/savings is  (are)just not sufficient to meet my (our) need(s). The reverse mortgage is the best option because I (We) do not wish to sell and there are no satisfactory current  financing options I (we) wish to pursue. While the reverse mortgage industry may have their own  differing criteria that must be met before a refinance can be done, I (We) am (are )aware that I (We) may not meet that criteria.( I (We) make this declaration in order to facilitate our reverse mortgage loan. The lender can rely on this declaration as my (our) desire to obtain a reverse mortgage.
____________________________

Borrower

Or this:
To whom it may concern:
We are tired of struggling financially. Bills can’t be paid.  We wish to remain in our home and have researched the facts and have concluded that another reverse mortgage would provide us with the additional funds that will help. We have no desire to obtain a loan that requires monthly mortgage payments.

______________________

Borrower

or something in between.

Comments

[RamonGustav]

Congratulations! You have so much useful information, write more.

[Loan Modification]

Thanks for sharing this info article with us.

[home loans]

Glad I stumbled into this article! Finally, got what I was looking for!! I definitely enjoying every little bit of it smile I have you bookmarked to check out new stuff you post.

[Scott Tucker]

Dennis,

I agree, it should be up to the senior as to what they want to do.

It's high & mighty for the lender to tell them what they should be doing.

I liked your article so much, that it's the basis for an article that Christopher Cruise just wrote, which will appear on my blog, on Sunday, December 14th.

Check it out after about 8 pm CT.

Good work!

Scott Tucker
http://blog.MortgageMarketingGenius.com

[James E. Veale, CPA, MBT]

Dennis,

In discussing the calculation with some of those at HUD who are regular NRMLA speakers, none could say why the increase in the principal limit was utilized and yet the entire current service fee set aside was used as an expense -- and not just the increase in the service fee set aside. This modification alone would make a tremendous difference in the calculation. It does not seem that the calculation is based on the same principles throughout.

The calculation needs reformation or total elimination.

[Deanne Opstad]

Dennis: This was not HUD but FNMA that will not pay SRP on Hecm to Hecm loans that do not meet the 5:1 ratio. Nutter is the only lender not making these loans that I know of but none are paying SRP if not at least 5 times the calculation. HUD really has nothing to do with the pricing. Looks as if the lower margins might as well be used on these loans. This really came out of left field for all of us.

[Larry Evans]

Dennis:

Your cogent observations on this issue beg the more general question of whether HECM underwriting standards should ever be more restrictive than HUD rules require to qualify for FHA insurance. Inevitably, the more restrictive private sector standards have the effect of increasing the costs of the HECM program and reducing availability to the neediest seniors. This ought to be of serious concern to HUD policy-makers since their objectives are being thwarted by over-zealous and arguably unwarranted, superfluous risk management conditions. The unnecesssary counseling requirements you noted are especially burdensome to seniors in view of the $125 up-front fees that most agencies are now charging. Unless HUD takes affirmative steps to reign in these practices, what's to prevent the advent of credit-scoring and/or proof of financial resources to meet future property tax and insurance obligations? There really is no limit to what could be imposed in the name of controlling risk exposure; but does the concept make any sense whatsoever for a government-insured loan?

[Michael Fullam]

11. All Lenders have cut off the Backend premium to the FHA correspondents effective 11-28-08. Some like JB Nutter, never did accept the loans at all if the ratio was less than 5:1. This hurts the corresponent, loan officers and the industry opinion of HUD for not doing anything to remedy this situation. Also, I agree that $417K limit was not the right choice. HUD was influenced by Lenders that wanted the Jumbo space to remain theirs. It should have been increase to %625,500 in high cost states like mine in CA.

[Reed Swain]

Dennis,
I absolutely agree. Pointing to #9 above, my experience is that seniors are usually very conservative in the way they use their reverse mortgage funds. They know whether they need the money or not. Instead of of government or
AARP or any other entity implying that reverse reps are predatory, they should put constraints on the seniors children who prey on them by asking them to pull money out for their own investment schemes or demanding they not do a reverse mortgage for fear it would eat into their inheritance even though the parents are living like church mice!

[Reed Swain]

Dennis,
I absolutely agree. Pointing to #9 above, my experience is that seniors are usually very conservative in the way they use their reverse mortgage funds. They know whether they need the money or not. Instead of of government or
AARP or any other entity implying that reverse reps are predatory, they should put constraints on the seniors children who prey on them by asking them to pull money out for their own investment schemes or demanding they not do a reverse mortgage for fear it would eat into their inheritance even though the parents are living like church mice!