A TARP FOR THE HECM PROGRAM and FOR THE REVERSE MORTGAGE INDUSTRY

Thank goodness 2008 is gone along with its concomitant investment detritus. It was a year where the stock market alone shed 7 trillion dollars of value. The housing market shed another 2 trillion dollars.  It is no wonder that all Americans share the financial malaise contagion.

Accordingly, we need to develop renewed confidence in our institutions and leaders.  Common sense  must be the shibboleth moving forward.  A clear vision is key. My fear, however, is that  our legislators and regulators will act like proverbial lemmings following each other over the precipice.

Now that the TARP money is out of the bag, let’s use it wisely….. What a silly thought. Our legislators and regulators believe that their omnipotence & omniscience   can solve any and all problems.  Politics often converts a good idea into a bad idea. Their new TARP book will be available soon:  The Throw Away Revenue Primer.

Our senior citizens are finding that living on a fixed income is more challenging than ever.  Therefore someone needs to come to their rescue. And someone must come to the rescue of the reverse mortgage industry. 

 Some individuals have alleged that a conspiracy existed to artificially keep the lending limits lower. A TARP like rescue for seniors would have meant a national lending limit of $625,000. instead of $417,000.

Many are dismayed that the margins on the HECM program keep going up.  People ask, “Do they really have to increase”?  Some say that the margins are purposely going up at a time the interest rates are low.  The thinking goes that many in the industry will not care, as the expected rate is well below the floor.  However, what happens when those indices upon which those margins  attach go up as well?   The point is eventually rates will have to go back up.  And when those rates go back up, it will eventually significantly decrease the benefit amounts going into the pockets of our clients.

And rates will go back up. If not to combat the threat of inflation, then to provide a better return for those countries that have invested in our treasuries. The answer to the interest rate queries noted above is that the market is dictating these results. This answer, however does not satisfy everyone.

As I have said many times before, our seniors that we serve should become a protected class. Accordingly, the rules of the game need to change. Transmuting the HECM or any other future reverse mortgage product into just another mortgage program/security to be sold on the secondary market, misses the opportunity to serve those who have made this country great.

The industry needs someone with vision who can reshape and mold the industry to provide the biggest return for our elders. The industry needs interest rates to be kept low. Since the government seems to be in a subsidizing mood, let the government subsidize the reverse mortgage program. This way rates can be kept low and benefit amounts can be kept high.

The rules can be changed if our leaders have the vision.  I call your attention to a politician who had great vision during a disastrous event. In 1994, California suffered an earthquake.   The freeways toppled . Governor Pete Wilson, threw out the rules and regulations and created a new playbook. In two months, along with help from Washington, the damage was repaired.  He violated just about every regulation but got the job done and rebuilt the system to superior standards.

Wouldn’t it be nice if this kind of vision attached to our industry? Imagine changing some of the rules to insure that competent people remain in the industry; imagine insuring that interest rates remain low; imagine having a marketing and education system in place that once and for all corrects the misconceptions that have reigned supreme for the past 20 years.

If the federal government can use funds to bail out businesses that have been poorly run, it certainly can use funds to assist our seniors in the use of the reverse mortgage program. It just takes some imagination. Now TARP can mean Toward A Renewed Program.

 

Comments

[James E. Veale, CPA, MBT]

Dennis,

Unlike prior eras where interest rates stayed in a relative tight range, we have seen the CMT indices drop precipitiously. With investors expecting the same return on investment, the only thing that could go up, did -- margins. As the CMT rates return to hisorical norms, it is hoped by many, margins will begin to recede.

If the situation changes, we will need to look at borrowers to see if refinancing their reverse mortgages will result in lower overall loan balances a few years out. There is little doubt some will take advantage of the margin drops to refinance seniors when it may not be in the borrowers' best interests.

Just today, an originator from another company tried to justify refinancing one of our borrowers. For a $5,000 upfront cost, they could get her $25,000 more in "benefits". I am sure he is convinced this meets the 5-to-1 refinancing standard even though the service fee set aside is nowhere to be found in his $5,000 upfront cost analysis.

When I asked the originator if he had told the borrower about the detriment, he asked me what I meant by that statement. I then told him that the margin on the new loan would be a full 1% higher (2.75%) than the old (1.75%). He then tried to say that the loan rates varied anyway. I literally had to repeat myself several times to get him to realize, the index is what varies and it varies the same for those loans using the same index. What does not vary is the margin once it goes into effect.

This originator finally got it but I do not believe he will tell the borrower the real situation. The sad thing is that the borrower will experience a 1% higher interest rate on over $200,000 just to get $25,000. This originator has been in business for over 3 years.

As an industry, we need better training, higher ethical and best practice standards along with accountability. I was disappointed not only by the originator but also by the lender who tolerated such irresponsible representation.

[Mike Gruley]

Great Blog Dennis,

The quickly rising margins, in my view, are a result of the lack of liquidity in the system. For those of us who remember a time when Fannie was the only purchaser of HECM's, we remember not ever having any YSP and the margin was fixed at 150. Very simple.

In late 2007, when Wall Street aggressively entered the game with a strong appetite for HECM's, YSP's were born and so was the HECM 100 (which I believe was a mistake of gigantic proportions). As more buyers of HECM's entered the market, the margins stayed low and YSP's remained. Now,since the economic meltdown has taken hold, we are in a sense back to start with only one consistent buyer of HECM's...Fannie. Essentially being the only market maker in HECM's Fannie has absolutely no economic incentive to keep margins or YSP's low. Until more buyers of HECM's appear on the scene and create competition in the secondary markets, expect margins in the 275-300 range with little or no YSP.

Perhaps the higher yield standard that Fannie sets will likely attract more buyers of HECM's and create the necessary competition in the secondary markets that will once again drive margins down and/or YSP' up.

We shall see.

[William J. Green]

Crossing the rubicon that the reverse rub hinges on more government subsidies and or bailouts may bode well for the short-term, but not the long-term. For "solutions do NOT emanate from heavy-handed government, they spring forth from the lightly governed."

The long-term solution, albeit at market interest rates, resides squarely within the private sector. The loan must make sense to private investors and thus they will require higher margins on top of market rate indices.

Need proof? Look at what happened this week with the likes of Nutter and Metlife. They adjusted their pricing such that it effectively required their correspondents to raise margins, in some cases, a full point.

Why did the wholesalers do this? Because they know that they can't rely exclusively on GSEs! They must diversify and find investors in the private sector. These investors won't receive payments on their investments for up to perhaps a couple decades, and hence will require a financial cushion provided by a higher margin. This is the natural cost of returning reverse business to the private sector and weaning ourselves from Government Sponsored Entities, both of whom just received huge government bailouts. Higher margins, I believe, are here to stay.

Thus the future for high-cost real estate markets like our beloved NY and CA, etc., resides squarely on the need to convince HUD to raise the lending limits to somewhere near $600K. The private sector will once again service markets above this ceiling, but they will certainly require, as before, higher rates even if they come with somewhat lower closing costs.

Savvy seniors will understand. And for the rest of seniors, we'll have to do what we've always done: gladly take the extra time and make the extra effort to educate and explain that this is how free markets work - the very markets and way of life they sacrificed so valiantly and heroically to defend.

[Frank]

Caught in a trap.

Hi, Dennis.

I would suggest that our current situation is even more problematic than availability of funds.

Seniors who take out a Reverse at these higher margins will have the increased margins for the life of the loan.

Let's assume that the one year rises to just 4% again, and that competition brings the margins back down. Borrowers stuck with these currently high margins will be paying the higher rate -- conceivably a percent or so higher, than new borrowers at that future time.

Current borrowers will be trapped for the life of their loan, by the higher margin.

While it is somewhat understandable that our lenders need at least a reasonable rate of return, there is no mechanism to lower the margin of a loan in force, to level the playing field when rates do go back up.

In fairness, we need such a mechanism now.

[Sylvia Williams]

Hi Dennis,

I always enjoy reading your blogs.

Your comments that with lower interest rates, the benefits are higher for the client is true with a new loan. however, if a borrower already has a reverse mortgage, the increase in rate won't affect their existing benefits. However, it will affect how quickly their equity is consumed. Just wanted to point that out to your readers.

I sure do agree with you that we need to make sure the reverse mortgage program stays strong and benefits our senior population.
Thanks, Dennis!

[Dawn Smith]

To: U S Government -

"Please Listen to this well-stated solution!"

[Deanne Opstad]

FNMA's new live pricing model is forcing the margins to increas so companies making reverse mortgages to survive.