Reverse Mortgages: FANNIE MAE Declares War On Seniors

Silence or non action by one side when “inappropriate action” is taken by another side, if history teaches us anything, is further reason why the one being harmed needs to speak up. The reverse mortgage industry has maintained an attitude of indifference, which is just as bad as maintaining silence. The force causing the harm is Fannie Mae.

           If one were to look back at an era that many are talking about today, we could find parallels for thinking all is fine.  As the economy worsened after the stock market crash, the Hoover Administration kept on proselytizing that things were fine.  Even as evidence mounted to the contrary, president Hoover’s  inaction grew into  an opprobrium that became known  as Hoovervilles; ad hoc  shanty like encampments that grew up all around the country. During the 1932 presidential campaign, Hoover said, “It could be so much worse that these days now, distressing as they are, would look like veritable prosperity.”

            Back in December,  the industry was silent when the first round of margin increases took affect.  In ATARP FOR THE HECM PROGRAM and FOR THE REVERSE MORTGAGE INDUSTRY I wrote about this on January 5th, 2009. There were a number of originators who were questioning this event. But the attitude of the industry seemed to be, “It could be so much worse that these days now, distressing as they are, would look like veritable prosperity.”   So here we are and things just got much worse. Are we to sit back and wait till all the gains of the higher limits are eaten away? Fannie Mae has made it abundantly clear that it does not wish to be in this market anymore.  What are we, as an industry to do?

            Speaking about eating it……..I would respectfully suggest that the terse statement by NRMLA’s Peter Bell would have been appreciated more by the industry if it contained more amplification. Many borrowers have issues with trust. It would be important for a company/originator to point to a rather objective statement by the industry leader, that their file was not intentionally placed in a higher interest rate program.  This is what Mr. Bell said. “It's pretty draconian. We wish Fannie had given us more notice. A lender has to eat the difference for loans in the pipeline in order to honor the interest rate that it sold its borrowers. Or they have to go back to them and redo the numbers with a higher interest rate, which means the borrower will get a smaller benefit." A higher interest rate reduces the proceeds seniors receive from a reverse mortgage.

           What could have been said was something like this: The increase in the margins means that the expected interest rate will be higher. This means that the borrower will have access to less money. So if a lender said to their borrowers at the time of application, that they will receive a certain amount at the closing, that amount will now be substantially less. A lender does have the option of delivering that loan at the originally disclosed expected rate and benefit amount. However, the lender will have to pay out of their origination fee, an amount to secure that for their borrower. This means that the lender will lose money each time that this is done. Since Congress reduced fees lenders can earn under the HECM reverse mortgage, lenders cannot afford to earn even less.  The reality of the draconian move by FANNIE MAE is to create uncertainty in the reverse mortgage market place. Uncertainty for lenders as they cannot promise what they can deliver and uncertainty for borrowers because just like before 2003 and the creation of the principal limit lock disclosure, they will not know what they will be getting until the closing.

            The immediate response to the above will be that the lender must now lock in a delivery rate that must be closed by a certain date. This I may add makes little sense at a time when one part of the industry is saying “hurry up” deliver that loan at the agreed upon terms, while the other part of the industry is saying Whoa! Slow down. Take your time doing the counseling Mr. /Mrs. Borrower. In fact, we are instituting a new protocol. And if you can’t answer a random set of questions, you can’t get a counseling certificate.  Clearly, two parts of the industry are going in opposite directions. This makes delivery of a loan that much more uncertain.

            The Fannie Mae problem as it must now be called is not insoluble. It requires new and different kind of thinking. It that same article, it was mentioned that the government (with a new entity) may need to step in and rescue the reverse mortgage industry. A new entity needs to replace Fannie Mae; an entity that understands that our elders are sacred and should have the ability to access the most money at the lowest cost. In other words TARP the reverse mortgage industry. While the industry has been focusing upon HUD/FHA, it forgot that it is one thing to look at the entity that makes the rules; the umpire. It is quite another to look at the entity that supplies the bat, balls, bases and stadia. Rules without the ability to play the game are sheer folly.  

           It is time to recognize that as long as FANNIE MAE, can unilaterally raise margins as its capital markets people see fit, this financial leviathan, will continue to hurt our elders. A new focus must be brought to bear on this industry that will return this program to its original purpose: To help seniors that want access to additional funds.

            A determination needs to be made.  Some may phrase the issue this way. Is the purpose of the higher rates (margins) to make the program appealing to other investors at the expense of seniors or is the purpose of the program to help seniors get the most out of their homes at the expense of the investor? Either way leads to an unjust result.

           That is why The House of Representatives’ Financial Services Committee may wish to get involved in choosing new ground in this ongoing dilemma.

            What many do not quite grasp is that in 2007 it was fine that margins temporarily hit the nadir of 1%.  The HECM 150 has, until recently been the workhorse of the industry.  A few months ago even the 150 became an anathema. Just the other day the new temporary plateau became the HECM 350. Where will it end? Where will the rate pogo stick go next?   And will the recent gains of this industry and concomitant good press be for naught? I for one pray this is not the case.

           

           

Comments

[Joe DeMarkey]

Mike/Dennis/All readers,

I welcome all suggestions on the solution here.

The reality is that FNMA is in a monopolositic position, and FNMA is now an entity that is under a Federal Gov't conservatorship. They are operating under a mandate to reduce their balance sheet - and since every one of their HECM loan purchases sits on their balance sheet & HECM's are a growing balance asset - HECM's are clearly on the regulator's radar screen.

NRMLA and some of its member lenders are very actively speaking with FNMA - the message we hear from them is very simple and candid - they are trying to attract other investors into this market. No one has "joined the party yet" and my personal opinion is that until we see other investors start buying HECM assets, the price increases could continue.

WE NEED AN ACTIVE SECONDARY MARKET TO SOLVE THIS PROBLEM.......

Joe DeMarkey

[James E. Veale, CPA, MBT]

Dennis,

Many of us agree with your assessment and appeal for a meaningful resolution. Late last month, I wrote an article similar to your January article with a slightly different take on how this problem can be resolved by using TARP monies or a small portion of the net assets in the HECM MIP pool. Over time, any losses incurred could be recovered.

No doubt there are proposals of similar and superior merit to which respected industry leaders could agree and propose to Fannie Mae. The question is: have they done it or are they doing it? If they have, no one has surfaced to discuss what the status of those discussions is or what roadblocks might have been encountered.

It is rumored that NRMLA believes if it leads this fight accusations of anti-trust violations could be raised. If this is true, who is stepping forward to take up this cause? To sit idly by is not just inappropriate; it is also irresponsible.

Surely in a period of over three months and despite the holidays, some of the industry leaders must have taken or are taking this “fight” directly to Fannie Mae. It seems this is but another instance of reacting and not being proactive when the issue first appeared.

Maybe in a future blog you can recommend a course of action. Action is what is needed from those RM leaders who can truly represent the interests of the lenders and seniors to Fannie Mae.

A big concern in this apparent vacuum is that AARP or some other well meaning organization will step forward and create a bigger problem than they cure.

[Mike Gruley]

Dennis,

Agree 100%

Here's a suggestion for discussion. If Fannie wishes to price RM's similar to forward loans, then they should take a reasonable processing time for a typical RM, and issue a lock period for that amount of time - perhaps 45-60 days.

This is the same as the forward industry.

This type of lock-in would offer seniors protection during the processing of their loan so increases in pricing (when necessary) wouldn't do any harm to those who are in process. This is the right thing to do. If it is not possible, then we need to know what is, so we can tell them that, and the seniors could make their own informed choice as to whether to begin the process fully knowledgeable of the risks.

Most likely, longer-term locks will cause the pricing to be a bit higher, but without longer locks, most originators will be forced to quote the highest margin available at application to avoid margin changes later on. The overall effect will be that borrowers will pay more. Also, having a longer lock-in will provide a checks and balance for wholesalers who may use below market pricing to pump up their pipelines, and raise the pricing as that pipeline readies to close. Yea, I know it sounds terrible…but if you have been in the forward business, you will know that I am right about that.

A long-term lock may be a start to the solution, but we desperately need dialogue. The silence from NRMLA, Fannie, HUD, and the lenders is deafening. I call out to you leaders to engage me in this debate publicly. What is happening is plainly wrong and unethical. You all know it, and you must address it now unless you just don’t care.

Who among you cares?

mgruley@firstloans.net