The Reverse Mortgage Storm- Hurricane HECM Part2

In part 1 we talked about both the current and impending changes to the HECM benefit amounts. In Part 2, I want to focus on the affect of such changes. I for one believe that by the end of the year all parties will know whether the reverse mortgage industry will survive as we know it.  The current limit of $625,500 is due to expire at the end of 2009, unless legislation is introduced to maintain same.  If the limits return to 417,000, for example, the industry will then be faced with a quintuple whammy that will be difficult to overcome. 

 If HUD resorts to a smaller principal limit factor, the program will become sick. (Whammy #1) If HUD also incorporates a higher MIP, the program will become very sick. (Whammy #2) If the margins continue to rise, the program will become critical. (Whammy#3) Implacable bond yield and index  increases will make the program gravely ill.(Whammy #4) Should the current lending  limit revert back to $417,000 next year, the program could die a slow death.(Whammy#5)  Each of these changes will reduce the amount that could be realized under the HECM program.  As the need for money becomes greater, the realized amounts will become smaller, much smaller.

But a lot can happen between now and the end of the year. One must take a wait and see attitude. Maybe home values will start to level off; maybe the $800 million HUD is requesting (if realized) will negate the need for an MIP increase or will make the increase smaller. Maybe the bond yields will stop rising. Maybe new investors will enter into the market; maybe the lower PL factor won’t be as steep as believed. Maybe the lending limit will stay as is. Yes, there are a lot of variables and a lot could happen.

Those that have already closed on their reverse mortgage are the lucky ones. Those that closed while the higher limits were enforced are fortunate. Those that will close before HUD tinkers with the program will also be lucky. Closing while Fannie continues its intractable margin increases, as it searches for phantom investors, should also consider themselves lucky. Your rates could have been even higher. If congress refuses to keep the higher limits in the new year (2010), get your reverse mortgage as fast as you can. I believe that it is in one's interest to make this assumption.

As I see it, no one is taking a holistic approach to the problem. It is as if Fannie & HUD are specialists. Together, each may think that they cured a specific problem; however, their efforts could kill the patient.

 Imagine two neighbors talking about their respective HECMS. One obtained a reverse mortgage after the new higher limits went into effect.  The other obtains a reverse mortgage after some of these aforementioned changes have occurred.  The results would be very different.  Getting back to our weather argot in part 1, it’s as if our first HECM borrower escaped from the financial storms of life. The second borrower was not as fortunate. The industry must urge their prospects to act now. If they continue to procrastinate, they do so at their own peril. There will be no reprieve from the next financial storm.

Comments

[Jeffrey A. Jackson]

Just wait and see. Things could get better or worse, who can tell? One can refinance (if necessary) when it gets better, but if it gets worse, at least he's not falling too hard.

[James E. Veale, CPA, MBT]

Dennis, as usual I enjoy reading your blogs. They are among the few that attempt to go underneath hype and look at the industry as it is.

The problem our industry faces is three-fold: political, economic, and overreaction. In the last 33 months we have seen elements of all three working first for us and then against us.

On the political front, we saw the greatest and most beneficial changes being proposed and advocated in Congress since HECMs were created. Then we saw AARP rise up to more than decimate our origination fee structure. About the same time Senator McCaskill began advocating elimination of cross selling and wholesale changes to counseling. In 2009 states are beginning to address reverse mortgages with less than favorable proposals.

Then in the midst of the most devastating downturn in the housing market in decades, we moved from the HECM 150 HECM down to the HECM 100 and now back up and beyond to the HECM 400. Proprietary reverse mortgages went from just two (Homekeepers and the Cash Accounts) to having what was alleged to be an ever growing number of new products, back down to none. Then Ginnie Mae was alleged to be bringing in a new way of selling HECMs in the secondary market that would result in the HECM 50 (no not HECM 500), back down to where Fannie Mae’s wish is now our command.

So now we are at the end of the industry. All is gloom and doom. Unfortunately this is the pattern of those industries that are controlled by marketers and sales people. In those industries more often than not, emotion rules the day; we are no exception.

Could Fannie Mae destroy us? Yes, if we do not act. Will HUD bring about an unacceptable restructuring of the MIP? Yes, if no one speaks up. Will housing declines produce such large losses, that the program becomes difficult to justify to voters as nothing more than another government giveaway to senior homeowners? Yes, if we do not advocate a revised structure to upfront and back end MIP.

There are storms in full bloom. The question is how will we navigate our way before we find ourselves in “the perfect storm”, an overworked term but not an overworked potential. Cooler heads must prevail so that the industry does not continue down the road of such wide swings that we produce our own self-destruction.

[mortgage]

nice article