The Reverse Mortgage Blog - by Dennis Haber Esq.

Will HUD & Fannie Mae Continue To Turn A Deaf Ear And A Blind Eye To The Fnancial Hopes Of Reverse Mortgage Borrowers?

I have been told that there is power in words. I do not quite know where this power comes from. I must admit that I’m feeling like the proverbial 98 pound weakling. I want to find the right words that will convey the urgency of this message.

Power, for those that have it, is a wonderful thing. The powerful can take sanctuary behind their elected or appointed office: They can pretend a problem does not exist; or create a problem when there was none; or conveniently convince themselves that they have “solved” another problem, when they have just confused a situation; and they can even become invisible at any time- hiding behind inscrutable laws, policies or regulations.

The powerless also have an indelible feeling of ghostliness.  The difference is that they can shout at the top of their lungs about the unfairness, unreasonableness and unjust affect of this unbridled use of power, yet forever remain unheard and ignored. I have just described older Americans who own their own homes and are in danger of being effectively shut out from the reverse mortgage program.

The goal here is to get the attention of two Leviathan governmental agencies. I know that this will be difficult. Our elders are being wronged and it is time to call attention to this pending disaster.

The governmental agencies are Fannie Mae and the Department of Housing and Urban Development (HUD).  They are the equivalent of a Goliath. I am just a David.  But, today the weapons of choice are words.   That is a good thing.  Words when spoken plainly and from the heart retain a magical quality that sometimes can pierce any defense. If I can find the right words that convey the plaintive misery that is about to befall our elder homeowners, then perhaps these words will be heard.

Governmental policy is usually heartless and soulless.  The vast emptiness lies in its organizational structure, not with its people. Yet people, who have a heart and a soul work at these agencies. It is too them that I speak.

While many in this country are suffering financially, seniors are probably suffering the most. Seniors have the least amount of time to recover from financial mistakes; have increasing health issues along with concomitant costs; and no longer can find sustainable work in an economy gone awry. They are walking around with bags full of unpaid bills and with only a pocketful of money. They dreamed that their lives in retirement would mirror those “happily ever after” endings, that characterized Hollywood movies of their day.

There is a program that is making a difference, a huge difference in the lives of those who are 62 and older and who are homeowners. This program is called the Home Equity Conversion Mortgage. Today this program provides a bountiful amount of money.(Largely due to the American Recovery and Reinvestment Act signed into law of February of this year) Tomorrow the amount of funds realized will become diminished. Could these funds become as scarce as water in a desert?  Probably not.  However the minimized funds will no longer offer our elders protection from the financial storms of life.

Both of these giants decree that this is how it should be. Each is taking action to make it happen. They each point to certain facts which bolster their conclusions.  Each remains blind to the financial crisis that will ensue.

Since coming under receivership, Fannie Mae appears to be determined to scuttle the reverse mortgage program. Since the reverse mortgage program represents a very small fraction of their loan portfolio, just let it alone.  By purposely increasing the margins, which for most of the program’s 20 years has been virtually unchangeable, it is their goal to get other investors to purchase this paper. So at a time when conventional mortgage rates have spiraled downward (and now have recently edged upward), reverse mortgage rates have only soared.

Let’s go behind these bare facts:
1. Investors do not like uncertainty. Investors do not like the fact that homes are still depreciating in value. That being said, it is my understanding that some investors at least or taking a look at this industry. That certainly is good news.

2. These higher margins mean that eligible seniors will receive less money. Think of the sea-saw. When one side goes up, the other side goes down. When the margins go up, the benefit amounts go down. In a matter of a few months the margins have more than doubled. And there is no end in sight. 

3.   Then add to this the specter of higher bond yields along with higher indices when (if) inflation takes   hold.  (There are differing opinions when and how bad the inflation will be. On the one hand, spending is down, capacity utilization is at only 65% and there is no wage inflation. On the other hand, there is pressure on the dollar as oil prices increase and investors are looking for higher returns. Pundits are all over the place on the inflation issue).

Fannie has just announced that as of September 1, 2009, they will no longer purchase reverse mortgages w/ a CMT index.  The remaining index, LIBOR will be stable as long as geopolitical issues do not flair up and world banking stabilizes. Two very big ifs. If things do not go according to plan, this move could have the twofold effect of “exponentially” raising the expected rate and the note rate. Again this will mean a substantially less benefit amount, while the equity decreases at an accelerated pace.

HUD, over the years has made a “fortune” on reverse mortgage insurance premiums that is charged on each reverse mortgage loan. Recently, however declining market values have taken its toll on the MIP. HUD’s MIP fund is now in the red. To combat this predicament HUD is considering raising the MIP in conjunction with lowering the Principal Limit factor.  Although the current HUD secretary seemed to discount raising the MIP, I could see other draconian actions occurring. I won’t be terribly surprised if the program ultimately becomes means tested. (This would contrvene 12 USC §1715z-20(a) of the National Housing Act).

Again let’s go behind these bare facts:
1. HUD has recently requested 800 million from the government to cover existing loses. While the current administration has primarily used funds to assist business, many believe that some of these funds should go toward keeping the reverse mortgage program functional. The end result would be that our seniors would benefit.

2.  However, it is not unheard of for government to tighten its belt on the backs of seniors. For example, some counties in New York are no longer allowing reconsideration of a Medicaid application denial. County budget constraints are forcing a different kind of attitude to be taken. Similarly, for the reasons noted herein, it appears that Fannie & HUD are complicit in their shared disregard for the welfare of  senior reverse mortgage borrowers.

It is folly to lower the benefits to an incommensurate amount. It is the reverse mortgage program that is keeping seniors off the government dole. That is also why it makes an inordinate amount of sense to keep the maximum claim amount at its current level and to keep the benefit amounts as high as possible.

Once upon a time the reverse mortgage program was solid enough; strong enough to grow and expand, in spite of the many frontal assaults heaped its way. HUD created a program that truly withstood the test of time. Fannie embraced the program because they saw its utility. Then things changed. A confluence of forces caused the concern for our elders to become secondary. Both Fannie & HUD turned inward, and saw things from a detached perspective. Fannie was never comfortable being the sole investor in a mortgage program. HUD likes to tinker with the program. The long awaited counseling mortgagee letter will illustrate the point that sometimes tinkering should stop.

Today things are very different.  In addition to everything else, we now have a reverse mortgage condominium policy that appears to take the burden off HUD while placing the burden on lenders. To date there has been eerie silence on this issue. I hope I am wrong and Mortgagee Letter  2009-19   does make it easier and better for lenders to deal with condominiums.

And so I urge these two giants to take a fresh  approach to the problem. Continuing the myopic approach where a bit of an issue is confronted without looking at its full effect, does not serve seniors well.  Eligible senior homeowners deserve better. It is as if Washington is suffering from its own form of dementia. They remember our elders on Election Day. Then they are conveniently forgotten the rest of the year.

Reverse Mortgage Leaders Show The Way

Last week we saw the best from an industry. When attacked one must answer in kind. When wrongly vilified, one must use the power of words.  In either case, a rapid response is essential.

 The problem started when John Duggan, the Comptroller of the Currency, compared subprime mortgages to reverse mortgages. His comments first appeared in the WSJ. It then spread like wild fire throughout the media. As reported, the comments suggested that reverse mortgages posed substantial risks that appear to mirror those already seen in the subprime arena. The  industry answered with the right degree of constraint.

 Jeffrey Lewis, Chairman of Generation Mortgage, appearing on CNBC, gave clear, concise and laser pointed answers. These answers provided even the uninitiated with solace that another mortgage meltdown was not in the offing.  In addition, Mr. Lewis stated that the industry has been around for 20 years; an arm of the government is insuring these loans; AARP in a recent study determined that 97% of seniors were satisfied with their reverse mortgage.  Wen reverse mortgage volume is compared to total mortgage volume, reverse mortgages represent half of one percent of this amount. 

The Florida elder law attorney that appeared in the same segment wants us to believe that the government will have to continuously bail out the program. Once the housing market corrects itself, the government will not have to be concerned with this.
Her comments were also inscrutable. While recognizing that seniors have lost a significant part of their nest egg, health care costs are going up and seniors are losing health care coverage, she couldn’t even acknowledge that a reverse mortgage, in the appropriate circumstances, could be a good thing.

NRMLA, through Peter Bell, crafted a response to the Wall Street Journal. I like the statement, “The only thing the two products share is the word ‘mortgage’”. The response then focuses upon the multiple layers of protection that seniors enjoy under the reverse mortgage program. To wit: mandatory counseling, FHA insurance, restrictions on cross selling and origination fee caps. In addition to this NRMLA members are required to abide by a code of ethics.

In accordance with this response, it was pointed out that the consumer complaint offices of the Federal Reserve, Office of the Comptroller of the Currency, Office of Thrift Supervision and The Federal Deposit Insurance Corp have not received complaints from seniors.

It is time that a clarion call, hailing the soundness of the reverse mortgage program be heard throughout the land.  And to elected officials and to regulators everywhere, please note that there is no symbiotic relationship between reverse mortgages and subprime loans. They should not even be mentioned in the same breadth. As Peter Bell said in his retort to the WSJ, “The only thing the two products share is the word ‘mortgage’”.

Unlike Roosevelt’s “Forgotten Man” Reverse Mortgage Borrowers Are Just Being Forgotten

One only has to survey the dismal economic landscape. The view from this vantage point is replete with the detritus from a failing economy. For example, during the experimental years of the New Deal, the focus was on the “Forgotten Man”. As the term evolved,  President Roosevelt promised to work for those at the “bottom of the economic pyramid.” The focus was placed upon those that were most apt to feel the brutal brunt force of the severe economic malaise.

Even today, government on all levels, fights back by reaching into its provincial bag of warn out tricks. In the name of belt tightening government commits the same dastardly deeds. While it appears that the belt may be temporarily tightened one notch, when no one is looking the belt is loosened again. Then while the Forgotten Man is losing pensions, homes, investments, nest eggs and self respect, the government increases its fees for just about everything and creates new taxes. Never before has “taking blood from a stone” been more evident.

And it is quite apparent that our elders are in dire need of a source of funds. The cohort that the reverse mortgage is charged to assist are those homeowners that are 62 and older. While the Baby Boomers are just be coming of age to take advantage of the program, the focus of the article is to the previous generation, the Matures. This cohort is facing dire economic consequences.

This group is being forgotten again as a tidal wave of new industry thought is drowning out previous established thinking and standards. While the New Deal laboratory tinkered with novel concepts with mixed results, perhaps the time is ripe to experiment again so the “forgotten man” can be protected.

Before I begin this analysis, let’s go back to those prescient words contained in 12 USC §1715z-20(a) (The National Housing Act):
The purpose of the reverse mortgage program is to meet the special needs of elderly homeowners by REDUCING (emphasis is mine) the effect of the economic hardship caused by the increasing costs of meeting health, housing and subsistence needs at a time of reduced income.

At no time do those words mean more than they do today. Those who dreamed the American dream were horrified as their dream turned into a nightmare as their pensions, investments, and home values dissolved like a pill in water.

It is clear to see that reverse mortgages are needed more than ever. And everything must be done to preserve benefit amounts, protection and the original focus of the program.

From  March of 2000 through March of 2009 there have been numerous tinkering with counseling requirements. The root of the intent has always been to impart unbiased information to our elders. Now this tinkering is about to take a wrong and devious turn. Soon counselors will have the power to deny counseling certificates if seniors cannot answer a series of questions correctly. This is a dangerous deviation that will harm those that the government is trying to protect. Is this not beginning to sound like the early days of the fatuous Minnesota reverse mortgage bill-under the guise of protecting seniors the rules hurt them? (The Minnesota legislation was rightly vetoed by the governor).

Now let’s talk about a reverse mortgage experiment that could work well. The following will insure that interest rates remain low; benefit amounts stay high; and investor interest continues to grow.

I would respectfully suggest that strong governmental support become the linchpin of the program; that the CMT index remain as part of the reverse mortgage index mix and that each state institute separate testing and licensing for reverse mortgage originators.

Accordingly, I would urge that the lending limit remain at its current limit at least through 2010. I would then suggest that the margins be capped at 2.5%. Next I would reverse Fannie’s determination that the CMT index be discontinued. Personally, I believe that the 1 month LIBOR contains the seeds of destruction. It is a most volatile and unstable index. Should the economies of Eastern Europe implode, then this index will take off like a rocket. And finally and most importantly, I would TARP the reverse mortgage program. “Impossible”, you say. “Can’t be done”, you say. “What drugs are you taking”, you say.

 Let me introduce you to the Obama Administration’s MAKING HOME AFFORDABLE PROGRAM.  FANNIE & FREDDIE ARE AN INTERGRAL part of this program. Under this program the loan servicer will be paid for each successful modification. Under this program the investor will also get paid for each modification when a borrower is in imminent danger of defaulting.
Under this program a borrower who continues to make payments under the plan will have their principal reduced up to $5000.

Future features of the program:
Payments will be made to lenders and investors to offset losses from home price declines.
Payments will be made to servicers and to borrowers to facilitate short sales or deeds in lieu of foreclosure.
Additional incentives will be made to extinguish junior liens on homes w/ first liens that have been modified.
FHA & VA will establish similar modification program.

AND THE REVERSE MORTGAGE PROGRAM CAN”T MAKE SURE THAT SENIORS CONTINUE TO GET THE MOST AMOUNT OF MONEY WHILE PRESERVING AS MUCH EQUITY IN THE HOME.

Who is kidding who.

Also read Reverse Mortgage Storms Part 1 and Part2