The Reverse Mortgage Blog - by Dennis Haber Esq.

There are 1375 rules that the HECM Reverse Mortgage Industry must follow-Well it Seems Like there are that many

In the NY Times editorial the other day(1/17/10), the  editorial writers  otherwise known as  those “wise repositories of knowledge” illustrated abject ignorance when it came to the concept of reverse mortgages. Lately commentators, when writing about this topic, seem to misplace their thinking caps.

 

The editorial suggested that while reverse mortgages have been used to increase income (their words, not mine-cash flow would have been a better word) reverse mortgages are nevertheless undermining the wealth of older Americans. I can’t put my arms around this particular thought because the program is enabling older Americans to lead  better lives. (A great thing)  I cannot understand how this same program is undermining the wealth of older Americans.  Maybe someone else can figure out this folderol. I admit I cannot.

 

On the reverse mortgage issue, the editorial concludes with the point that seniors are vulnerable and that regulators need to be even more vigilant. Even after acknowledging that the reverse mortgage is a government insured loan, I found it interesting that the editorial still mentions the need for additional vigilance.  The point is that there is a lot of oversight now. How much is there? Funny you should ask.

 

I decided to do a quick perfunctory check on the nature of and quantity of governmental supervision of the program.  Governmental oversight includes state and federal oversight.  For example in the state of New York, one would have to peruse the banking regulations and sections 280 and 280a of the Real Property law. A separate file on my desk contains what I consider to be important mortgage letters. I found a total of 25. A mortgagee letter contains rules promulgated by the Secretary of Housing and Urban Development. These rules regulate the HECM reverse mortgage program. Remember these are just the ones I consider important. That means there are a multitude of others regulating some component of the program.  

 

For additional proscriptions check the HUD Handbook (4235.1 Rev 1). I would also examine The National Housing Act (12USC§1715-20a). This section tells you why the program was created and the concomitant needs that it was intended to meet. Also check out the Federal Register to read about the HECM rules (Federal Register-Title 24 part 206). Then when you are done, do not forget to review the FHA Modernization Act which was part of the Housing and Economic Recovery Act (2008) which sets forth key concepts and protections. Also lenders have developed some underwriting guidelines that are stricter than HUD’s rules so review be mindful of them as well (5:1 counseling ratio morphed into an eligibility requirement and  the non borrowing spouse counseling requirement is stricter than HUD’s requirement).

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Your search would not be complete without examining the new Home Valuation Code of Conduct which is couched as a protection device but does anything but. And finally you may want to briefly review the new counseling protocol that will be required in a couple of months along with RESPA’s new GFE requirements. (This became effective the first of the year). Now I’m sure that I missed some things. This aforementioned list was  quickly compiled. Most was from memory. And there are more regulations and laws to come.

 

When this country was first settled, the community would take care of the infirm and the elderly. Now fast forward a few hundred years. Government invented a way to help the elderly remain in their homes; remain in the community. The reverse mortgage was that invention. It provided the means to stay in the home.

 

The program isbedeviled by a mountain of new rules, laws and regulations. As the media and our politicians bemoan the fact that there are not enough regulations, the program runs the risk of being smothered to death, under the weighty blanket of redundant and excessive laws.

Regulators & Congress beware: The SAFE Act is ruining the mortgage/reverse mortgage industry.

 
Thanks to overzealous regulations, you, the regulators, have planted a time bomb that will explode with    an annihilative force that will eradicate the reverse mortgage industry and perhaps the forward mortgage industry as well. 

The enemy of the people was not the mortgage bankers, mortgage brokers and FDIC Banks, who sold those liar loans that went bad. If truth be told, they were just complying with the demands of the secondary market. It was the unbridled greed of the secondary market s that created the imbecilic, maniacal mania that led to the “get your loan now” stampede.

People knew the old rules of the game. In order to get a mortgage, one had to earn that right. In other words, one had to meet the tried and true underwriting criteria as promulgated by Fannie Mae/Freddie Mac.  Then in 2002, this criterion was ditched in favor of a more generous one that demolished any and all barriers to the mortgage market.  And the regulators looked the other way.

During this free for all, if you were a potential borrower in need of that heretofore elusive equity, you were portrayed as a fool, if you did not take this opportunity to help yourself and your family. It was difficult to be the lone “village idiot holdout” who said “no thank you”, when the pundits were saying real estate values never go down. Let’s face it; this time became the time to take advantage of the mortgage market. Millions of people joined in. Imagine, it was like the drug addict being offered cocaine…and it was O.K.to partake. 

After the mortgage debacle, the search began in earnest for the scapegoats. Naturally the clues led to the entities with the smallest lobbying dollars.  There was no way that the blame for the implosion was going to be placed at their doorsteps. Those damn mortgage brokers/bankers. If it was not for them, we would not have had a mortgage market implosion, the thinking goes.  And the SAFE Act was passed by Congress.

I have met my share of politicians. One on one they are a very hard working, caring group of people. However, the FDIC banks have snookered Congress into thinking that they, the banks, do not need to have their loan officers subject to the licensing, continuing education & testing requirements of the SAFE Act. The test is so rigorous that the passing rate is about 50%. The unintended consequence of this is that the mortgage banker/broker component of the mortgage industry will be decimated.  Well maybe it was not an unintended consequence. If an individual wants to become a loan officer, they would choose a FDIC bank over a broker or a banker because no courses or testing is then required.

But I will tell you this, for my money a broker/banker is a thousand times more knowledgeable than a loan officer working for a FDIC bank. In fact, the SAFE ACT is being undermined by these banks. Whether a borrower goes to a FDIC bank or to a mortgage broker/banker for a loan, the same rules and laws apply. The banker/broker through the continuing education courses and the tests that are required to be taken know the rules and the laws like the back of their hands. The loan officers working for the FDIC banks know they are immune from these requirements. That is about all they know. It is impossible for banks to individually teach their loan officers what all others must comprehend.

The government cannot bring confidence to the mortgage industry unless all such originators are subject to the SAFE ACT. Therefore the registration of loan officers should be repealed and replaced with the same licensing requirements that are required of the brokers/bankers.

The Forward Mortgage Industry and The Reverse Mortgage Industry Must Unite

The forward mortgage and reverse mortgage industries are prosperous in angst and rich in abject despair as it tries to navigate rules and laws that are un-navigable. They create layers of redundant and unnecessary activities  that have no basis in serving the needs of the borrowing customer. The mortgage industry  as a whole, is like the octopus on roller skates-moving in different directions without going anywhere.

Accordingly, the forward mortgage and reverse mortgage industries will collapse from the weight of its own collective detritus. Neither possessed a sufficient enough vision of protecting their customers. Instead, the participants- the broker , the banker and the FDIC bank tried to protect their own turf.

The collective mortgage industry will be working harder, longer and more inefficiently as it follows new regulations and laws that does little to protect the consumer. Existing problems are made worse as the industry throws liquid upon the fire. This time the liquid is gasoline.

We know that fish swim in schools, geese fly in flocks and horses run in herds. Humans could learn a lot from these animals. They actually work together to get where they are going.

Those groups that make up the mortgage industry do not like to work together. The FDIC banks think they are better than the mortgage brokers and bankers. The mortgage bankers think they are better than the mortgage brokers. The point that all of them have missed is that they serve the borrowing public. Rather than work together, they have confused the regulators and lawmakers, as each points the finger at the other. And so the borrowing public will suffer because the opportunity of a united front was lost.

Each of the disparate mortgage groups have petitioned Congress in their own way. Without the power of collective wisdom, Congress will not be convinced and will create their own solution to a perceived threat. The industry has seen this first hand.

Legislators and regulators can promulgate rules and laws, but without a complete understanding of the ramifications of each, the aforementioned acts will create insurmountable barriers rather than the protection sought.

It is time to speak the truth and say things that many are thinking. Sometimes it is important to moderate the tone  and the words and to keep emotions in check. Now is not the time. When a home is on fire we do not tell a parent to GRADUALLY carry the child to safety.  And so I will make a plea for sanity.

First: The RESPA revisions are fatuous and offer little in way of protection. Rather, they create a bureaucratic nightmare for the mortgage lending industry as very technical compliance rules trump any protection from the creation of same.

Second: The HVCC rules that will go into effect will only benefit the banks since most own appraisal management companies. Real advocacy on behalf of the client will be lost. The appraisal will have to be paid up front by credit card. No longer will the senior borrower be able to pay for same out of the loan proceeds. A senior borrower will be forced to proceed with an application in order to find out the appraised value of the home. The mortgage industry cannot survive in a sterile environment. The HVCC rules facilitate less lending as lenders look to reduce risk by getting lower appraised values.

Third: The S.A.F.E. Act is suppose to make the mortgage industry safer. In essence it makes it easier to be good and harder to be bad. The testing component is eliminating many from remaining in the industry. On the reverse side, originators who had no forward mortgage experience, will find it difficult to pass this exam. That is why the act needs to be amended to account for the reverse mortgage side of the business. Until this is done, livelihoods are in jeopardy. At the same time, many of the bad players will also be gone in the forward and reverse mortgage industry. I surmise that when the dust is settled the S.A.F. E. Act will do what Congress intended. To have good people in the mortgage industry. And if that is what was intended, and the Act accomplishes that, then there is no need for HVCC or the new GFE either.

The mortgage industry has to show Congress that it is capable and competent. The FDIC banks believe that they teach their originators what everyone else in the mortgage industry is learning by taking continuing education and pre application credits. They know that this is disingenuous.  I do not believe that any originator working at a FDIC bank, could not pass the NMLS exam based upon what the FDIC banks purportedly teach.

It is now or never for the mortgage industry to unite. If each group cannot see that there is enough business for everyone, then I suggest that we all dust off our resumes.

Bad Reverse Mortgage Case Law –Now the New York Courts get it Wrong

A decision dated Dec 18, 2009 by New York Supreme Court (the highest court in the state of New York is the Court of Appeals) Judge Charles Thomas appeared in the New York Law Journal on January 8, 2010 (Judge faults lack of counseling to homeowner, saying she lacked capacity to enter into mortgage). The crux of the case involved the attempt of a temporary guardian to vacate a reverse mortgage placed upon the property by Financial Freedom.

The facts, as I understand them, are the following: Ms. Brunson purchased the home in 1974 and in 2001 deed the property to herself and her brother as JTWRS. On Dec 30 2001 and on June 20, 2003 the mortgagors obtained two different reverse mortgages.  The guardian claims that Ms. Brunson signed both mortgages under duress. At some point in time, the brother in some way mistreated Ms. Brunson and APS were called in. Ms. Brunson was treated at a psychiatric hospital until 2006 (Assuming as an out patient).

The holding in the case is that when one who is subsequently adjudicated to be incapacitated, the burden of knowledge shifts from the proponent seeking to void the agreement to the mortgagee when dealing with a reverse mortgage.

In other words, under New York law, while a mortgage cannot be voided unless the mortgagee has knowledge of the incapacity of the mortgagor, when the mortgage is a reverse mortgage, the knowledge and burden is shifted to the reverse mortgage lender.

This  ruling is clearly wrong and unsustainable.  It is for this reason that the counseling requirement was put into place. While the counseling protocols are more stringent today than they were back in 2001 and 2003, it by itself is not a reason to void the mortgage contract.  The counseling certificate is proof that proper counseling was done and that at the time of counseling there was no indication that the borrower did not understand what was being said.  To rule otherwise would make every counseling session meaningless , worthless and suspect and provide a way for families to circumvent counseling protocols put in place by HUD. However, the facts raise disturbing issues that  if ignored, the industry ignores same at its own peril.

Accordingly more subtle issues are raised regarding the new deed that conveyed a fifty percent interest in the property to Ms. Brunson’s brother. The actions of the brother raise rather bothersome questions that were not addressed by the court’s decision. The industry, however must develop training so that originators can recognize indicia of undue influence and fraud.

What I found rather disturbing is that the decision did not indicate any contact between the mortgagors and the originators of said loans. It would seem that this would be quite germane. Knowledge of the originator could be imputed to the lender. The decision totally ignores this aspect.

Also, without knowing what was discussed in counseling, the court concluded  that “counseling was not meant to be a rubber stamp for the banking and mortgage industry.”

I believe on appeal that the decision will be overturned because the lender did not have even a modicum of knowledge that there may have been cognitive issues at the time of these transactions.