An elderly gent was invited to his old friends’ home for dinner one evening. He was impressed by the way his buddy preceded every request to his with endearing terms – Honey, My Love, Sugar Buns, Scrumptious, Pumpkin, etc.
The couple had been married almost 70 years, and it was obvious they were still very much in love. While the wife was in the kitchen, the man leaned over and said to his host, “I think it’s wonderful that, after all these years, you still call your wife those loving pet names.”
The old many hung his head. “I have to tell you the truth,” he said, “I forgot her name about 10 years ago.”
The general backdrop for the reverse mortgage industry
Despite all the primping that folks do, especially in preparation for the upcoming MBA conference in Denver, we’re all becoming older – no one is getting any younger. Every day in the United States 10,000 people turn 62. That demographic tidbit is not lost on “forward” residential lenders who are increasingly exploring entering the reverse mortgage business. Many lenders already have reverse mortgage divisions, or loan officers, who specialize in these loans that can have incredibly long sales cycles. Bad press be damned. ReverseVision, a provider of software and technology for the reverse mortgage industry, reported a record number of newly licensed “traditional” lenders entering the Home Equity Conversion Mortgage (HECM) market so far in 2017.
Proponents of the product say older residents are less likely to sell their homes, according to Census data. This article from the Sacramento Bee is illustrative of a trend happening all over the nation – Boomers and the elderly are staying put, which a) leads to a different set of economics, and b) leads to fewer houses for move up buyers to purchase, which crimps inventory for first time home buyers.
The National Reverse Mortgage Lenders Association reports that homeowners age 62 and older saw their home equity increase by a combined 3.1 percent to $6.3 trillion in the first quarter of 2017 from $6.13 trillion in Q4 2016. “Aging in an Age Friendly Home: Managing the Costs of Home Modifications with Home Equity,” a recorded NRMLA sponsored webinar for the American Society on Aging. To help explain home equity and its uses, NRMLA recently released its “Learn about home equity” infographic, and the three-part article, “An introduction to housing wealth: what is home equity and how can it be used?”
What is a reverse mortgage? Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association, answers homeowners’ top questions about reverse mortgages. With a HECM reverse mortgage, you pay an FHA-approved lender an upfront fee and then have access to a percentage of your home equity. The loan is repaid when you move, sell the home, die or fail to pay property taxes or homeowners insurance to maintain the property. The maximum size of a reverse mortgage depends on your age, home value, interest rate and upfront costs.
Did you know for a HECM, the dollar amount shown on the face value of the Deed of Trust is 1.5 times the max claim amount? This is unique to a HECM and could confuse the borrower if they’ve not been previously informed. Click here to read more as specified in 6-6 Paragraph B.
FHA announced that it has updated its FHA Resource Center Knowledge Base with the new frequently asked questions regarding Home Equity Conversion Mortgage (HECM) for Purchase Transactions, following the September 19th effective date of the HECM Final Rule. FHA will make further updates to its FAQs as appropriate.
“To ensure the continued viability of the Home Equity Conversion Mortgage (HECM) program, FHA is making changes that are necessary to enable it to continue to endorse HECM loans in Fiscal Year 2018. The changes protect the program for seniors and balance serving FHA’s mission with taxpayer protection. View the FHA Mortgagee Letter 2017-12.
And don’t forget that FHA published Mortgagee Letter 2017-11, Implementation of HUD’s January 2017 Home Equity Conversion Mortgage (HECM) Final Rule, which serves as a consolidated directive for those mortgagees required to implement certain servicing policy changes contained in the HECM final rule (see 82 FR 7094) published in the Federal Register on January 19, 2017.
What does the public see? It (yes, “public” is both singular and plural) sees that the FHA changed some of the limits for reverse mortgages, after it found that the program amounts to a $7.7 billion a year loss for the government. The borrowing caps fell, such that a 62-year-old would be able to only access 41% of the equity in their property, down from 52%. An 82-year-old would only be able to access 51%, down from 60%. “Reverse Mortgages are a way for seniors to tap an illiquid asset (their home equity) and turn it into a liquid asset (cash) while still living in their home. They are a great deal for the senior, however they are a money-loser for the taxpayer.”
Peter Bell noted that, “The HECM program costs more to administer than the Trump administration feels is justified or that the premiums cover.” Despite a solid forward mortgage market, last year, the U.S. Department of Housing and Urban Development (HUD) said, the economic value of the government’s reverse mortgage program (part of HUD’s FHA) was a negative $7.7 billion.
Anyone who sprang into action, if seniors do that, to finalize a HECM before the October 2 deadline might have had it tough. To close a HECM before the terms changed, the lender must have recorded an FHA case number, which they cannot do until they receive a certificate from an approved counselor indicating that the senior has been counseled. The senior who follows the usual procedure of contacting a lender before doing anything else may have run out of time because the lender will give her a list of counselors, leaving it to the borrower to make the appointment, get counseled, and return to the lender.
Seniors can certainly contact a counselor on their own, which they can do on the HUD web site. This cuts 2 or 3 days from the process.
So earlier this month the product saw an increase in its upfront mortgage insurance premiums. Borrowers pay two insurance premiums on a HECM. An upfront premium calculated as a percent of the property value is currently 0.5%, except where the borrower is drawing more than 60% of his total borrowing capacity upfront, in which case the premium is 2.5%. Most borrowers who pay the 2.5% premium have a substantial existing mortgage balance, which must be repaid with proceeds from the HECM. The new premium is 2% for everyone, which increases the burden for all borrowers except those with large mortgage balances who now pay 2.5%. The upfront mortgage insurance premium typically is financed, as are all other upfront charges.
There was a reduction in the annual mortgage insurance premium. The annual mortgage insurance premium, which is applied to the borrower’s loan balance, was reduced from 1.25% to 0.5%. This will slow the growth of borrower debt, and it will also slow the growth of unused credit lines. Both grow at a rate equal to the interest rate plus the annual mortgage insurance premium.
There was also a reduction in Principal Limit Factors (PLFs). A PLF is a number that when multiplied by the property value equals the maximum initial HECM loan amount. PLFs are larger when the borrower is older and when the HECM interest rate is lower. HUD issues a table of PLFs for use by the industry.
What was the reason for the changes that happened 10/2? HECM reverse mortgages are insured by FHA, which means that if the loan balance at termination exceeds the amount recoverable from sale of the property, FHA will pay the balance holder the difference out of its reserve fund. The increase in insurance premiums is designed to augment that fund while the decline in the PLFs is designed to cut losses by reducing the growth of loan balances.
There are calculators. For example, Mortgage Professor LLC has released the latest version of its unique Kosher Reverse Mortgage Calculator with “new slider technology” that “greatly simplifies seniors’ ability to see the tradeoffs involved in various HECM options for drawing funds.”
Regulatory storm clouds
The reverse mortgage business has received more than its fair share of bad press during the last several years. And some lenders have had to pony up large fines, primarily for misleading advertising. Some forward lenders say that they are staying away from the product…”I don’t want to come in Monday morning and see a news crew filming The Gray Panthers picketing my office.”
Yes, plenty of Baby Boomers are happy with their 3.50% 30-year fixed-rate mortgages. But many “forward” lenders are entering or taking a hard look at reverse mortgages. HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their principal residence or fail to meet the obligations of the mortgage. Many financial advisors have started promoting reverse mortgages to delay taking Social Security benefits, but the Consumer Financial Protection Bureau (CFPB) is cautioning seniors that the risks of the tactic may outweigh the benefits.
Many seniors start taking Social Security retirement benefits as soon as they become available at age 62, the same age as being eligible for a reverse mortgage. Waiting until full retirement age (usually 65 or 66) increases the size of your monthly check. So those pushing the reverse mortgage idea are promoting it as a “bridge” that provides income until full retirement age is reached.
That bridge in income sounds like a good idea, but a report issued by the CFPB finds that, in general, the costs and risks of taking out a reverse mortgage exceed the cumulative increase in Social Security lifetime benefits that homeowners would receive by delayed claiming. “A reverse mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully,” said CFPB Director Richard Cordray. “For consumers whose main asset is their home, taking out a reverse mortgage to delay Social Security claiming may risk their financial security because the cost of the loan will likely be more than the benefit they gain.”
Issuance is running at almost $2 billion a quarter. Who’s making a name for themselves in reverse mortgages? Baseline (available here) ranks the top 5 HMBS new production issuers every month. Total HMBS new production issuance decreased slightly to $629MM in Sept from $631 in Aug. As an industry, the $629MM total is 11% stronger vs same month 2016. Looking at Q3 rankings, AAG leads all issuers again, and set a new high-water mark for the year with over $162MM in new production HMBS issued in September and issuing over $442M of new production paper in the 3rd quarter of 2017 – 24% market share.
At just under $386MM, Finance of America Reverse, closes out 3Q 2017 ranked as the 2nd largest issuer of new production pools. Their 21% market share marks steady, consistent improvement from 18.3% in 1Q and 19.1% in 2Q 2017. The $142MM FAR issued in September is the strongest new prod issuance total for FAR since 2013. RMF was #3 in 3Q 17 with over $331MM in new production HMBS issued for 18% market share.
Ocwen issued just under $246MM of new production, good for 13% market share and a #4 ranking. Total issuance and market share were both down from 2Q where Ocwen issued $284MM for 16.8% market share. Rounding out the top 5 was Longbridge with a 12% market share. Longbridge issued $218MM in 3Q 2017, including a reclassification of 4 August-issued pools from “seasoned” to “new production.”
“Rob, do you know who services HECMs? The question came up in a conversation I was having with a potential opportunity I am looking at. I know that the usual cadre of subservicers does not. Can you help?
I asked Kelly Kelleher with Reverse Vision. She replied, “Right now, only Celink and RMS service HECM loans. With the latest changes (ML 2017-12), however, these loans should be even more attractive than ever to the secondary market.”
Are reverse mortgage foreclosures on the rise? Apparently it is among those who didn’t know that the borrower needs to continue to pay the taxes and insurance, or who weren’t placed on the legal documents by their spouse who then passed away. Borrower education – so critical to avoid future liabilities, lawsuits, and bad press.
A lawyer and a senior citizen are sitting next to each other on a long flight.
The lawyer is thinking that seniors are so dumb that he could get one over on them easily.
So, the lawyer asks if the senior would like to play a fun game.
The senior is tired and just wants to take a nap, so he politely declines and tries to catch a few winks.
The lawyer persists, saying that the game is a lot of fun….”I ask you a question, and if you don’t know the answer, you pay me only $5.00. Then you ask me one, and if I don’t know the answer, I will pay you $500.00,” he says.
This catches the senior’s attention and, to keep the lawyer quiet, he agrees to play the game.
The lawyer asks the first question. “What’s the distance from the Earth to the Moon?”
The senior doesn’t say a word, but reaches into his pocket, pulls out a five-dollar bill, and hands it to the lawyer.
Now, it’s the senior’s turn. He asks the lawyer, “What goes up a hill with three legs, and comes down with four?”
The lawyer uses his laptop to search all references he can find on the Net.
He sends e-mails to all the smart friends he knows; all to no avail. After an hour of searching, he finally gives up.
He wakes the senior and hands him $500.00. The senior pockets the $500.00 and goes right back to sleep.
The lawyer is going nuts not knowing the answer. He wakes the senior up and asks, “Well, so what goes up a hill with three legs and comes down with four?”
The senior reaches into his pocket, hands the lawyer $5.00, and goes back to sleep.
Don’t mess with seniors.
Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Will User Names and Passwords Go the Way of Thermal Fax Paper?” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.
(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are over 300 mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2017 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)
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