Archive for February, 2013
We Knew It Was Coming – Eliminating Standard Fixed HECM Reverse Mortgage
HUD has announced in a mortgagee letter dated January 30, 2013 to mortgage professionals the necessary phasing out one of the HECM products, the Standard Fixed HECM Reverse Mortgage. We knew the day was coming, and now with the official HUD announcement, that day is here.
THE PROBLEM: What has been the problem with the FHA Fixed HECM Standard product?
“The HECM program has been racking up outsized losses for the FHA, in part attributable to foreclosures on homes whose market values have fallen below the insured amounts provided to the borrowers. In the FHA’s annual independent audit report to Congress, losses on reverse mortgages contributed $2.8 billion to the agency’s capital reserve deficiency and increased the chances that the FHA might have to seek a bailout from the Treasury next year.”http://articles.latimes.com/2012/dec/30/business/la-fi-harney-20121230
THE SOLUTION: MORATORIUM ON HECM STANDARD FIXED:
Carol Galante, Acting Assistant Secretary for Housing-Federal Housing Commissioner,in her December 18th letter to Senator Bob Corker (R-TN), outlined changes that FHA would be taking to help sustain the financial health of FHA. Actions that FHA will be taking included minimum credit score for new FHA loans, moratorium on HECM Standard Fixed loans, and other changes. But we will concern ourselves here with the elimination of the HECM Standard Fixed product. Carol Galante’s letter stated:
“….Moratorium on the full draw HECM Reverse Mortgage….This product currently represents a large majority of the loans insured through the HECM program, with the Variable Rate Standard product, and the HECM SAVER Products (Fixed Rate and Variable) representing the balance. The amount that can be drawn under the SAVER product is substantially less than under the Standard program, and the upfront fees to the borrower are all but eliminated for SAVER loans. Eliminating the use of the Fixed Rate Standard program is an immediate stop gap measure, and FHA will also commence rule making to make several other important changes, including establishing formal guidelines for conducting financial assessments of borrowers and the creation of set-asides for payment of taxes and insurance.”
Senior borrowers will only be able to choose from the HECM Saver Fixed product, lower closing costs but less cash out, or the HECM Libor, adjustable rate. As has been the case for years, the fixed rates require all cash be taken at closing while the adjustable is more flexible. The Libor provides that the borrower may choose from a monthly check, line of credit, cash out, or a combination of all three. But the Standard Fixed HECM was a popular product.
Mortgagee Letter 2013-01 from http://www.Hud.gov, fixed interest rate loans assigned an FHA case number on or before March 31, 2013 may be processed as a Standard Fixed HECM or a HECM Saver Fixed. Any fixed interest rate HECM Standard loan must close on or before July 1, 2013.
Jack Guttentag of http://www.mtgprofessor.com believes the elimination of this product doesn’t make sense. His article in its entirely is below. You can find it at: http://www.dailyherald.com/article/20130216/entlife/702169990/ – For brevity, we will excerpt sections. Article posted: 2/16/2013 5:09 AM
ELIMINATING FIXED-RATE HECM LOAN MAKES NO SENSE, by Jack Guttentag
“Editor’s note: This is the second column in a series. The series continues next week in Homes Saturday.
The first article in this series indicated that major changes were needed in the HECM reverse mortgage program to A) reduce its appeal to those with short time horizons looking for the largest possible immediate “cash-out,” who impose the largest costs on FHA; and B) to increase its reach to seniors who need steady financial help to stay in their homes during their retirement years. …. Eliminating the fixed-rate standard HECM would not eliminate the ability of seniors to use all of their HECM borrowing power to draw cash. They could continue to do this with the fixed-rate Saver although with a smaller cash draw.
Viewed strictly as a way to reduce FHA deficits, elimination of the fixed-rate standard while leaving the fixed-rate Saver makes no sense. If the first is a loser for FHA, so is the second. While the Saver loans are smaller and therefore expected losses are smaller, the insurance premiums on the Saver are correspondingly smaller. The only financial benefit to FHA would occur from seniors who, because the fixed-rate standard is no longer available, elect to drop out altogether.
I would not expect many dropouts because the options remaining are far more attractive than anything else available to financially strapped seniors. Borrowers looking for the maximum cash draw can switch not only into the fixed-rate Saver, but also into the adjustable-rate standard, which would allow them to draw more than on the fixed-rate Saver. I doubt that the risk of rising interest rates would offset the attraction of larger cash draws.
If every borrower looking for the maximum cash draw who is shut out of the standard fixed-rate HECM swings to either the Saver fixed-rate HECM or to the standard adjustable-rate HECM, the expected impact on FHA’s net income would be zero. Indeed, it could be even worse if — as seems very likely — cash-out adjustable-rate HECMs pose a greater risk of loss to FHA than cash-out fixed-rate HECMs.
HUD/FHA is certainly aware of this. It is clear from the tone of the Galante letter that the agency is looking into other changes in the HECM program that may be needed to protect FHA’s insurance reserve. Since we don’t know what these other changes are, I will take the opportunity to indicate what I believe they ought to be.
Reducing Adverse Selection
The way to strengthen FHA’s finances is to eliminate adverse selection. HECM borrowers are not a cross section of senior homeowners; rather a disproportionate number are bad risks who won’t properly maintain their properties and will default on their property taxes.
Eliminating adverse selection means discouraging those who are the greatest risks, and encouraging those who are the smallest risks. The risk imposed on FHA by HECM borrowers is highly correlated with the time horizon of the borrower. The greatest risk is posed by those with short horizons who are looking to draw the largest amount of cash allowed. The best way to get rid of them is to limit cash withdrawals in the early years — under all HECM programs.
One possibility would be to limit cash withdrawals to 20 percent of what would now be the maximum cash withdrawal, in each of the first three years. This might be subject to specified exceptions based on the uses of the funds drawn. One such exception could be seniors who use a HECM to purchase a house, based on the premise that homebuyers constitute a relatively low risk group.
Another possible exception would be the use of a HECM to pay off the balance on a standard mortgage. FHA has the data to determine whether these and perhaps other groups have sufficiently low default rates on property taxes and insurance that they deserve to be exempt from limits on the size of cash draws. The restriction of cash withdrawals would be much more palatable if it were combined with a provision to allow combinations of fixed-rate and adjustable-rate programs. It makes good sense to allow seniors to select a fixed rate on the cash they draw and an adjustable rate on what they will draw in the future.
Reducing adverse selection is actually the easy part of the challenge facing HUD/FHA. The greater challenge is increasing favorable selection by encouraging seniors with long time horizons to participate in the HECM program. It is important not only for making the program self-supporting, but also as a way of redeeming the purpose of the program, which is to help senior homeowners finance their retirement. This is the subject of next week’s article.”
• Contact Jack Guttentag via his website at http://www.mtgprofessor.com – © 2012, Inman News Service
OTHER OPINIONS
“I still believe that the “suspension” of the fixed rate will do more harm than good. Without the fixed rate product and the zero closing costs applied, many of my recent borrowers would not have been able to get themselves out of their forward mortgage payment, thus reducing expenses and increasing income to PAY their taxes and insurance. Equaling possible foreclosure on their home (eventually with their current loan.) The standard fixed was just recently implemented coinciding with market downturn. I believe the data is skewed and that these “fixes” are horribly misguided.
If the government and our policy makers are truly trying to help the underserved and financially challenged in this country, this is definitely not the way to do it. Where are the billions of dollars of bailouts for the banks? Do we see the large lenders modifying loans for our potential HECM clients? Many of my clients have banged on the doors of BOA, WF etc trying to get their loans modified to no avail due to fixed incomes. So, I see more travesty ahead for some of the HECM clients that really need this loan (could not do it) with new the set asides, having no closing cost credits,and new underwiting of credit. (most of my clients have impeccable credit, others are not as fortunate). Everyone that is reading this, please call your congress people and let them know how what is happening, what I consider small, pinpointed attack on our mature population is very, very wrong. 2.9 Billion in the red for the HECM program? Keeping the saver fixed with .01% upfront MIP? what is that? No mip to the fund? How does this help the FHA insurance fund? These saver borrowers are not the typical borrower/s that need this loan. They want it. The analysis of this is so illogical it makes my blood boil. I have been in this business since 2004. I have seen quite a few changes all not really harming the program. These politicians OUR EMPLOYEES, are making decisions without complete knowledge of the repercussions of the populace that they are serving.”
James E. Veale, CPA, MBT December 27, 2012 at 6:13 pm – –
Ms. Faison,
What you suggest is a specific social welfare program for senior homeowners. Yet there are many seniors in need who have no home. Should the federal government provide some welfare program that is purely based on home ownership? We tried using that standard in describing those eligible to vote in the Constitution a few centuries ago…
Should Saver borrowers be harmed due to their lack of risk to the HECM program? Besides there are so few of them. Why should they pay 1.99% more based on the MCA in upfront MIP? They still pay ongoing MIP. I fully support providing less risky HECMs to the “not-quite-affluent” or “mass affluent.” Many of them may not need cash flow assistance now but could do better if they took full advantage of this program with no real threat to FHA…
I am opposed to any taxpayer supplement to the HECM program. Industry leaders have falsely bragged to members of Congress that the HECM is self-sustaining. That may have been true for HECMs endorsed before October 1, 2008, but it has not been true since then. By fiscal 2010, HUD supplemented the HECM portion of the MMI Fund with $1.7 billion from other just as worthy HUD single family programs. If HUD had not done that plus put in another $0.525 billion in fiscal 2011, the negative balance in the HECM portion of the MMI Fund would have been well over $5 billion (including lower fund earnings)…
If we can no longer help the financially destitute, we are lenders, not social workers. Let us be thankful that insured PLFs were not cut as well. The financially destitute senior homeowners we have helped have been joyous events but again we are lenders first, not social workers. I will still continue to grieve with the seniors I cannot help just like I do now. This is not a happy solution but a necessary one.
Source: See: https://www.reversefocus.com/reverse-mortgage-news/fha-suspends-fixed-rate-hecm, comment by Robin Faison December 24, 2012 at 8:43 am –
QUESTIONS?
If you have any questions for me, please don’t hesitate to call or email. I am here to help!
Kathie Adler: 1-888-843-9797 (24 hour toll free voice mail) – Direct: 631-804-9044. Senior Reverse Mortgage Specialist- Advisors Mortgage Group, LLC. Kathie originates mortgages in New York and New Jersey – Kathie’s unique NMLS Identifier #65780, New Jersey Dept. of Banking and Insurance #0902775, Red Bank Branch-Advisors Mortgage | 407 Pine Street, Red Bank, NJ. 07701 | Office: 732-383-5382 | Fax: 732-640-5660 |
Advisors Mortgage Group LLC is an A+ Better Business Bureau rated company and a Multi-State Mortgage Banker with Headquarters located in Central New Jersey with offices throughout the US. Headquarters are located at 5114 Route 33, Wall, NJ 07727. New York Mortgage Broker License: 206697. Licensed by the N.J. Department of Banking and Insurance. Licensed Lender and Secondary Mortgage Lender no. 631155. All NY loans arranged through third party providers (FHA License #1548300002).
Reverse Mortgage Purchase Program – Widower Buys New Home
In an article January 29th, 2013 in the Wall Street Journal entitled, Reverse Mortgage Helps Client Buy a Home ., Jacob Levenson described how a recently widowed man in his mid 70’s was able to sell his Sacramento home and move closer to his family in San Francisco. “He owned his $250,000 home outright. But the median house price near his children was nearly $600,000.” The homeowner’s advisor “suggested the man sell some assets from his $600,000 portfolio. “He had a pension and Social Security and wasn’t relying on the portfolio for his living expenses.”
For this retired senior, this was not an attractive option. He had cared for his wife throughout her prolonged illness, and his desire was to retain his assets so if a similar situation presented itself, his children would not have to care for him. The adviser then offered the homeowner a solution. Secure a reverse mortgage and purchase a new home through the Reverse Mortgage purchase program. Under the HECM (Home Equity Conversion Mortgage) Purchase Program, the advisor’s client would be able to purchase a home and take out a reverse mortgage at the same time. In this way, the senior homeowner is able to keep their investments intact.
“Here’s how it worked. Mr. Hanson ran the numbers and saw that the client would easily be approved for a reverse mortgage. So the client sold his Sacramento home for $250,000 and made an offer on a new $600,000 house near his children. While the deal was closing, the man applied for and received a $350,000 reverse mortgage. At the closing, the house was completely paid for with the proceeds from his old home and the $350,000 from the approved reverse mortgage. His only remaining expenses were property taxes and insurance, and his only obligation was make the house his primary residence for six months. The bank would get its money back, plus interest, when he or his heirs sold it.”
“Using a reverse mortgage in this way allowed him to purchase a house that was of much greater value than the home he was living in, live near his grandkids and preserve his nest egg,” Mr. Hanson says.
The HECM Purchase program is wonderful program that can allow senior borrowers to buy a new home, possibly keep some money in the bank, and change their surroundings for the better.
http://online.wsj.com/article/SB10001424127887324329204578271800761424778.html?mod=googlenews_wsj
A REVERSE MORTGAGE – NON-RECOURSE LOAN
A Reverse Mortgage is a “non-recourse” loan which means the borrower can never owe more than the home is worth. The home is the collateral, the house stands for the debt. Mortgage insurance, which is required by the FHA on all Reverse Mortgages, protects borrowers from owing more than the value of the home. If the balance becomes higher than the value, the lender looks to the FHA for reimbursement based on the mortgage insurance paid throughout the life of the loan by the borrower. Your heirs are not personally responsible for the loan. The lender can only look to the sale of the property for repayment of the debt. If your heirs decide not to sell and keep the property, the full balance of the Reverse Mortgage will be due. Many of these heirs obtain their own mortgage, paying off the Reverse. If, at the time of your passing or moving out of your property, your reverse mortgage debt is higher than the value of the property (and of course an appraisal would have to be done), options for you or your heirs are a short sale or deed in lieu of foreclosure.
But remember, nothing is due the lender until the last surviving borrower passes away or permanently leaves the property. Any remaining equity is inherited by the heirs. Once again, if, upon selling the home, there is not enough to pay the lender, the lender will take a loss and will be reimbursed by FHA. This is why all FHA loans require mortgage insurance. It protects the borrower and the lender.
A Reverse Mortgage is a wonderful way to change your life, but as I have said before, the aren’t for everyone and they don’t always work for everyone. You must have enough equity in your home to do a Reverse Mortgage. And, something many people do not know: You can refinance your Reverse Mortgage over and over again as long as there is enough equity.
So look a that new home with bright possibilities. Be sure you can show the Reverse Mortgage lender that you can pay both insurance and taxes on the current and future home as this is a qualifition separate from the typical Reverse Mortgage where you refinance your existing home. There are going to be more stringent qualifications coming as lenders, FHA, and HUD are concerned about borrowers taking out a Reverse Mortgage but not being able to afford to pay the taxes and insurance on the home.
If you have questions, please give me a call. Kathie Adler – 631-804-9044 (cell phone). I am here to help.
Kathie Adler – Senior Reverse Mortgage Specialist, Advisors Mortgage Group, LLC, Kathie Adler is an MLO, Mortgage Loan Originator, approved to originate mortgages in New York and New Jersey. Advisors Mortgage Group, headquartered in Wall, New Jersey, is an A+ Better Business Bureau rated company, a multi-state mortgage broker with offices throughout the east coast.
Website address: www.ReverseMortgageLI.com
Kathie Adler can be reached by calling 888-843-9797 or 631-804-9044 or writing to reversemortgageli@yahoo.com
Kathie Adler - Reverse Mortgage Blog 