Reverse Mortgages and Fannie Mae
Fannie Mae rides again.
An open letter to all senior homeowners considering a Reverse Mortgage — and professionals who have suffered the recent change in margins!
Written April 1, 2009
This blog page is long– it covers events past and present that led us up till today. Anyone seeking a Reverse Mortgage needs to know the facts about Fannie Mae and the recent change in margins from Reverse Mortgage Lenders. After all, we are on your side – and we never wanted this to happen.
A Reverse Mortgage affects your future and your finances and is a wonderful tool. But in light of recent events with Fannie Mae (which resulted in an increase in Reverse Mortgage margins (the profit lenders make over the index), this has affected many potential borrowers from getting the amount they were looking for.
Being in the dark is never the route to go, and so I share this information with you.
A few days ago Reverse Mortgage specialists nationwide woke up to an awful nightmare. And immediately we knew one thing: our senior borrowers would suffer loss. For those of us who consider this more than a job, we were understandably upset. To our borrowers it would mean less proceeds from their Reverse Mortgage, and we would be the ones bearing this disappointing news.
Every one of us in the industry was upset. No, we were angry! But did the news media cover the story? No. Go figure. Maybe if Fox News or NBC carried the story there would be more outrage from more Americans. So what really happened? There is a background to how we got here– so please bear with me. Here’s the scoop:
Fannie Mae, currently the sole investor in Reverse Mortgages, changed their pricing on March 27th which necessitated all Reverse Mortgage lenders changing their margins (i.e., the percentage a lender adds to an index such as the LIBOR index (London Interbank Offered Rate) or the CMT index (Constant Maturity Treasury) to achieve a “fully indexed rate” for borrowers.
Dennis Haber’s March 29th blog (Dennis is an attorney and one of the most well known experts on Reverse Mortgages in the U.S. today), had this to say:
“Reverse Mortgages: FANNIE MAE Declares War On Seniors – Silence or non action by one side when “inappropriate action” is taken by another side, if history teaches us anything, is further reason why the one being harmed needs to speak up. The reverse mortgage industry has maintained an attitude of indifference, which is just as bad as maintaining silence. The force causing the harm is Fannie Mae.”
Dennis is right. It is “war on seniors”. But senior borrowers and the industry must make their voices known. We must get to the people who will listen to us. Here’s an interesting online article that sums up recent events:
“The Reverse Mortgage Wire – Brokers Scramble as Reverse Mortgage Rates Rise – Posted April 01, 2009 3:59 PM PST
Reverse mortgage originators have been scrambling to close and re-disclose home equity conversion mortgages this week as new pricing from Fannie Mae led lenders to raise margins a minimum of 50 basis points. . .
The sudden change caught the industry off-guard. Rising interest rates mean fewer proceeds to borrowers in most cases. Brokers either lose money on committed deals or have to re-disclose new pricing to customers.
“It’s been brutal,” said David Bancroft, president of Mission Viejo, Calif.-based brokerage Omni Reverse.
Generation Mortgage Senior Vice President Sherry Apanay said pricing from Fannie is negative for any margin lower than CMT 325 and LIBOR 275. Generation and other lenders, such as Financial Freedom and MetLife Bank, have been adding margins as high as 375 basis points for CMT loans and 325 for LIBOR loans as they eliminate premium pricing to brokers for lower margin reverse mortgages. . .
Industry insiders say that Fannie Mae is attempting to make the HECM product, particularly Constant Maturity Treasury indexed loans, more enticing to investors. The government sponsored enterprise, under federal conservatorship, needs to begin slimming down its loan portfolio in 2010.
Spokespeople for Fannie Mae did not responded to requests for further comment. “
Did you catch that? “Fannie Mae did not respond to requests for further comment.” Why am I not surprised?!!
Lest you think I am being sarcastic, let me be clear. You are absolutely right! It’s not pretty when you have to go to your borrower with a shortfall (they need money to close as the amount they qualified for with their Reverse Mortgage wasn’t enough to pay off their mortgage debt) and tell them they need even MORE money at closing! Sure, they signed an application, but you can’t — at least it looks like this – keep your word. The program no longer even exists because the lender dropped the program — because Fannie Mae forced them to. How does it make you feel to do this to a borrower? LOUSY.
But here’s the worst part. The problems that began on March 27th with Fannie Mae are not new. Fannie Mae had problems back in the nineties. And actually these problems began with Franklin Delano Roosevelt’s “New Deal”, and I quote:
“Legislation, Presidential & Congressional Politics – recession
Expert: Michael Troy – 10/23/2008
The current recession can actually be traced back to the New Deal, when the Federal government created institutions to buy and resell diversified mortgages. This increased bank liquidity and diversified risk, allowing for more people to get home loans, but it also helped to inflate home values and to separate lenders from the risks of lending. Over the following decades, these policies allowed home values to increase steadily. The diversification of risk made lenders willing to offer lower down payments and take greater risks with home buyers.
In the 1990’s many government officials . . . encouraged Fannie Mae and Freddie Mac to loosen standards for home loans. . . By allowing these higher risk buyers to qualify for loans that could be resold through Fannie Mae and Freddie Mac. . . a strong push in the 1990’s. . . The lowering of borrower standards brought new homeowners into the market. That, combined with an increase in real estate investment after the 2001 market crash, helped to push home prices even higher. . . When the inevitable pull-back in housing prices came, investors found that those low risk securities were suddenly higher risk. Since no one knew how to value that risk, the prices fell through the floor, leading to many of the problems we see today.”
Risk. Lowering borrower standards. Home buyers who knew they could not afford to pay high mortgage payments each month should NEVER have been granted mortgages. But they were. No ability to pay– and this is where problems began. Mortgages known as “sub-prime” loans and “stated income” loans were granted (where unverified incomes were used to qualify borrowers for mortgages). This situation was addressed by John Dugan in 2007.
Regulator sees stated income subprime problem
Wed May 23, 2007 4:19pm EDT – By John Poirier
“WASHINGTON (Reuters) – Use of unverified income data in making mortgage loans to borrowers with poor credit histories should be the exception rather than the rule, a U.S. banking regulator said on Wednesday. . . Comptroller of the Currency, John Dugan, said the use of a borrower’s stated income, without verification, had helped increase mortgage delinquencies and foreclosures in combination with other lax underwriting standards. . . But he said stated income is a “different kind of animal” because it invites misrepresentation and potential fraud. Stated income helped people qualify for bigger loans and more expensive houses, and tempted brokers to push such practices to gain higher fees.”
Now, the sub-prime problem came to a head and “stated income” mortgages ended while “sub-prime” lenders were either shut down or went belly up in 2007. The era of unverified income when applying for a mortgage was over.
THOMAS KOSTIGEN’S ETHICS MONITOR – No surprise here – Shaky ethics of subprime lending lead to shaken investors – By Thomas Kostigen, MarketWatch – Last update: 12:03 a.m. EDT July 20, 2007 SANTA MONICA, Calif. (MarketWatch) –
http://www.marketwatch.com
“In March, New Century Financial Corp., the nation’s second-biggest subprime mortgage lender, announced that it didn’t have enough cash to pay its own creditors. Fremont General Corp., Accredited Home Lenders Holding Co., NovaStar Financial Inc., and Countrywide Financial Corp., the nation’s biggest mortgage company, have also tumbled over subprime woes this year. . .
Bear Stearns, the highly regarded Wall Street trading firm, is now caught up in the fiasco. Two of its hedge funds with ties to the subprime mortgage market have gone belly up and it will mean losses to the firm as a whole. . .
Just how much financial carnage the hedge funds have stacked up at the firm is yet to be determined. But Bear Stearns could very well become the poster child for the subprime meltdown.”
So I ask you my readers, what word describes just what was going on for years prior to the mortgage meltdown of 2007? Just ONE word: GREED. Greedy banks, greedy brokers, greedy loan officers. On the part of the prospective homeowners it wasn’t greed. I call it wishful thinking, self deception, and desperation. ‘Get myself into a home of my own no matter what it takes and even IF I can’t afford it. I’ll figure out a way to make it work! I’ll just do a stated income loan because I could never qualify any other way.’
Back to Fannie Mae. After the surprise we got by Fannie Mae on March 27th Reverse Mortgage specialists and industry leaders knew that to close many Reverse Mortgages would result in a COST to their companies from the lenders. This is often prohibitive so some Reverse Mortgage loan officers were forced to change the program they offered their borrowers or suffer huge losses. I had such a situation; I checked my reverse mortgage software with one lender for a borrower in a shortfall whose application was written. It would have cost my company $8,000 to close the loan with that same program– while the origination fee to do the loan was only $6,000!
How do we explain this to borrowers? Compare it to a contractor who gives you an estimate to paint your house. The estimate seems reasonable. $3,000 for the outside including trim. You contract to have your house painted, but the next day Benjamin Moore raises the price of paint SO high that it results in a loss to the contractor. What is the contractor forced to do? Return to the homeowner telling him that he has to change his price because Benjamin Moore just pulled the rug out from under him!
Now, I am quite sure nearly all Reverse Mortgage specialists would be willing to suffer the loss of some of their profits to help their senior borrowers. After all, it’s not always about the money — it’s about serving a community of people who made America great. And it’s about our own credibility.
When you think things can’t get worse, something else happened. On March 30th the boom got lowered even farther. Because of Fannie Mae’s changes in pricing certain loan programs were no longer offered by lenders, one large lender in particular. Programs disappeared and were replaced by higher margin programs as the prior programs were no longer profitable to the lenders.
Who was to blame? Again, Fannie Mae. Our “wonderful” GSE (Government Subsidized Enterprise) known as Fannie Mae!!
What are Fannie Mae and Freddie Mac, and what do they do?” Here’s a synopsis:
“Fannie Mae and Freddie Mac are “government-sponsored enterprises” (GSEs). This means that they are privately owned, but receive support from the Federal Government and assume some public responsibilities.
The GSEs provide a secondary market in home mortgages, purchasing mortgages from the lenders who originate them. For lenders to stay in business, this is what they do – sell loans to Fannie Mae or investors. They hold some of these mortgages, and some are “securitized” — sold in the form of securities which the GSEs guarantee.
As many of you already know, Fannie Mae and Freddie Mac, are among the largest corporations in the world today. (They actually hold half the mortgages in the United States.) Sort of unveils the curtain as to why Fannie Mae is so important to the stability of our economy. If Fannie Mae gets into trouble, it’s a bad situation. http://www.mtgprofessor.com/A%20-%20Secondary%20Markets/what_do_fannie_and_freddie_do.htm
As you know, Fannie Mae was bailed out (taken over) by the Federal government on September 9th 2008. Let me quote the Times Online, September 8, 2008, but notice the emphasized words in BOLD (by me) :
“Fannie Mae and Freddie Mac bailed out by US Government – The US Government took control of Freddie Mac and Fannie Mae, the stricken companies that underpin the American mortgage market, yesterday and promised to inject up to $110 billion of taxpayers’ money to keep them afloat.
The cash infusion was one of a series of measures designed to restore order to the stricken financial system that included the immediate removal of the 0chief executives of the companies and the elimination of future dividends to shareholders.
Henry Paulson, the US Treasury Secretary and a key orchestrator of the rescue package, acknowledged that it was highly unusual for a government to intervene where publicly traded companies such as Freddie and Fannie were concerned. But he emphasised that the two struggling groups represented a special case because their survival was crucial to the health of the worst housing market since the Great Depression of the 1930s.”
In the same article, John McCain, the Republican nominee . . . told CBS that Fannie Mae and Freddie Mac had both become “sprawling, massive bureaucracies, rife with corruption and cronyism” in which the needs of ordinary mortgage-holders were ignored.”
Bureaucracy, corruption, cronysim. He’s got that right.
Here’s more about the warnings about Fannie Mae’s problems:
“The United States Senate May 25, 2006 Sen. John McCain [R-AZ]: “Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal. The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac. The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.
For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market.”
Unfortunately, Barney Frank, Chairman of the House Financial Services Committee and a defender of Fannie Mae as well as some House Republicans kept ignoring the problems of Fannie Mae! But an overhaul was proposed as early as 2003.
New Agency Proposed to Oversee Freddie Mac and Fannie Mae
By STEPHEN LABATON – Published: Thursday, September 11, 2003
WASHINGTON, Sept. 10 — “The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago. Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac , the government-sponsored companies that are the two largest players in the mortgage lending industry.
The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.”
However, here is an interesting statement that has now been quoted by the news media and critics alike:
“These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
As we see, the current crisis which has now affected even the Reverse Mortgage industry began years ago. Had Fannie Mae not been bailed out or had problems, it’s unlikely the Reverse Mortgage industry would have been blindsided as it was.
I don’t believe there’s a Reverse Mortgage specialist who isn’t upset with Fannie Mae about what has happened. It mars the name of the Reverse Mortgage industry. It hurts our reputation as specialists who offer this product to seniors, but most of all– it hurts our borrowers who look to us and our lenders to provide what we all consider a wonderful product. We offer lifestyle to our borrowers, not just money. And yet, our senior friends get blindsided by this shocking situation, and many just don’t understand it.
Is there anything that counteracts this horrendous situation? It’s bad enough we don’t trust our own government. Now some seniors don’t trust us either. But there are still benefits to getting a Reverse Mortgage and still honest people around who’ll give it to you straight.
Here’s the good news:
Reverse Mortgage rates are STILL very good.
a) A range of 3.5% or thereabouts (adjustable) is still quite good and rates in the mid 5’s to 7% (fixed) are also quite good.
b) FHA (the Federal Housing Authority) lending limits have increased to $625,500 up from $417,000 and prior to that it was $362,790 (and at least till the end of this year $625,500 will hold as a nationwide lending limit and hopefully will be extended beyond 2009 with some pressure from us in the industry on behalf of borrowers).
c) Origination Fees have been capped so the maximum origination fee lenders or brokers can make on the FHA Reverse Mortgage is $6,000. It used to be $7,255.80 on a lending limit of $362,790. Big change.
d) While it is true if your home is worth $625,500 or more (the current max lending limit of FHA) you will pay a 2% Mortgage Insurance Premium (or MIP), considering what you get it’s worth it. The premium, as with nearly every Reverse Mortgage closing cost (other than your appraisal) is financed inside the loan.
Paying mortgage insurance is absolutely essential. First of all, a Reverse Mortgage is a non-recourse loan; the home stands for the debt. And because you have mortgage insurance your debt will never exceed the value of your home when repaid. Plus, the lender can never attach your bank account, your winnings from the lottery, nor can they look to your heirs for repayment.
You carry mortgage insurance for a very good reason – to protect the lender which in turn protects YOU. Actually, you will NEVER be personally responsible for the debt. This is a loan where if you live in your home until your passing, you will never pay it back.
e) Where can you find a mortgage that GIVES you money and asks for no monthly mortgage payment rather than the typical mortgage where YOU are paying the bank? And where can you wipe out a current mortgage payment that costs perhaps one to two thousand dollars a month in just a single day?
The picture is not bleak, it is hopeful — and I trust this blog has helped clear away the cobwebs and unveil the mystery attached to Reverse Mortgages. Past and recent events have shaped where we are today. And I admit even those of us who work in this industry were left frustrated and somewhat confused.
When we are at the mercy of the federal government and Fannie Mae, nothing is guaranteed. Rates are not guaranteed. Programs can change. But one thing is for sure; we’ve got a program that is helping lots of people stay in their homes and enjoying their retirement. And I believe Reverse Mortgages will be around (God willing) for a long time to come. Despite the difficulties of recent weeks, Reverse Mortgages, in my opinion, are the best thing to come along from the Federal Government for seniors who own homes — and that’s a plus.
I hope this blog has helped. I apologize if it was lengthy, but I felt it needed to be said. You can find more information on Reverse Mortgages here: http://www.ReverseMortgageLI.com – and hear my radio commercial here – http://www.ReverseMortgageHelpline.com
Kathie Adler – Senior Reverse Mortgage Specialist
Advisors Mortgage Group, LLC, 300 Garden City Plaz, Suite 170
Garden City, NY 11530
Hello everyone. Welcome to my blog!
My friend Adam has been bugging me for months to create a blog. He made one, so he figured I should have one too!
I had no idea how to do one or which blog company to use. I’m new to blogging, and frankly never wanted to take the time to do one — so little time lately! But it was really quite simple. I’ve done website design (used to at least), so it’s pretty similar, though not as complicated.
I hope you will enjoy these blogs (updated weekly as time permits) and do let me have your thoughts. Most will be about Reverse Mortgages, what I do best, but some blogs will be about senior issues, how to make money from home, and interesting topics you might enjoy. I’ll try to include some interviews with interesting people who can impact your life for the better.
Now that I think of it I needn’t have worried about having content for my blog. My husband always says I don’t write letters I write books! Prolific writer or whatever label fits, I’m always thinking of how to write about something.
Maybe you’re like me, maybe you do that too? If so, then you’ll understand if these blogs become lengthy! I’ll do my best to shorten them, but it’s a real character flaw — I have BIG trouble editing things! For whatever it’s worth, welcome to my blog — I hope you’ll stay
QUOTE FOR THE DAY: “Character is what we do when we think no one is looking.” (H. Jackson Brown, Jr, American best selling writer, author of Life’s Little Instruction Book.
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