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June 21st, 2011

Is it time to end FHA reverse mortgages?

by Peter Miller


4-FHA-logoFollowing in the steps of Bank of America and Financial Freedom, another huge lender has announced that it will no longer sell reverse mortgages.

Wells Fargo says it’s leaving the reverse mortgage business. It will no longer sell home equity conversion mortgages (HECMs), reverse mortgages sold to those aged 62 and above and insured by the FHA. The company will continue to service current borrowers.

Most of us get “forward” mortgages where the lender puts up cash and we pay monthly for the next 15 or 30 years. With an FHA-insured reverse mortgage, the borrower gets cash but there are no required payments for principal or interest.

Instead, the loan is a negatively-amortizing mortgage with unpaid interest added to the initial debt each month. The loan ends when the borrower moves, sells or dies, at which point the estate can give the property to the lender, sell it to pay off the debt, or keep it and refinance. If the debt is less than the value of the property the FHA insurance covers the unpaid balance. In no case can there be a deficiency judgment against the borrower or the borrower’s estate.

Why did Wells Fargo leave the reverse mortgage business?

One reason cited is the matter of “today’s unpredictable home values.” Why this should be a problem for a lender is unclear, given that HECM lenders are insured against loss by the FHA.

Values, however, are a problem for borrowers. You can’t get 100 percent financing with a reverse mortgage or anything close. As home values have declined, owners have gotten less cash from their properties, perhaps not enough to make a reverse mortgage interesting.

To try to drum up more business, HUD introduced the HECM Saver plan last September. Instead of a 2 percent up-front insurance fee with a regular FHA-backed reverse mortgage, the cost of coverage was reduced to 0.01 percent. The catch was that in exchange for virtually no up-front mortgage fee, the amount a borrower could take out against a home was reduced–thus reducing future claims against the FHA.

Reverse mortgages hold foreclosure risks as well

Wells Fargo also talked about how difficult it was to judge the ability of seniors to “meet the obligations of homeownership and their reverse mortgage, e.g., payment of property taxes and homeowners’ insurance.”

Because a reverse mortgage has no required monthly payments for principal or interest, borrowers are qualified on the basis of the value of their homes. However, borrowers continue to have an obligation to pay property taxes and insurance. If homeowners don’t make those payments, a reverse mortgage with no monthly costs for principal and interest can actually be foreclosed. In fact, last year an audit showed that unknown to HUD, nearly 13,000 HECM borrowers could be facing foreclosure.

The solution to the taxes and insurance problem would be to create required escrow accounts to protect borrowers. However, such accounts would require monthly contributions and that’s precisely what many cash-strapped older borrowers are trying to avoid.

Falling home prices: No good for HECMs

In the end, Wells Fargo points out that “the government’s HECM or reverse mortgage program was designed in a different economic time.” This is precisely right.

Reverse mortgages made a lot of sense when home values were generally rising because negative amortization could be offset with higher prices. That’s a combination that limits and perhaps eliminates lender claims against HUD.

But home values have been falling in most areas of the country since April 2007. Combine negative amortization with falling home values and you have a program which is destined to fail.

Time for HUD to drop the HECM

This is a case where lenders are right. Like Wells Fargo, it’s time for HUD to drop the HECM program. HUD’s own figures show that HECM insurance claims for April were up 76 percent when compared with a year earlier.

There’s no sense issuing new reverse mortgages unless home values are growing. In particular, there’s especially no sense originating fresh HECMs in the five states which are home to more than half of all foreclosures–California, Florida, Michigan, Arizona and Nevada.

The reverse mortgage concept is a good idea in theory, but the theory is just not workable when home values are falling year after year.

13 Responses to “Is it time to end FHA reverse mortgages?”

  1. Thomas Says: June 21st, 2011 at 1:29 pm

    Falling home prices are not good for anybody. Everybody suffers – and many more borrowers and lenders of forward mortgages are losing out than on reverse mortgages. As a consequence, lenders provide less credit, which in return puts further pressure on the housing market… The HECM reverse mortgage as it is currently supported by HUD doesn’t cost the taxpayer a cent, it gives hundred thousands of people a decent life and prevents thousands from foreclosure. Dropping it would not make economic sense and even those who thought they could gain politically might find out that cutting where it only hurts but doesn’t really save is not all that popular.

  2. Rich Smith in PA Says: June 21st, 2011 at 2:43 pm

    Why don’t you stop projecting negatives on the reverse mortgage business. The HECM product serves seniors in very positive ways, there are situations where seniors should be looked at carefully, but most have saved so much paying off a forward mortgage freeing up the payments, or are left with a substantial credit line that will be a fund to pay taxes and insurance for years to come. We do need to have some qualifying and underwriting changes to look at suitability, but let’s not throw the program over the cliff. Wells Fargo had many issues, but the underlying fear was they might get caught with more foreclosed files, which isn’t the reverse mortgage fault, it had to do with a big bank making bad loan decisions on the forward side and they are struggling with that. As for falling or unstable values, care needs to be taken in originating reverses in a few select areas, but a majority of the country has really had stable values, like we have in Central PA. Our values are actually going up and never went down. Don’t want to jump the gun here and go off half cocked, reverses save seniors and the overall majority need the program to be alive and working. I am in favor of study, re-alignment of the program parameters and letting the dust settle. Proud to be a MetLife reverse loan officer and supporting seniors in my market. Have a little patience. Rich Smith

  3. Peter G. Miller Says: June 21st, 2011 at 4:13 pm

    Tom — HUD has asked Congress for taxpayer money to support the reverse mortgage program. First, there was an $800 million request. “The FY10 budget includes a request to appropriate nearly $800 million for HUD’s reverse mortgage program. Needless to say this program is very sensitive to the projected path of long term house price appreciation. Recognizing the uncertainty surrounding the timing of the housing market returning to full strength, our budget projections are conservative and request that Congress appropriate funds consistent with just a 0.5 percent real inflation adjusted house price appreciation for loans made under HECM. With house prices now already showing signs of stabilizing somewhat faster than was assumed even just a few months ago, this scenario could be too pessimistic, but we think it is better to err on the side of caution.” See: http://www.hud.gov/news/speeches/2009-05-07.cfm Then a request for $250 million. See: http://portal.hud.gov/hudportal/HUD?src=/press/testimonies/2010/2010-03-11c

  4. Peter G. Miller Says: June 21st, 2011 at 4:15 pm

    Rich — >>>Why don’t you stop projecting negatives on the reverse mortgage business. There are no negatives to “project.” There are realities to be faced. As you say, there is dust to be settled.

  5. Jon Sias Says: June 21st, 2011 at 6:28 pm

    Mr. Miller certainly presents some very interesting issues. However, the notion it is time to throw the reverse product onto the mortgage garbage pile along with stated and sub-prime loans is a bit overly dramatic. The nexus for the reverse program was a pressing need to create a solution to a horrible dilemma – seniors being forced out of their homes because they could no longer afford the mortgage payment or they needed the potential income represented by their equity. Those problems remain unsolved by any other viable option. Mr. Miller shares the statistic of 13,000 reverse mortgages that “could be facing foreclosure”, all unbeknownst to HUD. The foreclosure of just one senior’s home is a tragedy but the idea that this is happening completely under HUD’s radar stretches credibility. If they are, in deed, in the dark, it is only because loan servicers – whoever it is – have relied on the knowledge it’s no skin of their nose; HUD and the American taxpayer will step up and make them whole no matter what. The true issue is not foreclosures because of nonpayment of taxes and insurance; the true issue is foreclosure because of non-existent communication and ineffective follow up after the loan closes. He is on point when describing a HECM refinance loan as not being means tested. However, since it inception, the reverse PURCHASE program does include that critical step. Borrowers are required to submit all housing costs documentation and evidence of adequate income to handle those responsibilities. Most seniors are capable of understanding the necessity of providing similar income evidence to cover those costs in the refinance scenario. Interestingly, Mr. Miller suggests killing the reverse mortgages in the five states with significant number of seniors in residence. The fact that the five are “home to more than half of all foreclosures” has absolutely nothing to do with the number of failing reverse mortgages. Yes, property values are down significantly and it’s going to take some time to recover but the idea that a cure to our foreclosure problem is to take away this seniors only program altogether is shortsighted and places the burden on the backs of Americans who can least bear up under the pressure. If we had used Mr. Miller’s logic a generation ago, Medicare and Social Security would exist only in history books.

  6. Peter G. Miller Says: June 22nd, 2011 at 8:54 am

    Jon — Credibility is not being stretched at all. It was HUD’s Regional Inspector General for Audit who found the nearly 13,000 borrowers unknown to HUD who were facing foreclosure. This is in addition to 7,673 reverse mortgage borrowers who may face foreclosure and were known to HUD. See: http://www.hud.gov/offices/oig/reports/files/ig1060003.pdf The reason to not make reverse mortgages in the leading foreclosure states is that such areas have suffered enormous value declines. As property values generally fall it means that claims against HUD increase. Example: someone has a $300,000 reverse mortgage. It grows to $400,000. Meanwhile, the property securing the debt goes from a value of $500,000 to $350,000.

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  8. Lisa LeQuire Says: June 27th, 2011 at 6:34 am

    Sure, let’s just lock-up one more purchase option for the largest growing population sector. That’s exactly what this depressed market DOESN’T need. Come on Wells, this is the time to open avenues not close doors.

  9. Pat Gray Says: June 27th, 2011 at 11:03 am

    Home prices are down but beginning to stabilize, and foreclosures exist for every type mortgage, certainly more forward foreclosures as a percentage of total loans. Forward lenders suffer losses on foreclosures in a devalued market as well as well as do lenders of reverse mortgages. Many forward mortgages are also insured. Tax and insurance payments can become a hardship for any age group with any type mortgage. Is anyone considering abolishing forward mortgages?

  10. Beth Paterson Says: June 27th, 2011 at 11:14 am

    Even with Bank of America and Wells Fargo exiting the reverse mortgage industry the sky is not falling in the reverse mortgage world! Reverse mortgages are still available and a viable option for senior home owners. There are still lenders lending, some new ones even entering the industry. FHA is still insuring the Home Equity Conversion Mortgage (HECM), covering the risks for the lenders when the home values drop. Investors are still investing in reverse mortgages. Servicers are still servicing reverse mortgages. I outlined this in my blog: http://wp.me/pxPEm-s1

  11. Sean Says: June 27th, 2011 at 3:06 pm

    As a Wells Fargo Mortgage Employee I can tell you that it is less the loss of the mortgages as the bad PR that would happen. The FHA wanted Wells Fargo to foreclose on a lot of seniors who were delinquent as part of the “ability” to do Reverse Mortgages. Wells said then we won’t continue to do them. The reason being is that the cost of the PR damage is significant. Wells and many othere lenders are already spending millions of dollars to repair reputations. Could you imagine the front page story or story leading the news cast “Wells Fargo throws out another senior citizen in the gutter”. And yes I realize there is bad PR from doing a normal foreclosure and putting a family out of their home but the uproar from a “protected and vulnerable” group being “attacked” would be incredible. FHA put Wells and other Lenders in a no win situation, so the lenders decided to say no thanks.

  12. Steven Garcia Says: June 27th, 2011 at 3:48 pm

    Like so many ideas of late, this one comes about 4 years too late. When home values peaked in 2007, that is when the thought of killing the HECM would have made the most sense. I’ll completely ignore the fact that this program helps desperate seniors across the country. Now that home prices are lower, the risk of making a HECM is significantly less than it was 4 years ago. And on the political front, can you see a politician telling seniors they are killing the HECM product and then having AARP coming after them. Lots of baby boomers out there. I would predict the end of the HECM is no where near. It’s a valuable loan product that 1) can be profitable and 2) many people rely on.

  13. Peter G. Miller Says: June 28th, 2011 at 7:15 am

    Steve — To have ended HECMs in 2007 you would have to have know the future, something which does not often happen…. But, you raise an important point, the idea that it may be politically difficult to end the HECM program and that such loans are profitable for lenders. But, rather than end HECMs the more practical choice will be to let them wither as big lenders leave the market and falling home values make such loans less attractive.

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