Reverse Mortgage Counterpoints and Updates–How Many People Turn 62 Every Day?
The FHA’s insurance fund is out of the headlines, having moved above the mandated 2% level. (Yes, for the first time since 2008!) Everyone agrees that the increase is primarily due to the reverse mortgage program. Yes, actuary folks say we have about 10,000 people a day turning 62 (or turning 65 and retiring) here in the U.S. – that magic age for reverse mortgages. Who says it isn’t a growth business? Those “in the know” point to appreciation in the housing market, changes to upfront mortgage insurance premium pricing, and new borrower assessment rules. But the value of the reverse mortgage portfolio is very much subject to interest rate fluctuations and home value forecasts.
No one is getting any younger. Retirees have long loved to move to places like Florida, Nevada, and Texas due in part to the lack of state income tax, as well as a homestead program for real estate tax in Florida. In Florida the homestead program pretty much caps any real estate tax at the rate of inflation (or even less) so if you buy a home in FL as your primary residence, you can live there a long time on a fixed income without worrying about the cost going up. Of course, that is how it works until the insurance companies start to adjust your premiums for possible hurricane damage. As STRATMOR’s Garth Graham put it, “The other reason retirees love FL is early bird special at the various restaurants, but that is for a column about trends in restaurant sales not mortgage sales. And of course, the weather is pretty nice, but that is for the weather channel.”
In Florida and parts of other states there is also a big influx of foreign investment, especially in the once again growing condo market on the coasts. In many cases, these are speculative buyers getting the early hard to finance units, and hoping to cash in on the potential appreciation as the project has more presales. Values in South Florida are back to pre-bust levels, so those investors that bought when the market was at the bottom did well with this approach.
I spoke to Harlan Accola with Fairway Independent Mortgage Corporation. He pointed out that in the vast universe of consumer borrowing, reverse mortgages get little respect. They cause the same kind of eyebrow lift as pawn tickets, car title loans, and rent-to-own TV sets. Harlan mentioned a study done by Wade D. Pfau, a researcher and professor of retirement income at the American College of Financial Services, recently completed a study that examined the probable results of seven different ways of using a reverse mortgage. Included in those seven ways was the option of not taking a reverse mortgage at all. Among the options he studied were to use home equity first, use home equity last and use a monthly tenure payment. He also used three more complicated payment mechanisms. Finally, he also explored the legacy value of each way of using a reverse mortgage, i.e., how much money was likely to be left for heirs.
According to his study the lowest overall success rate, by far, was the “ignore home equity” route – no reverse mortgage at all. It had only a 40 percent 30-year survival rate. The others ranged from just under 70 to 90 percent. This strongly suggests that a reverse mortgage should be a tool middle- and upper-middle-income families consider. The overall best route was the monthly home tenure payment. This is a reverse mortgage that is based on your life expectancy. It makes a constant payment based on the owner’s age and the value of the home. It showed a probability of success over 80 percent. It also generally showed the highest median real legacy value. It was a big winner for periods over 30 years.
Fairway’s Accola had plenty of other studies. “The lack of focus on home equity in retirement income planning is nothing short of a complete failure to properly plan and utilize all available retirement assets. This needs to change immediately because strategic uses of home equity, especially reverse mortgages, could save many people from financial failure in retirement and help stem the overall retirement income crisis facing Americans.”
What about kids who worry about their parents taking out a reverse mortgage? John Yedinak puts out the Reverse Mortgage Daily. A recent article was titled, “Reverse Mortgage Heirs Are ‘Dead Wrong’ About Their Inheritance.” “Through the judicious and responsible use of a reverse mortgage, a borrower can actually provide heirs with a substantial bequest in the form of a securities portfolio, the money from which they may be eligible to receive tax-free, according to a presentation at last month’s NRMLA conference in San Francisco by Barry H. Sacks, J.D., Ph.D., a practicing tax attorney. A reverse mortgage accrues interest over a long period of time, but the interest is not deductible until it is actually paid. The tax law that dictates how much of the accrued interest is deductible, and under what conditions. If the estate management is done well, Sacks said there is a deduction available to reverse mortgage heirs that would otherwise be lost under the conventional approach to estate planning, where the estate sells the home and distributes the proceeds among heirs and beneficiaries.”
What about mortgage company owners that are afraid of showing up one morning and being confronted with the Gray Panthers picketing the office? The guidelines are pretty much set out by HUD. In fact the U.S. Department of Housing and Urban Development conducted a webinar last quarter which provided further clarification and important reminders pertaining to the HECM Financial Assessment and Property Charge Set Asides.
The HUD requirements mentioned here must be satisfied for all HECM loans submitted. The lender must document 24 months of property charge payment history for all properties owned by the borrower, including the previous principal residence if the borrower has changed the principal residence in the past 24 months. Only debts attached to the subject property can be paid off at closing with HECM proceeds. (Non-real estate debts (revolving, installment, etc.) not attached to the subject property cannot be paid off at closing with HECM proceeds.) Unused HECM proceeds that are not used for paying off mandatory obligations can be considered as dissipated asset and can be used in the calculation of the residual income. In cases of a residual income shortfall or negative residual income, a HECM can be approved only if one of the following conditions is sufficient to completely mitigate the residual income shortfall: the borrower must have satisfactory property charge payments and debt payment history AND meet one of the following requirements to completely mitigate the residual income shortfall: fully funded Life Expectancy Set Aside (LESA)*, or partially funded LESA, or Compensating Factors, or a combination of LESA and Compensating Factors. HUD states that if the residual income shortfall cannot be completely mitigated by one of the above, then the HECM cannot be approved because it cannot be considered as a sustainable solution to the borrower’s financial circumstance. (*LESA is the amount withheld from the proceeds of the HECM for the projected payment of property charges during the life of the borrower.)
And don’t forget that the FHA has given HECM (home equity conversion mortgage) borrowers more time by extending the deadline for lenders or servicers to submit due and payable notices when HECM borrowers or spouses are delinquent on property taxes or insurance payments. In Mortgagee Letter 2016-01 FHA Principal Deputy Assistant Secretary Ed Golding announced that the deadline has been extended for lenders and servicers until April 17 to file the due and payment notices in accordance with changes made by the FHA last April. The extra time was added to give servicers more time to pursue loss mitigation options such as an HECM Loss Mitigation Repayment Plan for their delinquent tax and insurance payments, according to FHA.
FHA stated in the original policy announcement last April that “Mortgagees must inform mortgagors in writing that they have thirty (30) days to respond to a Due and Payable Notice. All Due and Payable Notices sent to mortgagors must reference available loss mitigation options, if any, and inform the mortgagor of his/her ability to sell his/her property or execute a Deed-in-Lieu of foreclosure.”
Lenders aren’t ignoring trend in reverse mortgage lending. “How to Use the Reverse Mortgage to Purchase a Home” is being offered by Plaza Mortgage on Tuesday, February 16 at 11 a.m. Pacific. “Mark Reeve, Plaza’s Reverse Mortgage National Director, will explain everything you need to know to help your customers use a Plaza Reverse Mortgage to purchase a home.”
Certainly many lenders offer the product. For example Sun West’s HECM and underwriting Guidelines are now updated to include clarifications and additional information provided by the HUD webinar with examples of residual income analysis. Guidelines for the Correspondent channel can be accessed here. Guidelines for Wholesale and Hybrid Correspondent channels can be accessed here.
SunWest’s Standard 203(k) Rehabilitation Mortgages require the HUD Consultant to be selected from an approved list that has also been reviewed by Sun West prior to ordering any Consultant services or making any agreements with the Consultant or the borrower.
Sun West has created a summary of changes and a list of frequently asked questions related to the new underwriting guidelines of the new HUD Single Family Housing Policy Handbook 4000.1. Both the summary and the FAQ provide a quick overview of the upcoming changes but are not all-inclusive. Click the link to view this summary.
Turning to capital markets, tongues were still wagging yesterday about Barclays “trimming” its operations in securitized products. The company announced it will stop trading residential loans and GNMA commercial mortgage backed securities. Collateralized mortgage obligations and asset-backed security derivatives will no longer be offered.
We had a “down day” in the fixed-income markets Monday – the Treasury losses resulted the first session of 2016 that all benchmarks closed in the red! Traders thought the back-up was due to a “risk-on” tone with oil/equities rallying – there certainly wasn’t enough pure news to shift the market. And sometimes markets just head the other way! Rates here in the U.S are not being moved by our economic news. They are being moved by China and its mysterious economy & accounting, equities, and oil.
For news today, besides illiquidity due to thinly staffed MBS trading desks to avoid the storm, we’ll have December’s Existing Home Sales and Leading Indicators, both slated for 10AM EST. We closed the 10-year at 2.02% and this morning we’re up at 2.07% with agency MBS prices worse .125-.250.
Jobs and Announcements
As the storm hits the east coast and tests everyone’s disaster recovery systems, there are sure some zany things going on out there, personnel-wise. I guess when you combine a year just ending with a population of people who are weary of the business, or having their entire net worth threatened by regulators, we can expect to see turnover and retirements at plenty of lenders & investors, and even MBS trading desks like Barclays. (Regarding one business channel one industry vet wrote to me saying, “Correspondent is the spigot they turn on and off when the bath tub needs water. As predicted the hedge fund money that poured into the industry will leave as fast as it got here. With dozens of aggregators, however, bidding for loans it’s still a seller’s market.”) It is certainly a good time for solid businesses to be picking up talent!
Speaking of picking up talent, SoFi, a fast-growing mortgage lender based in Northern California, is seeking a “star capital markets / loan sale expert” to help sell pools of loans to asset managers, banks, insurers and other institutional buyers. If you are interested, please email head of mortgage Michael Tannenbaum (415.481.0746).”
On the origination side a well-capitalized national mortgage banker, agency direct seller servicer with large servicing portfolio, based in Southern California is seeking a highly motivated Sales Leader to manage and grow its Consumer Direct Division. Established in 1999, this lender is requiring a minimum of 10 years of consumer direct experience. Interested parties can send confidential resumes to me at email@example.com.
Marketplace Home Mortgage has a new person in its Chief Development Officer position: Greg Ettinger. “He will be a key employee at MHM as he oversees its sales, marketing and business development initiatives.”