In Greek mythology, Hera is known as the wife and sister of Zeus, the goddess of women and marriage. HERA, in the world of reverse mortgages, however, was written into law on July 30, 2008, as the passing of the Housing and Economic Recovery Act. The summer of 2008 was a turbulent time for mortgages, home values and the global economy overall, with the world on the cusp of a major economic correction.
HERA was the beginning of a tremendous amount of regulation in the mortgage business, with a great deal of it pertaining to the Federal Housing Administration, and more specifically the HECM reverse mortgage product. Each change, beginning with the HERA regulations and ending, for now, with the Federal Reserve Board’s rule on compensation set for April 1, 2011, has forced mortgage originators to adapt.
To see what regulatory hurdles lie ahead for the mortgage originator, one must review the past. And while reviewing the recent history of regulation, it helps to remember the words of Alexis de Tocqueville, who once remarked, “Events can move from the impossible to the inevitable without ever stopping at the probably.”
Thus begins our love story between regulators and originators, opening in the summer of 2008…
(Author’s note: I am not an attorney and many of the rules and dates have been abbreviated or perhaps even paraphrased incorrectly, both to keep the reader’s attention with brevity of explanation, and because of my general ignorance. Enjoy.)
ACT 1 – The First Date (2008)
HERA was signed into law on July 30, 2008, and was composed of several acts, all meant to bolster the flagging housing market, find a solution for Fannie Mae and Freddie Mac, and protect consumers and homeowners. As a reverse mortgage originator, the piece I remember most was the FHA Modernization Act. This act, among other things, allowed for an increase of FHA HECM limits to $417,000 on a nationwide basis beginning November 2008. There would be no more querying the FHA limit website for the lending limit in an obscure county, and more importantly, the overall maximum lending limit for HECMs had been increased by more than $50,000. We were in love!
But HERA is also known as a jealous and vengeful goddess, she brought with her the MDIA and the SAFE Act. The MDIA and the SAFE Act, with most parts implemented in 2009 and 2010 respectively, were far away, little noticed, and of no concern to the general mortgage originator in 2008. ACT 2 – Marriage and the First Fight (2009)
The American Recovery and Reinvestment Act of 2009, or ARRA, was signed into law on February 17, 2009, a meaningless acronym on an innocuous date. The ARRA changed the HECM national mortgage limit from $417,000 to $625,500, an increase of 50 percent. This was a great moment for the legions of reverse mortgage originators, as it ushered in a wave of new and refinance business. Originators contacted applicants that formerly could not be helped, as well as those that refused the smaller HECM reverse mortgages. The reverse mortgage business was booming.
However, while the reverse mortgage side of the industry was doing well, thunderclouds were gathering ahead for the overall mortgage industry. Now Governor Andrew Cuomo, the same Andrew Cuomo many of us remembered from his days as HUD Secretary, had stepped back into the housing ring, this time as Attorney General of New York. In order to cease an investigation into their practices by Mr. Cuomo’s office, Fannie Mae and Freddie Mac agreed to the Home Valuation Code of Conduct, or HVCC. In short, it said that an originator could no longer order an appraisal directly from an appraiser. This seemed like a good way to create appraiser independence, but carried with it a host of issues, most notably an increase in cost for the consumer. Thunderclouds indeed, but not affecting FHA and the reverse mortgages they insured just yet…
One year to the day after the passing of HERA, the Mortgage Disclosure Improvement Act, or MDIA, was finally implemented. Soon after implementation, the acronym MDIA began to be pronounced “Medea,” most assuredly after Medea, the wife of Jason and the Argonauts. The tales of Medea are known to be confusing and disparate, much like the similarly pronounced act, however most tales have Medea murdering someone over some disclosure of information. Here we have our second act passing with the best of regulatory intentions but a number of unintended consequences that would eventually affect the consumer. Many would agree that some parts were good, such as requiring redisclosure when the deal changes by a certain threshold; and others were not so good, like mandatory wait times of several days and rules about acceptance of documents through mail, fax, email and courier delivery. The love affair was not over, but the cracks were spreading in the foundation of the relationship.
September 30, 2009, was probably the busiest day in reverse mortgage history. After moving the HECM insurance fund in with the FHA fund, and due to horrific home value losses, it was determined by HUD that the previously subsidy negative (federal-speak for profitable) HECM program now was subsidy positive (federal-speak for broke). Approximately 10 days earlier, it was made clear that HUD intended to cut principal limits for new, unlogged applications as of October 1, 2009, by 10 percent across the board. This was a change that had to happen to preserve the program, but it was a major blow to consumers who saw the lending proceeds severely decrease with no accompanying decrease in rate or fees. Later, in the first quarter of 2010, originators saw the deleterious effects of this policy change, as new reverse mortgage applications fell by as much as 40 percent (many have postulated that falling home prices made up quite a bit of this drop in volume, however it is difficult to argue that the drop in principal limits didn’t cause much of this downturn).
ACT 3 – The Honeymoon is Definitely Over (2010)
This act begins with significant changes taking hold on January 1, 2010, with HUD, via RESPA, making sweeping changes to the Good Faith Estimate, or GFE. Now an official form was created, intending to show the consumer the exact details of their loan, its rate, features and costs. The new GFE, while welcomed by some, had two obvious fatal flaws. First, calculation of origination charge is often impossible to read correctly, even by an experienced originator. Added to this was a rule saying a bank or lender (and even if you’re not the lender, provided you can table fund) doesn’t have to disclose the origination charge. Second, the document was created with no signature line! Shady originators rejoice! Nice originators finish last. This new GFE at the time was seen as a potential watershed moment for mortgage originators, however after a few months it just became one more regulation to follow.
2010 also saw the brunt of the work for the SAFE Act, though part of HERA in 2008 (remember her?), had a multiyear, staggered implementation. The SAFE Act called for all non-bank mortgage originators to be licensed through a national database, known as the Nationwide Mortgage Licensing System. While this system has great utility for consumers and even some positive features for originators, it caused a massive increase in licensing fees for everyone in our industry, except bank employees. Many would agree that the SAFE Act and creation of the NMLS was a good thing overall, but again costs increased and again the banks were able to avoid a significant part of the cost and regulation.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21, 2010. Returning to the Greek mythology analogy, if HERA were Hera, then surely this would be Zeus, the mightiest of Olympians. As the implementation of most aspects of “Zeus” will not occur until after the publishing of this article, it is still largely unknown how it will affect the regulatory environment. One pertinent piece of it is the Mortgage Reform and Anti-Predatory Lending Act, which contains future regulatory hurdles such as another round of the loan originator compensation reform, rules on high cost mortgages, HVCC revisions (sorry, Governor Cuomo), and loan modification regulations. Dodd-Frank is still hotly debated, especially regarding the creation of the Bureau of Consumer Financial Protection and the lack of “too big to fail” legislation. However, many are no doubt wondering how anything in this bill could possibly fail if authored by Senator Christopher Dodd and Congressman Barney Frank…
Also in 2010, additional rules were passed or proposed and pending implementation, at the time of this article’s publishing, including changes to Regulation Z to be briefly addressed below, FTC Rulemaking regarding mortgage advertising, and numerous state-specific regulations.
FHA mortgages saw some new specific regulations in 2010 as well, as a previously released FHA Mortgagee Letter regarding condominium financing was implemented after several delays. On February 1, the “spot condo” approval process was eliminated, replaced with the requirement that any condominium must have the entire project approved in order to be eligible for FHA financing. Condominium financing, already struggling, was dealt a vicious blow.
Fourteen days later FHA implemented its own form of the HVCC, which basically required brokers and lenders to order appraisals through appraisal management companies. This was another regulation with the best intentions but some unintended consequences for the consumer, as appraisal prices increased and the quality of appraisals began to differ.
On September 11, FHA implemented the new HECM Counseling protocols, designed to help borrowers and improve the counseling. As with every previous counseling change, the industry groaned as the counseling system, which as usual was not broken, was fixed yet again.
Faced with another budget shortfall and subsidy request, FHA made four additional reverse mortgage changes effective October 4, 2010. First, the HECM Saver was introduced with lower fees and a lower principal limit to drive safer growth and offset losses. Second, the principal limits were reduced for all borrowers but with heavier effects on the older seniors. Third, the monthly FHA Mortgage Insurance Premium was increased from 0.5 percent to 1.25 percent. And in a complete surprise to the industry, FHA lowered the HECM factor floor from 5.5 percent to 5.0 percent, meaning that at the current low rates, customers would feel less MIP impact and could actually benefit from the principal limit changes. Very Promethean indeed, although disturbing to the gods of the secondary market.
As 2010 came to a close, brokers and smaller lenders were given one final parting shot, the Implementation of Final Rule FR 5356-F-02, know as FHA Reform…
ACT 4 – YOU DID WHAT??? – No, Seriously, What Did You Do? (1/1/2011 – 3/31/2011) Most of the FHA reform was implemented January 1, 2011. One rule that came with it was that it took away the FHA “mini-Eagle,” meaning that brokers were stripped of their FHA licenses, supposedly a way to increase oversight of FHA originators. The rule renames the brokers Third-Party Originators, or TPOs, and puts them under the supervision of the lenders. The accepted reasoning is that FHA was too thinly staffed to monitor all of the licensed brokers, however it seems odd that oversight was increased by no longer overseeing. Many in the broker community thought this could be the end of the broker, only to find this rule, like the GFE a year before, was just one more hurdle that was cleared fairly quickly.
All of this history takes us to the next regulatory hurdle, the Loan Originator Compensation Final Rule by the Federal Reserve Board. As of publication, this rule is fittingly set to be implemented on April Fool’s Day, 2011, the perfect date for such a confusing rule. Many believe that this rule is the biggest game-changer yet; the rule that will turn the entire mortgage originator world upside down. It is meant to be an easy, simple way to prevent mortgage originators from pushing products that aren’t in the best interest of the consumer. Now that most risky mortgage products (I swore I wouldn’t write the word “subprime.” Oops…) are no longer offered and basically eliminated entirely, many have remarked that this is like trying to close the barn door after the cows have already left.
The basis of the rule, and please remember that your author is no attorney, is that for fixed-rate loans (of course more risky adjustable rate mortgages aren’t included), loan originators and brokers cannot be compensated based on loan terms, including rate, aside from the size of the loan.
Additionally, compensation cannot be paid to a broker if the borrower is compensating the broker as well. The fact is, at time of this publication, no one really knows for sure what this exactly means, except that rate sheets, originator compensation plans and even business plans are already being altered. What we do know for sure comes from H.L. Mencken, who once said, “There is always an easy solution to every human problem – neat, plausible, and wrong.”
Due to this rule, some banks are dropping wholesale programs and restructuring their loan originators to work more on a salary basis. Every lender has a different idea on how to compensate brokers and their loan officers. Lenders are approaching brokers and individual mortgage originators to join them as branches in their regular retail operations. And some brokers are joining with lenders, while others are staying put to see how the dust settles.
Amid all this chaos, and looking back to all of the previous game-changing events, many cannot help but see the possibility that this rule, like the others, could just be much ado about nothing. This author looks forward to reading this paragraph after the rule’s implementation and laughing, either at the madness of the current environment, or himself.
ACT 5 – The Future (4/2/2011 and Beyond)
What will the future hold for the love between the mortgage regulator and reverse mortgage originator? Will the heavy pendulum of regulations swing back and loosen things up? No one can answer these questions, however a few things are for certain: Reverse mortgage originators will be there to cheer the victories, quietly lament the defeats, and do our best to care for our customers. And like almost every regulation since our beloved HERA, the new regulations will increase the cost of mortgage financing for our dear customers.
Cheers to the survivors of this torrid affair!