I recently was asked to speak at a forward mortgage servicing conference about the role of government in the mortgage market. As I thought about this topic and summarized my thoughts, my outline reflected what most already know: The government currently is the mortgage marketplace. Since the so-called “mortgage meltdown” of 2008, private participants either have left the mortgage industry, gone bankrupt, shut their doors, or, if they still remain in business, are more or less dependent upon the government for funding, product design and offerings, a secondary market, or all three. Moreover, the government (at both the federal and state levels), of course, continues to act as a regulator and an enforcer, and in many instances in a much more aggressive fashion. In short, the role of government in the mortgage market is both pervasive and dominant. What does this mean for the reverse mortgage market in 2012?
I have often said that a reverse mortgage is first and foremost a residential mortgage loan, and the regulatory compliance rules that apply to forward mortgages also apply to reverse mortgages, in addition to the specific federal and state reverse mortgage rules. Likewise, to a great extent, economically it would appear that the reverse mortgage market is, for better or worse, somewhat tied to the fate of the forward mortgage market for now.
With that as a backdrop, we can make some observations about where the reverse mortgage industry may be headed in 2012 and beyond.
Four areas come to mind:
1 Secondary markets and structured finance;
2 Variety of product offerings (or lack thereof);
3 Tighter regulations (particularly in the area of “qualified mortgages” and ability to repay); and
In the area of structured finance, the conventional forward mortgage securitization market currently is a shadow of its pre-2008 self. Opinions differ on what it will take for that market to return, but one view holds that until confidence is restored in the rating agencies, capital will continue to follow government-sponsored housing, insurance and guaranty institutions (the government-sponsored enterprises Fannie Mae and Freddie Mac, the FHA and GNMA). One consequence of this for the reverse mortgage industry today, given the disappearance of proprietary reverse mortgages, and Fannie Mae as a purchaser, is that Ginnie Mae is the primary execution strategy, and there are capital and corresponding accounting requirements that go with being a Ginnie Mae issuer. For 2012, this reality will continue to come into focus and play a significant role in the reverse mortgage industry.
Part of restoring confidence in the rating agencies may depend upon the underlying loans in the pools that the rating agencies review and rate. If the rating agencies are called upon to rate pools with low defaults, over time, perhaps that confidence will return. As the dust cleared and settled a bit from the mortgage meltdown, the most prevalent forward mortgage product offered is the more “plain vanilla” 30-year fixed-rate conforming loan with an 80 percent or less LTV ratio.
Coincidentally (or perhaps not), during this time, proprietary reverse mortgages virtually disappeared from the landscape, Fannie Mae both discontinued the Home Keeper loan and the purchase of HECMs, and the fixed-rate full draw HECM became most prevalent. However, during this time, HECM for Purchase and HECM Saver programs also were introduced. Some nevertheless believe that these two additional HECM products have not achieved their full potential in the reverse mortgage market.
What will it take for proprietary reverse mortgages to make a comeback? Innovation? Restored confidence in the broader secondary credit markets? Gyrations with the FHA-insured HECM (necessity being the mother of invention)? Or will more burdensome and onerous regulations snuff out any such innovation? Alternatively, will statutorily mandated underwriting requirements (think “qualified residential mortgages” in the forward world) further enhance mortgage credits and the pools they form, creating an upward spiral of higher confidence and credit ratings? While some have reported an increased interest in non-HECM “home equity release” programs, evidence of serious committed capital has yet to fully manifest itself. One would hope and expect to see further interest and more committed capital in this area in 2012.
Statutorily (or regulatory) mandated underwriting requirements seem to be headed our way in the FHA HECM world. Some view this with disdain, concerned about the effects on operations and loan volume. Others view it as the next best
and logical step to shore up HECM borrower tax and insurance delinquencies going forward, creating longevity for individual borrowers and providing the industry with overall sustainability.
Other HECM programs exist that could make up some of the perceived lost volume (HECM for Purchase and HECM Saver), but, as discussed above, these programs seem to have been underutilized to date. The nimble (and capital-sufficient) reverse mortgage companies probably will place more focus on these additional products in 2012.
The forward mortgage market has seen challenges in servicing (including the so-called “robo-signing” scandal and its fallout; increased and enhanced loss mitigation requirements from the GSEs, FHA, and Treasury HAMP; and state law “foreclosure moratorium”-related restrictions). With reverse mortgages, servicers continue to grapple with T&I delinquencies and the possibility of related HECM foreclosures. And with the exits of several large banks, overall industry servicing capacity will have to be addressed.
In summary, in 2012, Ginnie Mae issues will continue to be paramount, and the industry will continue to be heavily dependent upon government programs (FHA HECMs) and government partners (FHA and GNMA). While product offerings may not greatly diversify in 2012, a number of new and interesting players are coming into and will look to come into the reverse mortgage industry. And, while industry members may have an opportunity to comment on proposed FHA rules for limited HECM underwriting, some in the industry have already refocused on HECM for Purchase and are looking at new and innovative ways to utilize the HECM Saver. Servicing capacity could be addressed through the entry of one or more new servicers. Private market product alternatives may not blossom in 2012, but the seeds have been planted and sporadic sprouts will be seen.