With more than 10,000 American baby boomers reaching retirement each day, it is more important than ever to preserve and develop alternative methods of financing retirement and the unexpected costs that materialize late in life.For seniors trying to find the right balance of financial resources for their retirement years, having more options to consider is better than fewer, and the reverse mortgage industry is planning for that reality. The good news for those seniors is that the industry is battling to preserve as many financial tools as possible, including HECMs.
There is no question that 2011 was a very busy year for the reverse mortgage industry. The political upheaval and social unrest of the 1960s led rock-n-roll legend Bob Dylan to croon, “The times, they are a-changin’.” For the reverse mortgage industry, 2011 felt a little like 1969 all over again.
In 2011, two of the industry’s leading lenders announced that they would depart from the reverse mortgage market. Bank of America and Wells Fargo have discontinued their reverse mortgage products and ceased sales. The news heard industrywide raised many questions about the future of reverse mortgages, but the long-term impact has yet to be measured.
Wells Fargo exited after failing to resolve a dispute with federal regulators over how to address delinquent borrowers. Bank of America cited “competing demands” when it announced its departure from the market in August. At the time, Bank of America held 9.4 percent of the retail market and 18.3 percent of the wholesale market for reverse mortgages, and employed 600 people in its reverse mortgage division.
For sure, many of the other industry lenders looked at the departure of these mega-banks as a market opportunity, with more market share available to pursue and secure. There are other lenders “still here … to pick up the slack and keep the product going,” Generation Mortgage CEO Jeff Lewis told the media last summer.
Indeed, according to Reverse Mortgage Insight’s (RMI) November 2011 newsletter, reverse mortgage lenders have already picked up some of the market share in the wake of Wells Fargo’s departure in November. RMI’s analysis showed reverse mortgage endorsements holding steady against October after a double-digit drop in volume. RMI’s data showed 4,654 HECM endorsements in November, one more than in October.
Even as the corporate DNA of the industry is transforming, the regulatory and oversight environment presented a number of challenges to the industry that will likely continue into 2012 and beyond. Everything -- fluctuations in federal lending limits, threats to housing counseling programs, retirements of key industry leaders on Capitol Hill, the sluggish economy -- has given industry leaders plenty to work on in 2011 and even more to plan for in 2012.
Representative Barney Frank, the top democrat on the House of Representatives Committee on Financial Services, has always demonstrated an understanding of the reverse mortgage industry and the benefits the product can provide to consumers. In December, he announced his retirement from Congress, sending shockwaves throughout the financial services industry and the reverse mortgage industry. The full impact of his departure won’t be measured until he’s left office in January 2013, but lenders will sorely miss a friendly voice in Congress.
Industry leaders praised Frank for his understanding of the complex reverse mortgage markets. “From the standpoint of the reverse mortgage industry, we are losing an influential member of Congress who is perhaps the single most knowledgeable individual on Capitol Hill when it comes to reverse mortgage issues. Congressman Frank took the time to learn our topic (as he typically has done with most topics that have come under his jurisdiction) and has been helpful to us on many occasions over the years, both in achieving our legislative objectives and in getting other members of his committee to be supportive on matters concerning us,” said the National Reverse Mortgage Lenders Association said in a statement.
Counseling on Counseling
In one of the few bills that actually made it all the way through Congress and was signed by the president, there was a provision for providing funding for housing counseling administered by the Federal Housing Authority. The Senate’s Transportation, Housing, Urban Development (THUD) appropriations bill restored funds for housing counseling that had been zeroed out by the House of Representatives’ version of the bill.
Last year, FHA had $88 million to counsel Americans on their forward mortgages to avoid foreclosure and to meet the mandated housing counseling requirement for federally backed HECM loans. The counseling funding levels were in flux throughout the legislative process, but the U.S. Senate succeeded in restoring some of these funds – approximately $44 million – with $4 million devoted to reverse mortgage counseling. Industry representatives in Washington, D.C., had been working with key senators like Washington state’s Patty Murray, the chairperson of the Senate THUD Appropriations Subcommittee to restore those critical funds.
Those funds are important to consumers. Had the federal funding disappeared, the cost for counseling likely would have been passed on to the consumer.
“It could have been essentially a tax on borrowers, forcing them to cover the costs of mandated counseling for the loans they were researching. You have to pay the counseling costs whether you secure the loan or not, a significant expense to borrowers on fixed incomes,’ said H. West Richards, Executive Director of the Coalition for Independent Seniors (CIS), one of the groups lobbying for the restoration of the counseling funds.
In October, top regulators at the Federal Housing Authority issued a cryptic warning regarding the future of the FHA Home Equity Conversion Mortgage (HECM) program. Acting FHA Commissioner Carol Galante released a letter that indicated federal regulators were taking steps to head off an increase in the delinquency rates among HECM loan holders. While the industry provides an “important financial option for senior homeowners,” she wrote, the program had essentially been unchanged for 20 years and the time had come to review its performance
Citing the “distressed economy and housing market conditions,” Galante outlined a series of adjustments to the “sustainability” of the HECM program designed to shore up the Mutual Mortgage Insurance Fund, including the introduction of the HECM Saver product, the reduction of “principle limit factors,” and new guidance on handling property liability-related delinquencies.
The meat of the letter, and the language that has set off speculation and consternation among industry insiders, touched on additional financial assessments for potential borrowers – to ensure their ability to sustain the loans and related costs like taxes and insurance payments. The HECM program doesn’t require credit checks or financial assessment of borrowers because the loans are based on the value of the property and not other financial factors.
“HUD does not prohibit the inclusion of additional financial capacity and credit assessment criteria and processes in the origination and approval of HECM transactions,” Galante wrote. HUD, it appeared, was throwing open the door to financial assessment of HECM borrowers for the first time.
Galante has been acting FHA commissioner since July 2011. President Obama formally nominated her to head the agency in October, and the Senate Banking Committee has approved her nomination. But Senate Republicans are blocking her nomination due to a dispute over reforming mortgage giants Fannie Mae and Freddie Mac.
The industry looked at Galante’s letter and asked what it meant. Analysts found it unusual for a federal regulator or oversight agency to raise the issue of a new financial assessment function without providing industrywide guidance on how to structure, implement and reconcile the new qualifying requirement. Other than caution to carefully abide by fair housing and fair lending laws, FHA was leaving lenders to figure it out for themselves.
The letter sparked weeks of lobbying, hour of meetings and lots of speculation about how new financial assessment tools would be developed and implemented. It even sparked the creation of the reverse mortgage industry’s own “supercommittee,” a panel of lenders brought together to examine the issue and develop recommendations and standards for financial assessment procedures.
Getting in front of the pack, in November MetLife indicated their reverse mortgage division would begin to utilize financial assessment in securing reverse mortgages. Their approach didn’t sit well with others in the industry.
MetLife’s plan focuses on three elements: residual cash flow, credit history and principal limit usage (PLU) to determine a borrower’s ability to meet loan obligations. Using tax returns, credit checks, mortgage history and other financial information, MetLife will screen potential borrowers before awarding a loan. The plan allows for some flexibility in the approval process, awarding borrowers for strong showings in one area to make up for shortfalls in other areas of assessment.
MetLife’s one-size-fits-all approach didn’t address the needs of other lenders. Many believed that industry standards should be identified, but with plenty of flexibility to allow lenders with different market demographics and business models to develop financial assessment parameters that would help them better serve their client base.
“Some of our lenders were hoping for a different approach,” said Richards.
But other lenders aren’t rushing to implement their own financial assessment programs before receiving more direction from federal regulators. Many industry representatives have pushed FHA and HUD to provide some certainty about elements of financial assessment programs so that lenders can approach the matter efficiently.
“This is like playing football without a game plan,” said one industry lobbyist who requested anonymity in order to avoid antagonizing regulators at FHA. “You can’t just draw up plays in the huddle and expect everyone to stick to the plan. FHA is just handing over the football and waiting to see what happens.”
While the financial assessment matter is yet to be resolved industrywide, potential borrowers in 2012 can expect to endure some sort of financial assessment before securing a reverse mortgage on their property. Most likely, with financial assessment requirements in place, fewer potential borrowers will qualify for HECM loans, adding more uncertainty to the reverse mortgage equation.
Loan Limits Stay the Same
For borrowers and lenders, FHA’s evolving policy on HECM loan limits has provided uncertainty and instability in the market. At stake is how much a borrower can borrow against their home and the ability of lenders to provide consistent levels of service, especially in high-cost housing markets.
In December, FHA announced that the current lending limit of $625,500 had been extended through 2012. Earlier in the fall, Congress approved a proposal to lift the limit to $729,750. Before the FHA announcement, lenders and borrowers worried that lending limits would revert back to $417,000, severely limiting the accessible capital equity and making the product less enticing for potential borrowers. FHA’s announcement allows another year for the $625,500 loan limit but doesn’t provide long-term certainty some would prefer.
Another Agency With Oversights Set on the Reverse Mortgage Industry
Part of the sweeping financial reform legislation enacted in the wake of the financial services industry meltdown created a consumer-oriented oversight panel known as the Consumer Financial Protection Bureau (CFPB). In October the CFPB launched the Office of Older Americans, an agency dedicated to examining financial products marketed toward older Americans as well as those who advise seniors about these products.
The agency’s director, former AARP national board member Skip Humphrey, has identified health care and housing products, including reverse mortgages, as areas of interest.
With the reverse mortgage industry enjoying high levels of customer satisfaction, oversight from the CFPB could present an opportunity to break down the stereotypes about reverse mortgages. The CFPB is designed to weed out the bad actors and, in turn, could provide the data that demonstrates the high levels of satisfaction consumers enjoy from their reverse mortgages.
The CFPB is still a loose end. The first nominee to head the agency was successfully blocked by the U.S. Senate. The current nominee suffered a setback in December when a Senate vote failed to advance his nomination. The agency’s purview over reverse mortgages is still undeveloped, but depending on who eventually heads the CFPB, the industry could face more scrutiny in 2012.
Reverse for the Future
Even with the challenges of the economy and the uncertainty of the federal regulatory landscape, reverse mortgages have a bright future.
The American population is aging quickly, and presents a solid path for growth for reverse mortgage lenders. Beginning in 2011, more than 10,000 Americans, the baby boomers, turned 65 years old each day and that rate will hold for nearly 20 years. More than 35 percent of Americans already 65 or older live on Social Security alone. Federal budgets are shrinking and Social Security and Medicare reform could change the way those programs work in the future.
“Industry leaders fighting to preserve the HECM program realize the potential market opportunity the wave of retirements represents to the reverse mortgage industry. As the population grows older, more Americans will qualify for reverse mortgages, and with other benefits and retirement funds shrinking, tapping into equity wealth can be a lifeline for families paying for college, meeting a medical expense, paying their taxes and supporting retirement,” said Bob Yeary, Chairman of RMS, who also serves as the Board Secretary of CIS.
Still, significant challenges face the industry. Recently released data from HUD calculates that 46,000 borrowers are in some form of delinquency on their reverse mortgages. HUD’s hope is that by opening the door to financial assessment, they can close the door on increased delinquency.
“This could be a great time to be a reverse mortgage lender, with an expanding pool of borrowers, favorable economic factors and better products and services to offer,” said Richards of CIS. “Let’s hope that Congress doesn’t upend the program and take an important financial tool away from America’s seniors at a time when they need as many options as they can find.”
Ultimately, the HECM program exists to give seniors another financial tool to meet their unexpected and often expensive late-in-life expenditures. The program offers thousands of older Americans the ability to age in place and live in their homes longer, while maintaining their financial independence. Congress and the administration can, and will, tinker with elements of the program, but its value to seniors is well documented and its record of success is worth preserving in 2012 and beyond.