Housing experts and reverse mortgage professionals testified before members of Congress last month in an oversight hearing established to examine the health and future of the FHA’s HECM program.
Speaking before members of the Subcommittee on Insurance, Housing and Community Opportunity, eight strategically appointed panel members from various sectors of the industry presented their views on HECMs, as well as concerns about the state of the program and recommendations for its improvement. Specifically, panelists were asked to address the mechanics of the program; its administration; issues affecting stakeholders; benefits to borrowers; the program’s safety, soundness, and sustainability; and the risk HECM brings to FHA solvency.
Among those who testified were counseling representatives, including Daniel Fenton of Money Management International and Barbara Stucki of the National Council on Aging; AARP Policy Advisor Lori Trawinski; NRMLA President Peter Bell; CIS Chairman Jeffrey Lewis; HUD Deputy Assistant Secretary Charles Coulter; and two housing industry experts, New York Law School’s Houman Shadab and George Mason University’s Anthony Sanders.
The hearing was especially pivotal as it preceded a much-anticipated CFPB hearing scheduled this fall, which will examine the results of the CFPB’s HECM study that is slated for release in August. Some participants saw this as an opportunity to publicly tackle any looming questions thoroughly before the CFPB finalizes its findings.
At the hearing, most panelists spoke about the positive impact of the HECM program and the need for continued government support. Many, including the representatives from AARP and HUD, encouraged Congress to lift the cap on the number of FHA-insured loans to allow the program to reach its full potential. All of the panelists agreed that the need for HECMs will no doubt increase as more and more baby boomers reach the qualifying age of 62.
But not all of the testimony was positive. Dr. Sanders said that, while he has no objections to the HECM as a means to abstract equity, he does not think the program should be federally insured and subsidized. Professor Shadoub expressed similar sentiments, recognizing the value of the product but encouraging Congress to relinquish the program to the private sector.
Several panelists also raised concerns about the effectiveness of the program’s mandatory counseling. AARP’s Trawinski urged Congress to revisit the counseling requirements to ensure that the current guidelines were adequate, and Congressman Luis Gutierrez (D-IL) suggested that perhaps the Government Office of Accountability should reassess the idea of face-to-face counseling.
NRMLA President Peter Bell expressed concern over this suggestion. Speaking before attendees at the NRMLA Western Regional Conference in the week following the hearing, Bell said the idea of face-to-face counseling was a troublesome one that will need to be disputed. “This is an issue that we will be dealing with and educating people on in the months and years ahead,” Bell said.
Opinions on the results of the oversight hearing were mostly positive. CIS Executive Director H. West Richards said he felt it was a success. “Our mission was to raise awareness of the program on Capitol Hill and to stress how vital it is to seniors seeking financial independence,” Richards said. “The feedback on the hearing from top subcommittee staff was
CIS lobbyist Tom Worrall also called the hearing a success. Worrall said that, although educating policymakers is an ongoing process, the hearing “will go a long way to advance the industry’s interests within this congressional committee and on Capitol Hill.”
Bell said at the NRMLA conference that although many of the participants expressed outright support for the program, it’s hard to determine what kind of impact the hearing will have. “Where are we now that we had this hearing? What’s next? It’s hard to say,” Bell said. “The budget battles are fierce and deep.”
Deputy assistant secretary for single-family programs
Federal Housing Authority
-Supports the removal of the HECM cap
-Views the product as vital
-Sees vast potential for growth
-Predicts that HUD will properly address risk to ensure sustainability
In the President‘s FY 2013 Budget, HUD proposes to permanently eliminate the statutory cap on the number of HECM loans that can be endorsed for FHA insurance. Removing this cap, which is a remnant of the original demonstration project, along with the securitization of HECM loans through Ginnie Mae, will ensure that HUD continues to contribute to meeting the needs of seniors…
The requirement that consumers receive mandatory counseling from a HUD-approved counselor is perhaps the most important consumer protection feature of the HECM program. This safeguard is especially important because the counseling assists the borrower in understanding the HECM loan product and provides in-depth information to help seniors make informed decisions.
Although FHA has experienced a decline in the number of HECMs insured since its peak of 115,000 endorsements in 2009, the demand potential for HECM going forward remains significant… HUD continues to see this as a vital and important program for seniors.
Although some major players have left the HECM market for varying reasons, there is tremendous need and opportunity for the HECM product. We believe that as the market stabilizes and HUD is able to complete policy and process guidance, this will address risk issues to ensure sustainability of the program and address uncertainty issues for originators and servicers.
Peter H. Bell
President and CEO
-Views the HECM Saver and other varied products as key for growth
-Supports the removal of the HECM cap
-Requests reverse-specific disclosure documents
-Highlights notable consumer satisfaction
NRMLA urges the members of this subcommittee to support the continued availability of HECM by permanently removing the cap on the number of HECMs that FHA may insure to minimize any possible disruption in the availability of this important, personal financial management tool.
We are requesting [the CFPB] create a definition of a qualified mortgage… to assure that reverse mortgages, other than FHA-insured HECMs, have an opportunity to qualify for an exemption from the risk retention requirements. We believe it is healthy for the reverse mortgage industry to be able to offer a range of product options, including proprietary (non-FHA-insured) reverse mortgages, in addition to HECMs. Having a specific definition of a “QM” for reverse mortgages will help facilitate the return of a conventional market with proprietary products.
NRMLA fully supports the revision of mortgage disclosures as required by the Dodd-Frank Act. However, we believe it is imperative that a disclosure for reverse mortgages be developed independently of the effort on forward mortgages and that a format devised explicitly for reverse mortgages be utilized.
Money Management International
-Calls counseling mandate a critical safeguard
-Concerned about the consumer’s ability to afford counseling
-Recommends that a blind trust be established to fund counseling
Chief among [the challenges] is agencies’ ability to provide services to seniors who are unable to pay for their own counseling sessions when government funding is not adequate to meet demand… We believe that in an effort to maintain the independence of counseling agencies, Congress may have inadvertently created a funding model that actually undermines the ability of counseling agencies to meet seniors’ needs as effectively as possible…
Counseling agencies may also charge a fee as part of closing costs, removing the need for an up-front payment; however, this creates a financial model where independent HUD-approved counseling organizations are paid on a per-loan-closed basis and not a per-counseling-session basis. We believe this situation is less than ideal because specific agencies can become dependent on loan volumes related to specific lenders for their financial survival.
We urge that members of the subcommittee continue the dialogue on developing a sustainable model for funding for reverse mortgage counseling… One alternative that we suggest… is amending [the Housing and Economic Recovery Act of 2008] to allow the establishment of a blind trust that will compensate counseling agencies on a per-client-counseled basis, irrespective of whether the client enters into a reverse mortgage. The trust could be funded by a standardized closing cost on all reverse mortgages and contributions from the reverse mortgage industry and government as needed.
Jeffrey M. Lewis
CEO, Generation Mortgage Company
Chairman, Coalition for Independent Seniors (CIS)
-Supports government involvement in the HECM market
-Notes that big banks did not depart because of concerns about product quality
-Says action is being taken to address T&I issue
-Sees the HECM Saver as key for growth
The HECM is an example of the best kind of government program: a program that utilizes the reach and financial heft of the government to leverage private-sector involvement, pays for itself, is run largely by the private sector and provides a life-transforming financial product for consumers…
We expect to see modifications to the program itself that would allow originators to mandate monthly escrow payments for tax and insurance or to set aside some portion of the proceeds as a contingency fund, should the borrower struggle to keep up with his obligations. These changes will protect consumers, as well as the FHA insurance fund going forward.
Congress may want to consider changes to the statute that would allow financial professionals to offer comprehensive financial planning to clients—including HECMs—in a manner that ensures full disclosure and continues to fully protect consumers from fraudulent and unethical practices.
Dr. Anthony Sanders
Distinguished professor of real estate finance, senior scholar
George Mason University
-Does not believe the government should insure or subsidize the product
-Says government is micromanaging homeownership decisions
-Wary of the program’s cost to taxpayers
FHA insurance for HECMs protects the lender rather than the borrower. In the event that the amount owed by the borrower exceeds the value of the property, the loss to the lender will be covered by FHA. But under the reverse mortgage program, any payments due the borrower are also protected. HUD has a legal obligation to make such payments in the event that the lender does not. So HUD is “on the hook” for negative equity in a home (as well as defaults due to failure to pay property taxes and maintain property insurance).
The costs to taxpayers are the losses absorbed by HUD for the housing price shortfall, default and support. As our population ages and reverse mortgages become more common, we have to be careful about projected losses to taxpayers from yet another housing subsidy program.
I am not against reverse mortgages as an equity extraction tool. But I do not see any reason for the federal government to guarantee and subsidize it. And we need to stop micromanaging the homeownership decisions for American households.
A reverse mortgage for seniors is a reasonable idea, but should not be guaranteed by the federal government. It is an ownership decision and the federal government must stop trying to micromanage this decision, particularly since there is an easy alternative that does not require government guarantees.
Associate professor of law
New York Law School
-Believes the HECM product could be sustainable without FHA insurance
-Thinks Congress should reduce loan amounts
-Fears that taxpayer funds will be used to subsidize risks taken by financial institutions
Conventional reverse mortgages will likely increase in market share as the economy recovers, housing prices stabilize and credit conditions improve. Currently, the most important obstacles to the development of private reverse mortgages seem to be continued uncertainties regarding housing prices and the willingness of lenders, insurers and investors to assume housing price risk.
The relatively small market share of conventional reverse mortgages is likely due in large part to the inability of conventional reverse mortgages to compete with HECM loans. In other words, FHA insurance of reverse mortgages may be “crowding out” private market participation. Two separate studies by Fannie Mae economists found that FHA provision of insurance in forward mortgage markets to some extent crowds out private insurance. Although I am unaware of any studies of crowding out in the reverse mortgage market, these findings indicate that crowding out likely takes place in the reverse mortgage market as well.
Although conventional reverse mortgages have higher interest rates than HECM loans, there is good reason to believe that interest rates for such loans would likely decline over time due to the competition that would accompany a growing conventional reverse mortgage market. In addition, securitization of conventional reverse mortgages would also likely cause borrowing costs to decrease.
Dr. Barbara R. Stucki
Vice president of home equity initiatives
National Council on Aging (NCOA)
-Suggests Congress fund HECM counseling
-Warns that HUD regulations could cause problems by being overly restrictive
-Supports the effort to enhance consumer education
-Sees the HECM product as innovative, essential
The issue for many low-to moderate income seniors today is not whether to tap [into home equity], but when and how. NCOA believes that the HECM program serves a unique and important role in meeting these emerging needs.
We recommend [that Congress] adequately fund HECM counseling, so seniors can understand their options and the financial implications of these loans. It is a hardship for many lower-income homeowners to pay for counseling upfront. Charging fees for this counseling also discourages seniors from getting unbiased information from a HUD-approved counselor before they talk to a lender.
[We recommend that Congress] ensure that HUD regulations, such as the financial assessments lenders may conduct at origination, are not allowed to become overly restrictive to ensure that the HECM program remains a viable option for “cash poor” seniors… Seniors with modest incomes who do not qualify for conventional home loans may have few alternatives besides a HECM to tap home equity.
[We recommend that Congress] support and strengthen consumer education to ensure that older homeowners make informed decisions about the most appropriate use of their “nest egg” of home equity. Younger borrowers would especially benefit from working more closely with financial advisors, senior advocates, housing specialists and other experts.
[We] encourage HUD to continue using the HECM program as a platform to foster innovation through collaborative efforts with the mortgage industry, housing programs and aging services community. There is an urgent need to break down service silos and address problems holistically to promote consumer confidence in these loans and sustain them in their homes.
Dr. Lori A. Trawinski
Senior strategic policy advisor, consumer and state affairs team
AARP Public Policy Institute
-Thinks Congress should fully fund HECM counseling
-Supports the removal of the HECM cap
-Believes that seniors should have access to their home equity
-Sees government insurance as essential to consumer confidence
Proprietary loans have not been made within the range of home values served by HECM program, nor are they likely to be. Consumers seek the safety of the government guarantee, particularly in the case of reverse mortgages.
The HECM housing counseling program should be fully funded by Congress, particularly since HECM housing counseling is required by law and lenders are prohibited from paying for counseling on behalf of borrowers.
AARP understands the need to examine a borrower’s financial ability to pay property taxes, homeowners insurance, homeowners association dues and assessments, and to be able to maintain the property. However, we do not believe that credit scores, payment history or the existence of a bankruptcy filing or foreclosure should be part of the financial assessment. Rather, the determination should be whether borrowers have the ability to meet their basic living expenses, financial obligations and property charges, and this should be determined after taking the cash flow from the potential reverse mortgage into consideration.
To guarantee continuity of the HECM program, AARP supports legislation that would remove the statutory limit on the number of loans that can be insured by HUD in a given year… Lifting the statutory loan limit would be helpful in encouraging lenders to offer reverse mortgages and remain committed to this market.
AARP continues to believe that older Americans should have a means by which to access their home equity without having to sell their homes or take out a home equity loan, and that a reverse mortgage can be an appropriate financial product for some people.