ReverseSecondary

Originating: How Do We Fix the Reverse Mortgage Industry?

Written by Carl Rojas, as originally published in The Reverse Review.

Yes, I said it. Fix it. I know, I know. That implies it is broken, and that is exactly my assertion: The industry is broken and in need of significant change. If this industry is going to have the scale to fund the accessing of trillions of dollars of seniors’ home equity (that’s right, trillions), we’ve got to analyze, assess and remediate the identified shortcomings.

Since the HECM was introduced more than 20 years ago, it has remained relatively unchanged. Certainly there have been adjustments and tweaks, but nothing that one could call a dramatic overhaul. If we’re all in it for the long haul, and I assume we are, why not begin the substantive change that will enable all of us to participate in the meaningful evolution of this industry? Let’s change it into an industry that is a leader in available capital, liquidity, compliance, ethics and reputation.

Liquidity, Liquidity, Liquidity Lack of liquidity will bring this industry to a screeching halt. We need to solve the industry’s back end, the HMBS-servicing liquidity needs, which are driven by Ginnie Mae’s requirement that issuers purchase a loan from the HMBS pool when the loan reaches 98 percent of its maximum claim amount (MCA). This is one of the most overlooked issuer requirements of Ginnie Mae’s HMBS program. The issuer, who in many cases is also the servicer, is a financier for Ginnie Mae, since it is required to advance the funds for the purchase of the loan from the HMBS pool. Think about that. If one issues $1 billion of Ginnie Mae HMBS, over the ensuing five to six years (the current estimated life of Ginnie Mae HMBS), that same issuer will finance a good portion of the $1 billion series of purchase events for Ginnie Mae. Gulp. Houston, we have a problem. As one continues to issue, the problem only snowballs. The issuer is placed in a position in which it can’t generate enough current earnings to meet and finance its 98 percent purchase obligations. What is even more amazing is that for all the hard work that Ginnie Mae does for the mortgage industry and for determining who should be and will be an issuer, this financing role is never fully addressed. The establishment of back-end financing for the 98 percent purchase event is currently not a requirement. This has to be rectified immediately.

Unintentionally, the issuer acting as financier for GNMA has another negative implication, as the Securities and Exchange Commission “informally” pointed out late last year. The SEC has apparently asserted that because issuers act as a financier for Ginnie Mae (i.e., there really is no true sale), we have too large a remaining role (in the eyes of the SEC) to establish that there has been, in fact, an arm’s-length transaction with no further issuer performance obligations at the time of bond delivery. The manner in which we fix this financing role has multiple implications. If the issuer “fixes” it with its own financing, or financing with a third party, we still haven’t rectified the issues related to accounting. It would be optimal if Ginnie Mae took over this role as it helps rectify one of the larger current impediments to solving the accounting issue.

I know that there are many out there reading this and saying to themselves, “That’s right, let’s talk about how to fix the accounting issues related to the sale, delivery and servicing of HMBS bonds. This is something that has to be fixed now.” Actually, it doesn’t. Accounting will not be the end of this industry but the lack of liquidity will. Solving the liquidity needs around these repurchase events is an emerging crisis, and one that can actually kill this industry if it’s not properly addressed. Without a secondary market for HECM, there is no liquidity for HECM. No liquidity for HECM means no HECM. Banks that serve our industry must establish pricing for the debt, or line of credit, for servicing these 98 percent purchase events.

Higher Standards We should embrace financial assessment to stratify potential borrowers, because unfortunately (or maybe fortunately) we need to create a catered experience for the potential borrower. Our industry employs a “one size fits all” approach that assumes all potential borrowers need the same thing and should be treated equally. We know that’s illogical; all borrowers cannot be equal because each their financial positions are unique results of their earnings and retirement planning. I envision an environment where we ensure that each borrower with the demonstrable wherewithal to support a HECM has a successful origination experience and a trouble-free loan.

That’s the first step; in any financial assessment paradigm, there will be borrowers to whom we are able to say “no.” The industry can preserve the lighter credit underwrite for those with the justifiable credit and financial position profile. We have to be able to preserve the differences between the HECM and HELOC, but we have to remember that the HECM is a collateralized loan, and as such it’s in the best interest of the industry to have higher-caliber underwriting. Better underwriting means fewer defaults and foreclosures and helps keep liquidity moving.

Our goal should be 100 percent customer satisfaction. We all know that the CFPB thinks that our borrowers are confused and that our products are too complex for them to understand. But that simply is not the case. Many of these borrowers fought wars; their generation helped the United States go to the moon. Many responsibly paid their mortgages. If they understand a mortgage, they can understand a reverse mortgage. In our recent borrower survey, when we asked whether the product is too complex and if it’s really hard to make a decision, 79 percent said no. For those borrowers who are house rich and cash poor, we are obligated to improve the experience so they do not fail. We can minimize the foreclosures by utilizing set-asides, escrows and enhanced counseling. For those with more limited resources, it may mean that they do not get approved for a HECM. Either way, we will be clear about what it takes for them to qualify, and for our industry to flourish.

Enhanced counseling is paramount. The “one size fits all” approach doesn’t work. Rather than replacing the current funding with industry-driven funding, we perhaps supplement the existing counseling program by partnering with counseling agencies and try pilot programs for borrowers who are deemed the riskiest. Once we determine which enhanced counseling experience produces a better outcome, we then apply the best-tested approaches to the greater population. We should be a continually improving industry. In Darwinian terms, it’s survival of the fittest. x

This article is based on the personal views of Carl Rojas and do not represent the views or opinions of Generation Mortgage Company or its parent company.

 

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