As HUD’s deputy assistant secretary of single-family housing, Charles Coulter supervises the FHA’s Home Equity Conversion Mortgage program. Coulter, who has more than 20 years of real estate and finance experience, served as vice president of business transformation at Freddie Mac before he was appointed to HUD’s ranks in January 2012 by President Obama and Housing Secretary Shaun Donovan.
Coulter’s demanding job requires him to oversee HUD’s policy development and manage all aspects of single-family housing from an operational perspective—everything from the maintenance of the agency’s handbooks to communications, quality assurance, institutional risk, and servicing and asset dispositions.
Following HUD’s recent changes to the HECM program, which the agency has called necessary to ensure the program’s long-term viability, Coulter spoke with The Reverse Review about the potential impact of the program revisions, the growing need to access home equity and his hopes for the future of the HECM market.
TRR: The HECM program has come a long way since its inception. What do you think of its constant evolution?
CC: The HECM is obviously a more complex program than a typical 30-year fixed-rate product, and it’s not unusual for a program to be evaluated and to change over time. Given the
relative complexity of the HECM product, I think it’s a perfectly natural process for us to evaluate it and to make changes. I view it as fairly consistent with how I expect all of our programs to be managed. I think we had reached a point where this program was in need of a fairly significant overhaul, which we did back in August and we’re continuing to focus on through the Financial Assessment piece. I would expect us to continue to evaluate both the HECM program and our other programs on a periodic basis and make changes as necessary to ensure that they work well from a consumer perspective and in terms of the economics of the MMI Fund.
TRR: Do you think this recent wave of change has made the reverse mortgage a stronger financial tool that offers the maximum benefit to the consumer?
CC: I do. We’re very confident that we’ve brought the program back to a place where it will have a negative credit subsidy, which basically means that the value of the program’s revenue stream will be greater than the projected losses. I know it works well in terms of our own projections related to the MMI Fund, and I also think it will be a healthy thing from a consumer perspective. I think the program evolved to a place where it was predominantly fixed rate, full draw, and I don’t think that was in the best interests of seniors. I think the changes that have been made ensure that the program is used in a way that is more consistent with the way it was intended, which is to provide for the senior throughout their retirement years versus [offering them] one lump sum upfront.
TRR: Did the shutdown impact the HECM program to any significant degree and is the department still recovering from the hiatus?
CC: I would say the most significant issue was that the shutdown happened at the same time that our new policies were going into effect. It’s challenging enough to [institute] fairly complex changes, both from a HUD perspective and an industry perspective, and when you couple that with a government shutdown, that obviously created an environment that was ripe for confusion. Now, I think we’ve managed through that reasonably well. We’re completely caught up with endorsements; there’s no backlog. As you might recall, we were not able to endorse HECM loans during the shutdown, so we did have a backlog when we came back, but that has been taken care of. But it did affect our ability to continue our policy writing. We’re going to be putting out additional information in response to comments on the Financial Assessment, and we did lose a few weeks that have affected that. We’re moving ahead aggressively, but it still took away some time that we certainly could have used.
TRR: Do you expect current discussions in the House and Senate about FHA reform to have an impact on the HECM product?
CC: In terms of additional impacts on a go-forward basis, I would not expect so, but everything is tied together in a sense that the HECM program is part of the MMI Fund, so the economics of the HECM program impact the MMI Fund. The status of the MMI Fund is obviously relevant to how the House looks at FHA and looks at its administration of the program, so all of these things certainly are interrelated, but I think we’ve made a series of appropriate changes, both from an economic and a consumer perspective, and as a result of that I wouldn’t expect housing financial reform to force prospective changes to the program. I think we’ve already done the appropriate course correction.
TRR: How do you think the industry will be impacted by the program changes? Do you think volume will dip as significantly as some industry analysts have projected?
CC: I don’t want to get into any projections around volume, but at the same time I wouldn’t want to understate the significance of the changes we made. They were material, and I would expect a dip in volume in the near term as a result of those changes. Having said that, I think that the industry will adapt and I hope it will adapt in a very constructive way. I think we have an opportunity on a prospective basis to really make this program a healthy and constructive part of FHA’s offerings and ensure that it does what it’s supposed to do, which is service the needs of seniors who want to age in place. So, will there be a volume impact in the near term? Absolutely. Are we in a position to come out of that in a way that is better for the program over the long term? I believe so.
TRR: Do you expect the changes to affect the way the product is marketed and sold?
CC: I absolutely do, yes. We already went through one evolution with this product when we went from a predominantly ARM portfolio product to a predominantly fixed securitization product. Now we’re evolving back to what will probably be more of an ARM-based product, where the borrower is realizing the benefits of the program over time. So I think how you approach consumers with that is going to be very different. I think the most thoughtful way to do that is to [present] it in the context of a responsible, balanced financial plan for the senior that ensures that they’re getting the funds that they need over time, and getting away from this notion of cashing out their equity at the beginning of the loan.
TRR: Do you view the changes that were made as complete, or might we see more amendments down the road?
CC: They’re not complete. [FHA Commissioner Carol Galante] talked at the NRMLA conference about the fact that Financial Assessment was supposed to go into effect in mid-January, but we will be putting out a notice pushing that date back. One of the things that we know we need to come back and clarify are the parameters around Financial Assessment. We’ve asked for feedback, and we’ve received the feedback. Karin [Hill] and her team are thoughtfully going through that, and I think that we will come out with a program that is stronger and better than what was initially released because there was a comment period. So that is pending, and then we have a proposed rule that is also going into effect, which we view as really a parallel effort to the mortgagee letters that we put in place. The mortgagee letters, we were granted that authority by Congress, but at the same time we feel the need to ensure that this program is appropriately documented in the regs through a proposed rulemaking process. Karin and her team are working on that effort as well. I know the rulemaking process won’t have an impact on near-term changes, but I think it can give us some flexibility down the road. I’ll just point to one possible example: We’ve talked to the industry from time to time about the notion of a hybrid program that would be a fixed, upfront draw coupled with an ARM term or tenure payout, and I think that really blends the best of the fixed-rate and the ARM programs into one product. That’s something that we’ll look to gain the flexibility to implement through our rulemaking process.
TRR: Does HUD have a revised deadline set for the implementation of Financial Assessment?
CC: We don’t. We’ll be putting out a mortgagee letter that clarifies what our expectations are about timing. I can’t give you an early indication of what that looks like. As the commissioner said at the NRMLA conference, we will be pushing that date back. We are sensitive to the needs of the industry to adapt thoughtfully to the policies that we put out, so that will be factored in as we make changes based upon the notice and comment period.
TRR: Do you think HUD would ever consider revisiting the PLF reduction, perhaps raising it in the future if things look up for the MMI Fund?
CC: Certainly the MMI Fund is relevant, but I also think there are a number of other factors that come into play when we look at PLFs. House price path is relevant; how the program is used is highly relevant; how the industry markets to consumers and therefore what the draw patterns look like, that’s highly relevant. All of those things we need to manage and monitor. We’ll take a look at those things and there may come a point where it is appropriate for us to revisit PLFs in a way that would be positive and provide more flexibility. I don’t want to mis-set expectations; that’s certainly not going to be done in the very near term, but it’s something that we’re absolutely open to and we’ll continue to evaluate.
TRR: HUD has made statements in the past about the need to strengthen counseling. Have such measures been taken? What do you think still needs to be done?
CC: Over the last several years, we’ve actually introduced quite a few enhancements to counseling with the FIT tool and different financial evaluations that the counselors do. With all these new changes, we’re working closely with HUD’s housing counseling office to identify what kind of updates need to be made to the tools that are already in use, and also to provide more training to the counselors so they are familiar with the new Financial Assessment and the new program guidelines. One of the challenges frankly is the money aspect. Housing counseling agencies have supported a lot of the training for HECM counseling and have had restricted fund availability both in terms of restricted grants from HUD and general access to funds. And with the ramp-up in the changes, of course, there’s a real need for [more education], so we’re coordinating with the housing counseling office and also the counselors themselves. We’re doing internal webinars with them to help support their training. It is a bit of a challenge, but everybody is very committed to taking the right steps because the counseling is so critical to ensure that the borrowers understand the program.
TRR: Do you expect loan limits to return to $417,000 once the current extension expires? If so, how will that impact the program?
CC: There are two things I can tell you right now: One is we are going to the HERA limits effective January 1. Obviously that is more relevant to the forward product than it is to the HECM. As we look forward, FHA will be thoughtful about how its loan limits should evolve over time, consistent with its mission. When we do that, I expect us to look at both the forward product and the HECM product and ensure that they make sense in the context of what each of those products is meant to do. So we’ll go to $625,500 effective January 1, and I think beyond that we’ll be laying out a strategy for both the forward and the HECM program, but we’re not in a position today to communicate directionally what we’re thinking there.
TRR: Do you anticipate the development of a proprietary market with or without a loan limit reduction?
CC: I would be shocked if a private market doesn’t develop for this type of purpose, just because the demographics are so compelling. When you look at the fact that you have an aging population, you have a virtual elimination of the five benefit plans, stress on the Social Security program—people are going to need to leverage their home equity as a way to retire in a way that comes close to their standard of living pre-retirement. So I do think that these types of programs that allow consumers to responsibly leverage the nest egg that they’ve built in their home are very important and I would be very surprised if a private market doesn’t evolve here.
TRR: Would a proprietary market impact FHA’s offering?
CC: It could. We coexist with other mortgage offerings on the forward side of the business, and what we do there is make sure we are appropriately positioned to serve the segment of the market that we’re there for, specifically borrowers who are not served constructively by private capital. Could I envision a situation where a private offering comes in and forces us to re-evaluate the size of our footprint, the type and makeup of the consumers we are serving for the offering? Absolutely that could happen. Is that going to happen in the next year or two? Unlikely, but it could certainly happen over the longer term.
TRR: Do you think policymakers and members of Congress have a proper understanding of HECM and its value? What can be done to further their understanding?
CC: This is a complex product. I’ve been in this business for more than 20 years and it was a concerted effort on my part to come up to speed on this… It’s not an easy or intuitive product to understand. Certainly for members of Congress and for consumers who are not grounded in mortgage finance, this is not an easy program to wrap your mind around. I do think there needs to be a concerted effort by FHA, by the industry, and by groups like NRMLA and MBA to ensure that people are responsibly informed about what this program can do for seniors. We need to make sure that we’re managing this program collectively in a way that is responsible for seniors so that it’s viewed in a positive light both on Capitol Hill and by consumer advocates.
TRR: Do you anticipate the market ever reaching past its 2 to 3 percent penetration rate?
CC: Getting into projections about penetration rate is tough. I think this is an important and viable offering if used responsibly. I think we got off track in the course of the last several years—we in terms of our policy and the industry in terms of how it leveraged our policy—and I think we have got to work together to get this program back to where it needs to be. I think on a prospective basis, we’re in a good position to see this product be a key component of FHA’s product suite. Whether that means growth or stability, it’s tough to say at this point in time, but I think it’s an important offering and I think we’re well-positioned to get this product back to where it needs to be in terms of economic viability and consumer friendliness.
TRR: What do you think potential borrowers need to understand about the product? Are there elements to the product that you think are often misunderstood or that are feeding the public’s negative perception?
CC: It’s not the most straightforward product in the world; it takes some time to understand. When you couple that complexity with the fact that you have negative press and T&I defaults, it does put us in a position where the public is bound to raise some questions [about whether or not] this really is a good and constructive product. That’s why I think it’s so important that the changes we put in place are leveraged responsibly by the industry to get this program back on the right track. If we do that, [and establish] a strong education program both for consumers and other stakeholders, I really think we can shift the perception about the program. But do I think we have a bit of a hill to climb on that front? Yes, I do.
TRR: What are your hopes for the HECM program in the future?
CC: I would love to see this program become one of the key elements of FHA’s offerings in the marketplace. I’d like to see it be used responsibly as part of a long-term retirement plan for seniors and I’d like to see us—FHA and the industry and trade associations—work cohesively together to ensure that we get this product back on the right track, because I think it can be a useful financial instrument.