David Stevens isn’t a fan of reverse mortgages, and he’s not afraid to say it.
The former commissioner of the Federal Housing Administration – who recently stepped down as president and CEO of the Mortgage Bankers Association – posted a comment about HECMs on LinkedIn last week that ignited a chain of heated commentary about the product.
Stevens posted a link to a Wall Street Journal article on the second appraisal rule on select HECM loans, quoting current FHA Commissioner Brian Montgomery saying that the agency identified at least a 3% appraisal bias on 37% of the 134,000 reverse mortgages it evaluated.
“Brian Montgomery is trying to fix the abuse, but the product is the one that kept me awake at night when I was there – outrageous profits, predatory sales approach, and full-draw HECMs only fuel the fire,” Stevens wrote.
“We tried with HECM Saver, but it did not work...longer story. Need to start over with a blank slate,” Stevens continued. “Seniors do not need aggressive salespeople using former actors and presidential candidates as pitchmen.”
The post has received more than 111 likes so far and inspired dozens of comments from LinkedIn users who sided with and against Stevens.
Some called for appraisal reform and labeled the product as a scam. Others said reverse mortgages are important public policy and have been mischaracterized.
In an email to HousingWire, Stevens elaborated on his issues with reverse mortgages and offered his ideas on how to fix them.
“The HECM product is a challenging product to FHA and some seniors for a variety for reasons,” Stevens told HousingWire. “Because this program targets an audience of seniors, tighter controls should be in place to protect against predatory behavior and insure sustainability.”
Stevens said the HECM program continues to be a risk to taxpayers.
“At its core, it has proven almost impossible to accurately predict duration based on average life span tables, predict the long-term discount rates, or predict home prices over the long duration of these loans,” he said, adding that the result was a continued drain on the Mutual Mortgage Insurance Fund.
“Commissioner Montgomery has made some helpful changes, but I would recommend more,” Stevens said.
“First, require borrower qualification and minimum credit scores. While there is no mortgage payment on a HECM, the home itself still has obligations, including the payment of taxes, insurance, HOAs (if applicable) and utilities.”
Stevens also suggested that the ability to maintain the home be a qualifying factor.
“Appliances, paint, yard work and basic repairs are part of owning a home,” he continued. “Establishing a reserve requirement to pay for these items and a minimum credit score to prove overall credit worthiness is recommendation No. 1.”
Stevens also said full-draw HECMs should not be permitted, suggesting that the initial disbursement limits instituted in 2013 are not enough to protect borrowers from burning through their equity.
“When a borrower pulls all of the proceeds out of the home, they may dispose of those monies years before their time in the home is done,” he said. “If that is the case, they may find themselves without enough money to simply live and that is when we have seen the lack of payment of T&I and seen the home quality fall into disrepair, lowering the expected value of that collateral. The program should require payments over time versus lump-sum draws.”
He also highlighted the need to cap lender profits.
“Because of the gain on sale on securitization, the profits are significantly higher in basis points than a forward loan,” he explained. “This is a slippery slope to consider compensation caps as competition and other rules rein in QM eligible compensation for forward loans, but the HECM program is different and should be thought of as a service for seniors and come with limits in compensation.”
Another recommendation: Institute a separate screening to approve reverse mortgage servicers.
“Defaults are much higher on this product and managing the obligations for these loans should come with higher servicer capabilities,” he said.
Lastly, Stevens said new mandates for borrowing spouses should be put into play.
“It should be impermissible to only lend to the spouse who will generate the larger draw due to his or her age at time of application and respective life expectancy,” he said. “This is a long-time method that exposed FHA to greater risk by picking the one spouse as borrower who gets the larger draw, and this must stop.”
Stevens warned against heeding calls from some who assert that the HECM should be removed from the MMI Fund or not included in the capital reserve calculation.
“I fear that would just hide the forecasted losses associated with the product,” he said.
Acknowledging that the concept has value despite the current product’s issues, Stevens said the reverse mortgage program should be entirely rebuilt.
“The key point here is that policymakers should start with what they want from the program and build it from scratch to insure its longevity,” he said.