David Stevens – the former head of the Federal Housing Administration and the Mortgage Bankers Association – made some scathing remarks about reverse mortgages last week that sparked heated criticism from members of the industry.
In a recent LinkedIn post, Stevens blasted HECM lenders for “outrageous profits” and a “predatory sales approach,” saying that the product's issues kept him awake at night during his time as FHA commissioner.
Stevens elaborated on his post in an article for HousingWire, enumerating his issues with the product and suggesting some fixes.
“Commissioner Montgomery has made some helpful changes, but I would recommend more,” Stevens said.
Among Stevens’ suggestions:
- Require borrower qualifications and minimum credit scores
- Establish a reserve for home maintenance
- Eliminate the full draw and only disperse payments over time
- Cap lender profits
- Establish a separate screening process for HECM servicers
- Prevent older spouses from being the sole borrower in order to receive more funds
Stevens’ suggestions drew the ire of professionals in the reverse space, as several pointed out that his remarks failed to acknowledge program changes that have already taken place.
Many said his critiques of the product are dated.
“David Stevens is correct that ensuring the financial sustainability of HECM is the No. 1 priority. However, the observations and approach are out of date,” said Mark Browning, a long-time participant in the reverse mortgage space.
Stevens served as FHA commissioner from July 2009 to March 2011. Since that time, a number of important program adjustments have been made.
Dan Hultquist, vice president of education and organizational development at Live Well Financial, pointed out that Stevens’ concern regarding non-borrowing spouses has already been addressed through two mortgagee letters issued in 2014 and 2015.
“Since then, initial HECM proceeds must be based on the age of the youngest borrower or non-borrowing spouse,” Hultquist said.
Hultquist said Stevens’ remark regarding full-draw HECMs is problematic in that it can mislead people to believe that the loan allows borrowers to withdraw 100% of their equity. Instead, the average principal limit is about $170,000, or 50% of the home’s value.
“To those of us within the industry, we know ‘full-draw’ to mean 100% use of all of the 50% principal limit. But even that has been restricted since 2013,” Hultquist pointed out. “HECM borrowers now have ‘initial disbursement limits’ that cap how much of that principal may be drawn in the first year.”
“When you combine initial disbursement limits put into effect in 2013 with last year’s principal limit reductions, you’ll see that draws on HECMs are currently at historic lows,” Hultquist added, also noting that the only lump-sum draw product is a fixed-rate HECM, which represents just 9% of current HECM volume.
Shannon Hicks, president of Reverse Focus, took issue with the suggestion to cap lender profits, pointing to the fact that 2017 program changes have left lenders struggling to build a viable business.
“Lenders are competing more than ever before to attract new business, especially with endorsement volume being down. They have generally found a model that’s sustainable with the increased compliance and increased underwriting costs involved in originating the HECM, while offering fair and competitive rates and fees,” Hicks said.
Hicks also pointed out that HECMs require a much more detailed and lengthy origination process than traditional forward mortgages.
“What would you propose as a fair pay scale, especially considering the amount of work that’s required on HECMs now that we have additional underwriting guidelines?” he asked.
Hicks also called out Stevens’ suggestion to require set asides for property maintenance on all HECM loans, saying that 2015’s Financial Assessment handles this by requiring set-asides for risky borrowers.
“To require that of every single borrower just seems a little bit like overkill. Is that really treating the HECM like a mortgage loan and mitigating risk based on defined guidelines, or are we to penalize all future borrowers without cause?” Hicks questioned. “FHA has taken great strides to reduce that risk by creating the set-asides when deemed necessary.”
Hicks said Stevens’ criticism was disappointing.
“Coming from a former commissioner, what message does that send to seniors who may need to get a reverse mortgage?” he asked. “And, with the protections in place in recent years, the program is one of the most highly regulated mortgage products on the planet. Is it perfect? No. A market is only as perfect as the people who work in it.”
Browning acknowledged that there are programmatic improvements that could still be made.
“Now, a comprehensive approach for ensuring financial stability for HECM involves strengthening HECM operational processes, measurement analytics and risk management tools,” he said, adding that the program’s success is crucial to solving America’s retirement problem.
“Housing wealth and the HECM are essential tools for addressing a middle-class retirement crisis that has already arrived,” Browning said. “Also, HECM serves as a catalyst for private sector innovation and additional methods to manage housing wealth in retirement.”