Change Coming to Reverse Mortgages, Here is Hoping They’re the Right Ones

The reverse mortgage industry is never short on change, but it looks like the pace of that change is about to pick up.

Speaking before a packed room at the National Reverse Mortgage Lenders Association annual conference in San Antonio, Charles Coulter, Deputy Assistant Secretary for the U.S. Department of Housing and Urban Development said what most in the industry knew was coming.

“We’ve reached a point in the [reverse mortgage] industry where we do need to make some changes,” he said.

When asked about when changes to the product and financial assessment were coming, Coulter said he hoped they would be here within six months, but in true government fashion, he was vague on what exactly what those changes would be.

“The HECM program is a valuable product and we’re committed, but need to make changes to ensure they’re valuable over the long term,” Coulter said.

All eyes seem to be focused on the fixed-rate reverse mortgage product, which has become the choice for roughly 70% of borrowers over the last couple years. The product is also being looked at closely by the Consumer Financial Protection Bureau, which is concerned that if borrowers use most of the proceeds at a younger age, they might not have any left to deal with issues later in life.

Coulter specifically said that changes need to be made to the fixed product, especially since the majority of taxes and insurance defaults are coming from seniors who are taking out larger draws at closing.

The timing of Coulter’s statements came only a few hours after the New York Times published an unfortunate story detailing how non-borrowing spouses can lose their homes if one is removed from title before getting a reverse mortgage.

While the story failed to mention any of the protections the program provides—counseling has been required of non-borrowing spouses since August 2011— seeing such an article in print is another reminder that HUD and the industry needs to move quickly on making changes.

“The article in the New York Times is serious,” said Jared Bernstein, senior fellow at the Washington, D.C.-based Center on Budget and Policy Priorities during another presentation at the event. “It’s not the end of civilization as we know it, but take these messages to heart and let the investment community know it’s not the next bubble.”

There have been plenty of articles like the recent New York Times piece and the industry is very sensitive to them. No one wants those type of things to happen, but the industry is also hyper aware that it’s incredibly challenging to create a product that works for every person and every situation.

It’s easy for consumer groups to say that non-borrowing spouses should be able to remain in the home, but they also need to consider the the financial reality. If Hugh Hefner takes out a reverse mortgage and passes away, is his 22 year old wife allowed to stay in the Playboy Mansion until she passes away? How are the investor and HUD supposed to price that factor into the loan?

While the “Hugh Hefner scenario” might be rare, so are the stories cited in the New York Times article.

The industry knows that change is needed, but exactly what type of change isn’t clear. Conversations with people involved in the discussions with HUD indicate that all sorts of potential changes are on the table. A new report from Bloomberg shows that FHA could be in some financial trouble and require the first draw from the U.S. Treasury in its history to shore up its financial losses. If true, this means more drastic changes could be required. 

At the end of the day, it will be a tricky balance between the government and the industry to make sure those changes don’t cut off access to the product.

“I urge you to take the steps necessary, so that the important role of reverse mortgages helps solve [the retirement problem]… and can be a true solution to a real American problem,” said Bernstein.

Well Mr. Bernstein, the industry and HUD are doing just that. Let’s just hope we come up with the right solution that makes everyone happy.

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