Ted Tozer assumed the presidency of the Government National Mortgage Association (GNMA, or “Ginnie Mae”) in early 2010, when the nation was embroiled in its ongoing recovery efforts stemming from the 2008-09 financial crisis. He was nominated by President Barack Obama at the end of 2009, and served through to the end of his second term, having resigned just before the inauguration of President Donald Trump in January of 2017.

Prior to the confirmation of incumbent Alanna McCargo, Tozer was the last full-time appointed president of Ginnie Mae, since the Trump administration operated off of interim leaders for the duration of its term. While the reverse mortgage industry has seen a series of ups and downs since then, Tozer recently opined in an attributed quote published in a newspaper opinion column by a California mortgage broker that the reverse mortgage industry was “teetering on collapse.”

To get a better idea of what Tozer’s perspective is on the current state of the reverse mortgage program, RMD sat down with him to talk about it and some of the issues he saw up close during his time at Ginnie Mae.

RMD: You come to an understanding of the reverse mortgage business from a very particular and granular lens. What is your assessment of the state of the reverse mortgage industry at the moment?

Ted Tozer: The way I see right now is that it’s at an interesting crossroads from a lot of different aspects. The cost of servicing and dealing with all the issues around FHA’s curtailments, and the costs versus what they can receive in compensation, those issues are what I think are causing some real challenges for the industry. And also, the overall origination volume is not really very strong to the point where, again, you’re not bringing new servicing in and bringing in new loans, which are really critical. […]

So to me, it seems like the industry has a lot of challenges. But the big thing is [the issue of] the math and economics of making sure there’s enough money left on the back-end to service the loans, and that it’s balanced with the income needed on the front-end to be able to prospect and originate the loans on the front-end. I think that’s the big challenge. Plus, the idea of how you get the reverse mortgage business to the point where there’s enough scale, and the volume coming through justifies having enough originators and so forth that you can actually have a decent amount of competition between originators.

RMD: In terms of your interactions with the industry while you were at Ginnie Mae, what perspective would you say you formed about both the FHA HECM program and the reverse mortgage industry more broadly?

TT: The biggest thing I saw at Ginnie Mae was front-loading of income to the point that when I got to Ginnie Mae, for example, [it] didn’t have a minimum servicing fee. So because of that, originators were loading all their income so they could pay mortgage brokers [and themselves] a decent amount of money upfront.

But at that point, it became kind of like a house of cards because unless you continued to have volume coming in the door, you were going to go bust because you pushed everything up to the front. That’s the reason why at Ginnie Mae, we went through and put a minimum servicing fee in so that way, they would force their money to be shifted to the back-end of a loan for servicing purposes to try to do a better job of balancing that origination income with that of servicing income down the road.

When you get a forward mortgage, everyone knows [what the interest rate is]. In the HECM program, most seniors didn’t know what the rate is and because of that, we saw really high interest rates. This whole front-loading to the detriment of the senior by literally having these relatively high interest rates on these loans compared to that of forward mortgages, those are the kinds of things I saw [during my time at Ginnie Mae].

RMD: You recently described that the HECM program is “teetering on collapse” because of insufficient loan volume. HECM volume annually has hovered between 40,000-50,000 loans for most of the past ten fiscal years save for 2019. How long do you believe the industry has been on the verge of collapse for, or were you more specifically referencing these back-end issues you talked about previously?

TT: I’m talking about the back-end issues and the fact that you have various sub-servicers that are all having a tough time. Because what I hear from them is, for example, that they need to raise their fees to cover the costs of trying to keep up with all the FHA requirements and to be able to minimize curtailments for their clients. But they can’t pass on those price increases because there’s not enough income on the revenue side that was set aside.

So, the whole industry is having this real problem, because you need to get the new loans in that have the big revenue streams on them because of the fact that these older loans are just putting the whole industry in a tough position on the servicing side.

And I’m also concerned, too, because I just don’t know if they’re still even setting enough revenue, in the form of servicing fees, aside on the origination end to really cover the true costs of having to deal with serviced loans. For example, I always tell people on the forward side that the vast majority of their loans never go to foreclosure. The borrowers make their payments, and you move on with life.

But on the reverse mortgage side, virtually every loan goes to foreclosure. So, your costs on the back-end of a reverse mortgage are substantially higher than that of a forward mortgage. But I’m really concerned that I don’t think there’s that much more revenue for a reverse mortgage as there is for a forward mortgage, even though the costs of taking the property and possibly having to go through foreclosure to get the title dealt with [is paired with] anything else you’ve got to do. It’s a lot more expensive than that of a forward mortgage.

RMD: It was announced earlier this year that FHA has selected a new HECM servicing contractor, and the industry’s reaction was very positive. When that is finalized, do you think that a more reverse-oriented holder of the servicing contract could have the potential to address some of your concerns?

TT: To some degree. […] Regarding Celink, the people there are very good, they’re very professional. The thing I was really pushing during the Trump administration to Brian Montgomery and the people there at FHA was that instead of having to assign the loans to a new servicer, they just should allow the current servicer to continue to service [under] FHA.

That’s because the biggest problem we ran into when attempting these servicing transfers was that you would have to get out all your old documents from who knows when, when a loan was originated. It could have been 10 years ago, and you need to dig them up because the new servicer is going to have to have all those files for all their information. Why even go through the hassle?

Why is it that if you’re currently servicing for FHA, you can’t buy the loan out of the Ginnie Mae pool because you’re at 98% of the maximum claim, and then turn and sell the loan to FHA and keep the servicing where it’s at? Why do you have to transfer the servicing? It has a substantial amount of cost, and it also creates a tremendous amount of chances that a loan may not be able to be transferred, because it can’t find some document or something from when the loan was originated, [sometimes upwards of] 10 years ago.

So, that’s the reason why I’m disappointed. I thought we had some traction on the concept of just letting the current servicer continue to service and just sell the loan, not the servicing, when FHA took on the loan.

Look for more from the discussion with Ted Tozer on RMD in the coming days.