Reverse Originators Must Check Credit
The changes to the Home Equity Conversion Mortgage program introduce credit underwriting criteria to the product for the first time, which until now only had been using actuarial standards in the decision making process, a reverse mortgage specialist said.
The Department of Housing and Urban Development is looking to keep the product going for the baby boomer generation, the first one that a majority does not have a defined benefits retirement plan (also known as a pension), Linda Sands of Luxury Mortgage says.
Many in this generation have a defined contribution plan, such as an IRA or a 401(k) and have the need to supplement retirement income.
But the HECM is no longer a loan for those who have not paid their taxes or they have other financial issues, Sands says.
The big issue comes from loans where the borrower used the option to draw down the entire equity at closing have higher problems than other variations of the reverse mortgage product
The primary cause of default on reverse mortgages is the borrower’s failure to pay taxes and insurance and that is a threat to the Federal Housing Administration’s Mutual Mortgage Insurance Fund. HECM has to be self-sustaining and HUD made changes to keep it so.
“From my perspective and the bottom line is that if you are retired and you have substantial equity in your home and you don’t have enough other income to qualify for another type of mortgage, this is basically where you are,” she says.
FHA has a responsibility to make sure its mortgage insurance fund is secure and so it has had to make changes to make sure HECM remains a fiscally sound program says Colin Cushman, CEO and president of reverse mortgage specialist Generation Mortgage.
Those changes restrict the upfront draws and change it back to HECMs original intent, which was to provide supplemental cash flows to assist with retirement planning. Where it might have been heavy handed was in cutting the drawable equity by the borrower by 15%.
Like Sands, Cushman feels the government is trying to reposition HECM for long-term sustainability. Most borrowers recently were taking out all of the cash at closing and that might not be the best use of the proceeds. It also removed the option for gaining more proceeds in the future as equity increased.
And, he says, a fully drawn loan has more credit risk for FHA.
The fact that the large aggregators in this space exited allowed Generation to gain market share, but it reduced overall lending volume on a product which has yet to gain the expected traction among American consumers.
The reverse mortgage business was just a small percentage of NewDay USA’s overall volume, says president and CEO Joe Murin. The company is expanding its efforts in the Veterans Affairs loan guaranty program and wanted to concentrate in that area. “You make choices in business in where you want to allocate capital, and it just became a logical business choice” to drop the reverse product.
Murin adds that the changes to the HECM by FHA will have more of an effect on the senior borrower, with all the limits and set asides, then it will on the borrower.
“In an effort to protect the seniors, are they in fact hurting the program and hurting the senior? Time will only tell if that is the case,” he says.
Murin is a former president of Ginnie Mae, the government agency that issues HMBS created from HECM loans, during the George W. Bush and Obama administrations.
NewDay stopped taking applications as of Oct. 1. It is working through the remaining loans in the pipeline. Instead, older veterans will be offered a forward home equity product as an alternative. The average age of the veterans who do business with New Day is 50-plus.
It has financial literacy programs for veterans, not surprising giving the company’s board. Its chairman is retired Rear Admiral Tom Lynch; other high ranking officials are on the company’s board and that gives its focus on the welfare of American veterans, he said.
The market penetration has not lived up to the hype, but Generation’s Cushman says his company is looking to change public perception of reverse mortgages.
The industry has not had a fully transparent way of demonstrating the value proposition and way to use one’s home equity.
The selling feature of reverse mortgages has been how much cash the borrower can get up front.
The real selling feature, he says, is showing the borrower how he or she can use their home equity over time in the overall context of their financial plan.
Reverse mortgages has not been shown to the public how they can be used in their most optimal way for their use as a financial planning tool. And once that happens, there should be growth in origination volume, Cushman says.