Reverse mortgages apparently have drawn more interest as a possible way to mitigate recently heightened prepayment risk in competing investments. But with some HUD issues in litigation, FHA commissioner David Stevens resigning (albeit likely for unrelated reasons) and the recent departure of Wells Fargo from the wholesale channel, there are some other aspects of them that call for close monitoring and, in some cases, resolution.
New investors "haven't come in to start buying yet but [the relative prepayment advantages are] getting them off the fence" as far as interest in researching and educating themselves about the sector, Jeff Traister, managing director at Cantor Fitzgerald, told NMN. Recent rate volatility has increased interest in the stability of the cash flow performance of securitized government reverse mortgage pools, he said.
Rates, of course, aren't the only the prepay risk. Credit's another issue. But even with a recent mortgagee letter providing reverse mortgage servicing guidance that some view as making foreclosure more possible in situations where there are tax and insurance payment concerns, investors so far generally have not considered government-backed reverse mortgages to be as prone to credit-related prepays as competing financial instruments, he said. "Most investors...right or wrong, they seem to believe that no government agency is going to go and foreclose in any kind of mass on seniors," Traister said. But he would "qualify that because you never know."
Even if mass foreclosures are unlikely, in addition to the T&I guidance one should keep an eye on lawsuits related to the loans made to the sensitive senior population that could also evoke the sensitive foreclosure issue. In recent litigation, for example, three borrowers' surviving spouses who were not originally listed on the loans or related deeds alleged a 2008 HUD rule "clarification" requiring them to pay the underwater portion of their loans' equity in order to stay in their homes is at odds with other and more longstanding rules promising to protect their rights to the property and not to owe more than the home is worth. (HUD, as is its policy on pending litigation, had no comment on the suit at press time.)
On an ongoing basis a relatively small set of investors tends to react to such developments, according to Traister. At the time of this writing last week the reaction to the lawsuit was much less significant than, say, the broad-based concern from investors last fall that followed a reduction in principal limits on the loans, he said. "A handful of investors just don't want to be buying anything that has headline risk," Traister said.
However, he noted the litigation centers on a key and longstanding issue as far as ambiguities involving spousal rights in a reverse mortgage that need to be resolved, he said. "This issue has been out there for a long time and it's never been fully addressed to everybody's satisfaction by HUD so maybe this will force their hand," said Traister.
In addition to the spousal rights issue, the lawsuit also calls for the resolution of controversy as to whether the 2008 mortgagee letter contradicted earlier policy, Atare Agbamu, a reverse mortgage consultant and longtime critic of both the letter and the lack of clarification on and protection of spousal rights, told NMN. Agbamu thinks the litigation could lead to "exposure" for HUD, lenders and investors, but thinks this will depend on and not be seen until its outcome. He hopes it makes HUD revoke the letter and protect seniors'/spousal rights to stay in their homes and not be liable for underwater debt beyond their property's current worth.
