Few industries can say they’re looking forward to the unveiling of a new regulatory scheme with hopeful anticipation. But that’s exactly the strange position the reverse mortgage industry finds itself in today.
“Obviously the devil is in the details, and we’re bracing ourselves for perhaps a small step backwards in order to take a major step forward,” said Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association.
The industry has suffered a wave of bad headlines in recent years. Reverse mortgages are structured so that lenders can’t take a home merely because its value is less than the amount of the loan. But the housing crisis’ double whammy of falling home values and high unemployment have spurred an increase in the number of seniors defaulting on tax and insurance obligations for their homes, leading to the previously unheard of phenomenon of seniors with reverse mortgages being foreclosed on.
The increasing risk of defaults – to say nothing of news photos of grannies being kicked out of their homes – helped drive some large reverse mortgage lenders out of the business over the past several years, including MetLife, once the largest reverse mortgage issuers in the country. That caused a nosedive in the overall volume of reverse mortgages issued: the industry went from more than 10,000 originations in June 2008 to fewer than 6,000 in June of this year, according to data from industry analyst firm Reverse Market Insight.
With more than 90 percent of reverses government backed through the Federal Housing Administration (FHA) and its Home Equity Conversion Mortgage (HECM) program, the wave of tax and insurance defaults was also helping to blow a hole in the FHA’s balance sheet. An independent audit conducted last November projected that the portfolio of reverses currently on the FHA’s books would contribute $2.8 billion worth of red ink to the agency’s bottom line over the next few years.
Bill Passed
That was enough to get Congress’ attention, and earlier this month it passed a bill which allows the FHA to make changes to its reverse program to help put the agency’s books in balance. The agency is expected to release full details later this month, but expected changes will include requiring a full evaluation of borrowers’ finances before authorizing the loan, requiring set asides for borrowers to pay property taxes and homeowner’s insurance, restrictions on lump-sum payments, and changes in the rules to better protect a borrower’s spouse if their reverse mortgage wasn’t taken out in their name.
The new rules could kick in as soon as October, with the FHA hoping to get a program in place in time for the start of the federal government’s fiscal year.
Those new underwriting standards would be a vast change from the HECM program’s current rules, which specify merely that the borrower own their home, “be over 62 years old, and have not defaulted on a federal debt,” explains Laura L. Schaefer, executive director of the Plymouth Redevelopment Authority and a long-time reverse mortgage counselor.
The new restrictions could render some seniors ineligible for the loans, Schafer said. But she doesn’t think that would necessarily be a bad thing.
“I do get clients in here who really shouldn’t be staying in their homes. It’s really time to move, and they’re just foregoing the inevitable,” she said. “I had a case just the other day, when I said, unless you get some public services [and other help] you’re not going to be able to sustain this. But right now they’re able to get the loan.”
Most industry observer expect the reforms to drive down lending volumes still further once they’re implemented. But over time, Bell said, the reverse mortgage lenders are hopeful that by eliminating foreclosures, consumers will have more confidence in the products and more lenders will be willing to make the loans, helping to grow the industry to its full potential.
“The reality is, change has to occur, otherwise the program would run the risk of perhaps being severely compromised or even extinguished,” said George Downey, founder of Harbor Mortgage Solutions Inc. and a reverse mortgage specialist.
Downey said he’s pleased that the reform bill has passed, allowing the FHA to make tweaks to the program rather than simply eliminate products in order to help balance its books. But he anticipates that “there will be some melt in the applicant pool” which could impact volumes.
And he admits to being a little worried about the new powers the FHA has been given. “Now that the leash is off the dog, the dog can go wherever he wants to go,” he said.
Email: csullivan@thewarrengroup.com
