Calls in­ten­sify to sep­a­rate re­verse mort­gages from FHA fund

National Mortgage News - - Contents - By brian collins

THE FED­ERAL HOUS­ING AD­MIN­IS­tra­tion’s re­cent ac­tu­ar­ial re­port has added more fuel to the fire over con­cerns about re­verse mort­gage losses.

A jump in FHA claims for re­verse mort­gages ad­min­is­tered through the Home Eq­uity Con­ver­sion Mort­gage pro­gram drove a 26-ba­sis-point drop in the re­serve ra­tio of the main FHA in­sur­ance fund in fis­cal 2017, to 2.09%. The de­cline to­ward the fund’s 2% statu­tory min­i­mum makes it less likely an Obama-era plan to cut pre­mi­ums will go for­ward.

In ad­di­tion to stok­ing wor­ries about seniors de­fault­ing on their loans, the spike in losses could also in­flu­ence the de­bate over whether the fi­nan­cial re­port­ing for FHA re­verse mort­gages should be sep­a­rated from the FHA for­ward sin­gle-fam­ily pro­gram and placed in a sep­a­rate FHA fund

“It is has be­come an al­ba­tross around the neck of the FHA for­ward pro­gram and mil­lions of low-in­come and mi­nor­ity home buy­ers,” Brian Chap­pelle, a mort­gage con­sul­tant at Po­tomac Part­ners in Wash­ing­ton, said of the HECM pro­gram. “How much longer are first-time home­own­ers go­ing to be sub­si­diz­ing the FHA re­verse mort­gage pro­gram?”

The re­port is likely to am­plify voices clam­or­ing for the FHA to sep­a­rate re­port­ing for the two pro­grams, which pro­po­nents say will bet­ter il­lu­mi­nate the fi­nan­cial im­prove­ments in the in­sur­ance fund.

The Mort­gage Bankers As­so­ci­a­tion, the Na­tional As­so­ci­a­tion of Real­tors and other groups sup­port a re­view to look at re­mov­ing the HECM pro­gram from the FHA Mu­tual Mort­gage In­sur­ance Fund.

At an Oc­to­ber con­gres­sional hear­ing, Hous­ing and Ur­ban De­vel­op­ment Sec­re­tary Ben Car­son agreed that sep­a­rat­ing the two mort­gage pro­grams would be a “wor­thy pur­suit.”

MBA Pres­i­dent and CEO David Stevens said in a press re­lease af­ter pub­li­ca­tion of the ac­tu­ar­ial re­port ear­lier that re­mov­ing the HECM pro­gram “would strengthen the MMI fund, give a more ac­cu­rate look at the health of FHA’s for­ward book of busi­ness and could al­low for the con­sid­er­a­tion of a mort­gage in­sur­ance premium re­duc­tion.”

The re­port noted that the FHA re­verse mort­gage pro­gram has a neg­a­tive cap­i­tal ra­tio of nearly 20%, while the larger FHA for­ward pro­gram had a stand­alone cap­i­tal ra­tio of over 3.3%.

Mean­while, more FHA home­own­ers are re­fi­nanc­ing out of the agency’s in­sur­ance pro­gram and into con­ven­tional mort­gages than the agency orig­i­nally ex­pected.

The FHA paid $5 bil­lion in claims on HECM loans in fis­cal year 2017, up from the $4.2 bil­lion in claims paid in fis­cal year 2016.

In a press brief­ing on the re­port, Adolfo Mar­zol, a se­nior ad­viser to Car­son, noted that re­verse mort­gage claims jumped 20% in fis­cal year 2017.

“A large per­cent­age of HECMS are ad­justable rates and as in­ter­est rates rise ... the neg­a­tive amor­ti­za­tion inherent in re­verse mort­gages in­creases, and that in­creases risk to the fund,” Mar­zol said in a re­cent con­fer­ence call with re­porters.

In 2009, HUD merged the HECM and FHA for­ward pro­grams to­gether in an ef­fort to bol­ster the for­ward mort­gage pro­gram. But that pol­icy move has back­fired.

The FHA ac­tu­ar­ial re­port showed that the post-2008 HECM loan port­fo­lio has just $1 bil­lion in cap­i­tal. And the re­verse mort­gage pro­gram

is pro­jected to gen­er­ate $15.5 bil­lion in loan losses for the FHA Mu­tual Mort­gage In­sur­ance Fund over the next 30 years.

Mean­while, the for­ward FHA pro­gram has steadily im­proved over the last six years. It is now pro­jected to gen­er­ate a profit of $38 bil­lion over 30 years.

But po­ten­tial HECM losses make it harder for pol­i­cy­mak­ers to re­duce pre­mi­ums on for­ward mort­gages and first-time home buy­ers.

“Mov­ing for­ward, we sup­port an ef­fort to study whether the HECM pro­gram should re­main in the MMI Fund, or if it should be sep­a­rated into its own mort­gage in­sur­ance fund where it can be eval­u­ated on its own. This is a con­ver­sa­tion we will be hav­ing with pol­i­cy­mak­ers at the agency and on Capi­tol Hill, and with in­dus­try stake­hold­ers,” Peter Bell, ex­ec­u­tive direc­tor of the Na­tional Re­verse Mort­gage Lenders As­so­ci­a­tion, said in a state­ment.

Bell also noted that HUD im­ple­mented sev­eral re­forms in Oc­to­ber to ad­dress the per­for­mance of the Home Eq­uity Con­ver­sion Mort­gage pro­gram.

As part of the over­haul, HUD re­vised how loan lim­its are set and the pric­ing struc­ture of its mort­gage in­sur­ance. The changes, an­nounced in Au­gust, prompted a tem­po­rary spike in de­mand from bor­row­ers try­ing to ap­ply for loans be­fore the new poli­cies took ef­fect.

“NRMLA shares Sec­re­tary Car­son’s op­ti­mism that re­cent pol­icy changes will help sus­tain the HECM pro­gram, which more than a mil­lion se­nior house­holds have used to sup­ple­ment re­tire­ment sav­ings and age in place,” Bell said in the state­ment.

On top of con­cerns about the ef­fects of re­verse mort­gages on the FHA fund’s health, con­sumer groups re­main wor­ried about how losses in the HECM pro­gram af­fect home­own­ers. Re­verse mort­gages have also been a new point of em­pha­sis in False Claims Act in­vesti- gations, ac­cord­ing to in­dus­try lawyers, even as Car­son has ex­pressed con­cern about the law’s use in mort­gage en­force­ment.

On the same day the FHA re­leased the re­port, the Cal­i­for­nia Rein­vest­ment Coali­tion and the Jack­sonville ( Fla.) Area Le­gal Aid re­leased a re­port show­ing that HECM fore­clo­sures to­taled 74,200 from April 2009 to De­cem­ber 2016, in­clud­ing nearly 33,000 HECM loans dur­ing the last nine months of 2016.

The FHA pro­vided the data to the con­sumer ad­vo­cacy groups in re­sponse to a Free­dom of In­for­ma­tion Act re­quest.

“It is an in­cred­i­ble in­crease in the num­bers and it is not clear why that is the case,” Kevin Stein, the deputy direc­tor of the Cal­i­for­nia Rein­vest­ment Coali­tion, said in an in­ter­view.

HUD of­fi­cials con­cede that there has been a spike in HECM fore­clo­sures. How­ever, 99% of the fore­clo­sures are a re­sult of ei­ther the death of the last HECM bor­rower or the bor­rower mov­ing out of the prop­erty, ac­cord­ing to HUD.

A HECM fore­clo­sure can be trig­gered when a bor­rower moves out of the prop­erty to an as­sisted liv­ing fa­cil­ity.

HUD con­tends that only 170 of the 74,200 fore­clo­sures re­sult from fail­ure to pay prop­erty taxes and hazard in­sur­ance.

Fore­clo­sures on HECM loans are not com­pa­ra­ble to for­ward sin­gle-fam­ily loan fore­clo­sures be­cause seniors are not ob­li­gated to pay prin­ci­pal and in­ter­est on their FHA-in­sured re­verse mort­gage. How­ever, fore­clo­sures oc­cur when HECM bor­row­ers stop pay­ing their taxes and in­sur­ance.

But Stein doubts HUD’s as­sess­ment of what is caus­ing the fore­clo­sures.

“There has been a huge in­crease in re­verse mort­gage fore­clo­sures, and we don’t be­lieve it is be­cause peo­ple all of a sud­den passed away,” he said in the in­ter­view.

Con­sumer ad­vo­cates are con­cerned the spike in fore­clo­sures stems from ser­vic­ing prob­lems.

“Seniors are los­ing their homes at an alarm­ing rate, and HUD ap­pears to be do­ing lit­tle more than rub­ber-stamp­ing fore­clo­sure re­quests by ser­vicers who should be mak­ing ev­ery rea­son­able ef­fort to pre­serve se­nior home­own­er­ship when­ever pos­si­ble,” Stein said in a press re­lease.

Mean­while, con­sumer ad­vo­cates at the Cen­ter for NYC Neigh­bor­hoods are “see­ing a huge jump in re­verse mort­gage fore­clo­sures,” said Caro­line Nagy, the group’s direc­tor for pol­icy and re­search.

De­spite an in­crease in re­verse mort­gage lend­ing, Nagy said, most seniors who take out re­verse mort­gages are in pretty poor fi­nan­cial shape and of­ten have health is­sues. “There is a lot of con­fu­sion around taxes,” she said in an in­ter­view.

When a se­nior takes out a re­verse mort­gage, the lender cre­ates a life ex­pectancy set-aside ac­count that cov­ers prop­erty taxes.

In cases where the ac­counts run dry and no one no­tices, the home­owner gets a state­ment from the city say­ing that he is be­hind on his taxes.

So the bor­rower is in de­fault and the HECM reg­u­la­tions re­quire a “fairly ag­gres­sive fore­clo­sure time­line,” Nagy said.

“And there are not a lot of op­por­tu­ni­ties for loss mit­i­ga­tion like a con­ven­tional mort­gage fore­clo­sure.”

“What is re­ally trou­bling is the amount of money that could save the per­son’s home,” she said. “We have been see­ing an in­creas­ing num­ber of re­verse mort­gage cases from across New York State for an amount of less than $10,000.”

Fam­ily mem­bers gen­er­ally have an op­tion to pur­chase their par­ent’s home that is headed for fore­clo­sure.

“It is a shame to lose a fam­ily home for a small amount of money,” Stein said.

Con­sumers groups are also con­cerned that ser­vicers are not ad­her­ing to HUD poli­cies that al­low non­bor­row­ing spouses to re­main in their home once the HECM bor­rower dies.

AARP sued HUD in 2014 to pro­tect the right of non­bor­row­ing spouses to re­main in their homes.

And HUD is­sued a Mort­gagee Let­ter in 2015 to ad­dress the is­sue. But fore­clo­sure is still at the dis­cre­tion of the ser­vicer, ac­cord­ing to Stein at the Cal­i­for­nia Rein­vest­ment Coali­tion.

Reps. Max­ine Wa­ters, D- Calif., and Denny Heck, D-Wash., in­tro­duced a bill to pro­tect non­bor­row­ing spouses from fore­clo­sures. The bill calls for manda­tory as­sign­ment of HECM loans to HUD if there is an el­i­gi­ble non­bor­row­ing spouse liv­ing in the home upon the death of the bor­rower.

“It is crit­i­cal that we take ev­ery pos­si­ble step to en­sure that seniors who take out re­verse mort­gages, and par­tic­u­larly their sur­viv­ing spouses, do not un­fairly lose their homes,” Heck said in a re­cent press re­lease.

The Na­tional Con­sumer Law Cen­ter and the Cal­i­for­nia Rein­vest­ment Coali­tion sup­port the bill.

“This bill would pro­vide much needed pro­tec­tions for older bor­row­ers with re­verse mort­gage loans. It would re­quire lenders to give seniors a chance to stay in their homes by re­pay­ing back taxes and in­sur­ance when they can af­ford to do so,” said Alys Co­hen, staff at­tor­ney for the Na­tional Con­sumer Law Cen­ter.

“There has been a huge in­crease in re­verse mort­gage fore­clo­sures, and we don’t be­lieve it is be­cause peo­ple all of a sud­den passed away.”

— Kevin Stein, Deputy Direc­tor, Cal­i­for­nia Rein­vest­ment Coali­tion

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