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Reverse mortgages remain widely misunderstood, despite growth, expert says

The Federal Housing Administration’s (FHA) reverse mortgage program, known as a Home Equity Conversion Mortgage (HECM), has seen many changes over the past two years. In May, the U.S. Department of Housing and Urban Development (HUD) rolled out another round of proposed rules for HECMs. Peter Bell, president and chief executive officer of the National Reverse Mortgage Lenders Association, spoke with Scotsman Guide News about the potential impact of the new regulations and why he believes the demand for reverse mortgages will grow.   

There always seems to be a lot of media attention about reverse mortgages in proportion to the modest size of the program. Do you think the program is misunderstood?

Peter BellYes, it is vastly misunderstood. For some reason, a lot of members of the press like to bring out anytime there is a negative story [about reverse mortgages]. The most common one I see is that widow Brown is losing her home because of her reverse mortgage. When you go through the story, you realize it is because she hasn’t paid taxes. To me, [even] if you have no mortgage, and you don’t pay taxes, what happens?  You lose your house. It becomes dramatic when they say that it is because of the reverse mortgage. We see a lot of stories about adult children who didn’t know that mom and dad took out a reverse mortgage, and now they are saying they are losing their home. But it wasn’t their home. It was mom and dad’s home, and mom and dad took the reverse mortgage, took the money and spent it, and now they are gone. Both local newspapers and local television channels love that kind of story, where somebody elderly is being put out on the street supposedly by the big, bad lender.

There have been a number of new regulations. Which ones have had the greatest impact on the industry?

Over the last couple of years, HUD, the industry and other stakeholders have come together in a series of discussions to talk about what we’ve learned and what changes can be made from it. As a result, HUD has made a number of changes over the past couple of years. One lesson was that reverse mortgages perform best when the money is drawn out slowly over a longer duration as opposed to when all of the money is taken upfront, is spent, and then the homeowners can’t pay their taxes down the road. That recognition led to a couple of major changes, which were implemented by mortgagee letter by HUD. The first is a principal-limit use restriction, which basically limits the amount of money that you can take out on a reverse mortgage.

Earlier this month, HUD rolled out new proposed regulations. Have you been able to gauge the impact of those?

Those proposals are codifying the changes that have already been made, for the most part. There are a few new items in there but, for the most part, that document is simply putting into regulations the items that they have already implemented by mortgagee letter. The principal-limit use restriction was put out by mortgagee letter, and now it is in the proposed rule. The other major one is a financial assessment, which is an underwriting [requirement] to ascertain that the borrower has the history of meeting their obligations and the wherewithal to be able to pay their obligations, their taxes and insurance, and homeowner dues, and still have enough to live on.

I’ve seen media reports that say the outlook for reverse mortgages might be good because of the aging population and because equity has been rising. Do you agree with that?

Absolutely. The demographics show a need for this. There is something like 65 to 75 million boomers entering retirement. Half have no savings other than the wealth in their home, and half of them have under $125,000. So clearly the home equity is going to be a major part of the resources that they use to fund longevity.

Is anything out there about the economy or the regulatory environment that concerns you?

There was one new item that took us by surprise in the proposed rule. It is a limitation on the interest rate increases that would be allowable under the HECM annual adjusted loans. What they are proposing is to have a 5 percent lifetime cap but, of greater concern, is a 1 percent annual cap. A lot of loans now are made with an annual cap of 2 percent, and our concern is that if you compress that from 2 percent to 1 percent at a time when we are entering a rising interest rate environment, that investors will either back away from buying this product, or they will demand a higher margin on the interest rate. So the interest rate will be higher upfront to compensate for the fact there is a limitation on how much it can go up in a year.

What is your forecast for participation in the program?

Like I said before, I think the demographics show that the demand is going to rise. More people will need it, and [the program] is becoming increasingly recognized as a component of a comprehensive approach to managing resources through retirement. In terms of the mortgage industry, everything that you read shows you that refis are tapering off and the refi business will pretty much shrink down to a trickle as interest rates rise. There is some new buyer business, but not enough to replace all the refi business. As a result, we are seeing more mortgage bankers and mortgage brokers take a look at the reverse mortgage space. The question is whether all these people entering the business will actually stay in the business. It is not the same as the forward mortgage business. It is a different relationship with clients. It is a different mindset. The customer care required is perhaps a little deeper than on the forward mortgage. A question in my mind is whether these newcomers entering the space will actually make the commitment required to be successful, or whether they will kick the tires, try it and move on.


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