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New rules won't slow reverse mortgage momentum

In August, the U.S. Department of Housing and Urban Development (HUD) announced new rules, effective this past week, that lowered the borrowing limits and restructured the cost of insurance for reverse mortgages. Peter Bell, president and CEO of the National Reverse Mortgage Lenders Association (NRMLA), discussed those changes. He also addressed a recent bulletin issued by the Consumer Financial Protection Bureau (CFPB) that warned seniors against using a reverse mortgage as a strategy to defer taking Social Security early.

In August, HUD officials indicated that the insurance costs on reverse mortgages would rise under the new structure and the reverse mortgage volume will likely be reduced as borrowing limits have been reduced, but has that been mischaracterized in any way?

peterbellI believe it is. The upfront insurance premium is going up, but the annual insurance premium is going down. So, after about four years, somebody starts getting ahead. The amount of money that people will be able to have access to is diminished by the new principal limit factors.

Do you expect these changes to reduce demand for reverse mortgages?

No, I don’t think so. Maybe in the immediate term, but only because the demand was accelerated to meet the deadline prior to this Monday. There may have been a lot of activity accelerated into September. We may see a slowdown in October and November but, over time, the demographics are such that I don’t think this market will be impacted. 

HUD announced these changes as a way to stabilize the insurance fund, saying the reverse mortgage program was a big net loser for the fund. Do you take issue with that?

Yes, with a couple of aspects of it. First of all, I don’t believe they have the proper tools and methodology for valuing the funds. You have had such volatile swings from year to year. So, for instance, a few years ago, they said that the fund will be negative ‘X’, and the next year it was positive ‘Y,’ and it was a huge swing. And the difference was that the first year they projected that interest rates would go up in the next year, and would compound at those higher rates for the remaining three years. It turned out that rates didn’t go up that much. It made a tremendous change in it. Therefore, the way that they measure the performance has huge volatility. My goal is to work with FHA [Federal Housing Administration] and members of Congress to essentially establish a separate fund for HECMs [home equity conversion mortgages] from the regular forward-mortgage fund, and get the proper tools and metrics in place for assessing the performance of the HECM fund.

I know from NRMLA’s initial press release that you weren’t happy that HUD lowered the borrowing limits. Is there a better way they could have handled that?

We believe there is alternative ways to enhance a financial performance of the program. The traditional levers that HUD has used have been to reduce the principal limits and/or raise the insurance premiums. This time they did a combination. They raised some of the MIP [mortgage insurance premium], lowered some parts of the MIP, and they reduced their PLFs [principal limit factors]. But we believe there are a lot of issues with the way the back end of the program is handled — when loans are being resolved; when loans get assigned to HUD and are serviced by HUD’s servicer; or when people pass away and the loan has to go through an estate. By expediting that process, you could shave lots and lots of cost off the program to the FHA fund. That is what we are hoping, that HUD will focus on that, so they can restore some of the PLF cuts.

Aside from HUD’s changes, the Consumer Financial Protection Bureau, in a recent bulletin, appeared to undercut the industry’s effort to brand reverse mortgages as a superior home equity line product for seniors. What do you have to say about that?

I think they took a very narrow approach to the subject matter. They assumed that the concept of the Social Security deferral strategy would be that somebody would start collecting Social Security today  — for example, get $2,000 a month, [and] instead they would start taking $2,000 a month every month out of their line of credit. In other words, there would be a direct dollar-for-dollar replacement of the Social Security with the reverse mortgage proceeds. They say, if you do that, it doesn’t add up. But that is not what the deferral strategy is. The deferral strategy is for people who feel they can get by [without Social Security payments], but may need a little bit more money, and the line of credit from the reverse gives them the option to defer because they know they have standby line of credit if they need it.

Can reverse mortgage’s still be marketed successfully as a superior HELOC for seniors?

It has its advantages. It is optional whether anybody makes payments. You can take a HECM, and you can draw down money. You can pay it back into the line of credit if you want, but you certainly cannot make any payments, and just let it accrue. Whereas with the home equity line of credit, you have to make those payments. So, if people are on a fixed income, sometimes making those payments is difficult. Also, if the property value goes down on a HELOC, the bank may call in the line of credit. They have the right to do that if the collateral does not support the loan. Whereas with the HECM, because of the FHA insurance, there is not that requirement. Even if the property goes down in value the HECM line of credit will continue to be available.

Can the industry overcome the CFPB’s latest warning, though?

Yes, I think so. I have yet to be at a cocktail party and hear anybody say that are doing something, or not doing something, because they heard from the CFPB. 


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