Reverse mortgage lenders, battling intensifying criticism from consumer advocates and some legislators, are now facing a financial squeeze as well. To close a widening budget gap in the Home Equity Conversion Program (HECM), the Federal Housing Administration (FHA) has slashed by 10 percent the maximum amount borrowers can receive in FHA-insured reverse mortgages.
Declining property values have created an estimated $800 million shortfall in the popular FHA program, which accounts for nearly 90 percent of all reverse mortgages originated. The department of Housing and Urban Development (HUD) had asked Congress for a credit subsidy to close that gap, but legislators directed the agency to reduce the program’s costs instead.
“We are taking steps to make certain the reverse mortgage program remains viable for current seniors as well as the next wave of baby boomers who may be considering it as an option,” FHA Commissioner David Stevens said in a press statement announcing the change in the program’s “principal limit factors.”
The average HECM loan is $159,000, and borrower interest in the product has been growing. Total HECM originations increased from 22,000 in 2003 to 112,000 in 208, when seniors tapped more than $17 billion in home equity. Through the first six months of the current fiscal year, reverse mortgage lenders had originated more than 70,000 loans. The new restrictions will affect “tens of thousands” of senior homeowners, according to Peter Bell, president of the National Reverse Mortgage Lenders Association, who estimates that nearly 1 in 5 prospective borrowers will no longer qualify for the loans.
Further restrictions are likely next year, when HUD officials have indicated that they are going to be asking some “very serious questions” about the program, among them: Whether to limit the maximum equity borrowers can tap for anything other than “essential” expenditures, and whether to impose a “suitability” standard on lenders, requiring them to verify that the reverse mortgage in the interest of the borrower. “These are issues that come up all the time with lawmakers,” Meg Burns, director of single-family program development for the FHA, said at a recent conference.
HUD has already adopted new regulations governing the counseling that is mandatory for HECM borrowers. Under the new standards, counselors must:
- Pass an exam approved by the American Association of Retired Persons (AARP) and re-take the exam every three years; and
- Take continuing education classes and be re-certified by HUD every two years.
Additionally, counselors must give borrowers information on the financial implications and tax consequences of reverse mortgages and outline possible alternatives to them; and lenders must give borrowers a list of at least 9 HUD-approved counseling agencies, including “at least one within a reasonable driving distance for the purpose of face-to-face counseling.”
HUD’s new standards respond to criticism from consumer advocates, who have complained bitterly about the inadequacy of counseling for reverse mortgage borrowers, and their vulnerability to misleading marketing practices. Those concerns were echoed in a recent report by the Government Accountability Office (GAO), which recommended that bank and credit union regulators and the Federal Trade Commission “take steps as appropriate to strengthen oversight and enhance industry and consumer awareness” of potential abuses and questionable marketing practices the GAO had identified.
In addition to strengthening the HECM counseling requirements, HUD has increased the program’s counseling budget from $3 million in 2007 to $8 million for the coming fiscal year. That is a notable improvement, but still amounts to only $80 per mortgage – “too little to pay for several hours of in-person advice from a skilled financial professional,” the National Consumer Law Center (NCLC) noted in a recent report, highlighting multiple concerns about reverse mortgages. Even the most effective counseling programs can’t protect consumers from “the powerful market forces at play in the reverse mortgage industry,” according to the report, which echoed warnings that the marketing of reverse mortgages resembles the marketing of subprime loans in dangerous ways.
“The subprime debacle showed that loan originators frequently sacrificed responsible lending in the name of greater value, higher fees, higher interest rates, and more points,” the NCLC report asserted, warning, “the same forces…are now growing in the reverse mortgage market.”
NOT ENOUGH HELP
The Obama Administration’s loan modification program is reaching more troubled borrowers, but preliminary statistics indicate that the relief provided is only temporary – delaying foreclosures, but not ultimately avoiding them. The Congressional Oversight Panel monitoring the program reported recently that only 2000 of the approximately 400,000 trial modifications completed through September had been converted to permanent status – a conversion rate of 1.26 percent.
“No one is really sure why the conversion rate is so low,” Mike Zoller, an assistant economist at Moody’s Economy. Com told CNN Money recently.
Under the program, foreclosures are deferred for three months to give lenders a chance to review the borrowers’ financial qualifications and give borrowers a chance to demonstrate that they can make the payments on their restructured loans.
Lenders say they are having trouble obtaining the required documentation from borrowers; borrowers complain that lenders and servicers repeatedly lose the documents they submit. To address those problems, the Treasury Department recently extended the trial period to five months and many participating lenders say they have hired companies to go door-to-door to help borrowers prepare the required financial information.
Industry executives and Administration officials also point out that the Home Affordable Mortgage Program (HAMP) got off to a slow start; most of the trial modifications have been initiated in the past two months, making the preliminary conversion statistics misleading. But some analysts contend that neither time nor intense efforts to collect borrower documentation will do much to alter those disappointing results.
“Everyone is going to be shocked at the low conversion rates,” Guy Cecela, publisher of Inside Mortgage Finance, told CNNMoney. “The president’s program won’t result in a significant number of loans being modified,” Cecela predicted, “and it won’t put a significant dent in foreclosure rates.”
The foreclosure prevention initiative may not be doing as much as hoped to help troubled homeowners, but there is one area in which the results have been positive – the employment of loan modifiers. The Wall Street Journal reported recently that four of the nation’s largest loan servicers have hired a combined total of 17,000 workers this year. Well Fargo has added 7,000 employees, nearly doubling its restructuring staff and Citigroup has created 1,400 new positions, 800 of them in a new servicing center opened in Arizona.
New companies entering the loan modification arena have contributed to the hiring trend. Private National Mortgage Acceptance (PennyMac), which opened its doors about a year ago, now employs a staff of 120, many of whom have considerable expertise in the lending arena; PennyMac’s founders were former exectuives at Countrywide Financial, which originated many of the failed loans PennyMac and others are now trying to modify.
THE WRONG TARGET
Industry analysts are asking why loan modification efforts have been disappointing. (See related item.) Economists at the Federal Reserve Bank of Boston have suggested an answer. Most foreclosure prevention programs, including the Obama Administration’s HAMP (Home Affordable Mortgage Program) initiative, are designed to reduce mortgage payments, according to a recently but loans that are “unaffordable” at origination are not the primary cause of defaults, these economists contend in a recently published study. Job losses and declining home prices are much stronger indicators of default risks, they conclude in an analysis of foreclosure trends.
The Fed economists estimate that a 10 percentage point increase in a borrower’s debt-to-income ratio increases the probability of a serious (90 days or more) delinquency by 7 percent to 11 percent; a 1 percentage increase in the unemployment rate, by contrast, boosts default risks by from 10 percent to 20 percent, and a 10 percentage point decline in home prices increases the risk by more than half.
“An important implication of our analysis,” the authors suggest, “is that policies designed to reduce foreclosures should focus on ameliorating the immediate effects of job loss and other adverse life events, rather than on modifying loans to make them more affordable on a long-term basis.”
The Federal Deposit Insurance Corporation (FDIC) is also focusing on the impact of job losses on foreclosures. The agency is “encouraging” banks that have acquired failed institutions to provide temporary relief to borrowers who have lost their jobs or suffered salary reductions, by reducing their loan payments to “affordable levels” for up to six months.
“This is simply good business,” FDIC Chairman Sheila Bair said in press statement announcing the plan, “because foreclosure rarely benefits lenders and would cost the FDIC more money, not less. “With more Americans suffering through unemployment or cuts in their paychecks,” Bair added, “we believe it is crucial to offer a helping hand to avoid unnecessary and costly foreclosures.” Bair described this approach as “a win-win for the borrower, who can remain in his or her home while looking for a new job, and for the acquiring institution, which continues to receive payments on the loan.” The FDIC also benefits, she said, from the reduction in losses the agency must absorb.
Reflecting a similar mindset, Sen. Jack Reed (D-RI) has proposed legislation aimed at helping homeowners who “experience a sharp reduction in income through no fault of their own.” Reed’s bill, co-sponsored by Senators Sheldon Whitehouse (R-RI), Dick Durbin (D-IL), and Jeff Merkley (D-OR), would provide more than $6 billion federal funding for revolving loan funds stands can use to offer grants or subsidized loans to homeowners who have suffered employment-related setbacks. The legislation would also add enforcement teeth to the HAMP program, by requiring lenders to evaluate a borrower’s eligibility for a modification before initiating a foreclosure action, limiting the foreclosure-related fees lenders can charge, and making noncompliance with the statute a defense against foreclosure.
“More and more households are finding that even with a fixed-rate mortgage that they could afford before the recession, they are just one pink slip away from losing their biggest investment,” Reed said in introducing the “Preserving Homes and Communities Act.” “My bill provides targeted relief to qualified homeowners so that more families can keep their homes, protects communities from suffering even greater financial losses, and sets us on the path to stabilizing the housing sector as a foundation for a lasting economic recovery.”
(A LITTLE) RESPA RELIEF
Despite the pleas of industry executives and their warnings of a lending disaster in the making, the Department of Housing and Urban Development (HUD) won’t bend on the implementation of the revised RESPA rules, which will take effect January 1, as planned. However, agency officials have agreed to delay aggressive enforcement for 120 days, to give lenders time to adjust to the sweeping changes in the form and content of the disclosures they must give mortgage borrowers. The new rules require, among other changes, that lenders use a revised and standardized form for the ‘good faith estimate,” and adopt a revised HUD-1 Settlement Statement comparing borrowers’ final costs with the lenders’ initial estimates.
Most of the major financial industry trade groups have been urging HUD to withdraw and revise the new rules, hoping the public warnings and intense lobbying would at least delay the most extensive overhaul of the RESPA framework in more than a decade. But HUD officials have remained adamant that the new rules, drafted in the Administration of former President George Bush, will go forward.
“While we will not delay implementation…we are sensitive to the concerns of the industry as it integrates these new rules into their day-to-day business practices,” HUD Secretary Shaun Donovan, said in a letter to lenders. Donovan noted that he has instructed the members of HUD’s Mortgagee Review Board to “exercise restraint” in enforcing the rules and has asked other banking industry regulators to follow suit for the first 120 days after the rules take effect. “We will work with those who are making an honest effort to work with us as we implement these important new consumer protections,” Donovan said.
While expressing appreciation for the forbearance Donovan has promised, industry executives continue to press their argument that HUD should withdraw the rules and substantially rewrite them. In an October 13 letter to Donovan, five trade groups, including the Mortgage Bankers Association, the American Bankers Association, and the Consumer Mortgage Coalition repeated their warning that “despite the best motivations of HUD and the sincerest efforts of the industry, we are headed for a mortgage market train wreck on the tracks of RESPA compliance.”
The 33-page letter details extensive complaints about the rules and contends that the guidance HUD has issued to date, in the form of frequently-asked-questions, has failed to address industry concerns or answer outstanding questions about the implications and impact of the new RESPA requirements. Many of the FAQs are “further complicating the process of developing systems that will enable lenders and other mortgage service providers to deliver RESPA-compliant loans,” the letter asserts, noting that some of the HUD’s interpretations are “inconsistent with the rule,” while others “clearly have unintended consequences to consumers.”
The trade groups urge HUD to resolve still unanswered questions, then provide “a reasonable implementation period” before making compliance mandatory, and notify the public that during that implementation period “use of the new or old forms will not constitute a violation of RESPA.”
“Without taking the steps recommended above,” the letter warns, “widespread consumer confusion, crippling market dysfunction, and a strong possibility of an imminent litigation morass are on the horizon.”
Recent reports of modest but continuing increases in home sales look somewhat less encouraging when you realize that nearly one-third of those transactions involved distressed sales – short sales or foreclosures. Still, the National Association of Realtors (NAR) was able to find at least some good news in the data compiled for the association’s annual “Profile of Home Buyers and Sellers. Particularly encouraging, according to the NAR: First-time buyers accounted for the largest proportion of purchases on record in the past year. Their 47 percent market share was up from 41 percent in 2008 and topped the previous high of 44 percent in 1991. Why is this good news? Because “the last cyclical peak of first-time home buyers was during the last noteworthy downturn,” Paul Bishop, vice president of research for the NAR, explained at the association’s recent annual conference. And that first-time buyer surge, he recalled “started the chain reaction that led the nation out of recession.”