REVERSE MORTGAGE INFORMATION: Tools, News and Resources to Help Seniors Decide

The US Department of Housing and Urban Development (HUD) is seeking public input for a proposal to standardize and improve counseling for its Home Equity Conversion Mortgage (HECM) reverse mortgage program. HUD has a longstanding requirement that requires all senior homeowners wishing to participate in the HECM program to have a counseling session with a HUD-approved counselor. The counseling requirement is intended to ensure borrowers are making informed decisions.

The new proposal is aimed at standardizing qualification testing for HECM counselors and, also, looks to establish a nationwide roster of HUD-qualified counselors:

SUMMARY: This proposed rule would amend HUD’s HECM regulations to establish testing standards to qualify individuals as HECM counselors eligible to provide HECM counseling to prospective HECM borrowers. The rule also would establish a roster of eligible HECM counselors and provide for their removal for cause. HUD believes that this proposed rule would contribute to improving the quality of HECM counseling. HECM counseling helps to enable elderly homeowners to make more informed decisions when considering whether to pursue a HECM loan.

Notice of the proposed changes was posted in the Federal Register on January 8, 2006. HUD is seeking general public comments on the changes as well as comments on two more specific issues:

First, the Department is seeking input from housing counseling agencies and counselors concerning the implementation of the HECM roster for HECM counselors who have already passed the HECM counseling exam. Specifically, should HUD adopt a delayed implementation for those counselors that have already passed the exam, or alternatively, should those counselors automatically be included in the roster for a period of time before they must repeat the exam?

Second, HUD invites comments that address whether a counselor should be required to take the exam on a regular basis, for example, every 2 years, in order to remain on the roster, and, if so, how often should housing counselors take the exam to remain on the roster.

Public comments on the proposal are due March 9, 2007 as follows:

Regulations Division
Office of General Counsel
Departmentof Housing and Urban Development
451 Seventh Street, SW.
Room 10276
Washington, DC 20410–0500

Interested persons also may submit comments electronically through The Federal eRulemaking Portal at www.regulations.gov. HUD strongly encourages commenters to submit comments electronically in order to make them immediately available to the public.

The proposed rule will strengthen the quality and consistency of HECM counseling. Reverse mortgages are inherently complex and hard to comprehend. Required counseling is a very important part of the HECM process and we believe this effort to further improve a crititcal consumer safeguard deserves quick implementation.

The following is a press release from [tag]Ginnie Mae[/tag] that has important ramifications for the [tag]reverse mortgage[/tag] industry:

Washington, DC – Ginnie Mae today announced it is creating a [tag]Home Equity Conversion Mortgage Mortgage-Backed Security[/tag] (HECM MBS). The HECM MBS will allow approved issuers to securitize and sell their Federal Housing Administration (FHA) insured home equity conversion mortgage loans in the form of a [tag]Ginnie Mae MBS[/tag]. [tag]HECM[/tag]s are commonly referred to as reverse mortgages, and are designed to allow older homeowners to convert the equity in their homes to monthly streams of income or lines of credit.

“The Ginnie Mae HECM MBS is an extension of our existing mission to expand access to affordable housing opportunities in America,” said Robert M. Couch, President of Ginnie Mae. “Home values have grown significantly over the years, and reverse mortgages are a good way for many seniors to stay in their homes, maintain ownership, and access an additional stream of income to enhance their retirement.”

The Ginnie Mae HECM MBS will provide the mortgage-backed securities marketplace with a full faith and credit vehicle for the securitization of HECMs. The HECM MBS will increase liquidity by providing capital market funding sources to primary market HECM lenders, broadening distribution channels for HECM loans and expanding the investor base for the HECM product.

The increased competition among lenders should result in expanded product offerings and reduced costs to borrowers. The Ginnie Mae guaranty allows mortgage lenders to obtain better pricing for their mortgage loans in the secondary market.

“The HECM program is clearly a key growth area for [tag]FHA[/tag]. We’re working hard to ensure that we keep pace with the needs of our low-to moderate-income borrowers, making programmatic changes to keep up with the times,” said Federal Housing Commissioner Brian D. Montgomery. “Ginnie Mae’s securitization of HECMs will help us keep pace.”

Under the Ginnie Mae structure, approved issuers will have the flexibility to pool HECM loan draws and securitize the balance through a Ginnie Mae security. The HECM MBS will be a new class of Ginnie Mae security under the umbrella of the Ginnie Mae II Custom Program. The HECM MBS will be an accrual class pass-through security. Accordingly, the HECM MBS will not have a payment schedule. Rather it will accrue interest on the securitized principal until such time as payoffs are received. The HECM MBS can be sold to investors as a stand-alone security or be used as collateral for a [tag]Ginnie Mae Real Estate Mortgage Investment Conduit[/tag] ([tag]REMIC[/tag]).

Reverse mortgages allow homeowners aged 62 and over to convert home equity into cash while living at home for as long as they wish. Borrowers continue to own their homes, and do not need to make any monthly payments. Instead, they can choose to receive the funds as a lump sum, line of credit, or monthly payment. The loan comes due only when the last borrower moves out, dies, or sells the home.

According to a 2006 Government Accountability Office (GAO) report, today’s older Americans are expected to comprise a larger share of the population, live longer, and spend more years in retirement than previous generations. Americans 65 and older now total about 34 million people. This number is expected to reach 70 million by the year 2030.

The Center for Retirement Research has found that 43 percent of working households were in danger of having too little income to fund their retirement needs. Historically, retirees have not viewed primary residence equity as a source of consumable wealth, except in the case of financial emergencies. Reverse mortgages are expected to become more attractive.

The creation of a secondary market by Ginnie Mae is a vital enhancement to HECM lending and will provide the platform for lenders to repackage their capital into new loans and attract new lenders.

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Ginnie Mae is a wholly owned government corporation within the U.S. Department of Housing and Urban Development. Ginnie Mae pioneered the mortgage-backed security (MBS), issuing the very first security in 1970. An MBS enables a mortgage lender to aggregate and sell mortgage loans as a security to investors. Ginnie Mae securities carry the full faith and credit guaranty of the United States government, which means that, even in difficult times, an investment in Ginnie Mae is one of the safest an investor can make.

Much is written about how [tag]reverse mortgages[/tag] differ from traditional (“forward) mortgages. Here’s a subtle difference we’ve noticed but not seen discussed previously:

While traditional mortgage lenders use every opportunity to put mortgage rate information in front of customers’ eyes, a potential reverse mortgage borrower has to do quite a bit of work just to get an idea of the going rate for a reverse mortgage.

Examples:

• a random sampling of five internet ads for [tag]reverse mortgage lenders[/tag] showed that none of them included specific information about current rates on their landing pages;
• a search for the term reverse mortgage interest rates brings up lots of technical info on how rates work, but few specifics like “Today’s Rate Is __%. Actually, one of the results from this search – a link to [tag]Wells Fargo[/tag], the largest reverse mortgage lender – did look promising: “Visit our Today’s Rates page to view current interest rates for a variety of products. But clicking through brought us to this page which includes rates for just about everything but reverse mortgages.
• a call to another prominent reverse mortgage lender’s 800-number to ask about current rates met with a promise to have a specialist call back if we cared to leave our name and number;
• the website for the [tag]National Reverse Mortgage Lenders Association[/tag] ([tag]NRMLA[/tag]), has this information, but restricts access to “members only. Huh? Only the lenders get to know the rates?

Now there are some reasons for all of this.

First, there is no real interest rate competition among lenders. Reverse mortgage rates are tied to indexes and margins that are the same for everyone. Lenders compete on service, reputation, and, to a lesser degree fees, but not interest rates. Using advertising resources or web real estate to tout interest rates that are standardized across the industry probably doesn’t make much sense.

Second, reverse mortgage interest rates can be bewildering and easily misunderstood. Having a knowledgeable person explain these rates to customers is a good idea and is one of the reasons counseling is a mandatory requirement for potential reverse mortgage borrowers.

Third, there are no readily available “apples-to-apples interest cost comparisons between different programs and options. One reverse mortgage may have a higher nominal rate, but still be the better choice in certain situations. The standard [tag]APR[/tag] that consumers are familiar with in comparing regular loans doesn’t exist for reverse mortgages – at least not without first obtaining a lot personal information (age, home value, etc.) from the customer

Finally, the interest rate in a reverse mortgage transaction simply may not be as important to the borrower as it is with other loan transactions. After all, reverse mortgage borrowers don’t make monthly loan payments to the bank and never have to worry about owing more than the value of their home no matter how rates change. On the other hand, interest rates do help determine how large a reverse mortgage the borrower can qualify for – but this relationship isn’t understood by many people.

Still, we thought there was need for a readily available source for current (and historic) reverse mortgage interest rate info. Accordingly, we are pleased to unveil the following reverse mortgage rate webtool to help meet this need. We’ve tried to make it as easy to use and understand as possible – simply select date ranges to see reverse mortgage rate information for the listed products and time periods.

A permanent link to this tool will be prominently included on the Reverse Mortgage Information website menu. We hope visitors find it useful and, if you have suggestions for making it better, please contact us. In future posts we’ll comment on reverse mortgage interest rate trends and describe some ways this information can be used in your decision-making.

The [tag]U.S. Department of Housing and Urban Development[/tag] ([tag]HUD[/tag]) – overseer of the popular HECM reverse mortgage program – recently released a new [tag]Mortgagee Letter[/tag] aimed at clarifying Home Equity Conversion Mortgage (HECM) counseling requirements.

In the letter (2006-25), HUD references some recently publicized cases of reverse [tag]mortgage fraud[/tag] and makes it clear it expects HECM counselors to take an active role in educating consumers about how to avoid [tag]reverse mortgage fraud[/tag] schemes.

Preventing Mortgage Fraud Against HECM Borrowers

It has come to HUDs attention that HECM borrowers are increasingly becoming targets of mortgage fraud scams. HUD has learned of a recent fraud scheme involving loan officers originating HECMs and arranging to keep the HECM borrowers loan proceeds. In one case the loan officer arranges for the title company to pay the loan proceeds through two checks. One check is sent to the senior and the other is kept by the loan officer. In another case loan officers are convincing seniors that a standard procedure in the HECM origination process is to sign over the loan proceeds to the loan officer for future disbursement to the HECM borrower. In these cases the loan officer may make a few payments but then keeps the balance of the funds. In an effort to warn HECM borrowers of these potential fraud schemes, HUD advises HECM counselors to discuss the potential of mortgage fraud with their clients. Counselors are to explain the standard ways in which HECM borrowers can access their loan proceeds. Counselors should warn clients against signing over their funds to loan officers or other parties involved in the mortgage transaction. While this type of fraud does not happen in the majority of HECM transactions, HUD believes it is important to educate prospective HECM borrowers about how to avoid becoming victims of fraud schemes (emphasis added).

We’ve previously written about some of the reverse mortgage fraud cases HUD references in Mortgagee Letter 2006-25 and recommend that borrowers educate themselves about these cases and the techniques being used by reverse mortgage scam artists.