Will HUD Fixes Help Reverse Mortgages Go ‘Mainstream’?

*Will HUD Fixes Help Reverse Mortgages Go ‘Mainstream’?*
**By George Yacik**

NEW-GeorgeY***It may be make or break time for the reverse mortgage business.

****I’m sure I’m not the only one who’s been confounded by the lack of success of the reverse mortgage over the past two decades. Many seniors are in critical need of tapping into their home equity in order to supplement their retirement income, but neither Wall Street nor Washington has been able to figure out a safe, cost-effective way to make the product work for borrowers, lenders and taxpayers.

****At last count, according to the National Reverse Mortgage Lenders Association, aggregate home equity held by Americans age 62 and older totaled $3.25 trillion. That can surely help a lot of seniors having trouble making ends meet on a fixed income.

****Yet despite all the hard work of everyone from Pat Boone to Robert Wagner to Fred Thompson to the Fonz, the reverse mortgage has been a flop.

****But one of the founding fathers of the reverse mortgage says legislation currently being debated in Washington to fix HUD’s Home Equity Conversion Mortgage program may help the reverse mortgage to finally go “mainstream.”

****But if the legislation doesn’t become law, says Jeffrey Taylor, president of Wendover Consulting Inc. in Greensboro, NC, “then the program will not survive.”

****The House has already passed a bill that would give HUD the authority to revamp the HECM program by mortgagee letter. HUD wants to be able to require financial assessments and suitability tests for loan applicants for the first time, set loan limits, and mandate escrow accounts for property taxes and homeowners insurance. It now goes to the Senate.

****The HECM program is certainly in need of – and I believe worth – fixing. Last December, HUD told Congress that the insurance program that backs HECM loans is running a nearly $3 billion deficit. The main cause for that shortfall is the growing number of defaults on fixed-rate Standard HECMs, which account for about seven in 10 reverse mortgages. Nearly 10% of FHA-insured reverse mortgages are in technical default because borrowers have failed to pay property taxes and homeowners insurance.

****Currently, escrow accounts, while commonplace on conventional “forward” mortgages, are generally not required on HECM loans. Applicants are also not required to go through a financial assessment or even a credit check.

****While that’s certainly a great deal for seniors, it doesn’t do much for loan quality. So the changes HUD wants to make are way overdue.

****Taylor, the founding chairman of the NRMLA and the former head of Wells Fargo’s now defunct reverse mortgage unit, says, “What’s going on in Washington is critical to the future stability of the program.”  The changes HUD wants to make will “solidify the program” and make it sustainable so “it will be around for a long, long time.”

****Once Congress passes these changes he expects the message in TV ads to change. “I think we’re going to see a reeducation of borrowers and financial advisers who will begin to look at the reverse mortgage as a line of credit and as an emergency fund, which is what the original intention was back in the early ‘90s,” he says.

****By contrast, most HECMs taken out to date have involved the borrower maxing out the available equity to pay off existing mortgages, leaving many of them with little left over to pay taxes and insurance, hence the high defaults.

****Once the changes are in place, Taylor expects financial planners – who have been slow if not reluctant to endorse reverse mortgages for their clients – to finally embrace the product.

****“Financial planners are starting to look at reverse mortgages as mezzanine financing, which will let retirees get a line of credit to get cash without having to sell their stocks and bonds to live,” Taylor says. “There’s not another tool like this.”

****For his part, Taylor is confident that Congress will make the necessary changes to allow the product to finally flourish. “I’m an optimist,” he says. “I’ve got to be.”

George Yacik has been a financial writer for more than 30 years. After working 12 years at The Bond Buyer and American Banker as a reporter and editor, he joined SMR Research Corp. as a vice president, where he was the lead research analyst and project leader for SMR's studies on residential mortgages and home equity lending. Since 2008 he has been writing for a variety of mortgage-related and financial publications. George is based in Stratford, CT, and can be reached at gyacik@yahoo.com.