FHA – About to get into our tax dollars?

Like that is a big surprise… I’ve been telling people that we would get there since the first quarter in 2007 when it was obvious that sub-prime was going to be out of the picture, and all that pressure started heading to FHA.   I’m actually baffled that it has not yet happened.

For those of you who don’t know, I used to work for an Equifax affiliate here in Macon.  My brother, who also worked for Equifax until 2001, used to have a cute speech he would give finance companies when managers would ask him credit questions about their customers. 

It went something like this:  “You know, we really, really appreciate your business, and I don’t want to say or do anything that would harm our relationship.  We want you to pull credit files!  But, really… If you are going to make loans to people like this, why even bother to look at their credit?  I mean, they obviously never paid anyone, so what made you think you were going to be so lucky?”

Now, FHA isn’t doing everything that the sub-prime guys were doing toward the end when Fannie / Freddie got into the business & started squeezing them out, but FHA was (and to a lesser extent, still is) guaranteeing loans that were absurd. 

It didn’t matter when house prices were going up and up.  That is how the SP boys covered up their credit quality issues for so long.  But, given that they are not going up any longer, what makes us think FHA will be so lucky?

I’m sure somebody is going to give me the 1934 speach and how there has never been a problem with FHA.  So, I’ll type some more to help you find my thinking on the delayed timing of the potential FHA bubble.

You will see in the article referenced below (which in turn references an article that will be in the Wall Street Journal tomorrow) that FHA 90+ delinquency is now 7.8%.  That is an un-freaking-believably high number, first off.  No small fiance company could ever survive such an insanely high delinquency rate, even with car titles for collateral.  

Much more importantly, whenever your growth is exploding, the actual measure of that delinquency is  terribly understated.  I call this the “John Henderson effect.”

What’s does the “John Henderson effect” mean?  In the small loan business in Macon (can you tell I had one?), all the managers knew about John Henderson.  If you knew John as a buddy (as opposed to a potential employer), you knew HOW John could walk into any loan office, take over, and make the books look a thousand times better in a short time.  He would tell you… “if they can walk into my office, they cannot leave without a loan.  If they fog a mirror when I put it under their noses, they qualify.”  (I first heard the “fog the mirror” statement more than 20 years ago!)

The reason growing fast by making bad loans makes your books look good today, is because your delinquency is always stated as a percentage of your outstanding loans… TODAY.  Your delinquencies, however, are coming from loans that you made YESTERDAY.  So, all you have to do to suppress delinquency, is grow FAST.

The problem is that we could not outrun sub-prime and Alt-A delinquency forever by making more and more bad loans.  The housing & mortgage industries are John Henderson’s employer.   We found the brick wall.  Boom.

Back to FHA problems.  When you read the Reuters blurb linked below, you will see that the growth in FHA loan volume has been insane over the past 2 years.  You already knew that.   My point here is that FHA didn’t have its bubble run in 2002 – 2006 like all the other loan programs… the FHA bubble run started in 2007.

OH MY LORD!  DO YOU MEAN TO SAY THAT 90+ DELINQUENCY IS UP TO 7.8% IN AN ENVIRONMENT WHERE THE VOLUME HAS GROWN BY 46% IN 2009 VS. 2008????  YOU MEAN EVEN THE JOHN HENDERSON EFFECT CAN’T COVER UP THE RISE IN DELINQUENCIES ANY BETTER THAN THAT?  HOW BAD WOULD IT BE IF THE VOLUME WAS STAGNANT?  15%, 25%, EVEN MORE? 

Now, I am concerned, not just because I close FHA mortgages for direct referrals, but because all of this will also affect, no doubt, the HECM program for seniors, who were never involved in the bubbles. 

BTW- I searched this morning for more updates on the section of the appropriations bill relative to cutting HECM benefits, and I can’t find any confirmed changes from my previous post on the subject.  It seems to be in limbo.  As I understand it, the appropriations bills have to be consolidated and passed by the end of the month, so news should be available at any time.  Still, I expect to see a reduction in HECM benefits as proposed by the House, because everybody sees FHA’s insolvency on the way.

Note that you can see the budgeted dollar amounts for all of HUD’s activities in the bill as it stands for the 2010 budget as I did when I was looking for that HECM information this morning.  The numbers for max guarantees and direct loan budgeting for FY 2010 does not jive with the information you will read via the link at the bottom to today’s post.

The bottom line?  Neither they, nor the FHA MIP insurance fund, will make it though 2010 as budgeted.  I expect emergency appropriations and big injections of your tax dollars by perhaps next Summer. 

Unfortunately, that event may either be preceded or otherwise trigger more serious tightening in FHA 203(b) & (k) forward mortgage underwriting standards.  And, I fear that it will result in reduced loan guarantees for seniors on the HECM program (for purchase & refi).  THOSE changes, if they occur, will put more pressure on house prices, wipe out the “less bad” news in housing that has recently shown up, and further frustrate us all.  What a vicious cycle.

As usual, the message here for potential homeowners or seniors is probably “Do it now, or forever hold your peace!”  Or, maybe you should tell them “Get it while you still can!”

Here is that link to Reuters:

http://blogs.reuters.com/rolfe-winkler/2009/09/04/wsj-loan-losses-spark-concern-over-fha/

Me thinking out loud.

An objection that I often run into with Seniors as it relates to a reverse mortgage has to do with fear of loosing the home.  If you’ve done any reading at all on the subject matter, you already realize that the presence of FHA insurance via the HECM program completely eliminates the possiblity of somone who is alive and living in the home from loosing it unless he or she refuses to pay property taxes or to make an insurance claim to fix major damage. Of course, someone has to do those things, regardless.

That having been said, I want to descibe a situation that occured in my life over the course of the past few years.  My mother-in-law began to experience failing health in 2002.  By the time 2006 rolled around, her health came ot the point where she needed full time care.  We were lucky enough to be able to afford that full time care in the form of an upscale nursing facility, and then for her last year, at home care, until she passed away in May of this year.

We were not forced to seller her home in order to qualify for Medicade to pay for her nursing care.  As you probably know, Medicare is good for 90 days.  Most would be fortunate to only have 90 days of tenure in a nursing home.  To qualify for Medicaid, you must be broke.

Now, in my mother in law’s situation, the net cost of her care in conjunction with the past 2 years in the stock market (which was our funding source), we are presently down approximately $500,000. 

You read that figure correctly.  Between Carlyl Place here in Macon & the uncovered portion of her medications, we ran a little under $10,000 per month for an extended period, and it actually was cheaper to have nurses come into the home for the period after that.  The financial markets were able to take care of the rest.

Where does that leave me an my wife?  Well, between these events and the essential failure of the forward mortgage system in our country (which had always provided our means of making a living), we are very nearly dead broke.  So, if either of my parents (currently in their 70s) have to go in the nursing home, we are dead in the water.

Now, a typical nursing home stay would be cheaper than our experience… let’s say 4k / month with uncovered medications.  Even at that level, what happens when a senior is faced with that prospect and he or she does not have a few million dollars in the bank or really good long term care insurance? 

Well, as you may have heard, some nursing homes will take a home in trade.  In lieu of that, Medicaid will kick in if they can prove that they are destitute.  Money and property cannot be transferred to children in order to qualify (as many mistakenly believe).  Under limited circumstances, Medicaid will allow a spouse to stay in that home as long as other factors are met… like a very minimal checking account balace at the end of each month.  But eventually, Mecicaid is going to require that the house be sold to help recoup money paid out for a nursing home stay.  In other words, you have to be broke to qualify.

Now let’s enter a reverse mortgage at, say, age 65, and there still aren’t millions of dollars in the bank, and there still isn’t really good LTC insurance that was bought years in the past.  What happens then?

The way I see it, the average senior has the upside benefit of a much better life style and less worry about money in those youger years.  But, if it comes to Medicaid and the same senior having to be dead broke in order to qualify, the situation is exaclty the same… EXCEPT the government doesn’t get back the money that the senior was able to spend from the proceeds earlier in life.

Bottom line?  Unless a senior has rich children or lots of money in the bank, HE OR SHE HAS ALREADY LOST THE HOUSE if a nursing home gets involved… they just don’t know it yet.  If that is the case, and especially if money is tight, why not close a reverse mortgage and free up money to make this part of life more pleasurable?  If the government gets the house anyway, he or she ends up with thousands of dollars that nobody but the government would ever see.

No class action law suits here…

This subject may very well be too complex to post on my blog, but I find it fascinating.  If companies were unafraid of frivolous law suits, the subject would never be a factor.  But, that is not the world in which we live. 

As it turns out, those who have looked at the growth rates of open HECMs (those set up with a line of credit feature), it appears that there is a very small amount of money being scammed by servicers each month.  But, it is the very formula set for that LOC growth by HUD that causes the anomaly. 

If you are interested in this subject as an attorney or a borrower, you may need to read it 2 or 3 times to understand what is going on.  And, you will have to have a thourough understanding of how LOC based HECMs work before any of it will make sense.  At the end of the day, no class action law suits would ever make it through based on “missing” dollars in LOC growth.

Enjoy:

http://reversemortgagedaily.com/2009/08/03/are-reverse-mortgage-credit-lines-really-shrinking/

Bad News and Good News

Both of these items are time sensitive.

First… the bad news.  It looks like the government, one way or another, is going to cut funding to FHA to help support the reverse mortgage guarantee program.  A house appropriations bill passed the last week in July which could cut net proceeds by an unknown amount, and the Senate is now kicking around a version of the same bill that would reduce proceeds by approximately 5%. 

One possible solution which would keep the net available cash at close almost unchanged would be for HUD to reduce the up front portion of the FHA guarantee insurance, and then increase the annual portion.  Friday evening, I searched dilligently for such verbiage in the Senate version of the bill, and I could not find that this potential solution is presently in consideration. 

What’s my prediction?  Expect at least a 5% reduction, and expect it to go into effect in October.

Here is a quick story from an industry source on the matter (also including more links) published just last week:

Senate & House Appropriations

 

Some good news, however,  is that a nationally known and respected organization, the National Council on Aging (NCOA), is temporarily waiving their $125 fee for the required reverse mortgage counseling by a HUD approved source. They, as most counseling firms, will do that counseling over the phone with an appointment. So, while I am not allowed to point anyone in the direction of any particular counselor, I don’t think there would be any problem with posting a link to a public news story on the internet, right? It looks like they are going to pull the plug on waiving the fee on September 30:

NCOA News Story

 

So, do you know any seniors that need or are considering a reverse mortgage to help pay for health expenses, home repair expenses, or just to provide a safety net?  Between this potential guarantee reduction and an increasing interest rate environment (which we all expect), NOW would be the time for that senior to take action.  Waiting will very likely decrease the amount that a senior will receive from the process.

Agents, all of this is also affects the HECM for purchase program.  So, if you have any seniors downsizing or moving to your area to be close to children, etc., now is the time for them to act.

Closing a reverse mortgage

After seeing a few mistakes made at reverse mortgage closings more than once, I put together this page with 10 quick pointers for attorneys to read prior to closing a reverse mortgage. I hope that it will make everyone’s closings go more quickly and smoothly!
http://members.cox.net/rscottmeyer/hecmclosing/closing.htm

Rip Off?

I just had a conversation with an attorney, and it surprised me to hear that he “had read too many horror stories about reverse mortgages.” 

Let me summarize RM horror stories.  First off, ALL “horror stories” which I have read have involved “proprietary” reverse mortgage products.  Fannie Mae even had a non-FHA insured “Home Keeper” product which was a pretty bad.  The available cash on that product was a disaster @ usually somewhere between 30% & 40% of the home’s value. 

Even then, the REAL nightmares were period certain reverse mortgages done by privateers back in the 1970s.  Those were done on (as an example) 10 year terms, and the borrower had to pay it back @ the end or leave the house right away.

So, the quick answer to this objection is that the nightmare stories are pre-FHA.  HUD so heavily regulates FHA insured HECMs that the biggest danger is that they may regulate them out of existence altogether.  As far a the borrower, all of this regulation is squarely focused on protecting his and / or her best interests.

As a quick sample of the very nearly OVER protection forced by HUD, there are actually two security deeds and two notes filed on every HECM.  One goes to the lender / servicer of record at the initial closing, and the second is filed in the name of “Secretary of Housing and Urban Development.”  In every closing package, there is a telephone number for a special department of HUD and instructions on how to handle a situation whereby the borrower’s loan servicer bites the dust.  So, somebody cannot be without access to any unused money or at a loss for statements.  Ultimately, your tax dollars will insure that this is the case.

Too, there is no reasonable way that a senior can be forced to leave a home.  Those reasons sited by critics are 1) if a senior becomes delinquent on property taxes or homeowner’s insurance or 2) “if the borrower fails to maintain the home.” 

Well, if anyone (including seniors) doesn’t pay the property taxes, the city / county will eventually take the house, anyway, right?  On the second matter, there aren’t any maintenance police out there looking for lawns that are not properly cut.  What this means (to use an example) is that if a tree falls through the roof of the house and the borrower refuses to make an insurance claim, that’s a problem!  If it is raining inside the collateral every day, that is killing the value.  If a rose bush dies… not so much.

There is no (even unreasonable) way that a senior or a senior’s estate could ever owe more than the house is worth.  To the contraray, if a senior ever decides to move or passes away, there is typically still significant equity, and there is a period of up to a year for a senior or an estate to sell the collateral after the borrower is gone.

So, given that the average client I close is living from social security check to social security check in a total panic as to how they could handle any health emergency or even keep up his or her house, and given that the government has stepped in and will smash any lender who is “ripping off seniors,” it seems that worrying about being “taken” on a reverse mortgage is NOT the correct thing about which one should be worried!

04.13.2009

And… the reverse mortgage subject of the day is…. HUD mortgageee letter 2009-10.

This letter, introduced on March 27, relates to the mandatory reverse mortgage counseling.  To review, all persons who obtain a FHA insured reverse mortgage are required to obtain reverse mortgage counseling from a HUD approved counselor who is COMPLETELY dissociated with the transaction. 

The purpose of the counseling is to ensure that the borrower is not being “sold” into something that he or she does not understand via the presentation of false information and 1/2 truths by a loan officer needing to make a car payment.   That sounds like something that might have been a good idea for those who closed on interest only LIBOR based ARMs or negatively amortizing pay option ARMs.  Required counseling might have saved us a majority of the agony in the current housing market!

That having been said, the primary purpose of the new mortgagee letter is to restrict the methodologies by which a senior may request the counseling.  As a direct quote:  “the lender may not contact a counselor or counseling agency to refer a client.” 

This will be a big change for the process of obtaining that counseling as it has been practiced over the years since the government insured reverse mortgages were introduced.  Standard procedure has always been for the loan officer or processor to “orchestrate” or “implement” the ordering of that counseling so that it actually gets done.  As an extreme example, Wells Fargo actually used to have HUD approved reverse counselors on staff who would conduct that counseling.  That could be construed as a conflict of interest, no?

The new rules will require that the senior be offered a list of approved counselors, and that senior must contact the counselor of choice on his or her own behalf to schedule counseling.  The exact quote is:  “Prospective borrowers must initiate communication with the counseling agency on their own, without the assistance of the lender.” 

Further down you will read:  “HUD is aware of instances in which a lender, or lenders, have dialed a counseling agency’s phone number and then handed the phone to the borrower to schedule counseling, or the lender entered the borrower’s contact information into a web-based system which automatically put that borrower’s name in a queue to be called by a counselor.  These two examples run counter to our requirement that the borrower must take the initiative to contact a counseling agency when and if he or she is prepared to pursue the HECM.”

There are two sides to this story, and both have merit.  One side is that the ENTIRE process has to be completely handled by people who do NOT have a vested interest in the closing of the transaction in order to insure objectivity.  The very fact that this letter has surfaced suggests that HUD has encountered situations where approved counselors are on the “take” to make sure they don’t say anything to discourage the transaction.

The other side of this controversy is that many seniors are very timid when it comes to taking any major financial actions, regardless of how disparately they are needed.  I’m going to site an example of one such senior who I closed just last week. 

I originally took  Jane Smith’s (as she will be called) application in November of 2008.  She lives in a free and clear home, but her husband passed away two years ago.  In the absence of her husband, her total income is $1200 / month.  Jane has repeated trouble with her chronically unemployed adult son.  That son recently had a “minor” issue that caused him to become incarcerated.  Jane pawned the title to her 2004 year model Chevrolet truck to pay the $3,500 bail required.  And no… she did not have $350 to go to a bail bandsman.  (She probably didn’t know that she could do that, either).

So anyway, that was September of 2008.  I spoke to her in November of 2008.  At that point, she had made $700 in payments on that truck pawn, and SHE STILL OWED THE ORIGINAL $3,500.   Yes, In Georgia, you can charge 25% a month for the first 3 months, and 12.5% per month there after on pawn transactions.  She went to a “cheapie” and got 10% per month terms. 

Let’s see, those payments are $350 / month, and she makes how much a month?  Too, she didn’t realize that $350 / month would not pay down her balance.  Woops! 

Well,  she just really didn’t know what to do, and she just didn’t know which way to turn, and she just didn’t want to do anything with the house.  She did talk about having a gun, which caused me to try to round up a non-profit to give her SUICIDE counseling, but I had little success.  So, I bought some stuff from here, and my wife offered to run some of her husband’s stuff through her auction house to raise some money.   And… she made it through the holidays ok.

Then, I call her again in March ’09.  Gee.  She still owes $3,500 on that truck.  The payment is “killing” her.  She still doesn’t know which way to turn.  Her son still isn’t working.  On and on and on. 

So, I WENT ON THE INTERNET AND REQUESTED THAT A COUNSELOR CONTACT HER FOR THAT COUNSELING AND BILL HER FOR THE FEE.  Bottom line, she closed last week, she no longer has to worry about her truck being reposessed, the first thing she did was BUY GROCERIES (since she couldn’t afford to go to the store but one time in the past month), she paid off her burial insurance, she is fixing her HVAC which has not been working for months, her 2008 property taxes are now paid, and she has over 30k in a credit line to handle the next crisis.  Don’t worry, her son doesn’t know she has access to more money.

The point of all of this is that some seniors will not do what they need to do to make their own lives more livable, or in some cases, even save their own lives.  But, because human nature is often exactly what HUD sees it to be, we have another new rule.  Give a goup of 1,000 folk an opportunity to cheat, and many will.  That is just the way that it is.  And, this never would have come up if somebody hadn’t been caught cheating. 

One more thing on this subject… we are now required to record whether the counseling was paid up front vs. billed for collection at close.  You don’t need a big calculator to see that they will be measuring follow through on “billed” cases.  They won’t likely need a statistically significant variance in order to take billing away as an option in the future.  But, there probably will be a statistically significant difference.  See above.  See the post from the 9th.  See the trend.  All one has to do in order to ensure that it will be more expensive to close a reverse mortgage is to wait for some more regulation… and it will likely continue to come!

There is another potentially positive point in this letter that has never before been a rule.  The reverse mortgage counseling must include a budget analysis to be completed by the counselor.  This will help identify, with real numbers, who is being “sold,” and who has a real and valid need that can be filled by a reverse.  Real numbers always make me feel better.  A calculation with a real mathematical outcome is better than a “I think you outta get one.”

So, if you are a senior considering a reverse mortgage, or if you are a professional with a client that is thinking about a reverse, just know that the telephone will not bite you.  As a senior who needs a reverse to make life more livable,  DON’T PROCRASTINATE… TAKE THAT ACTION.  The  government just ensured that nobody else can take that action for you.

As always, your link to HUD’s mortgagee letter page is:  http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/index.cfm, and the letter for the day is (again), 2009-10.

04.09.2009

Surely most anyone who has made it to this blog already has a working knowledge of what reverse mortgages are and now they work.  If not, you may want to visit:  http://members.cox.net/rscottmeyer/Reverse/index.mht.

 

 I will do my best to reserve this page for timely news from a perspective that you would not likely get from other sources.  One thing any regular reader will take away from my blog is that I will shoot straight!  There won’t be any question about that! 

So then… what, today, is on my mind about reverse mortgages in the news? 

Well, I’m a bit frustrated that the ruling of last week to require the Fannie Mae form 1004/mc or Freddie Mac form 71 in FHA appraisals associated with HECMs.  Once again, a ruling intended for regular mortgages, which are subject to severe issues on a short term basis due to declining markets, is going to be applied to HECMs which are long term instruments to a completely different market far less affected by short term swings in home value trends. 

We in the business have been smiling for over a year at appraisals marked as “stable” or “increasing” for area values in markets like Atlanta.  The new form will put a halt to that, and it will also likely reduce the average appraised value by 10% or more. 

 

However, is it really necessary to have the same form included in a HECM appraisal where the borrower can’t loose a home in the short term by having missed payments?  I mean, essentially, all a senior has to do is be alive and be in the house in order to NOT have FHA subjected to a claim.  Furthermore, since the average beginning gross loan to value ratio is under 70%, what real risk is the government fund exposed to when a borrower does die within just a couple of months of borrowing (a VERY rare situation)?  I agree, there is a good argument to add the form as a requirement on loans where the loan to value ratio is 96.5% and the area is declining @ 10% per year… but requiring it with an exposure of around 70%?  What must they be expecting for home values over the next five or ten years?  Actually, I’m going to guess that they (HUD) didn’t think of the fact that this mortgagee letter would have to be applied to HECMs, and it isn’t going to be worth the effort to carify its use in a HECM scenario.  I can see Pee-wee Herman… “I meant to do that!”

  

Frankly, this wouldn’t be a concern for me, EXCEPT that several appraisers, with whom I’ve discussed the form’s introduction, are saying that this form is MORE work than the appraisal itself (if completed correctly which requires that all sale information be verified with parties to the various transaction and NOT MLS records).  That, my friends, means that the price of the typical HECM appraisal just went up by probably $100 or better, and the way I see it, there isn’t a good case for mandating its use on a reverse.  In most markets, we may now be looking at $500 to $550 for an appraisal to fit the new standard. 

 

Here is a link to the original Fannie Mae post on the usage of the form, which was originally intended for conventional forward mortgages.  A copy of the addendum itself is at the end:

 

https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0830.pdf

 

 

Here is a link to the FHA mortgagee letter site, and the mortgagee letter about which I am complaining today is # 09-09:

 

http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/index.cfm

 

(I’ll be sure to address other mortagee letters on another day!)

Note that (as a direct quote under “Data Requirements” from # 09-09):

·       The appraiser must verify data via local parties to the transaction: agents, buyers, sellers, lenders, etc. (if the sale cannot be verified by a party then public records or other impartial data source that can be replicated may be used).  A Multiple Listing Service (MLS) by itself is not considered a verification source.

 Oh well.  At least HUD is still guaranteeing them.  They are still the best way to handle money matters in retirement for many seniors… particularly those who are short on liquidity and only have social security as a dependable income stream.  But, it also looks like those who are considering a RM transaction ought to move forward before they (the government) regulate them even further adding to the expense of getting one closed!