Some good news, for a change!

It looks like there is a trend going on that is the elimination of the servicing set aside on FHA insured reverse mortgages. That extra $4,000 to $5,000 is now available to go back into the borrower’s pocket.  In a lot of cases, this will make up for the government’s formula change which reduced the amount which FHA would insure.  

Too, the whole concept of a “servicing fee set aside or escrow” is one which most seniors can’t be made to understand, and its existence on disclosures adds confusion to a process which the government has already made too confusing.  I’ve never been more pleased to see something go away.

I think this is the first positive change I have been able to report since maybe 2006?  If this keeps up, I could actually start blogging again without fear of generating depression! 

So, find a senior who is in a bind and can’t borrow money though the regular channels, and let that person know there is a way out!

It Happened.

Well, I’ve been far too busy handling fires as of late to post on the blogging page. But, just so you all will know, the budget crisis for FHA did reach the head that I knew would occur, and the HECMs guarantee formula was cut by approximately 10%. So, seniors are getting less money on a reverse as of October 1. It isn’t like I didn’t say it would happen, right?

My timing may have been off?

I wake up this morning, and this is one of the first articles that hits me in the face courtesy of CNBC:

http://www.cnbc.com/id/32911222

Pay attention to the changes that are on the way including the introduction of new minimum net worth standards and new minimum credit scores. This is very big news. The government’s push to blame the small lender and broker for stupid underwriting is reaching a fevered pitch. Too, my predicitons in the previous post relating to FHA’s insolvency may have been long on the trigger point.

Bottom line? If you know anyone who is struggling and needs a reverse mortgage, NOW is the time, or forever hold your peace. For that matter, the same may be said for the majority of potential FHA regular mortgage borrowers.

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!