Dec. 30: SF Bay island for sale; HECM (reverse mortgage) primer

Why do they require seat belts be worn during take off and landing? Here’s one example why, which was a landing in London on a flight from Los Angeles. In news from another major city, here in the San Francisco Bay Area, real estate isn’t cheap and some of it is very unique. If one wants to go to an extreme, Red Rock Island is currently for sale with a list price of $25 million. I’ve driven by it many times, and shown visitors it, and while the island currently has no structures on it, apparently it is the only privately owned island in the San Franscisco Bay. So, if you want 6 acres near a Chevron tanker pier with little or no chance to build anything on it, here’s your chance! If you want to see listings from around the United States for raw land and farms, here’s a good site with which to start. Real estate agents will tell you that buying and selling raw land involves a different skill set than buying and selling homes. Speaking of which…

What’s the big deal with reverse mortgages?

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Every day 10,000 people turn 62, or 65, a demographic that isn’t lost on reverse mortgage lenders, or forward lenders who are thinking about entering that business. “Reverse LOs” have a different skill set than “forward LOs.” The reverse mortgage history in the U.S. is relatively short, with perhaps the first one dating back to 1961, and the HECM being created by the federal government through the 1987 Housing and Community Development Act. The forward market has “government” products, but also non-Agency or non-QM loans as well as certain proprietary products offered by certain investors.

Yes, there are physical difficulties with old age, which can be manageable, but there are also mental difficulties that LOs specializing in HECM’s encounter with some clients. Some are perpetually aggravated. Every eight seconds, a baby boomer turns 73. Over the past century we’ve created the greatest gift in history: an extra thirty years of life. And we don’t know what to do with it. Now that we’re living longer, how do we plan for what we’re going to do? If you make it to sixty-five you have a fifty percent chance you’ll make it to eighty-five. That’s another 8,000 days! That’s no longer a trip to Disneyland and waiting for the grandchildren to visit and die of the virus you get on a cruise.

Engineering and promoting new products and services specially designed for the expanding market of the aged is a good way of going out of business. Old people will not buy anything that reminds them that they are old. They are a market that cannot be marketed to.

 

“I’ve fallen and I can’t get up!” A simple and effective neck pendant. No one wants one. And studies show that even owners of the pendant don’t or won’t use it when they fall, even when fully conscious. No one wants to admit they’ve fallen and can’t get up.

 

We buy products not just to do jobs but for what they say about us. Retirement villages came to be centered on golf courses not because old people like golfing but because they like using golf carts: mobility! Meals that are delivered? Millennials want them for convenience, but they’re ideal for old people.

 

Less than ten percent of the elderly go into nursing homes or assisted living. The vast majority want to stay in the same home where they have the three “M’s”: marriage, mortgage, and memories.

Reverse mortgages include the FHA’s Home Equity Conversion Mortgage (HECM, because our business needs more acronyms). Over the years HUD has announced several proposed changes to its HECM program, including localized loan limits, eliminating HECM to HECM refinances, and more. It’s important for reverse originators to be aware of and understand the proposed changes, and how they will affect their business.

 

Reverse mortgages can be a powerful financial tool for seniors, but they’re not necessarily for everyone. There are a lot of misconceptions about the program, and many lenders think they’re simply too complicated to bother with This article from Forbes does a great job of explaining the program and detailing who benefits the most from it and why.

Of course the Consumer Finance Protection Bureau has a keen interest in reverse mortgages, and has an explanation of the product. Recall that seven years ago the CFPB called three lenders “on the carpet” for deceptive advertising about the product.

 

GAAP requires private reverse mortgages use Mark-to-Fair Value Accounting. The development of proprietary products is relatively new. This year the HECM might take a back seat to proprietary products since in 2018 proprietary product development was the focus. Back then, and even now, companies like FAR, AAG, Retirement Funding Solutions, Longbridge Financial, and others like Guild and Fairway were developing, looking at, or rolling out new products. The loan amounts of proprietary reverse mortgages can be so much greater, reaching millions of dollars per loan, which most HECMs are fairly small in comparison with just a few hundred thousand dollars.

 

As one example of the proprietary reverse mortgage world, Plaza Home Mortgage, Inc. announced a new proprietary Reverse Jumbo mortgage program that will offer refinance loan amounts of up to $4 million with no FHA mortgage insurance requirement. The fixed-rate program is available through Plaza’s Wholesale channel in California and Hawaii. It covers a wide range of property types including single-family, 2-4 units, townhomes, and condominiums, and has no minimum or maximum draw amounts. The program can also be used to refinance seasoned home equity conversion mortgages (HECMs) to jumbos or jumbos to HECMs. The guidelines are very similar to Plaza’s other HECM offering in terms of credit, income, and age requirements.

 

Many forward lenders don’t know much about the product. Like that any income received from the reverse is not taxable. Not everyone should obtain a reverse mortgage, but everyone should have a better understanding of the facts and myths. If an originator is trying to help a client, and doesn’t know anything about the product, that is not good.

 

So how do homeowners utilize a reverse mortgage to improve their quality of life? Increase monthly cash flow. Pay off a current mortgage or home equity line. Credit card consolidation. Funds to pay real estate taxes and property insurance. Complete needed home repairs. Ability to pay for at home care or nursing home expenses. Divorce situations. Pay IRS obligations. Settle legal matters. Use a reverse mortgage to purchase a new home. Install a new septic system. Purchase a new or used car. Support a grandchildren’s educational needs. A gift to adult children for their home purchase dreams. Prepay funeral expenses. Estate and financial planning purposes. Cash reserves for unforeseen emergency life events. Estate planning. Lifestyle improvement. Travel. Home accessibility improvements. The option of receiving a lump sum of cash, a monthly distribution, a line of credit or a combination of the three. Peace of mind knowing that cash is available if needed.

 

The government has continuously revamped the program over the years to improve consumer protections and to ensure that the program does not become a burden on taxpayers as the HECM is secured by the FHA Mutual Mortgage Insurance Fund. At the HECMs peak back in 2009, with around 114,000 new reverse mortgages being issued, there was a healthy proprietary market. However, that market has since disappeared. The robust market back in the mid to late 2000s was not all that surprising as seniors looked to tap into home equity during the economic downturn to meet their spending needs. Since then, research has supported the use of home equity during market downturns, but in more of a proactive than reactionary manner.

 

In 2017, HUD and the FHA changed the reverse mortgage rules, which shifted the mortgage insurance premiums (MIP) paid on HECMs. Instead of paying a higher MIP over the course of the loan, most borrowers now pay a higher MIP upfront and a lower MIP over the course of the loan. This higher initial MIP does create some sticker shock and caused a drop in reverse mortgage applications after it went into effect. The drop off of applications and loans has caused the reverse mortgage world to react in considering a more diversified product offering. As such, a focus on proprietary products to both supplement the HECM and to compete against it have started to develop.

Five years ago, the Federal Housing Administration (FHA) began requiring lenders originating new Home Equity Conversion Mortgages (HECMs), commonly referred to as reverse mortgages, to provide a second property appraisal under certain circumstances. The FHA instructed lenders to provide a second independent property appraisal in cases where FHA determines there may be inflated property valuations.

 

FHA’s new requirement took affect for case numbers assigned on or after October 1, 2018, through September 30, 2019. The FHA periodically reviews this guidance and, based on the results, may renew these requirements beyond fiscal year 2019. Read FHA’s Mortgagee Letter.

 

FHA will perform a risk assessment of appraisals submitted for use in new HECM originations. Based on the outcome of that assessment, FHA may require a second appraisal be obtained prior to approving the reverse mortgage for an insurance endorsement. Under the new policy, lenders must not approve or close a HECM before FHA has performed the collateral risk assessment and, if required, a second appraisal is obtained. Where a second appraisal is required by FHA, lenders must use the lower value of the two appraisals.

 

The appraisal validation policy further reduced risks to FHA’s Mutual Mortgage Insurance Fund (MMIF) and protect the health of the HECM program. The financial soundness of FHA’s reverse mortgage program is contingent on an accurate determination of a property’s value and condition. The property value is used to determine the amount of equity that is available to the borrower, and it is also used by FHA to determine the amount of insurance benefits paid to a mortgagee.

 

In the past, proprietary reverse mortgage products were offered by only a few companies, had limited products, and really looked like a jumbo HECM. So, what changed? Products on the market now include a proprietary line of credit. Products have also attempted to compete with the HECM by offering cheaper loans, but with lower loan to home value options. By offering less access to home equity, the lenders feel they can manage the risk of the loan better and don’t need to use the HECM which requires borrowers to pay into the MIP fund because of the risk of the loan going underwater at some point.

The cost of the HECM is one of the biggest complaints, so a less expensive loan could find some traction. A few years back the HECM changed, requiring a larger upfront payment for many loans. This sticker shock brought down the total value in the HECM market. So now, there are other options and options create opportunity. Furthermore, FHA loans cannot be approved on certain community housing set ups, which proprietary loans can be approved on.

What all this means for retirees is more options, flexibility, and innovation. Innovation and competition are good for the market, it drives companies to develop new products to meet current market needs and to try and solve problems. The reality is that the HECM has only reached a small portion of the overall senior housing market that could benefit from tapping into home equity. Perhaps increasing product development and growth in the proprietary market can take smart home equity solutions both up-stream and down-stream.

What happens after a reverse mortgage is funded? Mechanically, HECMs are securitized in Ginnie II bonds (HMBS), but they are not comingled with, nor do they fit in the same structure as forward G2s. Unlike the forward market, there are no TBAs and there is no screen to reference for pricing. Instead, each loan has to be priced individually by running loan level cashflows and discounting them at the appropriate rate.

 

When loans are originated, only the initial balance is securitized. When borrowers request subsequent draws (after closing), the draw amount is added to the loan balance, and the new principal in the loan can be securitized in a “tail pool.” Tail pools actually consist of more than just subsequent draws: they include things like FHA MIP advances, LESA advances, scheduled monthly payment advances, and the accrual of the servicing strip retained between the HMSB coupon rate and the loan note rate, etc.

 

The SRPs and margins are very different from forwards because the originators are paid partially for advances and partially for anticipated average tails because some borrowers don’t take any initial draws at all.

HUD publishes a list of approved HECM lenders for anyone interested.

 

What’s that you say? More drinking jokes ahead of Sunday night?

A guy walks into a bar, sits down and hears a small voice say, “You look nice today.” A few minutes later he again hears a small voice, “That’s a nice shirt.” The guy asks the bartender, “Who is that?” The bartender says, “Those are the peanuts. They’re complimentary!”

An amnesiac walks into a bar. He goes up to a beautiful young woman and says, “So, do I come here often?”

What’s the difference between men and pigs? Pigs don’t turn into men when they drink.

How does a man show that he is planning for the future? He buys two cases of beer.

A duck walks in a bar and orders a beer then says, “Put it on my bill.”

A gorilla walks into a bar, orders a Mai Tai, and hands the bartender a $20 bill. After recovering from his shock, the bartender thinks, hey, this gorilla doesn’t know how much drinks cost, and hands him back one dollar in change, saying, “We don’t get too many gorillas in here.” The gorilla replies, “At 19 bucks a drink, I’m not surprised.”

A grasshopper walks into a bar and the bartender says, “Hey, we have a drink named after you!” The grasshopper says, “You have a drink named ‘Kevin’?”

Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. STRATMOR’s current blog is titled, “How Treasury Auctions Influence Mortgage Rates”. The Commentary’s podcast is live and at any place you obtain your podcasts (like Apple or Spotify).

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Rob Chrisman