Reverse Mortgage Guide

If you’re concerned with credit card practices then now is the time to say something.

The Federal Reserve has proposed modest changes to curb credit card abuses — not touching 28 percent interest rates, of course, but at least getting rid of several practices as described below.

You have a chance to say something — but your thoughts must be received by August 4th — next Monday. The addresses are:

Mail:
Regulation Comments,
Chief Counsel’s Office,
Office of Thrift Supervision,
1700 G Street, NW.,
Washington, DC 20552
Attention: OTS–2008–0004.

Facsimile:
(202) 906–6518.

Hand Delivery/Courier:
Guard’s Desk,
East Lobby Entrance,
1700 G Street, NW.,
from 9 a.m. to 4 p.m. on business days,
Attention: Regulation

The full proposal is at:

http://edocket.access.gpo.gov/2008/pdf/E8-10247.pdf

The proposal news release is below:

The Federal Reserve Board on Friday proposed rules to prohibit unfair practices regarding credit cards and overdraft services that would, among other provisions, protect consumers from unexpected increases in the rate charged on pre-existing credit card balances.

The rules, proposed for public comment under the Federal Trade Commission Act (FTC Act), also would forbid banks from imposing interest charges using the “two-cycle” billing method, would require that consumers receive a reasonable amount of time to make their credit card payments, and would prohibit the use of payment allocation methods that unfairly maximize interest charges. They also include protections for consumers that use overdraft services offered by their bank.

“The proposed rules are intended to establish a new baseline for fairness in how credit card plans operate,” said Federal Reserve Chairman Ben S. Bernanke. “Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs.”

The proposed changes to the Board’s Regulation AA (Unfair or Deceptive Acts or Practices) would be complemented by separate proposals that the Board is issuing under the Truth in Lending Act (Regulation Z) and the Truth in Savings Act (Regulation DD).

The provisions addressing credit card practices are part of the Board’s ongoing effort to enhance protections for consumers who use credit cards, and follow the Board’s 2007 proposal to improve the credit card disclosures under the Truth in Lending Act. The FTC Act proposal includes five key protections for consumers that use credit cards:

Banks would be prohibited from increasing the rate on a pre-existing credit card balance (except under limited circumstances) and must allow the consumer to pay off that balance over a reasonable period of time.

Banks would be prohibited from applying payments in excess of the minimum in a manner that maximizes interest charges.

Banks would be required to give consumers the full benefit of discounted promotional rates on credit cards by applying payments in excess of the minimum to any higher-rate balances first, and by providing a grace period for purchases where the consumer is otherwise eligible.

Banks would be prohibited from imposing interest charges using the “two-cycle” method, which computes interest on balances on days in billing cycles preceding the most recent billing cycle.

Banks would be required to provide consumers a reasonable amount of time to make payments.

The proposal would also address subprime credit cards by limiting the fees that reduce the available credit. In addition, banks that make firm offers of credit advertising multiple rates or credit limits would be required to disclose in the solicitation the factors that determine whether a consumer will qualify for the lowest rate and highest credit limit.

“Unfair practices can impose significant costs on credit card users,” said Federal Reserve Board Governor Randall S. Kroszner. “The new proposed rules would provide the benefit of substantial protection against practices that can harm consumers.”

The Board’s proposal under the FTC Act also addresses acts or practices in connection with a bank’s payment of overdrafts on a deposit account, whether the overdraft is created by check, a withdrawal at an automated teller machine, a debit card purchase, or other transactions. The proposal requires institutions to provide consumers with notice and an opportunity to opt out of the payment of overdrafts, before any overdraft fees or charges may be imposed on consumers’ accounts.

To ensure that consumers enjoy the same protections regardless of the institution from which they obtain a credit card or receive overdraft protection, the Board’s FTC Act proposal is issued concurrently with substantively similar proposals by the Office of Thrift Supervision and the National Credit Union Administration that would apply, respectively, to savings associations and federally-chartered credit unions.

Like the last two minutes in basketball, changes continue to flow back and forth on Capitol Hill as various versions of the FHA reform package are passed.

Thomas, the electronic information service operated by the Library of Congress, has now posted the final version of the FHA reform package and — once more — we have changes related to reverse mortgages.

In the enrolled version of the legislation, the one being sent to the President — we are back to caps on reverse mortgage origination fees.

The new fee schedule will allow origination fees equal to 2 percent of the first $200,000 of the maximum claim amount, 1 percent of every thing above with a $6,000 cap per transaction.

The actual language in the bill says the following:

(c) LIMITATIONON ORIGINATION FEES.—Section 255 of the National Housing Act (12 U.S.C. 1715z–20), as amended by the preceding provisions of this section, is further amended by adding at the end the following new subsection:

“(r) LIMITATIONON ORIGINATION FEES.—The Secretary shall establish limits on the origination fee that may be charged to a mortgagor under a mortgage insured under this section, which limitations shall—

“(1) be equal to 2.0 percent of the maximum claim amount of the mortgage, up to a maximum claim amount of $200,000 plus 1 percent of any portion of the maximum claim amount that is greater than $200,000, unless adjusted thereafter on the basis of an analysis of—

“(A) the costs to mortgagors; and

“(B) the impact on the reverse mortgage market;

“(2) be subject to a minimum allowable amount;

“(3) provide that the origination fee may be fully financed with the mortgage;

“(4) include any fees paid to correspondent mortgagees approved by the Secretary;

“(5) have the same effective date as subsection (m)(2) regarding the limitation on principal obligation; and

“(6) be subject to a maximum origination fee of $6,000, except that such maximum limit shall be adjusted in accordance with the annual percentage increase in the Consumer Price Index of the Bureau of Labor Statistics of the Department of Labor in increments of $500 only when the percentage increase in such index, when applied to the maximum origination fee, produces dollar increases that exceed $500.”

Given the news recently, a lot of people have been wondering just how safe their money is in local banks — and in big, huge banks as well.

Banks are supposed to have significant reserves because there will always be losses. However, when reserves are not enough we have in place a federal insurance program which provides coverage for most borrowers and most deposits, but not all.

“Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation’s banking system,” says the FDIC about itself. “The FDIC insures deposits at the nation’s 8,494 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. The FDIC receives no federal tax dollars — insured financial institutions fund its operations.”

Hold onto the contact information below… just in case.

FDIC’s Depositor’s Bill of Rights

1) You have the right to automatic deposit insurance coverage when you open a deposit account at an FDIC-insured bank, with no additional cost or action on your part.

2) You have the right to separate FDIC insurance coverage for deposits held at different FDIC-insured banks.

3) You have the right to confirm that a bank is insured by using the FDIC’s Bank Find service (www2.fdic.gov/IDASP/main_bankfind.asp) or by calling the FDIC toll-free at 1-877-275-3342.

4) You have the right to deposit insurance coverage of $100,000 for your deposits at an FDIC-insured bank – up to $250,000 for your IRA deposits.

5) You have the right to deposit insurance coverage of more than $100,000 at a single bank when deposits are held in different “ownership categories,” such as a single, joint and trust accounts.

6) You have the right to confirm that your deposits are within the insurance limits by using the FDIC’s Electronic Deposit Insurance Estimator and other online resources at www.fdic.gov/deposit/deposits or by calling the FDIC at 1-877-275-3342.

7) You have the right to be informed when a financial product offered by your bank is not covered by FDIC insurance.

You have a right, if your bank fails, to prompt access to your insured deposits.

9) You have the right, if you are an uninsured depositor, to receive distributions from the receivership as the sale of assets permits.

10) You have the right to sleep well, knowing that since the creation of the FDIC 75 years ago, no depositor has ever lost one penny of insured deposits.

The final version of H.R. 3221: The Housing and Economic Recovery Act of 2008, has some real teeth when it comes to selling annuities and other insurance products to reverse mortgage borrowers.

Buried in the 636-page bill is the language below. In basic terms, it says that mortgage lenders are welcome to sell reverse mortgages but they cannot be paid for the sale of insurance products or annuities.

Some seniors have obtained reverse mortgages for the purpose of buying annuities from the same folks who sold them the reverse mortgage — only to discover that the rate of return on the annuity is less than the cost of the reverse mortgage and to also discover that the annuity has a huge prepayment penalty.

This is one the Congress got right. In particular, congratulations and a thank you to Sen. Claire McCaskill (D-MO. She led the effort to block annuity sales to seniors who want reverse mortgages, and in doing so she has helped homeowners nationwide. You can imagine that there are a bunch of people in the insurance industry who are fairly peeved with Sen. McCaskill for having the gall to seek fairness for seniors.

Language from the final FHA bill is below:

(n) Requirements on Mortgage Originators-

(1) IN GENERAL- The mortgagee and any other party that participates in the origination of a mortgage to be insured under this section shall–

(A) not participate in, be associated with, or employ any party that participates in or is associated with any other financial or insurance activity; or

(B) demonstrate to the Secretary that the mortgagee or other party maintains, or will maintain, firewalls and other safeguards designed to ensure that–

(i) individuals participating in the origination of the mortgage shall have no involvement with, or incentive to provide the mortgagor with, any other financial or insurance product; and

(ii) the mortgagor shall not be required, directly or indirectly, as a condition of obtaining a mortgage under this section, to purchase any other financial or insurance product.

(2) APPROVAL OF OTHER PARTIES- All parties that participate in the origination of a mortgage to be insured under this section shall be approved by the Secretary.

(o) Prohibition Against Requirements To Purchase Additional Products- The mortgagee or any other party shall not be required by the mortgagor or any other party to purchase an insurance, annuity, or other additional product as a requirement or condition of eligibility for insurance under subsection (c).

Also:

SEC. 2122. HOME EQUITY CONVERSION MORTGAGES.

(a) In General- Section 255 of the National Housing Act (12 U.S.C. 1715z-20) is amended–(1) in subsection (b)(2), insert `real estate,’ after `mortgagor’,';

(2) by amending subsection (d)(1) to read as follows:

(1) have been originated by a mortgagee approved by the Secretary;’;

(3) by amending subsection (d)(2)(B) to read as follows:

(B) has received adequate counseling, as provided in subsection (f), by an independent third party that is not, either directly or indirectly, associated with or compensated by a party involved in–

(i) originating or servicing the mortgage;

(ii) funding the loan underlying the mortgage; or

(iii) the sale of annuities, investments, long-term care insurance, or any other type of financial or insurance product;

Our sister site, FHALoansPros.com report that by a vote of 72-13 the Senate on Saturday wrapped up H.R. 3221: The Foreclosure Prevention Act of 2008.

Next, the bill — which includes important provisions for FHA reverse mortgage borrowers –  moves to President Bush for a signature or veto. The White House says it will now sign the bill, a measure which it had threatened to veto.

A veto, however, would be pointless. Senate support included 43 Democrats, 27 Republicans and two independents. All 13 opposed were Republicans and 15 senators did not vote. In other words, a veto-proof majority.

In the House, passage was by a vote of 272-152. This means 63 percent of the House members approved of the measure — not enough to overcome a veto.

However, the politics of this matter are changing daily and the House vote was before release of the RealtyTrac.com foreclosure results for the second quarter of 2008. Realty Trac found that foreclosure filings “were reported on 739,714 U.S. properties during the second quarter, a nearly 14 percent increase from the previous quarter and a 121 percent increase from the second quarter of 2007. The report also shows that one in every 171 U.S. households received a foreclosure filing during the quarter.”

FHALoanPros.com, our sister site, reports that the Senate has closed off additional debate on the FHA modernization bill that was earlier approved by the House. The vote for cloture was 80-13.

What this means: The Senate will now vote on the full bill. This could happen later today, Friday, but there could be some delay which would result in a Saturday vote. (The reason to push for a Friday vote is so that Senators can return to their states for weekend politicking.)

Once past the Senate the measure will then go to the President. The White House has said that the President — who consistently opposed the measure and threatened a veto — would now sign the package.

The House version of FHA reform, H.R. 3221: The Foreclosure Prevention Act of 2008, contains an important fee limitation for reverse mortgage borrowers, or at least those who obtain an FHA-backed HECM (home equity conversion mortgage).

Should the language remain intact, it would significantly reduce current lender fees from roughly 2 percent to a fee schedule equal to 1.5 percent of the maximum claim amount.

This is different than earlier versions of the bill which would have limited lender fees to $6,000 regardless of the loan amount.

Somehow, magically, the language changed radically from the Senate version of the bill to the later House version.

See for yourself:

Language approved by the Senate

(k) Limitation on Origination Fees- The Secretary shall establish limits on the origination fee that may be charged to a mortgagor under a mortgage insured under this section, which limitations shall–

(1) be equal to 2.0 percent of the maximum claim amount of the mortgage up to a maximum claim amount of $200,000 plus 1 percent of any portion of the maximum claim amount that is greater than $200,000, unless adjusted thereafter on the basis of an analysis of (A) costs to mortgagors, and (B) the impact on the reverse mortgage market;

(2) be subject to a minimum allowable amount;

(3) provide that the origination fee may be fully financed with the mortgage;

(4) include any fees paid to correspondent mortgagees approved by the Secretary or to mortgage brokers;

(5) apply beginning upon the date that the maximum dollar amount limitation on the benefits of insurance under this section is first increased pursuant to the amendments made by section 219(a)(3) of the Expanding American Homeownership Act of 2008; and

(6) be subject to a maximum origination fee of $6,000, except that such maximum limit shall be adjusted in accordance with the annual percentage increase in the Consumer Price Index of the Bureau of Labor Statistics of the Department of Labor in increments of $500 only when the percentage increase in such index, when applied to the maximum origination fee, produce dollar increases that exceed $500.

Language approved by the House

(r) Limitation on Origination Fees- The Secretary shall establish limits on the origination fee that may be charged to a mortgagor under a mortgage insured under this section, which limitations shall–

(1) equal 1.5 percent of the maximum claim amount of the mortgage unless adjusted thereafter on the basis of–

(A) the costs to the mortgagor; and

(B) the impact of such fees on the reverse mortgage market;

(2) be subject to a minimum allowable amount;

(3) provide that the origination fee may be fully financed with the mortgage;

(4) include any fees paid to correspondent mortgagees approved by the Secretary; and

(5) have the same effective date as subsection (m)(2) regarding the limitation on principal obligation.

The way to get the largest reverse mortgage is to have as much equity as possible. If you have a home without a mortgage, that’s great. If you have a home without a mortgage and the value of the property is rising that’s even better.

What’s not so good is when values fall. That means there is less equity to secure a reverse mortgage and less value to tap. Thus the news from the Office of Federal Housing Enterprise (OFHEO) is not what anyone wants to hear: home values fell 4.6 percent nationwide between April 2007 and May 2008.

If you were selling a property and had been a long-term owner the fall in value would have little practical effect because you would be losing paper profits. However, many people are recent owners and they bought with little or nothing down. The result? They cannot sell without a loss.

Unfortunately, some of these very same recent owners also cannot stay. They have toxic loans with rising mornthly payments. Many will sell at a loss, rent at a loss or be foreclosed. They will devalue neighborhood properties.

The chart below from OFHEO shows where we are: Essentially prices have fallen to 2005 levels — bad news for many of the people who bought during the past three years.

Our sister site, FHALoanPros.com reports that by a vote of 272-152 the House passed H.R. 3221: The Foreclosure Prevention Act of 2008.

Next, the bill goes back to the Senate for final approval. However, while passage by the Senate is expected, the final vote is unlikely until Friday at the earliest. The reason? A number of senators, including Sen. Jim DeMint (R-SC), Sen. Tom Coburn (R-OK) and Sen. Jim Bunning (R-KY) oppose the authority given to the Treasury Department to invest in and loan to Fannie Mae and Freddie Mac.

One of the key points of the legislation is that it will raise the FHA loan limit to a maximum of $625,000. This is a compromise between those who wanted $729,750 such as leading House Democrats and the Administration which favored $550,000. This new loan limit is substantially above the 2007 FHA loan limit in the lower 48 states of $362,790 — but below the temporary 2008 limit of $729,750.

Reverse mortgage borrowers will benefit from a higher loan cap ($625,000)and also by a reduction in allowable lender fees from roughly 2 percent to 1.5 percent. HUD insurance charges remain unchanged.

The bill also halts HUD’s risk-base pricing scheme for FHA mortgage insurance for at least a year.

Also, earlier in the day the Bush Administration announced that it would not veto the legislation because “the housing legislation is so essential right now, and that we need it promptly, the President agreed to accept Secretary Paulson’s recommendation that it was more important to accept the bill in this form so that we could get the housing reforms in the form of the GSEs.”

Any veto, however, would like have been pointless. The House vote included 227 Democrats and 47 Republicans in support of the measure.

Kieran P. Quinn, CMB, Chairman of the Mortgage Bankers Association, said “considering the current state of the real estate, mortgage and credit markets, I can confidently say this is the most important piece of housing-related legislation that we have seen in more than a generation. It will help stabilize the mortgage market, stop the downward spiral of home prices in parts of this country and provide additional tools for lenders to work with borrowers to avoid foreclosure whenever possible.”

“With the U.S. financial system now under extreme duress, H.R. 3221 represents a thoughtful, comprehensive approach to address the housing and economic crisis facing the nation,” said NAHB President Sandy Dunn. “This bill is vital to restore confidence and get housing and the economy moving again.”

The centerpiece of the bill, say the home builders, is a temporary, $7,500 first-time home buyer tax credit for the purchase of any home. The tax credit can be used for homes purchased between April 9, 2008 and July 1, 2009. It is expected to spur home sales, eliminate excess inventory and bring otherwise qualified home buyers back into the market.

“The tax credit is the best stimulative measure,” said Dunn. “It will shore up home prices and halt the downward spiral in the housing market.”

HUD also issued a statement which said the “legislation is a mixed bag. The proposed legislation takes important steps to provide stability and confidence in the financial markets and in the institutions that support American’s ability to gain access to affordable mortgages.

“Yet, the bill ties our hands and denies us the proper tools to help more families. FHA has recently expanded its ability to refinance homeowners trapped in subprime adjustable rate mortgages. As we help more struggling families, FHA has implemented a fairer, more flexible pricing structure.

“Unfortunately, this legislation would ban FHA’s ability to charge differential pricing. Now, FHA will be required to increase prices on all customers or eliminate its refinancing program for subprime borrowers at a time when they need it the most.”

Major Provisions

The major provisions of the bill, according to the Mortgage Bankers Association, include the following elements:

___FHA Modernization: Authorizes a $25 million appropriation to improve technology, processes, program performance, eliminate fraud and provide appropriate staffing. Effective January 1, 2009, it also increases the FHA loan limit to the lesser of 115 percent of the local median home price or $625,500 with a floor for lower priced markets of $271,000, establishes a 12-month stay on FHA’s proposal for risk-based premiums, sets the down payment requirement at 3.5 percent and prohibits seller-funded down payment assistance (both direct or through a third party).

___GSE Oversight Reform: Creates a new regulator (five-year term, appointed by the President, confirmed by the Senate) with oversight authority similar bank regulators, establishes a new affordable housing fund and capital magnet fund to be funded by a 4.2 basis point fee on all new loans, significantly changes the affordable housing goals and raises the conforming loan limit to the higher of $417,000 or 115 percent of the local median home price, not to exceed $625,500 (the stimulus limits remain in effect until January 1, 2009).

___FHA Rescue: Creates a voluntary program for lenders to write down the loan balance in exchange for an FHA guaranteed loan not to exceed 90 percent of the newly appraised value of home. The lender would pay a 3 percent FHA loan origination fee. To qualify, the borrower must have a debt-to-income ratio above 31 percent on the original loan. The program is capped at $300 billion.

___Tax Incentives: Creates a $7,500 refundable tax credit for first-time home buyers, expands the volume cap for the low income housing tax credit, allows for tax-exempt treatment of bonds guaranteed by the Federal Home Loan Banks and exempts the low income housing tax credit from the alternative minimum tax.

___Low Income and Affordable Housing: Encourages the development of low-income and affordable housing by harmonizing multi-family FHA mortgage insurance programs with the low income housing tax credit. Allowing these two programs to work together will result in more effective uses of both programs.

___GSE Backstop: Authorizes the Treasury Secretary to temporarily increase the GSEs’ line of credit and to, if necessary, buy equity in the GSEs in order to provide confidence to credit markets. Also provides a role for Treasury and the Federal Reserve in GSE oversight to ensure safety and soundness.

___Truth in Lending Reform: Requires TILA disclosures to be delivered seven days prior to loan origination, requires that disclosures include examples of how payments would change based on rate adjustments in addition to disclosing the maximum possible payment under the loan terms and mandates that the consumer receive early disclosures before paying anything more than a nominal fee that covers the cost of a credit report.

___Empowering States: Raises the cap by $11 billion on tax-free bonds that state housing finance agencies may use to help at-risk homeowners by refinancing troubled loans and appropriates $4 billion for states to purchase and renovate abandoned and foreclosed properties.

___Licensing: Encourages state officials to create a national licensing system for residential loan originators, allows HUD to create a licensing system for those states that fail to enact their own, establishes minimum qualifications for all loan originators and requires federal regulators to create a registry for banks and thrift employees who originate loans.

In Florida, the Bradenton Herald has an interesting reverse mortgage story, a column which is well-done — and a column which leads to an interesting question:

“The amount you get through a reverse mortgage,” says the story, “depends on your age, your home’s value, where you live and the current interest rates. Generally, the older you are, the more your house is worth, and the lower the interest rates are, the more you can borrow. To calculate how much you may be able to borrow with a HECM visit www.rmaarp.com. You can calculate conventional reverse mortgages on the Web sites of the financial institution you’re considering.”

All of the above is true. But in addition to the how much I can borrow I would also like to know my specific borrowing costs. That’s something not shown on the AARP calculator.

A reverse mortgage is simply a huge “negative amortization” loan. This means that the size of the loan is not the amount borrowed, it is instead the amount borrowed plus the cost of all fees, charges and interest.

Surely there must be someone in the known universe who can build a calculator which creates a cost statement for a reverse mortgage.

For example, if I join AARP I not only want to know about all about the goodies that accrue with membership, I also want to know the cost. If I buy a Hummer, I want to know about today’s exciting discounts, but I also want to know how much it will cost to operate.

In a similar way if I get a reverse mortgage, I want to know not only about the dollars which will be piled in front of me, I also want to know about the costs of the transaction.

For the full story, see: What you need to know about reverse mortgages

HUD has come out with an interesting reverse mortgage study, A Turning Point in the History of HUD’s Home Equity Conversion Mortgage Program.

The bottom line is that despite terrible problems in the mortgage marketplace, the demand for reverse mortgages remains strong. In basic terms,

Prospects for Future Growth

Reverse mortgage lending in the United States is poised for considerable growth. First, demographics show that the number of eligible elder households is much larger than the volumes of reverse mortgages that already have been made. Demand for reverse mortgages would remain high based on this fact alone. The number of eligible elder households is expected to grow rapidly, however, as increasing numbers of the baby boom generation reach the minimum age of 62. Not only will the new generation of senior homeowners be larger than its predecessor generation, it is likely that they will also be less averse to debt and more willing to use reverse mortgages.

To put the numbers in perspective, according to the national sample of the 2005 American Housing Survey, there were 17.8 million owner-occupied units with elderly householders (age 65 or older); of these, 14.8 million represent potential HECM borrowers—12.1 million had no outstanding mortgage, and 2.7 million had outstanding mortgages that totaled less than 40 percent of their home’s value.3 Offsetting refinements to this 14.8 million estimate would add in homeowners with primary householders between the ages of 62 and 65 and subtract those who would be unlikely to apply because they have spouses under the minimum qualifying age of 62 or have homes that would not qualify based on condition. Furthermore, the Joint Center for Housing Studies of Harvard University projects the number of owner households with heads ages 60 to 69 will increase by 53 percent between 2005 and 2015 (Joint Center for Housing Studies, 2007). The Joint Center’s projection captures the early wave of baby boomers entering their eligibility years for reverse mortgages.

As the baby boom generation ages, demand for reverse mortgages may also rise with the demand for long-term medical care services, which is also growing rapidly. Already a major expense for state governments, Medicaid programs are being targeted for cost-control efforts. In this tight fiscal environment, home equity could play an important role in reducing government expenditures for long-term care. The National Council on Aging reports that increased use of reverse mortgages for long-term care could result in substantial savings to Medicaid by 2010, depending on the future take-up rate for these loans (National Council on Aging, 2005). These estimated savings result from the additional cash available to reverse mortgage borrowers that could delay or even prevent their need for Medicaid assistance for nursing home care and, at the same time, afford these older Americans more choices in less costly home-based health care.

Thus, 2008 does indeed appear to be a turning point for HUD’s HECM program: the volume of HECM originations has exceeded 100,000 a year, the secondary market for HECM continues to develop, the first baby boomers become eligible, and long-term healthcare demands fuel reverse mortgage demand. The next several years could be very dynamic for reverse mortgage activity in general and for HECM in particular.

Notes

1 Note that the rate of HECM growth has slowed during 2008, possibly due to lender liquidity constraints related to conditions in the secondary mortgage market and falling home prices in some markets affecting consumer demand. As the secondary mortgage market for HECM rebounds, and as home prices stabilize, these temporary disruptions in supply and demand are likely to dissipate.

2 For fiscal year 2008, the HECM subsidy rate is negative 1.9 percent.

3 Because HECM must be in a first-lien position, homeowners with existing mortgages must pay them off or subordinate them to the HECM. Homeowners with existing mortgages up to 40 percent of home value are more likely to be able to pay off the existing mortgage with the proceeds of a HECM (depending on the available principal limit) than those with existing mortgages more than 40 percent of home value.

The Seattle Post-Intelligencer, an excellent newspaper, posts items by local bloggers. Tom Layson, writing “Media Money Monkey: Help for Your Finances,” said the following on Friday:

“The raid on retirement savings and the breathless marketing of reverse mortgages has begun. Those two pots of gold represent the last fertile field for the equity strippers. I mixed that metaphor in triplicate.

“The long term damage that can be done by stripping away America’s 401-k and home equity can’t be overstated. Taken to its fullest extent, today’s equity stripping in a recession could lead to tomorrow’s descent into a depression.”

He later adds: “the message is this: Protect your long term equity at all costs. If not tapping your 401-k means defaulting on your zero-down home loan and walking away, do it. If your choice is between paying off credit cards or making a house payment where there is equity to protect -– do it.

“In other words, do your best to avoid tapping your last remaining real assets for any short term need. First of all, chances are the short term need won’t be as bad as the need you’ll face when your assets were supposed to kick-in. Secondly, chances are the solution to your short term problem will only clear a path toward your next short term problem. Our fixes to cash flow issues are structural and have to be addressed that way. Our notion of the consumer society is going to change, and you’re going to see a lot of the window dressing fall away.”

This is provocative stuff — and sobering.

What do you think?

For the full story, see: Ever the optimist

Every so often I hear from my local government. “Come serve,” they say, and then provide a summons for jury duty….

Jury duty is important, thus there’s a need to be on the look-out for a new scam. It works like this:

You’re called and a voice at the end of the phone says that you have not answered a summons for jury duty and thus are subject to arrest. You protest, correctly, that you did not receive such a summons. The voice agrees to “check” his records and asks for your full name, address, birth date and social security number.

If you answer these questions you will be giving an identity thief all he needs to ruin your credit. Don’t fall for this scam! If someone calls about jury duty and requests such information, contact the police.

If you have questions about jury duty, call your local courthouse and get proper information.

The FBI has posted a good explanation of the fraud. For details, press here.

According to AARP Senior Vice President David Sloane, “predatory mortgage lending has cost too many older Americans the security that was the equity in their home. Caught in later life with unaffordable loans, their dreams for a safe and comfortable retirement turned into nightmares by foreclosure; they deserved better. With the rules adopted today, The Federal Reserve Board has acknowledged the role lax or nonexistent underwriting standards and abusive loan terms and conditions played in the foreclosure crisis among older homeowners.

“The Fed did the right thing to protect consumers by creating a marketplace for sustainable home ownership. Because of the new rules, older Americans who need to tap their equity to pay for home repairs, long-term care or other expenses will have protection from abusive lenders and predatory loans. After the worst mortgage marketplace since the Great Depression, the next wave of older Americans on fixed incomes who need to tap the equity in their homes can have real confidence that they will be protected from false advertising and high pressure marketing tactics.”

Really?

The Federal Reserve has used its power under the Home Ownership and Equity Protection Act (HOEPA) to introduce new — and astonishingly limited — protections for selected borrowers.

Other than a basic disclosure requirement, reverse mortgage borrowers are specifically excluded from the most important aspects of the alleged reforms.

Here’s some of what the new rules actually say:

___”Under the proposal, higher-priced mortgage loans would be defined as consumer credit transactions secured by the consumer’s principal dwelling for which the APR on the loan exceeds the yield on comparable Treasury securities by at least three percentage points for first-lien loans, or five percentage points for subordinate-lien loans. The proposed definition would include home purchase loans, refinancings, and home equity loans. The definition would exclude home equity lines of credit (“HELOCs”). There would also be exclusions for reverse mortgages, construction-only loans, and bridge loans.”

___”The Board proposed to apply the protections of § 226.35 to first-lien, as well as subordinate-lien, closed-end mortgage loans secured by the consumer’s principal dwelling. This would include home purchase loans, refinancings, and home equity loans. The proposed definition would not cover loans that do not have primarily a consumer purpose, such as loans for real estate investment. The proposed definition also would not cover HELOCs, reverse mortgages, construction-only loans, or bridge loans. In these respects, the rule is adopted as proposed.

___”Pursuant to its authority under TILA Section 105(a), 15 U.S.C. 1604(a), the Board proposed to require creditors to give consumers transaction-specific, early mortgage loan disclosures for closed-end loans secured by a consumer’s principal dwelling, including refinancings, home equity loans (other than HELOCs) and reverse mortgages. The proposed rule would require that creditors deliver this disclosure not later than three business days after application and before a consumer pays a fee to any person, other than a fee for obtaining the consumer’s credit history. The Board also proposed corresponding changes to the staff commentary and certain other conforming amendments to Regulation Z. Providing the mortgage loan disclosure early for all mortgage transactions, and before consumers have paid significant fees, would help consumers make informed use of credit and better enable them to shop among available credit alternatives.”

___”(3) Notwithstanding paragraph (a)(1) of this section, the term “higher-priced mortgage loan” does not include a transaction to finance the initial construction of a dwelling, a temporary or “bridge” loan with a term of twelve months or less, such as a loan to purchase a new dwelling where the consumer plans to sell a current dwelling within twelve months, a reverse-mortgage transaction subject to § 226.33, or a home equity line of credit subject to § 226.5b.”

Last Friday IndyMac Bank was closed by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation (FDIC) was named as the conservator. The firm had total assets of $32.01 billion and total deposits of $19.06 billion as of March 31st.

This is the fifth bank to fail this year and the potential cost is considerable. The FDIC says that “based on preliminary analysis, the estimated cost of the resolution to the Deposit Insurance Fund is between $4 and $8 billion.”

A major question is this: IndyMac owns Financial Freedom, one of the nation’s largest reverse mortgage lenders. What happens if someone has a reverse mortgage with Financial Freedom and money has not been paid to you? For instance, imagine if you have a line of credit and have the right to an additional $100,000.

The answer is that HUD is on the hook for the money. That’s the deal, that’s why you pay those hefty insurance premiums.

As we reported with Realty Times, at the start of the year the FHA had issued roughly 375,000 reverse mortgages and had just 1,609 losses. Not one claim was from a borrower — all claims were from lenders.

“There have been between 5,000 to 6,000 ‘assignment claims’ from lenders. Under HUD’s plan, lenders can make a claim when a loan has reached 98 percent of its maximum claim amount but is not yet due and payable. Of these assignment claims, only 109 resulted in losses to the FHA. Another 1,500 reverse loans simply went sour. Burns says there have been no ‘demand claims’ from borrowers as a result of lenders who have not fulfilled reverse mortgage obligations.”

At this early point no one knows what will happen to Financial Freedom. The view here is that the company is a valuable IndyMac asset and will be sold. As to the FHA-backed reverse mortgages it’s issued, if you’ve got one you’re fine.

Suppose you have more than $100,000 on deposit with a bank. What happens if the bank fails?

It turns out that there are various circumstances where more than $100,000 can be insured. As the Federal Deposit Insurance Corporation explains, “all bank depositors should also understand that they can have insurance coverage in excess of the basic limits of $100,000 per institution, with an additional $250,000 per institution for IRAs. For instance, subject to certain conditions, single and joint accounts are separately insured, and revocable trusts generally provide $100,000 of coverage per beneficiary.”

Well dandy, what are those “certain conditions”?

“If you have any questions about whether your deposits are insured,” continues the FDIC, “we encourage you to consult with your bank or contact our deposit insurance specialists at 1-877-ASK-FDIC. If you find that you are not fully insured, it may be possible to restructure your accounts to bring your deposits below the insured limits. But first get the facts before making any changes in your accounts or banking relationships.”

In addition to the information for depositors provided by the FDIC, it would certainly be useful for HUD or the FHA or the FDIC to explain how reverse-mortgage borrowers are protected when a bank fails and money remains available with a home equity conversion mortgage (HECM). If someone has a $200,000 reverse mortgage and has only taken out $50,000 then you can see the borrower as a creditor of the bank because money is still owed to the homeowner.

The answer should be that HUD will stand in for the bank with FHA-insured reverse mortgages, but it would be good to hear an official statement to that effect.

The full release from the FDIC is below:

FDIC Chairman Sheila C. Bair, today issued the following statement about IndyMac Federal Bank, FSB, the conservatorship created by the FDIC to continue to provide banking services in communities served by the former IndyMac Bank, F.S.B.

FDIC Chairman Sheila C. Bair said, “Over the past weekend, I have seen news reports which have fairly and accurately reported on the conversion of Indy Mac Bank into a conservatorship operated by the FDIC. I have also seen inaccurate and inflammatory reporting which could well cause needless, unnecessary worry and angst among bank depositors throughout the country.

That (sic) fact is that for insured depositors, IndyMac’s conversion has been largely a non-event. The more than 200,000 customers of IndyMac with deposits of $18 billion are fully protected. It’s important to keep in mind that the small percentage of uninsured are still covered for their insured amounts and half of their uninsured money. As assets of IndyMac are sold, they may receive even more. They have had continued access to their funds through ATMs, debit cards, and writing checks over the weekend, and on Monday morning, it will be business as usual.

All bank depositors should understand that their insured deposits are safe. IndyMac is only one of 8,494 depository institutions operating throughout the country and represents only .2 percent of banking industry assets. The overwhelming majority of banks in this country are safe and sound. The chance that your own bank will be taken over by the FDIC is extremely remote. And if that does happen, you will continue to have virtually uninterrupted access to your insured deposits.

All bank depositors should also understand that they can have insurance coverage in excess of the basic limits of $100,000 per institution, with an additional $250,000 per institution for IRAs. For instance, subject to certain conditions, single and joint accounts are separately insured, and revocable trusts generally provide $100,000 of coverage per beneficiary. If you have any questions about whether your deposits are insured, we encourage you to consult with your bank or contact our deposit insurance specialists at 1-877-ASK-FDIC. If you find that you are not fully insured, it may be possible to restructure your accounts to bring your deposits below the insured limits. But first get the facts before making any changes in your accounts or banking relationships.

The banking system in this country remains on a solid footing through the guarantees provided by FDIC insurance. Our industry-funded reserves are strong and our insurance guarantee is backed by the full faith and credit of the United State Government. No bank depositor has ever lost a penny of insured deposits. On this, our 75th anniversary, we will continue that proud tradition.”

The just-passed Senate version of the American Housing Rescue and Foreclosure Prevention Act of 2008 (H.R. 3221) provides for a new origination fee limitation.In basic terms, the new arrangement will be a max of 2 percent on the first $200,000 plus 1 percent of any claim amount above $200,000 up to a max of $6,000. The $6,000 will be adjusted for inflation each year.

The Senate and House will next try to work out differing versions of the measure.

The actual language from the bill is below:

(k) Limitation on Origination Fees — The Secretary shall establish limits on the origination fee that may be charged to a mortgagor under a mortgage insured under this section, which limitations shall–

(1) be equal to 2.0 percent of the maximum claim amount of the mortgage up to a maximum claim amount of $200,000 plus 1 percent of any portion of the maximum claim amount that is greater than $200,000, unless adjusted thereafter on the basis of an analysis of (A) costs to mortgagors, and (B) the impact on the reverse mortgage market;

(2) be subject to a minimum allowable amount;

(3) provide that the origination fee may be fully financed with the mortgage;

(4) include any fees paid to correspondent mortgagees approved by the Secretary or to mortgage brokers;

(5) apply beginning upon the date that the maximum dollar amount limitation on the benefits of insurance under this section is first increased pursuant to the amendments made by section 219(a)(3) of the Expanding American Homeownership Act of 2008; and

(6) be subject to a maximum origination fee of $6,000, except that such maximum limit shall be adjusted in accordance with the annual percentage increase in the Consumer Price Index of the Bureau of Labor Statistics of the Department of Labor in increments of $500 only when the percentage increase in such index, when applied to the maximum origination fee, produce dollar increases that exceed $500.

Our sister site, FHALoanPros.com reports that late Friday afternoon the Senate voted 63-5 to approve FHA reform. The measure, H.R. 3221, the American Housing Rescue and Foreclosure Prevention Act, now goes to the House for consideration. In practice, the House and Senate versions of the measure will be combined into a finalized form by a conference committee and then voted on by each chamber. If passed, the measure will be sent to the President.

While it’s expected that a unified measure will emerge from the conference committee, it’s also expected that there will be a lot of debate as various interests try to mold the final bill to their liking.

Items of debate include:

___The FHA loan cap — the Senate wants $625,000, the House wants $729,750 and the Bush Administration would prefer $550,000. The bottom line: The FHA loan limit will be raised substantially from the 2007 cap of $362,790 for a single-family home in the lower 48 states.

___The Senate wants nearly $4 billion to buy foreclosed properties. Many Republicans and conservative Democrats in the house oppose this item.

___The present Senate bill would get rid of downpayment assistance programs. This is an odd situation, considering that the Congress has generally backed such programs while HUD has vehemently opposed them. Scott Syphax, President and CEO of Nehemiah Corporation of America, a major provided of downpayment assistance, said “we are extremely disappointed and astonished by the full Senate’s decision to ban privately-funded downpayment assistance programs through the passage of its Housing Bill. This decision turns a blind eye to the overwhelming success of these programs and their role in helping hundreds of thousands of working families become homeowners.”

“The Senate has trivialized the tremendous bipartisan support from members of the House, community organizations, caucus groups and families nationwide who are dependent on such programs,” he said. “Increasingly, there are no other options for thousands of qualified low and moderate income homebuyers in this country today to achieve what middle class and wealthy Americans see as their birthright. Despite what the Administration and members of the Senate falsely profess, privately funded down payment assistance is not the reason that FHA is looking at a budget imbalance in the coming years. As Congress works to finalize the Housing bill in the coming weeks, we unequivocally urge members to weigh their decision closely with regard to seller-funded downpayment assistance programs overall, and to consider the lasting impact of their actions on countless American families working to reach homeownership.”

The Mortgage Bankers Association put out a statement earlier on Friday describing some of the provisions in the Senate measure:

___FHA Modernization: Authorizes an appropriation to improve technology, processes, program performance, eliminate fraud and provide appropriate staffing. Effective January 1, 2009, it also increases the FHA loan limits to 110 percent of the local median home price (not to exceed $625,000), establishes a 12-month stay on FHA’s proposal for risk-based premiums, sets the down payment requirement at 3.5 percent and prohibits seller-funded down payment assistance (both direct or through a third party).

___GSE Oversight Reform: Creates a new regulator (five year term, appointed by the President, confirmed by the Senate) with oversight authority similar to the other bank regulators, establishes a new affordable housing fund and capital magnet fund to be funded by a 4.2 basis point fee on all new loans and raises the conforming loan limit to the local median home price, not to exceed $625,500 (effective January 1, 2009).

___FHA Rescue: Creates a voluntary program for lenders to write down the loan balance in exchange for an FHA guaranteed loan not to exceed 90 percent of the newly appraised value of home. The lender would pay a 3 percent FHA loan origination fee. To qualify, the borrower must have a debt-to-income ratio above 31 percent on the original loan. Program capped at $300 billion.

___Tax Incentives: Creates an $8,000 tax refund for first-time home buyers, expands the volume cap for the low income housing tax credit, allows for tax-exempt treatment of bonds guaranteed by the Federal Home Loan Banks. Also provides for the use of low-income housing tax credits against the Alternative Minimum Tax which should expand the investor base for this key generator of affordable rental housing production.

___TILA Reform: Requires TILA disclosures to be delivered seven days prior to loan origination, requires that disclosures include examples of how payments would change based on rate adjustments in addition to disclosing the maximum possible payment under the loan terms and mandates that the consumer receive the disclosures before paying anything more than a nominal fee that covers the cost of a credit report.

___Empowering States: Raises the caps on tax-free bonds that state housing finance agencies may use to help at-risk homeowners by $11 billion and appropriates $4 billion for states to purchase and renovate abandoned and foreclosed properties.

___Licensing: Encourages state officials to create a national licensing system for residential loan originators, allows HUD to create their own national licensing system if the states fail, establishes minimum qualifications for all loan originators and requires federal regulators to create a registry for banks and thrift employees who originate loans.

The National Association of Home Builders also had a summary of the bill, saying it would:

___Create a temporary, first-time home buyer tax credit for the purchase of any home. This would stimulate the housing market, eliminate excess inventory, relieve downward pressure on house prices and bring otherwise-qualified home buyers back into the market.

___Establish a more effective and balanced regulatory system for the housing government sponsored enterprises (GSEs) – Fannie Mae, Freddie Mac and the Federal Home Loan Banks. It would also permanently increase the GSE’s conforming loan limits up to $625,500, making home loans more affordable in high-cost areas.

___Give the Federal Housing Administration (FHA) greater flexibility to respond to the needs of borrowers, help more working families become home owners, provide a viable alternative to the subprime market and play a greater role in stabilizing the mortgage markets. The maximum FHA-insured loan would be permanently increased up to $625,500, helping prospective buyers to purchase homes in more markets across the country.

___Provide a temporary increase in state tax-exempt housing bond authority to help struggling home owners refinance their subprime loans and to increase access to affordable mortgage credit.

___Enhance the Low Income Housing Tax Credit (LIHTC) and tax-exempt housing bond programs to increase their effectiveness in addressing the nation’s continuing affordable housing needs.

Ray Denton writes and says “my peers and I have a file of homeowners waiting for the FHA Modernization bill to pass, and approximately 50% of all Reverse Mortgage candidates I’ve talked to are waiting for it. Expect the number of HECM originations to skyrocket after the bill has passed. They’ll be a backlog with Counseling facilities and Underwriting for quite a while.”

I suspect this is right.

I also suspect that while reverse mortgage originations are being held as people wait for the authorization of larger loan amounts in Washington, home values in many areas are falling.

The conflict is obvious and overt.

National Association of Realtors reports that “the median existing single-family home price was $206,700 in May, which is 6.8 percent below a year ago.”

In other words, if you raise reverse mortgage lending limits and at the same time home values fall then many borrowers will not be ahead. Less home value means less equity and less equity means smaller reverse mortgages for many borrowers.

The result is rather than wait, owners with moderately-priced and less expensive homes who feel that value declines will continue may want to consider getting a reverse mortgage now. Those with homes in the upper brackets can still wait because they will have sufficient equity to maximize reverse mortgage options if loan limits are raised.

Mary Schapiro, the Chief Executive Officer, FINRA (the Financial Industry Regulatory Authority), spoke recently in Washington about tough times and financial choices:

“In tough financial times,” she said, “many investors feel pinched for cash—and some may search for different, often risky ways to make ends meet, or to maintain a certain lifestyle. Troubling trends include investors leveraging or prematurely depleting their retirement savings, trading in their insurance policies in transactions known as ‘life settlements,’ and tapping their home equity through reverse mortgages.”

Later she added these remarks regarding reverse mortgages:

“Reverse mortgages may benefit some senior investors by unlocking their home equity, but they should only be entered into carefully and with a complete understanding of the consequences.

“As we well know, the sting of the recent sub-prime mortgage crisis extends not only to Wall Street, but to Main Street as well. An estimated 2 million homeowners could face foreclosure this year, up from about 1.5 million last year.

“Borrowers who can no longer afford to pay their mortgages when the low teaser rates adjust to higher levels have limited choices: sell, refinance, seek a modification from the lender or face foreclosure.

“With negative equity, refinancing may not be an option; and in an area with depressed housing values and a glut of homes on the market, selling may not be possible.

“As a result, some homeowners who owe more on their mortgages than their house is worth are simply walking away, wreaking havoc on their credit profiles and their financial futures.

“For homeowners over the age of 60 who want to stay in their homes—and have equity in them—but are having trouble making their mortgage payments, a reverse mortgage might seem appealing.

“Like a home equity loan, a reverse mortgage allows a homeowner to convert home equity into cash that can be used for any purpose. Unlike other home loans, however, homeowners make no interest or principal payments during the life of loan. The interest is added to the principal, which is why reverse mortgages are often called “rising debt” loans.

“Yet, as more Americans near retirement age, some financial institutions are aggressively marketing reverse mortgages as an easy, cost-free way for retirees to finance lifestyles—or to pay for risky investments.

“Despite the fact that this product can jeopardize their financial futures, more and more people are buying them. Currently, the federal government insures about 350,000 reverse mortgage loans. Nearly one-third of these loans—about 107,000—occurred in 2007 alone. And two-thirds of these mortgages have been insured since 2005.

“Because home equity is often a homeowner’s most valuable asset—and the most precious source of retirement security—entering into a reverse mortgage is a very serious decision.

“Not only can they be costly, but just as in the case of life settlements, there may be serious unintended consequences if the homeowner doesn’t fully understand the terms of the transaction, including the possibility of becoming ineligible for Medicaid or other benefits.

“Moreover, since reverse mortgages typically come due when the homeowner moves for any reason—including going into a nursing home—some homeowners may be surprised to find that they have very little left over to pay for long-term care just when they need it most.

“The bottom line is that reverse mortgages are an expensive option that may prematurely deplete home equity that will likely be needed in the future.

“In an effort to help prevent investors from being harmed, FINRA’s enforcement and examinations departments are paying close attention to brokers who actually recommend that a homeowner use the proceeds from a reverse mortgage to invest in other financial products and potentially do further harm to their financial position.”

As I look at Ms. Shapiro’s speech I plainly agree that a home should not be financed or refinanced with a reverse mortgage to buy an annuity because the result is typically a huge loss for the homeowner.

That said, with regard to some of her other comments I am not certain that borrowers always have many options. If you need money TODAY then worrying about future issues such as Medicaid may not have much impact. Moreover, some homeowners are plainly using reverse mortgages to avoid foreclosure, a strategy which at least should be considered when other choices do not exist.

For Ms. Schapiro’s full remarks, please press here.