Reverse Mortgage Guide

9 Responses to “Annuities To Reverse Mortgage Borrowers Out Under FHA Reform”

1. John Yedinak Says:
   July 28th, 2008 at 9:53 am

   Peter,

   I was under the impression this was removed from the Bill? When you check out the text it has been crossed out… let me know if I am missing something.

   Thanks

2. ReverseMan Says:
   July 28th, 2008 at 10:05 am

   Our lawmakers are the master of “the law of unintended consequences”. The language of this bill if accurate would force out all insurance licensed professionals from the reverse mortgage industry regardless if their insurance activities are completely separate.

   Those with previous and current professional licenses from the financial services industry actually bring valuable knowledge to the reverse space in retirement planning, financial fact-finding and many other areas.

   It looks like yet another case of throwing out the baby with the bath water.

3. Peter G. Miller Says:
   July 28th, 2008 at 2:53 pm

   John –

   Thanks for your note.

   The last version of the bill, as posted by THOMAS, is H.R.3221.EAS2, the “Housing and Economic Recovery Act of 2008 (the “Engrossed Amendment as Agreed to by Senate.” This is what is on the public record.

   Is there a later version of the legislation?

   Peter

4. Valerie VanBooven Says:
   July 28th, 2008 at 6:36 pm

   This bill is too vaguely worded to be “fully” interpreted by anyone at this time. For instance the language that reads:

   “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; ”

   Funny, I thought all seniors already had to be counseled by an unbiased third party ie..HUD Counseling..so how is that new?

   Too bad for the homeowners who wanted the long-term care insurance protection, but now can’t afford it (again).

   Let’s see what the mortgagee letters say with reference to all of this, and wouldn’t it be interesting to hear what Wells Fargo, GenWorth, MetLife and others have to say about all of this since at least 2 of them just entered the reverse mortgage space, and all of the above sell financial products.

   Finally, ReverseMan stated it correctly….who would you rather go to for a reverse mortgage…the mortgage broker who can no longer sell in the sub-prime space and came to the RM side for a paycheck, or the financial advisor that you have known and trusted for years?

   Just a thought.
   Valerie VanBooven RN BSN

5. Peter G. Miller Says:
   August 1st, 2008 at 12:35 pm

   >>>who would you rather go to for a reverse mortgage…the mortgage broker who can no longer sell in the sub-prime space and came to the RM side for a paycheck, or the financial advisor that you have known and trusted for years?

   If they are asking me to fund an annuity with the proceeds from a reverse mortgage or trying to sell a subprime loan I would not want either of them.

   Happily, there are more and better choices out there.

6. Bill Peters Says:
   August 4th, 2008 at 1:39 pm

   No, Peter, they didn’t get this one right.

   I’m very much opposed to the guys who sell deferred annuities with reverse mortgage proceeeds, but the broadly prohibitive language in the bill does not distinguish between deferred annuities, immediate annuities which can rarely but occasionally provide higher incomes than the reverse mortgage payments, life insurance to protect a spouse, estate, or increase a legacy, and even long-term care insurance. It could also prohibit a good insurance agent from using a medicare Advantage plan to save the borrowers hundrdeds of dollars each month versus a Medicare Supplement health plan. Most securities broker-dealers already prohibit using home equity to fund market-based investments.

   I mention long-term care because the same legislation resurrects and implements the Clinton-era law stating that FHA mortgage insurance premiums will be refunded to those that use reverse miortgage premiums to purchase long-term care insurance.

   We can stop the “get a reverse mortgage so you can buy this annuity” guys with much narrower language. The current language just imagines that professionals all operate in distinctly regulated “silos” - they don’t, and customers benefit from pros with multiple licenses who can talk about the pros and cons of a broader range of ideas and products. These are the guys who are in business to first find out what the client wants to do, and then figure out the best way to do it. The norm, and the regulatory assumptions, in the financial industry is the other way around.

7. Peter G. Miller Says:
   August 4th, 2008 at 3:52 pm

   Bill –

   Thanks for your note.

   You make a good point, I suspect the trouble is in how to draw that bright line between what is allowed and what is not.

   One of the by-products of abuse is over-reaaction. That’s not fair to the people who act honorably, but it seems like a common result.

8. Valerie VanBooven Says:
   August 6th, 2008 at 5:50 pm

   President Bush signed into law the long awaited HR3221 The Housing Recovery Act. This was a long awaited legislation to modernize FHA. The President had repeatedly threatened to veto this legislation, but abruptly changed his position in response to the critical condition of the two GSE’s Fannie Mae and Freddie Mac. It is important to note that this legislation is designed to stabilize the housing market and stimulate the economy. While the legislations primary intent is addressing the challenges in the conventional mortgage market, the bill contains several components that will impact the reverse mortgage industry.
   Unfortunately, this legislation is poorly written, and will require significant efforts by HUD to clarify their guidelines. We expect changes in the legislation to be made as the implementation process evolves. I have outlined the main components of the bill that impact the reverse mortgage industry, and have indicated if we view the changes as favorable or unfavorable.

   Maximum Loan Limits (Favorable): While the industry had hoped for a single national loan limit as part of this legislation, HUD’s lawyers still have not resolved this matter. As the legislation reads a floor is created at $417,000.00, but loan limits could go as high a 115% of the Area Median Standard with a cap of $625,000.00. Currently the debate is whether the legislation does establish a national loan limit, and if it does is the limit $417,000.00 or $625,000.00.

   If it is determined that there is a single national limit, then the HUD could implement the new limits fairly quickly. We would expect HUD to issue a Mortgagee letter by October 1, and implementation of the higher limits by November 1. If it is determined that this legislation does not establish a single national loan limit, it will take until January 1, 2009 for HUD to implement the new loan limits based on Area Median Standards.

   HECM For Purchase (Favorable): The legislation does establish the ability to use HECM’s for purchase money transactions. We anticipate this to be implemented fairly quickly, and to be operational by November 1, 2008. This is a very positive component of the legislation, and creates some significant market opportunities.

   HECM For Cooperatives “Co-op’s” (Favorable): HECM for Co-op”s will be addressed by the HUD Mortgagee Letter that covers Co-op’s for both FHA forward mortgages and reverse mortgages. We expect that this Mortgagee Letter is several months away.

   Established Limits of Origination Fees (Unfavorable): This legislation established limits on the origination fees for HECM’s. This does not apply to non-HECM reverse mortgages. The new formula limits the origination to 2% of the first $200,000.00 of maximum claim amount, plus 1% of the balance above the $200,000.00 to a maximum origination fee cap of $6,000.00. HUD will probably raise the floor on the minimum origination fee from $2,000.00 to $2,500.00
   This is legislation was intended to reduce the cost of a HECM to senior homeowners. However, the unintended consequence will be that over the life of the loan seniors will end up paying more. The reduction of the origination fees will force lenders to offer only the higher margin HECM programs to the customer. While this legislation reduces the revenue a company can receive to originate a HECM, a companies fixed expenses required to originate a HECM are not reduced. The origination of a HECM is very labor intensive and consequently expensive. Companies will be forced to increase the HECM margins in an effort to cover revenue shortfall created by the new limits on the origination fees.

   We anticipate the HUD Mortgagee Letter will implement the cap on HECM origination fees simultaneously with the new loan limits.

   Unfortunately, the Senator McCaskill Amendments have resulted in several unfavorable provisions being added to the law.

   Counseling (Unfavorable): Effective with the HUD Mortgagee Letter issued within the next thirty-days lender will no longer be able to pay for the clients counseling directly, indirectly or under any circumstances. HUD will require all individuals listed on the roster of HUD Counselors to pass a counseling exam within six-months. All new counselors will be required to pass the exam before beginning counseling.

   The law calls for HUD to consider utilizing some of its FHA Mortgage Insurance (MIP) income to pay for counseling, but HUD’s lawyers have determined that this provision is flawed and would violate federal credit reform requirements.
   We believe this component of the legislation will significantly increase the amount of time required for counseling and increase the expenses incurred by the senior client.

   Elimination of HECM Advisor Programs (Favorable): HUD will issue a Mortgagee letter within the next thirty-days eliminating the “HECM Advisor Programs.” The law requires that” all parties that participate in the origination of a mortgage to be insured under this program to be approved by the Secretary. Once this goes into effect only employees of FHA-approved lenders will be permitted to participate in the origination of HECM’s. This new rule will eliminate many of the mortgage brokers who have begun to originate loans without having to obtain HUD approval. Many mortgage brokers do not meet the financial requirements for HUD approval, nor do they have the required mortgage experience to obtain HUD approval. We believe this will eliminate a significant amount of competition, and create substantial market opportunities.

   Cross Selling Of Financial Products (Unfavorable): This is the most difficult and uncertain component of the legislation. The legislation is poorly written, and does not provide any clarity as to the ability for a lender to cross sell a customer any financial product using reverse mortgage proceeds. One paragraph strictly prohibits an individual from cross selling a financial product using HECM proceeds, if they receive financial incentive for the sale of the financial product and the reverse mortgage. However the second paragraph indicates that this maybe permissible if a lender has “safeguards and firewalls.”
   One of the misconceptions of this legislation is that it prohibits financial advisors, insurance agents, and other related financial professionals from originating reverse mortgages. HUD will be issuing a Federal Register notice soliciting industry input on the implementation of this provision. This will take several months before HUD can issue the Federal Register and several months before the implantation of this provision. Although NGFS has set the standard for “firewalls and consumer safeguards”, we will be required to implement a policy that prohibits the use of reverse mortgage proceeds to fund any other financial product until HUD issue further clarification of the use of proceeds.

   It should be noted that several industry leaders, including NGFS are taking the lead, and working together to address this issue. This is the most ambiguous and misguided of all the components of the legislation. If you remember Senator McCaskill’s hearings, when she had several seniors who have been “victimized” by unscrupulous financial advisors, she has been very vocal in her efforts to limit the use of a senior’s HECM proceeds, in other words their money even if it is their best interest, to purchase other financial products. We will continue to work with other industry leaders to repeal this component of the legislation, but this is a very good example of how a few bad participants in an industry can create a climate that allows the government to create legislation that limits the appropriate uses of established programs to the benefit of their constituency. The unintended consequence of this legislation is that seniors may not be able to create a complete financial plan utilizing all the financial tools at their disposal to achieve desired financial results. Which in the long run, will be far more detrimental to the senior client.

   We will keep everyone informed as this process continues over the next few months. While this process may be difficult, we believe this will have one major impact of eliminating many of our competitors and creating additional market opportunity for NGFS.

9. Trevon Kanavy Says:
   August 23rd, 2008 at 6:56 am

   An annuity is the only prodect that provides income to a senior for as long as he or she shall live, reqardless of home ownership, equity, or condition.

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