NINE MONTHS THAT HAVE CHANGED THE COURSE OF THE REVERSE MORTGAGE INDUSTRY FOREVER ?
Thursday, 17 December 2009 16:39
After 40 years observing the mortgage banking industry, 8 of which have been spent in the reverse channel, it is clear that in the past 9 months we have seen one of the best loan programs for a senior citizens erode into a nightmare for so many seniors and all those that originate the product.
To understand how the industry has evolved into its current state, I want to retrace the paths that lead us here. By dissecting this timeline it becomes apparent that there have been three key periods that explain why we have come close in destroying one of the major hopes for our senior citizen homeowners.
The first time period I will take you back to is about two and a half years ago, to the beginning of the worst housing crash and financial breakdown of our economy I have seen in my life time. Home values plummeted and still are in most parts of the country. Loan amounts on homes in many areas of the country have exceeded the value of a home by fairly high percentages. We have never seen the amount of foreclosures throughout the country that we have experienced. The foreclosure era has not come to an end by any means. We will experience another wave that will hit hard.
The financial crisis in this country is out of control, can we pull out of it, the answer is yes. Will we pull out of it, only a very few know the answer to that one.
We now go back in time again; this is when the floodgates on credit standards and lending were opened wide. I first saw what was happening and what was going to some day happen in our country about 14 years ago. This is when the credit standards and underwriting guidelines were relaxed as the floodgates were opened for just about anyone to borrow money. People were borrowing money on homes, credit cards, automobiles etc.. All this borrowing with very little credit qualifications required.
FNMA with their “Negotiated deals desk” started negotiating with various lenders, negotiating commitments for their so-called ALT-A rated products. Many of these loans had hardly any qualification requirements to them. Loan programs that were option ARMs, 100% loans to people that could never qualify for them in the first place and many other sub standard loans. FNMA would issue these commitments, most of which were created and presented to FNMA by lenders. FNMA would put pools of loans together in a security, and then sell them in the secondary markets.
Many of these pools consisted of mixed products. As an example, a pool of $25 million may have 60% A-rated loans in it but the other 40% could have the other type loans mentioned previously. These pools or security issues were not that good as a stand-alone security. However, FNMA went to AIG to obtain pool insurance, AIG would insure them if the securities could get a triple (A) rating from a Standard & Poor’s, Moody or one of the major rating agencies. FNMA would go to these rating agencies and get the pool rated triple (A), contingent on the pool being insured, AIG would then insure the security.
These securities were being sold everywhere, China, Japan and many other countries including the USA. Wall Street got heavily involved with these securities and created their own. What got started was the beginning of the end that we see today, D-Day!
During this period the Reverse Mortgage was growing slowly and virtually a risk free product, unknown to most.
I started to write letters when I saw what was happening. I wrote letters to Congressmen, Senators and various organizations because I knew it would only be a matter of time before we were to face a major crisis in the housing and financial markets and we did. No one listened; I was ignored along with many others who saw the same thing I did. The economy started growing at a brisk pace.
The problem was the economy grew through the largest accumulation of debt in the hands of the American people I have ever seen, along with the increasing of our national debt. When the Bubble broke, it broke with the wrath of God behind it!
While the economy was in the tank and foreclosures were occurring on the average of one an hour, the Reverse Mortgage started gaining more popularity. However, the steep decline in housing values was taking its toll on the Reverse Mortgage as well. The saving grace was that interest rates on the Reverse Mortgages were low and margins were low.
Our industry was relatively simple. A reverse mortgage was highly regulated by HUD and rates were controlled by it as well. Generally speaking Each lender had the same rates and fees, but what set one lender apart from another was their service and the product knowledge of their loan originators. Senior’s were protected as well as they could be with the controls in place.
We had very little predatory lending going on because it was difficult to almost impossible to manipulate rates or fees for a predatory gain.
About nine months ago things started to change. This is now our third time period to cover, the past nine months in the Reverse Mortgage industry.
FNMA and Freddie Mac were bailed out and taken over by the Government. This shocked many in the mortgage banking industry. What this meant to Reverse Mortgages was the start of the erosion of the product we all once new.
FNMA made a monumental move on our industry, they raised margins and introduced live pricing to the lenders servicing and buying Reverse Mortgages from the retail and wholesale sectors of the market. This move was done overnight, with out warning to our industry. This was like a bomb being dropped on our industry and to add insult to injury we were not given a lot of time to adjust and work out our pipelines.
Many seniors were affected adversely by the move; seniors were going into foreclosure all over the country. Originators and their companies were doing everything they were capable of doing but seniors were still losing their homes.
I am not saying FNMA did not have to change the margin and do something in order to sell the paper in the secondary market. However, they could have given the market place and our seniors in process proper time to clear the pipeline and adjust. The seniors had the right to close the transaction they entered into under the lock provision and margins they thought they were going to get.
It took everyone a lot of time to recover from what FNMA did to the reverse mortgage industry. Other methods could have been taken by FNMA to handle the situation but that is another story for another time.
However, after the disruption of many lives of our seniors it was one thing after another. States got involved in changing their laws on the books governing reverse mortgages, FNMA, FHA/HUD has been coming out with new underwriting guidelines to the industry like bullets out of a gun.
The principle limit rate lock loan disclosure became a worthless piece of paper that seniors were depending on. So many found out to late that there were loopholes in the disclosure that did not protect them. Many found themselves with large shortages and not enough funds to save their homes. We do not hear about all the seniors around the country losing their homes in the news media, do we?
To add more insult to injury we found ourselves facing a wave of negative publicity in the news media. Unfortunately, the negativity is still with us today and most of the adverse publicity has been from those who have little to no knowledge about the reverse mortgage product, which gives the industry a bad name. Many legislators and the media alike are tagging us as the next sub prime industry. In response to this I asked one legislator a question; would FHA have insured a sub –prime loan? I never did get an answer!
Over the past couple of years we have started seeing a different element coming into the reverse mortgage world, those who specialized in Sub-Prime loans, people from other sales fields, many were and are the fast pace city slickers.
More predatory lending has occurred in the last nine months than I have seen in this industry in the eight years I have been in it. I can understand the concern of the agencies and states to do something. I say, ENFORCE the laws they have on the books now, new laws, new restraints and controls like those that are being implemented and proposed are not needed. The states, the agencies our entities set up to protect the public did not do a very good job with the sub-prime and alternative unorthodox loan mess that plagued this country for quite a few years.
The latest round we have all had was the reduction in the principle limit. The mortgagee letter came out on September 23rd, the industry had to adjust, clean its pipeline up and save as many seniors as they could in seven days. This was criminal in nature.
Companies, originators, processors, closing departments, title companies, counseling agencies and our seniors were in a panic state to get HUD certificates signed and dated along with FHA case numbers that had to be pulled before October 1, 2009. On October 1, 2009 many seniors found themselves facing their worst fears, foreclosure. The principle limit affected the people in a reduction of at least 10% of the value of their home.
To sum it up we have to look over what has taken place over the past 15 years. We have had the worst fleecing of the American people through the erosion of the economy and the housing market I have ever seen. All this brought on by our government, due to falsely growing our economy through enormous debt in the hands of the American people.
When the crash hit, everything came out as far as what our government had done. Everyone blamed everyone else or everything possible except where the real blame belonged.
The subprime industry was on the lips of most American people. The Reverse Mortgage was starting to suffer a bit because of dropping home values. Foreclosures were occurring so fast the country and the lending industry could not keep up with them.
Seniors were losing fortunes in their 401-Ks, the stock market and their overall investments for retirement. Their home became a haven for them; a reverse mortgage was the salvation to many people around the country until the bail out of FNMA by the Government.
Our industry is being attached unjustifiable, our seniors our being treated wrong. We are being used as a scapegoat for the mistakes made by our government. They are trying to change a great program around to become the type of programs that put us in this mess in the first place.
With that said, we need to roll the reverse mortgage industry back in time, put the controls back in the program, and have HUD/FHA regulate the rates like they did. The agencies can work with the market place to price the product with the controls and stability we once had. We used to be proud to say” Reverse Mortgages are regulated by HUD for your protection”. We were proud to say, “The rate we offer will be the same any where you go”. Our industry had less predatory lending going on, more knowledgeable people working with our seniors and the service to the senior was better.
We know that rates and margins have to be marketable so everything can’t remain the same. Today’s reaction to the declining markets by lowering the principle limits are giving varied signs. Is HUD/FHA concerned that housing prices will not come back? They can’t do anything about the exposure they have out there now because of the plummeting values that our government created.
Tell me, what was the real purpose of lowering the principle limit factor tables? Lowering them at a time when the economic conditions of our country are critically affecting our seniors and the industry from an adverse financial position. My opinion is our government has a deep uncertainty and concern on what is going to happen to the economic future of our great nation.
The Reverse Mortgage industry will survive, even though it has gone through many battles. Those that survive will be among the elite that will serve our seniors professionally and represent our industry with dignity.
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