For me, the new year is a time of reflection—a time to contemplate goals for the year ahead. While life is filled with change, it’s essential to focus on what we can control. This year begins with a sense of uncertainty related to the HECM product and regulatory changes wait in the wings. While it’s tempting to worry about the unknown, I am choosing to focus on the opportunities that lie ahead. Our industry is still a boutique business, yet it has the potential to become a prominent, mainstream financial solution. With more than 32 million baby boomers who own homes, utilizing home equity will be an essential ingredient for providing retirement income. If we can scale in a responsible and ethical fashion, we’ll have the great privilege of helping millions of Americans retire more comfortably. I am invigorated about our possibilities but know we need to work prudently to preserve the health of the HECM program in the year ahead. And that is my goal.
Controlling Our Destiny
Last year ended with HUD’s announcement of a pending moratorium on the full-draw, fixed-rate HECM (as of press time, the final details have not been released). This announcement does not come as a surprise; in fact, the writing has been on the wall for some time. Home prices continued to decline; our borrowers are living longer; taxes and insurance defaults continue to be an issue; and the secondary market demand for the fixed-rate HECM has spiked. These combined factors created the “perfect storm,” which is continuing to cause havoc on the financial stability of FHA’s Mutual Mortgage Insurance (MMI) Fund.
Without private sector involvement, our only liquidity execution is with the loan program rules promulgated by FHA and GNMA. As an industry, we need to carefully examine our actions and business practices in order to sustain the HECM program for the future.
Jack Welch once said, “Change before you have to.” I think that’s wise advice. We cannot simply sit around waiting for policymakers to make changes that will safeguard our industry—we need to be proactive.
Change Before We Have To
Now, I am not suggesting that we try to take on counseling reform or consumer disclosures—leave that to the CFPB. Let’s control what can be controlled and make responsible changes to our businesses without waiting for the regulators. In my view, there are three main issues that we need to be mindful of:
1 Ensuring the financial stability of FHA’s MMI Fund
2 Reduce reputational risk
3 Proactively address the CFPB’s concerns
Protect the MMI Fund
In response to declining home values, the MMI Fund required “rebalancing” back in 2010. FHA imposed an increase in the monthly MIP from .5 to 1.25 percent and introduced the HECM Saver. Two years later, we find ourselves in a similar position—home values deteriorated further and the number of T&I defaults remains consistent. As we wait patiently to see what the FHA’s final product adjustments will be, shouldn’t we just take immediate action? We should refocus our businesses on products that make the most sense to the borrower and have the greatest impact on the MMI fund: HECM Standard ARMs and the HECM Saver.
Transitioning away from the full-draw, fixed-rate HECM could be a challenge financially, but it needs to be done to restore the health of the HECM. To those in management, it’s a good time to revisit originator compensation plans to aid in the shift. Paying salespeople based on maximum claim amount will remove any bias related to the product selection process and will better protect your business and the consumer.
Reduce Reputational Risk
Recently, the reverse mortgage product and the ethics of our industry have been challenged by certain mainstream media outlets. It’s difficult to witness reporters inaccurately describe our business or publish half-truths.
Today, there are two major HECM topics that fuel negative media:
Non-borrowing spouse issues 8 The concept of taking a younger spouse off title in order to increase eligibility initially made sense when there was an opportunity to pay off significant forward mortgage debt. However, even with the proper protections in place (education, counseling and disclosures), the non-borrowing spouse is put in a compromising position and does not want to leave their home. In my opinion, taking a spouse off title has serious repercussions and should be a practice that is highly scrutinized.
Foreclosures 8 Foreclosing on a senior’s home is a huge headline risk. While we continue to wait on HUD to unveil guidelines for financial assessment (that can minimize foreclosures related to T&I defaults), we need to be mindful of the prospect’s financial picture. The HECM is not for everyone and sometimes it makes sense for a consumer to downsize or sell the home.
Training your sales team on the best ways to discuss product selection, suitability and loan obligations will ultimately benefit the consumer and the industry at large.
Banding Together
By deploying a more proactive and prudent business strategy, we can all improve the financial health of the HECM program and create a solid foundation for growth. While the pending product changes are still unclear, the good news is that consumer demand remains strong. Let 2013 be a year of reinvention, innovation, teamwork and forward thinking. Working together, we can ensure a successful future. I’ll end with another quote, this time from Henry Ford: “Coming together is a beginning; keeping together is progress; working together is success.” Here’s to a successful 2013.
