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Reverse Mortgage Alert for RMF HECM Loan Servicing Borrowers

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 A major reverse mortgage lender, Reverse Mortgage Funding, RMF filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the District of Delaware on November 30,2022.
RMF maintains a large portfolio of FHA-insured reverse mortgages, named the Home Equity Conversion Mortgage (HECM). Its loan servicer, Reverse Mortgage Serving Department is responsible for distributing monthly payments and responding to requests for draws on the HECM Line of Credit.

The RMF servicer contacted its book of business with the following notice:

Accordingly, the Company is legally required to obtain a court order in order to process loan payments, and expects to do so on Monday, December 5, 2022 if not the Friday before. Once the court order is granted, RMF will immediately remit those funds to customers so their requests can be received Friday, December 2, or at the latest, Tuesday, December 6.
 
Please know with confidence that if your loan is in good standing, you will receive payment. Your loans are FHA insured, and your draw request is 100% insured by the FHA.

If You Have Concerns
The mailing address for the RMF servicer is
P.O. Box 40087
Lansing MI 48901
Your monthly servicing statement will indicate a phone number to call, and your loan number.

Loan and Sale of RMF Servicing
On Dec. 5, RMF secured a $13 million loan to meet these obligations. Reportedly it is in negotiation with another lender to sell the servicing portfolio and resume obligations to make payments and draws. 

Conclusion
The mortgage industry is sensitive to interest rate fluctuation and other macro-economic factors. The FHA-insured reverse mortgage is designed to protect borrowers against a lender’s inability to make payments or draws. Although there appears to be a delay in meeting this obligation on the part of the RMF servicer, ultimately these loans are backed by the full faith and credit of the United States government. 

Background

The 100th United States Congress passed the 1987 Housing and Community Development Act. Part of its mandate was to create a reverse mortgage to “enable elderly homeowners to convert equity in their home to monthly streams of income and/or lines of credit.” 1

Since its inception in 1988, the Home Equity Conversion Mortgage (HECM) reverse mortgage is insured by the Federal Housing Authority (FHA). The reverse mortgage differs from the traditional mortgage “which is repaid in periodic payments, (while) a reverse mortgage is repaid in one payment, after the death of the borrower, or when the borrower no longer occupies the property as a principal residence.”1 Most importantly, the reverse mortgage is a non-recourse loan. “This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.”1

Like any insurance program, FHA insurance is funded by premiums. Reverse mortgage homeowners incur equity cost for both an upfront FHA premium (MIP) and an ongoing monthly assessment.

Product Evolution

In the last three decades, the non-recourse benefit has been augmented with additional consumer safeguards. Protections for younger spouses, limitations on the amount and pace in drawing equity, and underwriting the homeowner’s ability to meet the tax and insurance obligations have strengthened the program. The last of these is critical to the stability of the FHA insurance fund.

Once in the red, in part due to the frothy mortgage conditions along with inadequate underwriting in the Great Recession, “the financial health of the Home Equity Conversion Mortgage (insurance) portfolio dramatically improved in fiscal year 2022, ending September 30 with stand-alone capital ratio of 22.75 percent, compared to 6.08 percent the previous year, the Department of Housing and Urban Development announced this week in its 2022 Annual Report to Congress. Put another way, the capital levels for the HECM portfolio improved by $11.3 billion over the past year from a positive $3.8 billion in FY2021 to a positive $15.1 billion in FY2022.”2

Because the house itself stands as sole collateral for repayment, rising home values positively affect the insurance fund stability. If the home value at the end of the reverse mortgage is equal or greater than the loan balance, there is no claim against the insurance fund. (Note that any remaining equity remains in the control of the borrower or his estate.)

Because the homeowner must contribute to the MIP insurance fund, the lender’s recovery from the borrower is limited to the value of the home. There will be no deficiency judgment taken against the borrower or the estate because there is no personal liability for payment of the loan balance. 

Current Environment

With rising home values and low interest rates, many existing reverse mortgage holders had a strong incentive to go to the well again with a HECM to HECM refinance. Some lenders built a large percentage of their business on already existing customers who chose to get more money out of their increasingly valuable asset. This maneuver caused existing loans to pay off earlier than expected, causing unease among the investors who hold the securitized mortgage bonds: 

While refinances have provided a boom in overall HECM volume investors are less than enthused.  Not surprising considering payoffs of HMBS (HECM Mortgage Backed Securities) exceeded $1 billion for 10 months in a row. New View Advisors noted, “December 2021 came close in both dollar amount and speed: $1.28 billion, representing a 24% annual payoff rate”. Faster prepayment speeds of existing securitized HECMs, they noted, means investors will see smaller yields.3

The cycle of boom or bust in the mortgage business persists. In 2022, rising interest rates are affecting all mortgage lenders. Mortgage lenders across the country are consolidating, closing, and/or laying off staff. 4

There is a particular risk of rising interest rates for the homeowner seeking a reverse mortgage. As interest rates increase, his access to equity declines. The result can be that many homeowners are shut out of the reverse mortgage market because their existing liens exceed the amount of benefit available. The number of new reverse mortgage loans originated has dropped.5

References

  1. 1987 Housing and Community Development Act
    https://www.hud.gov/sites/documents/42351C1HSGH.PDF
  2. Health of HECM Program Improves in FY2022
    https://www.nrmlaonline.org/2022/11/18/health-of-hecm-program-improves-in-fy2022
  3. Is the HECM Refi Boom Ending?
    https://hecmworld.com/reverse-mortgage-news/hecm-refinance-boom-ending-rates/
  4. A Long List of Mortgage Layoffs, Mergers, and Closures
    https://www.thetruthaboutmortgage.com/a-list-of-recent-mortgage-closures-mergers-and-layoffs/
  5. Reverse mortgage volume, HMBS issuance fell further in November
    https://reversemortgagedaily.com/articles/reverse-mortgage-volume-hmbs-issuance-fell-further-in-november/
Reverse_Mortgage_Alert_2022-12-06Download

A Closer Look at Home Equity in Financial Planning

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Numbers Indicate How Financial Planners Discuss Reverse Mortgages

In his white paper “Home Equity in Financial Planning,” Craig Lemoine, executive director of the Academy for Home Equity in Financial Planning at The University of Illinois at Urbana-Champaign, illustrates the need for home equity release programs. “The Academy of Home Equity in Financial Planning’s mission is to develop and advance, for retirees and their financial advisers, a rational and objective understanding of the role that housing wealth can play in prudent planning for retirement income,” says the 2020 report, which included detailed surveys of financial professionals. Lemoine also is an associate clinical professor of financial planning at the university. Here is a closer look at some of his findings that, in some cases, compare how a Certified Financial Planner operates compared to a non-CFP.

Found in REVERSE MORTGAGE MAY-JUNE 2021
https://www.nrmlaonline.org/publications/reverse-mortgage-magazine/may-june-2021-issue

Are Reverse Mortgages Expensive— Especially For Those Who Don’t Need Them?

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Whenever the subject of reverse mortgages come up, invariably one of the objections that are cited is the perceived high cost of originating a reverse mortgage. Virtually every news media article about reverse mortgages cites the high cost and how it eats away at equity.  That is why so many advisors recommend they only be used as a “loan of last resort” when there is no other option.

The opposite is actually true.  When all costs are considered, reverse mortgages became the loan of first resort.  The fact is that they actually cost considerably less when used as a source of income as compared to a portfolio or continuing to make payments from a portfolio once past the age of 62.  Let’s investigate the concerns that both consumers and advisors have about the actual fees and closing costs that are the subject of concern.

https://www.nasdaq.com/articles/are-reverse-mortgages-expensive-especially-for-those-who-dont-need-them-2021-03-31

Reverse Mortgages: 10 Things You Must Know

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Reverse mortgages can be complicated so it’s imperative that you understand how the loan is repaid, the monthly costs and potential scams to look out for.

Get a large wad of cash! Never make a mortgage payment again! Stay in your home as long as you want! Sounds like a great deal, right? Well, for some older homeowners, a reverse mortgage can be. 

For others, it’s more perilous than promising. If you’re considering a reverse mortgage, there’s a lot you need to know before signing on the dotted line. 

Here’s 10 things you need to know about reverse mortgages. 

https://www.kiplinger.com/real-estate/reverse-mortgages

Reverse Mortgage Volume, HMBS Issuance Rise in March as MMI Fund Position Improves

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Home Equity Conversion Mortgage (HECM) endorsements in March ticked upward in March, rising 3.8% to 4,220 loans. It is yet another month recording over 4,000 loans, marking another increase after February saw the first reduction in volume since December and January. HECM volume previously had been on a downward trend in the final months of 2020 prior to December according to data compiled by Reverse Market Insight (RMI).

Reverse Mortgage Volume, HMBS Issuance Rise in March as MMI Fund Position Improves

Tap Home Equity for Extra Income

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Home is where the heart is, but it’s also a source of regular income for many retirees.

Housing wealth, better known as home equity, increased to $7.8 trillion for homeowners 62 and older in the third quarter of 2020, according to a report from the National Reverse Mortgage Lenders Association. That’s good news for retirees who are concerned about running out of money in retirement—as well as those who aren’t—because your home could provide the key to long-term security.

There are more ways than ever to turn your equity into a source of retirement income. Outside of a plain-vanilla refinance, retirees can access their home equity through a cash-out refinance, a home equity line of credit or a reverse mortgage. Or you can downsize (more on that below) and use the proceeds to beef up your nest egg. Read on to help determine the best option for you.

https://www.kiplinger.com/personal-finance/credit-debt/debt/refinancing/602471/tap-home-equity-for-extra-income

This new type of reverse mortgage would help retirees generate much more income

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Reverse mortgages can be a powerful financial tool in retirement — especially as more Americans age in place. But the product’s design today isn’t meeting many borrowers’ needs.

By design, reverse mortgages are meant to make retirement easier — and keep people in their homes.

Nelson Haynes, who worked at Deering Savings & Loan in Portland, Maine, is traditionally credited with creating the first reverse mortgage back in 1961. He wanted to help the widowed wife of his high school football coach stay in her home after her husband died.

In that era, “people observed that there were a lot of widows,” said Martin Neil Baily, a senior fellow in economic studies at Brookings and the former chairman of the Council of Economic Advisers under President Clinton.

“It was a time when a lot of men had pensions, and when the man died, the pension died as well. So these were women that didn’t have anything much to live on, but maybe they were living in a house that was quite valuable,” Baily said.

https://www.marketwatch.com/story/how-to-create-a-better-reverse-mortgage-11616167736

Reverse Mortgages Aren’t Just for People Who Are Out of Money

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Reverse mortgages are surprisingly unpopular considering that they let you spend the wealth locked up in your home without having to sell, protect you from a decline in the home’s value, and even (if you so choose) pay you monthly checks for as long as you live, like Social Security. Fewer than 1% of eligible homeowners have a reverse mortgage, according to a Brookings Institution report.

The word “reverse,” which conjures images of retreat and defeat, might be the problem. Or maybe it’s “mortgage,” which is no one’s favorite financial product. There seems to be an impression that taking out a reverse mortgage is an act of desperation by people who have no choice but to crack open and spend their nest egg of housing wealth.

That’s unfortunate because a reverse mortgage can be a smart choice for a wide range of people aged 62 and older, including ones who are far from desperate. Many people who are well set for retirement have most of their wealth tied up in tax-advantaged savings plans such as 401(k)s. Extracting some money from the house they live in without having to sell it can be a good way to raise cash for big expenses—say, to help pay for at-home health care or their grandchildren’s education.

https://www.bloomberg.com/news/articles/2021-03-29/reverse-mortgages-aren-t-just-for-people-who-are-out-of-money

Finance of America Reverse Empowers Homeowners to Reinvent Their Retirement Roadmaps with Game-Changing New Mortgage

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EquityAvail TM lowers monthly mortgage payments for ten years, at which time they are eliminated altogether; creates glidepath to retirement.

Innovative hybrid product, combines aspects of traditional and reverse mortgages to deliver a ‘new world of options’ for homeowners at or near retirement

For many Americans over the age of 60, the pathway to achieving financial security in retirement has become increasingly challenging. They are living longer and often have cashflow shortfalls and carry significant debt – including a traditional home mortgage. In fact, over the last three decades, the number of people over the age of 60 burdened by traditional mortgage debt has doubled to more than 40%i. With historically low interest rates, some homeowners will end up exploring a mortgage refinance in an effort to reduce monthly payments and potentially take “cash out” from their home equity. However, a traditional refi can spell trouble for borrowers over 60 who are charting their course to retirement.

  • When one or more borrowers have reduced income due to retirement, they may not qualify under traditional loan guidelines due to high debt-to-income ratios.
  • Those who do qualify can end up tethered to 30 more years of mortgage payments. If ability to make these mortgage payments is dependent upon continued full-time employment, this is not sustainable for borrowers hoping to retire.
  • Even if the borrowers can qualify for a refinance today, and plan to work for the foreseeable future, an unexpected income loss—through disability, death of a partner or unrelated economic upheaval, like that encountered in 2020 with COVID-19—could leave the borrowers with no feasible option but to sell their home.

The upcoming launch of EquityAvail by leading retirement solutions innovator Finance of America Reverse LLC (“FAR”) is opening up a significant new set of options for homeowners. This product is the first-of-its-kind and will provide a needed option for a large segment of the population looking to improve cashflow and remain in their home for as long as they wish.

Finance of America Reverse Empowers Homeowners to Reinvent Their Retirement Roadmaps with Game-Changing New Mortgage

Are HECM Reverse Mortgages Best Viewed As A Stand-Alone? Or As Part Of An Integrated Retirement Plan?

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Jack Guttentag in Forbes

The practice, almost without exception, is to deliver HECMs as a stand-alone. HECM reverse mortgage lenders are barred by HUD rule from delivering HECMs in conjunction with any other financial instrument. And every annuity provider we have queried has an internal rule that prohibits annuity sales when the funds used for the purchase have been obtained from a reverse mortgage.

The rationales for these restrictions are flimsy, and their cost to the retirees who are affected by them is enormous.

Check out the article here.