The reverse mortgage industry, hammered for high fees and high pressure sales tactics, has steadily improved its procedures and its image. Loan fees and interest rates have been lowered, consumer disclosure has improved, and the federal government's insured reverse mortgage program has provided stability and credibility to the industry. A-list lenders have expanded their presence in the market; Wells Fargo and Bank America are the nation's top two reverse mortgage lenders.

Now that the industry is cleaning up its act, it is finding that customers are very hard to find. The volume of reverse mortgages is off nearly 40 percent so far this year, and is on an annual pace to record only 70,000 transactions nationally for the entire year. The number of lenders active in the reverse mortgage market has plunged by more than half in the past year to roughly 600, according to Reverse Mortgage Insight, which tracks industry trends.

Reverse mortgages allow qualified borrowers (the youngest owner must be at least 62) to tap the equity in their home, pay off their existing mortgage balance, and remain in their home as long as they're able. Homeowners remain responsible for all home maintenance expenses and property taxes. Under certain conditions, the products are a sensible solution for aging homeowners who are running short on retirement funds.

Most reverse mortgages are offered through the Federal Housing Administration's Home Equity Conversion Mortgage (HECM) program. The program sets the prevailing rules on what percent of a homeowner's equity can be pulled out of the home; amounts vary depending on the age of the homeowner and the interest rate on the loan. Interest charges are paid to lenders out of the remaining equity in the home. HECM also provides insurance to guarantee the loans, and charges insurance rates that currently are 2 percent of the loan amount up front and ongoing premiums of half a percent. The insurance guarantees the promised equity payments to homeowners will be available.

That's especially important in reverse mortgages where homeowners do not pull down a lot of money right away but use the loan as a line of credit for future needs. Using a reverse mortgage to lock in access to funds at a later date can have tax advantages, and there are no loan interest charges on funds that have not yet been drawn down. Many older homeowners may have trouble qualifying for traditional home equity loans, making a reverse mortgage a more realistic way to access the equity in their homes.

HECMs are non-recourse loans, meaning borrowers and their families are never on the hook for any loan losses experienced by lenders. Such losses can easily occur when homeowners continue living in their homes for long periods after the HECM is issued. Because HECMs are federally insured, the amount of homeowners' cash-loan proceeds are guaranteed and protected from lender defaults as well as any declines in the value of their homes during the life of the reverse mortgage. If home values rise, however, the gains benefit the borrower, who continues to own the house until he either dies or moves out. At that time, if the home has positive equity, the homeowner's heirs have up to a year to pay off the loan and keep the home or sell it. If the loan is "underwater," homeowners can simply walk away with no obligations and the lender will take title to the home.

Because up-front HECM loan fees can be steep, the loans aren't attractive for people who are planning to stay in their homes for only a few years. There's no absolute residency time rule, but it should be long enough so that the per-year impact of the fees is not too large a number.

The HECM program has been subsidized by taxpayers, but current concerns about budget deficits are expected to force program cuts. To trim its deficits, the FHA has been reducing the percentage of homeowner equity that can be pulled out of the home. This reduction narrows government losses but makes the HECM product less attractive. This fall, industry experts expect that ongoing insurance charges will be raised as well, perhaps to 1.25 percent. An FHA spokesman declined to provide specifics but affirmed the agency is seeking the authority to raise premiums

"There is no question that the product is going to be altered again. The only question is by how much," says Jeff Lewis, head of Generation Mortgage. He supports the idea of a non-subsidized program but believes the government should adopt a broader definition of budget neutrality. In addition to direct subsidy costs, for example, he says reverse mortgages also generate taxable income to investors and that this benefit should be part of a broader measure of the program's budget impact.

The National Consumer Law Center, which has been critical of reverse mortgage fees and practices, acknowledges that costs have come down. However, it notes that the lower loan charges are generally only available on loans where consumers pull down all their remaining home equity in a lump sum. This product is easily packaged for investors and it's that secondary market demand that has been shaping the market. Lump sum distributions, however, may not make sense for many homeowners. And in the past, some financial companies have convinced older homeowners to spend the proceeds on unneeded or inappropriate investments.

"If a borrower takes out a line of credit, we don't have a very large loan to sell,"Lewis explains, which is why recent price breaks have not been offered on lineof-credit reverse mortgages. He agrees it would be better for the market to have more line-of-credit loans, and that this use of the product would permit the kind of financial planning he advocates. In some situations, for example, it would be better for retirees to spend down their home equity while keeping funds in their retirement accounts. The accounts are likely to appreciate more than their home equity, and may carry tax advantages as well.

"Clearly, that's not been going on," Lewis says. "The majority of the loans we do are retiring other liens on the property. We're not doing reverse mortgages for people whose homes are fully paid up. . . . We seem to be primarily helping people who are close to running out of their other sources of money."

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It might seem strange to bring up reverse mortgages in a space dedicated to the lives of baby boomers.

After all, reverse mortgages have a reputation as being products used primarily by seniors. Jeff Lewis, chairman of Generation Mortgage, a reverse mortgage-only business in Atlanta, says those utilizing the product are on average in their early 70s. (Reverse mortgages can actually be utilized by homeowners starting at the age of 62).

Reverse mortgages also have another reputation as being products not just used by seniors, but by seniors who are desperate for income. Furthermore, reverse mortgages are seen as being complicated to understand. The industry has also come under the same scrutiny and criticism that has afflicted the mortgage industry as a whole, including accusations that loan officers are using unscrupulous tactics to generate commissions. In the case of reverse mortgages, this means preying on seniors.

“We have spent a lot of time in the industry fighting off what I think are fundamental misperceptions about what the product does and doesn’t do,” Lewis says “It’s our responsibility to do a better job explaining to people what the product can do and when it can be effective.”

But Lewis says people who are engaged in financial planning “have to look at the whole picture.” This means being aware of the extent to which there might be home equity available for a client. “For a lot of people the biggest part of their net worth might be their home equity and for a lot of people the biggest expense they expect to have over their lives is housing,” Lewis says.

So where does the boomer fit in this picture? Lewis argues that the reverse mortgage would be especially helpful as part of the financial planning discussion for boomers in the “sandwich generation,” of which he is a member. These boomers are struggling with expenses by caring for both children and parents. After the recession their retirement savings may be depleted. Their home isn’t providing the nest egg like it once did. Rather than going to their oldest children for a loan, these boomers might want to consider a reverse mortgage, Lewis says.

“It’s really important for the oldest children to see how a reverse mortgage enabled their parents retain their financial independence,” he adds. “It has an important social component. I think people feel better when they take care of themselves. Parents really don’t want to go to their kids for help. They’d rather do it themselves.”

Lewis says that five or 10 years ago children might have objected to their parents using a reverse mortgage because they were expecting to inherit the house. “But if you send your parents a check every month and then you get the house [when your parents no longer live there] what is that? That’s a reverse mortgage,” Lewis says.

When an advisor begins talking with a client about possibly utilizing a reverse mortgage, he first and foremost has to determine how much existing debt the client has on the house. If a client finds himself in a situation where he can barely cover everything by using a reverse mortgage, he’ll likely have problems paying his real estate taxes, home owner’s insurance, or keeping his house up. These are obligations he has to meet if he has a reverse mortgage or else he’s defaulting on the loan.

“It’s a very powerful tool but once you use it you can’t use it again,” Lewis says. “The industry is trying to make sure that the people who are using reverse mortgages aren’t in such a dire circumstance that they won’t be able to live up to the obligations they have after they do it.”

There is little argument that there has been a recent drop in the origination of reverse mortgages recently. Lewis notes that last October the principal limit factor (similar to a loan-to-value ratio on a normal mortgage) was dropped 10% and that has caused the market volume to drop 30-40% from last year to this year. It appears almost certain that there will be lower factors and higher mortgage insurance premiums this year as well, Lewis says. This could make it even more difficult to get people into a reverse mortgage.

But Generation Mortgage could be tapping into a new market not normally associated with reverse mortgages: The high net-worth homeowner. In the last few weeks the company has introduced two different fixed-rate jumbo loan products that are more for people with homes in excess of seven figures.

Lewis says the low market penetration for reverse mortgages could be due in part to the unfamiliarity that many advisors have with the products. Although he concedes that reverse mortgages are complicated, he says that doesn’t make them bad. All of the complications are features that end up working to the benefit of the consumer, Lewis argues. This includes the fact that you can have a fixed rate or you can have floating; you can receive that line of credit up front, or over time on a schedule. You can also take a lower coupon and pay higher upfront costs or you can take less upfront costs and take a higher accrual rate.

“I think the financial professional should take the time to learn these products because they can be a very powerful tool in enabling people to remain in their homes and remain financially independent as long as possible,” Lewis says.

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Upfront fees on reverse mortgages have fallen substantially in recent months, giving homeowners interested in this product a new challenge: how to compare offers to find the best one.

"Quite a few of the lenders now have reduced the origination fees," says Barbara Stucki, vice president of home-equity initiatives for the National Council on Aging. "Some of them are getting rid of the origination fees. Some are willing to pay some of the mortgage-insurance premium fees upfront."

It's an important development for reverse mortgages, which have in the past faced criticism for charging high upfront costs, says Peter Bell, president of the National Reverse Mortgage Lenders Association.

Stay in Your Home

A reverse mortgage allows older homeowners to tap their home's equity while they remain in the house. The amount available to the homeowner depends on his or her age and the home's appraised value, among other things. Payments to the borrower can be made in a lump sum or in regular installments, or a home-equity line of credit can be established, according to the Department of Housing and Urban Development's website (hud.gov). The loan typically doesn't come due until the homeowner sells the house or dies.

Reverse mortgages are available to homeowners who are 62 years old or older and own their homes outright or have a substantial amount of home equity, according to the HUD website. The vast majority of reverse mortgages are insured by the Federal Housing Administration, through the Home Equity Conversion Mortgage (HECM) program.

The reduced upfront fees on reverse mortgages are a result of another important industry development: investor demand for securities backed by those mortgages, Mr. Bell says. These securities are backed by Ginnie Mae, based on reverse mortgages insured by the FHA, he says, and with that combination, "you have a very secure investment."

Investors are willing to pay a premium for that kind of safety with an attractive yield. And lenders are essentially passing on some of that premium to borrowers in the form of lower fees, he says.

The origination fee is often a few thousand dollars, with a $6,000 maximum, Mr. Bell says. The upfront mortgage-insurance premium is 2% of the lesser of your home's value, or the FHA's HECM mortgage limit for the area, according to HUD's website. Some lenders are covering all or part of these costs.

The recent fee reductions mean more work for prospective borrowers to compare loans. One lender might reduce the origination fee, Mr. Bell says. Another might waive the origination fee but raise the interest rate. Another could change the servicing fee.

"Consumers need to get the full details of the offer from the lender, and [they] need to analyze them and compare them," he says. Counseling, which is required to qualify for the FHA HECM program, also can help borrowers sort through their options.

With declining home values, people might be less inclined to take out a reverse mortgage these days because the equity in their home has taken a hit, says Ms. Stucki of the National Council on Aging. Typically, people like to tap their home's equity when they have a lot of it.

It's important to note that those who took out a reverse mortgage when home prices were at a peak won't face changes to that loan—even if their home value has fallen substantially.

"We've seen instances...where people already have higher balances than the value of their house," says Jeff Lewis, chairman of Atlanta-based Generation Mortgage.

That's not a problem. When the loan comes due, the amount owed will never exceed the value of the home, because of the FHA insurance.

But falling house values have prompted some recent changes to the program. Last year, HUD put in place a 10% reduction in borrowing limits for FHA-insured reverse mortgages, reducing the amount of equity a homeowner can tap, Ms. Stucki says. And this year may bring more changes, including another possible reduction in borrowing limits and an increase in mortgage-insurance premiums.

Reasons to Reverse

Historically, people have sought reverse mortgages as a way to make ends meet, as they balance the costs of health care, housing and other basic needs in their retirement years. But in today's housing market, it has become more common to see people using them to eliminate their monthly mortgage payments, Mr. Bell says.

"We have people who, in a more normal environment, might have sold their home and moved to a different type of housing," he says. "But since they can't sell their home in this environment, they're using a reverse mortgage to sustain themselves in the home until they can sell it."

Some distressed homeowners also are finding relief in reverse mortgages. "For others at risk of foreclosure, it could be a lifesaver," Ms. Stucki says. "They could risk losing the house, and if they can defer mortgage payments, that makes sense."

Still, a reverse mortgage isn't right for everyone. For one, it probably makes the most sense for people planning on staying in their homes for more than a few years, Mr. Lewis says. "If this is a short-term financing situation, you might have other options that you can consider."

On top of the mandatory counseling for an FHA-insured reverse mortgage, Ms. Stucki says it's not a bad idea to go through pre-lender counseling as well; she advises searching for a HUDapproved HECM reverse-mortgage counselor at hud.gov.

She also recommends walking through the National Council on Aging's BenefitsCheckUp.org site, which helps seniors find financial assistance in their area, sometimes eliminating the need for the extra funds.

Write to Amy Hoak at amy.hoak@dowjones.com

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Generation Mortgage, the largest independently owned reverse mortgage lender has won the 2010 Better Business Bureau (BBB) of Metro Atlanta’s Torch Award for Marketplace Ethics and was the first runner up for the Torch Award in Customer Service said a company statement.

“Receiving these awards is a huge honor for Generation Mortgage,” said President and CEO Scott Peters, Generation Mortgage Company.

“We are thrilled to be a part of such a highly regarded group of businesses and are pleased that our ethical business practices and customer service efforts have been recognized. These awards are just another way to demonstrate how seriously we take our business and our customers.”

The BBB of Metro Atlanta Torch Awards includes four different categories, Marketplace Ethics, Customer Service, Community Service and Charity. Judges use a variety of information including client testimonials and documentation of business practices applicable to the specific award.

Generation is a reverse mortgage lender based in Atlanta, GA and is licensed in 48 states. The company has endorsed 571 HECMs during 2010 according to data from RM Insight.

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Consumer Credit Counseling Service of Montana is now offering free reverse mortgage counseling for the next six months said a company statement. The free counseling is possible after receiving $90,000 to deliver HECM counseling services through a US Department of Housing and Urban Development grant.

"We determined that it best meets both the consumer and broker/lender needs to offer the free counsels through the HUD funding," said Tom Jacobson, Executive Director for CCCS of MT.

The agency tentatively plans to revert to the standard $125 counseling fee, which can be financed in closing costs when the HUD grant runs out said the company. Based upon current numbers, they expect to offer the free sessions through at least September.

While the HUD regulations stipulate certain national and local counseling agencies to include on the referral list, adding additional agencies is at the brokers discretion said the company. "We hope that brokers/lenders will expand their lists to include additional agencies that are committed to the highest quality service on both ends," said Jacobson.

In the past three years, CCCS of MT told RMD it has completed 10,141 HECM counseling sessions.

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Reverse mortgage originators, especially those with ancillary life and long-term care insurance offerings, are chafing at what they regard as "vague" rules governing product cross-selling. Last year, sweeping legislation enacted by Congress – the Housing and Economic Recovery Act (HERA) – held that "neither mortgagees nor any other party may require mortgagors to purchase insurance, annuities or other additional products as a requirement for, or a condition of, eligibility for HECM insurance."

But, the words "require" and "requirement" have muddied the waters, according to originators who argue that such lack of clarity intimidates reverse mortgage providers and ultimately shortchanges seniors. "It's up to insurance and investment companies” to decide such matters," fumes Jeff Lewis, senior managing director, Guggenheim Partners, New York, who says language in the year-old law is "wrongheaded and ends up having a detrimental affect. It's hopelessly vague," says Lewis, insisting that "HUD knows they don't regulate these things."

One Florida originator flatly criticizes the HERA Act as having "disrupted the HECM industry." As a result, he reports hearing “that seniors are having a tough time finding a qualified originator to explain this product to them." For his part, Lewis is hopeful the housing agency will issue rules clarifying what products may or may not be sold in conjunction with reverse mortgages. "That's when we’ll have a chance to [understand] the regulations, but it will still be on all of us to do what’s responsible."

And, that may be ultimately where the issue comes to rest, he says – originators acting in the best interest of seniors "who ought to have the freedom to use their home equity," accessed with a reverse mortgage, to purchase other products. A lot of good can come about if is properly controlled," according to Lewis. "It's really about how people are compensated. We don't want to gang up on senior to generate commissions."

The Florida originator cautions against "rushing rule changes and writing hurry-up mortgagee letters [that] cause unintended consequences." He recommends creation of a "HUD Originator Council used to vet changes."

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While HECM refinances played a big role in reverse mortgage endorsement volume for FY 2009, Generation Mortgage Chairman Jeff Lewis notes that the current economic climate has stepped in to change that.

For a HECM refinance to be possible, either the value of the home has to rise or the person has to get a lot older. And even if the person might get more from being older, the house would still need to be at least back where it was when the reverse mortgage was taken out. “Given how difficult it is in this appraisal context, [it’s] hard to think of many cases when a refinance would be possible, “ said Lewis in a conversation with RMD.

During FY 2009, HECM refinances totaled 8,985 and were up 102.6% compared to FY2008. According to the latest FHA Outlook Report, HUD is projecting 7,268 HECM refi’s in FY 2010.

In addition, Lewis notes that the drop in principal limit factors (PLF) has a negative effect on the amount of money a borrower would be able to receive from refinancing.

“At the end of the day if a person needs money and they can do it, it’s hard for me to see a lot of cases when it would not be in their best interest,” says Lewis. Nonetheless, given the current climate, “I don’t think it’s a huge issue for our industry,” he adds.

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WASHINGTON (MNI) - The government is currently maximizing options for Fannie Mae and Freddie Mac post conservatorship, the Federal Housing Finance Agency said Tuesday, but it has yet to work out its long-term strategy for reforming the two mortgage giants, which for now will be kept in their current form.

Meanwhile, analysts say the private sector is unlikely to step into the mortgage market to provide alternative sources of funding until there are clear signs housing is stabilizing.

In that regard, the private sector's reaction to the termination of the Federal Reserve's purchases of mortgage-backed securities will be a first test, and here, the Federal Housing Finance Agency expressed confidence Tuesday the private sector will in fact pick up the slack.

Analysts also said that in designing a strategy for the two GSEs, the government could take some clues from the Federal Housing Administration.

Asked whether the Treasury Department views the FHA as a successful model, a spokesman declined to comment.

For Financial Services Roundtable Vice President of Government Affairs, Housing Policy Council Paul Leonard, there are definitely some features that could be used from the FHA that could help guide a new structure of the GSEs, although, "It wouldn't be wise to just make them a government agency."

One possibility would be for them to issue one variety of MBS through a Ginnie Mae-like facility, he said, "so that there would be a single MBS."

Private sector companies could create those MBS, but they would have to meet specific standards "and then be issued through this single facility."

Another way to learn from the FHA is to "make sure that your product is available for middleincome borrowers," meaning a product serving the need of a "great number of people," Leonard said.

It should be clarified how the FHA would issue regulations on the types of mortgages that would be "acceptable for these MBS," he added.

"I think that would give more confidence in the market."

For FTN Financial analyst Jim Vogel, "We are still learning on where the FHA-style model, I think, fits into what can be accomplished with more generous credit underwriting standards."

In an August paper, Goldman Sachs analysts had said that a nationalization of the two entities -- total or partial -- "could mean combining the GSEs and folding them into an expanded FHA."

They added, "This option is likely to be part of any permanent reform proposal; the question is how much of the GSEs will become an explicit part of the government."

"If we're going to have a system where the government purposely creates different kinds of subsidies to enable different kinds of home buyers to afford home ownership, it probably needs to be done more in a FHA and Ginnie Mae kind of a construct, where it's not private," said Jeff Lewis, Chairman of Generation Mortgage, a reverse mortgage lender.

"This way they would clearly be public," he concluded.

Whatever option the government chooses, a key consideration is the willingness and ability of private capital to step into the mortgage market to offer alternative sources of funding.

This is especially true since the Federal Housing Finance Agency for a reform of the two entities that could involve privatization, at least partially.

In a letter to Congress on the status of the conservatorship, Acting Director Edward DeMarco said, "In my view, maintaining and, where needed, strengthening these important private sector disciplines associated with each Enterprise's corporate infrastructure promotes the goals of the conservatorships and maximizes the government's options in a post-conservatorship world, including the opportunity to gain some return for taxpayers in a resolution of these companies."

And in detailing the status of the retained Fannie Mae and Freddie Mac's portfolios of mortgagebacked securities, he expressed confidence the private sector will actually step in as the Federal Reserve ends its asset purchase program.

"I also expect that other private parties will begin to invest in new Enterprise mortgage-backed securities as the Federal Reserve gradually withdraws its purchase activity," he told lawmakers, adding that he instructed the two mortgage giants to "develop a detailed plan for how" they will manage their retained portfolios within the limits imposed their regulator.

By the end of the year, each company's retained portfolio should be under $810 billion.

While seeking to maximize the alternatives for reform, the FHFA made clear that in the short term, the only option is the status quo.

"There are a variety of options available for post-conservatorship outcomes, but the only one that FHFA may implement today under existing law is to reconstitute the two companies under their current charters," the letter reads.

As far as the private sector's involvement is concerned, analysts, including Standard & Poor's, do not expect the private sector to provide enough sources of funding to replace Fannie Mae and Freddie Mac anytime soon.

Financial Services Roundtable's Leonard said while Fannie Mae and Freddie Mac would have to remain in their current form under the direction of the government, "as the housing market starts to stabilize we think that the debate should focus on whether you can transition to a series of potentially private companies" that would put together mortgages and issue them through this single facility.

Once there is more confidence that the housing market has stabilized and once "it's clear that there will be clear standards for these mortgages, I think you would start to see interest in private capital returning, maybe creating these types of mortgage-issuing companies."

We would need a transition to the new companies over "several years," he added.

Generation Mortgage's Lewis noted that in the reverse mortgage market, already, Fannie Mae's withdrawal has occurred gradually and has benefitted the market place.

In the reverse mortgage industry, where virtually all of the loans were purchased by Fannie, the overwhelming majority of the loans now are getting securitized into pass-throughs and there is a "natural progression away from Fannie Mae to a broader market."

Along the process of withdrawing itself from the market, Fannie Mae's participation reached a level "where it did make sense for others to participate," Lewis said.

"It's a much healthier marketplace when we have multitude of investors," he said, although he acknowledged Fannie Mae is still buying and is still necessary.

However, the housing finance market could operate "just fine" without GSEs, saying there is "ample liquidity" in the system that would generate "reasonable" prices.

A step-by-step withdrawal of Fannie Mae and Freddie Mac could be adopted at the national level in the traditional mortgage market despite the significant challenges, he continued.

In particular, a key question is how private investors will behave once the Federal Reserve's agency MBS purchases stop, in an environment where unemployment is widely expected to remain high, making defaults, even from prime borrowers, still very likely, especially if combined with a rise in interest rates.

Vogel notes that the role of both the FHA and Fannie Mae and Freddie Mac was always to fill in where others were not as efficient of more expensive.

So it is unclear how "you redesign the government's role until you have a better picture of what the private sector can do on a sustained basis."

"You need a very flexible model for the government's housing finance presence," a feature that Freddie Mac and Fannie Mae -- despite all their drawbacks -- had. "Part of the situation is we are still cleaning up the debris from the abnormal growth of 2005 through 2008. And until that debris is cleaned up, it's going to be hard to see sort of what remains in terms of the willingness of private capital to step in to this market and to the extent the private capital waits for government does, we could have a stand off for a while," he added.

Therefore, one cannot know when the government could begin the process of dismantling Fannie Mae and Freddie Mac.

Ideally, Fannie and Freddie can demonstrate that the loans they originated in 2009 already provide "the beginning of the foundation of good credit criteria."

"So it's possible that if we can continue to see that the 2009 vintage conforming loans were fairly solid, maybe that attracts private capital back in," he said.

"We're still in the learning process."

The credit judgment that Freddie and Fannie applied to new loans in 2009 "is sort of the largest base of after-the-crash credit information that we have."

"If their judgment turns out to have been good, it can be the model for the way we should try to underwrite mortgage credit after the bust," he concluded.

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The Obama Administration announced earlier this week that it was requesting a $250 million credit subsidy for the Federal Housing Administration’s reverse mortgage program along with a contingency appropriation to meet all program demand.

In addition to the subsidy request, Secretary Donovan told a group of attendees at the Brooke-Mondale Auditorium at HUD’s headquarters in southwest Washington that it would increase the ongoing annual Mortgage Insurance Premium (MIP) from .5% to 1.25% and a low-to-mid single digit cut in the principal loan limit said the National Reverse Mortgage Lenders Association.

Donovan added that there would be long term reforms in the reverse mortgage program down the line, but that the $250 million subsidy “is a reaction to last year’s adjustments to make sure the program does not limit its availability to seniors.”

After the need to reduce the principal loan limits for the second year in a row, many feel the Office of Budget and Management’s assumptions regarding the HECM program are off.

“I think their assumptions about housing prices are far too pessimistic,” said Jeff Lewis, Chairman of Generation Mortgage in an email to RMD. “Again we have a process that is highly flawed as no constituents will have the opportunity to examine OMB’s assumptions, which must be extremely pessimistic.”

He adds that, “the FHA is an insurance company, why does it act like there are no cycles? They should try to break even through a complete cycle, not at the bottom of the cycle.”

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A proposal by FHA to eliminate correspondents and raise the bar on mortgage brokers – both forward and reverse – may have a silver lining for several industry players.

Possible increases in net worth requirements, strengthened lender approval criteria and greater lender liability for the practices of wholesale clients, appear on the surface to spell fewer originations and less business for smaller players. But it could also bring new business for outsource service providers and new liaisons between lenders and loan suppliers potentially shut out by their previous patrons.

“If larger lenders set high thresholds for brokers to be approved it will create a pool of people and we can find [new] good players,” says Bill Trask, general counsel, Security One Lending. He has heard that the [new] broker approval process “will mean higher net worth to as much as $200,000. It means that at a baseline, we would have to absorb the approval process [costs] that FHA previously used to [pay]. We’ll have to staff up for [these] background procedures.”

Companies unwilling or unable to do this new due diligence will be turning to outside firms for such help, according to Sherry Apanay, senior vice president Generation Mortgage Co. “We have a new vendor that is going to perform much more detailed due diligence for approval and provide monthly monitoring,” she tells RMD.

The FHA move is intended to “further reduce risks to [our] single-family insurance fund as [we] continue to play a critical role in today’s housing market,” the agency states. It will permit FHA to “more effectively focus its resources on lenders that pose the greatest potential threat to [our] insurance funds and to ensure that lenders possess the resources appropriate for the financial services they deliver.”

Security One’s Trask reasons that the change is a direct result of FHA’s large jump in loan-backing during the recent housing market downturn. “When you go from 5 percent to 32 percent of the market without increasing staff it means they’re stretched pretty thin.”

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NEW YORK (TheStreet), Jan. 28, 2010 – In an era where politicians use financial reform as a vehicle to get into the spotlight, it's odd that the two entities which have connections to $5.66 trillion worth of mostly residential mortgages aren't being talked about much at all.

Fannie Mae(FNM Quote) and Freddie Mac(FRE Quote) appear to have been swept under the rug of financial reform -- perhaps because the task of restructuring them is so enormous and complex. Although the White House has promised to outline a plan for Fannie and Freddie within the next couple of weeks, in the federal budget proposal, Treasury Secretary Timothy Geithner recently acknowledged that the process probably won't begin in 2010.

"It's just a complicated thing to get right," he said in a PBS interview that aired last week.

Barney Frank (D., Mass.) sent shock waves through the bond markets the following day by saying the House Financial Services Committee, which he chairs, will probably recommend "abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system."

Although "abolish" is a scary word, it's unclear why it frightened mortgage-bond investors so much: That's pretty much the same vague notion politicians have been tossing around since Fannie and Freddie were put into conservatorship 16 months ago. Frank didn't provide any specifics about what they may look like going forward, and said changes -- whatever they may be -- won't be coming any time soon.

In an effort to find out what's going on behind the scenes, or what options the Beltway appears to favor, I reached out to half a dozen key financial legislators or legislative aides, as well as a lobbying group, and several industry players over the past month. The response was something like a box of crickets: Only a few responded to say they hadn't heard anything, and none wanted to go on record as saying so.

"No one, I mean NO one, knows what's going to happen," one Washington insider replied by e-mail.

Last June, the Obama administration outlined six potential options for reform, a few of which don't seem to stand any chance of success. (For instance, one source whose bond shop is very active in the mortgage space didn't even know what covered bonds were, much less how the government would replace the country's $5+ trillion worth of mortgage-backed securities with them.) An industry group has also issued a proposal that would keep Fannie and Freddie in the same public-private hybrid, but with some nuances.

Liberals tend to favor a plan that pushes affordable housing, and leaves much of the process of getting there in government hands. Yet the government can't afford to forever hold mortgage rates down and finance every homeowner who can't afford to buy. Conservatives tend to lean toward an entirely free-market approach, but there's little chance the government wants to -- or even can -- exit the mortgage market completely.

"We clearly have a mythology in this country about home ownership," says Jeff Lewis, chairman of Generation Mortgage, one of the country's biggest reverse-mortgage lenders. "But if you look around the world, these kinds of entities don't exist. We have to look at it and ask, is home ownership the goal or is affordability the goal?"

Indeed, a priority has been placed on government's presence in the mortgage market for more than 40 years, at least since Fannie and Freddie were chartered as governmentsponsored entities. Taxpayers now own 80% of the firms, and the Obama administration has essentially given them a blank check to support the mortgage market. That doesn't include the Federal Reserve's purchase of $1.1 trillion in mortgage debt over the past year, whose unwind is riddled with uncertainty.

But Lewis notes that the mortgage market has adapted to changes remarkably since the crisis took hold in mid-2008. It was once frozen with fear that Fannie and Freddie would crumble under the weight of bad mortgage debt, and risk-averse traders sent spreads through the roof. Now?

"Lo and behold, a year and a quarter later, most of the loans we sell in our industry right now are Ginnie Mae pass-throughs," says Lewis, referring to another government entity that guarantees mortgages. "I would guess at one point 100% of what we sold was Fannie Mae. Now they account for a minority of what is produced."

He says Fannie and Freddie were once "crowding out" private buyers because of their huge presence in the mortgage space, but that the private firms can replace them as long as there is some semblance of government assurance. As Fannie and Freddie debt became less profitable because of explicit government support, Ginnie Mae issuance surged 68% to $454 billion last year.

Lewis says the market can survive without Fannie and Freddie remaining outright government agencies. But "the part of it that I don't think anybody thinks we can live without, at least for the foreseeable future, is the guarantees."

So what will happen to Fannie and Freddie? They probably won't remain government wards, but winding down the status quo will take quite a few years. They probably won't become entirely private, either, because America has a history of government-supported housing. Also, if taxpayers are left holding the bag on mammoth mortgage losses, and they're restructured into profitable, shareholder-owned entities, populist rage would reach a new octave.

The shape of their public-private model, however, is too politically delicate and too entwined with a fragile housing market to be decided in 2010, even if it's proposed next month.

"This is not imminent," says Lewis, "it is very complex. And given how packed the agenda is in Washington, I'd bet it's not going to happen any time soon, probably not this year."

Both stocks were looking slightly lower in early action on Thursday, and each is down more than 15% since the start of the year after a volatile 2009 based on closes of $1.01 for Fannie Mae and $1.21 for Freddie Mac in Wednesday's session.

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Reverse mortgages are for seniors who don’t have enough spendable income to meet their needs but do have equity in their homes, which they don’t mind depleting for their own use rather than leaving it for their heirs. For reasons not clear to me, reverse mortgages are being bad-mouthed by an unlikely source: consumer groups that are supposed o represent the interest of consumers in general, and seniors in particular.

Reverse mortgages have always been a tough sell. Potential clients are elderly, who tend to be cautious, especially in connection with their right to continue living in their home. Fears about losing that right were aggravated by some early reverse-mortgage programs, which allowed a lender, under certain conditions, to force the owner out of his house. These actions are the reasons why, until recently, reverse mortgages never caught on.

In 1989, however, Congress created a new type of reverse mortgage called the home equity conversion mortgage, or HECM, which completely protects the borrower’s tenure in his or her house. So long as he pays the property taxes, maintains the property and doesn’t change the names on the deed, he can remain in the house forever. Furthermore, if the reversemortgage lender fails, any unmet payment obligation to the borrower is assumed by the Federal Housing Administration.

The HECM program was slow to catch on but has been growing rapidly in recent years. In 2009, about 130,000 HECMs were written. Feedback from borrowers has been largely positive. In a 2006 survey of borrowers by AARP, 93 percent said their reverse mortgage had had a mostly positive effect on their lives, compared with 3 percent who said the effect was mostly negative. Some 93 percent of borrowers reported that they were satisfied with their experiences with lenders, and 95 percent reported that they were satisfied with their counselors. (All HECM borrowers must undergo counseling rior to the deal.)

But while all is well for almost all HECM borrowers, some of their advocates in consumer organizations, alarmed by the program’s growth, are bad-mouthing it. I hasten to add that there is a major difference between bad-mouthing and educating. Legitimate issues exist regarding who should take out an HECM and when they should do so. Seniors face hazards in this market, as in many others. Advice and warnings to seniors fromauthoritative sources on issues such as these are useful. I try to provide useful advice and warnings myself.

What is not useful is needlessly and gratuitously fanning the flames of senior anxiety about losing their homes. In its September issue of Consumer Reports magazine, Consumers Union warned: “The Next Financial Fiasco? It Could Be Reverse Mortgages.” The centerpiece of its story is a homeowner who is “likely to be evicted” because of an HECM balance he can’t pay off. How is that possible?

It was his wife’s HECM, not his, and when she died, ownership of the house reverted to the lender because the husband was not an owner. At the outset of the HECM transaction, he was too young to qualify, so he had his name removed from the deed so his wife could qualify on her own. She could have lived in the house forever, but as a roomer in her house, he had no right to remain.

This was painted as a reverse-mortgage horror story, but it was nothing of the sort. HECMs are for owner-occupants, not roomers, which was what the husband had made himself into. The correct moral is that the program should not be misused.

Even less useful are spurious claims that growth of the reverse-mortgage market has major similarities to the growth of the subprime market, and could lead to the same kind of “financial fiasco.” The major source of this nonsense is an October monograph by Tara Twomey of the National Consumer Law Center titled “Subprime Revisited: How Reverse Mortgage Lenders Put Older Homeowners’ Equity at Risk.”

In fact, the two programs could hardly be more different, and there is no chance of a similar fiasco.

Subprime loans imposed repayment obligations on borrowers, many of whom were woefully unprepared to assume them, and which tended to rise over time. The financial crisis actually began with the increasing inability of subprime borrowers to make their payments, and as a result, defaults and foreclosures ballooned to unprecedented levels.

But reverse-mortgage borrowers assume no repayment obligation at all. Their only obligations are to maintain their property and pay their property taxes, which they have to do as owners whether they take out a reverse mortgage or not. They cannot default on their mortgage because the obligation to make payments under an HECM is the lender’s, not the borrower’s. There are no reverse-mortgage foreclosures.

Subprime foreclosures imposed heavy losses on lenders and on investors in mortgage securities issued against subprime mortgages. Such securities were widely held by investors, which included Fannie Mae and FreddieMac. Losses by the agencies on their subprime securities played a major role in their insolvency.

In contrast, no lenders have suffered or will suffer losses on HECMs because they are insured against loss by the FHA. The FHA assumes the losses when HECM loan balances grow to the point where they exceed property values. However, this is an expected contingency against which the FHA maintains a reserve account supported by insurance premiums paid by borrowers.

It is true that the unprecedented decline in property values over the last few years has increased losses and eaten into the FHA’s reserves. But the FHA has responded to that by reducing the percentage of home values that seniors can access. According to a recent study by New View Advisors, who are seasoned experts on HECMs, this should allow the FHA to break even over the long run.

In sum, the current state of the HECM market has no resemblance whatsoever to the conditions in the subprime market that led to disaster.

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Ginnie Mae issued the first reverse mortgage real estate mortgage investment conduit (REMIC) composed of Bank of America reverse mortgage securitizations according to an offering circular supplement obtained by DealFlow Media last week.

The REMIC is worth $130.9 Million, and consists entirely of HECM MBS, making it the first reverse mortgage REMIC. The REMIC is guaranteed by Ginnie Mae, bearing its timely payment guarantee, and backed by “the full faith and credit of the United States of America.”

The REMIC contains two classes of assets, FA and FI, bearing initial interest rates of 1.4% and 1.786% respectively. According to Jeff Lewis, Chairman of Generation Mortgage, this is “the simplest form of restructuring that could take place in a REMIC.”

Lewis notes that there has always been a conflict in the reverse mortgage industry between the structure of the HECM product and investors. He adds that it is very complicated to provide the original floating rate HECM to consumers. “The certainty associated with a fixed rate has combined with the fact that investors like dealing with fixed rates and not dealing with the potential of future cash flows,” says Lewis.

At the end of the day, Lewis cites the REMIC as a distribution method. Better execution in the industry will lead to better deals for reverse mortgage borrowers but the REMIC does not represent a “seed change” for the reverse mortgage industry says Lewis.

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There is an attack underway on the smaller lenders in the reverse mortgage industry, says Jeff Lewis, Chairman of Generation Mortgage, in his conversation with RMD.

According to Lewis, the proposed net worth and REG Z changes favor the larger depository lenders over the little guys. “It is not clear why the government is favoring depository businesses in the reverse mortgage process," says Lewis, "It is going to make it more difficult for the smaller independent provider to maintain themselves."

Lewis believes that regulation of the industry should be focusing on fostering increased competition rather than further regulating itself, noting that customers are "protected much more by competition than by regulation." For example, the increase in the number of pages in the necessary disclosures is one example of a regulation that is not likely to have a large effect on consumers. "Is there anybody who can understand the insane reams of paper they're dealing with?" he quips.

Rather, Lewis believes the best way for the industry to be regulated is for everyone to be competing for business. When multiple loan officers contact a prospective borrower, the borrower has the opportunity to listen to all the products available and find the best deal. In addition, competition between the brokers can push origination fees lower, amongst other advantages.

Lewis points out that while the big lenders have more lobbying power, Wells Fargo and Bank of America would not be able to exist if not for the independent operators. Reverse mortgages wouldn't be what they are today if not for the small operators in the field who didn't have enormous overheads and could spend time proselytizing and educating seniors.

With such a large portion of the industry's volume coming from the little guys, Lewis adds, "we need to let 1,000 flowers bloom."

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Generation Mortgage Company announced that they recently became a national Better Business Bureau Accredited Business and earned an A+ Rating from the BBB.

"While those of us who work for Generation Mortgage know that we offer top quality service to our business partners and our boomer and senior homeowners nationwide, the rigorous Better Business Bureau accreditation process is one more way to prove that treating our clients fairly and honestly is the primary goal of our organization," said President and CEO Scott Peters, Generation Mortgage Company. "We’re incredibly proud to have achieved the highest rating possible upon accreditation."

According to the Better Business Bureau, ratings are determined by a proprietary formula which gives organizations a grade from A to F with pluses and minuses. A+ is the highest grade and F is the lowest.

The grade represents the Better Business Bureau’s degree of confidence that the business is operating in a trustworthy manner and will make a good faith effort to resolve any customer concerns. Details as to any issues identified by the Better Business Bureau are contained in each organization’s Reliability Report.

Looking for reverse mortgage data on Generation Mortgage? Check out ReverseBase http://reversemortgagedaily.com/2009/12/22/generation-receives-better-business-bureau-accreditation/

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By Glenn McCullom

Once booming, Home Equity Conversion Mortgages have begun a slowdown that could continue until home prices stabilize.

In the fiscal year that just ended, mortgage lenders funded 114,692 reverse mortgages under the FHA's HECM program, a phenomenal growth rate of 1,336% over 10 years. Five years ago just 43,000 of reverse loans were written.

Until a year ago, the reverse mortgage niche looked like a safe bet for mortgage bankers seeking a haven from the carnage in the industry. After all, what could be safer than lending money to "The Greatest Generation" and older baby boomers who not only were good savers but had a ton of equity in their homes?

But now — with home prices still under pressure and fears of a double-dip recession rampant — reverse mortgages no longer look like a safe bet. Moreover, new government underwriting guidelines are likely to crimp the market's stellar growth.

According to a survey by the National Reverse Mortgage Lenders Association, of the loans booked year-to-date by the three largest portfolio lenders of reverse mortgages, had the Oct. 1 changes been in effect for the entire year, one out of five borrowers would not have qualified for their loans because the amount of equity available to them would have been less than what was still owed on the property.

Declining home prices have had a major impact on the reverse mortgage industry and seniors who are considering their financial options. Currently, a potential customer doesn't know if a reverse mortgage will work for them until the appraisal comes in.

"Once homeowners get an appraisal, they may find out that it was appraised for less money than expected," said Jeff Lewis, chairman of Generation Mortgage, Atlanta.

"They may not receive enough reverse mortgage proceeds to pay off an existing mortgage or to handle another financial issue," he said. "No question the drop in home prices has had an impact," he added.

During these tough times, reverse mortgage servicers also have to keep an eye on borrowers to make sure they are maintaining their real estate tax payments and home insurance payments.

On a traditional mortgage, these payments are often escrowed and the servicer automatically pays them. But the borrower is responsible for making these payments on a reverse mortgage. "Even though this is discussed when taking out a reverse mortgage, it may throw borrowers for a loop, so it is important for us to work through the process with customers," Mr. Lewis said.

He also mentioned that as a result of weak home prices it makes it difficult for people to know what their house is worth and to determine for themselves to know if a reverse mortgage will get them enough proceeds.

Meanwhile, Mr. Lewis is looking for the economy and consumer confidence to recover. "As we get stabilization of home prices and retirement assets, we will get into a healthy phase of growth and people will look at their retirement and home situations and will begin to have reverse mortgages as part of their financial plan," he said.

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By Brian Collins

Originations of FHA-insured Home Equity Conversion Mortgages were up substantially in fiscal year 2009, which ended Sept. 30, mainly due to increases in FHA loan limits. Lenders and borrowers had to contend with falling house prices, which made it more difficult to translate applications into actual loans.

Traditionally, over 90% of applicants end up in a reverse mortgage, according to Jeff Lewis, chairman of Generation Mortgage, Atlanta.

But over the past two years, there has been a big decline in the pull-through rate, he said. And the major cause is appraisals.

In many cases, borrowers discover to their dismay that their house is not worth what they thought, he said. Or the funds available were not sufficient to pay off their existing mortgage or some other outstanding debt.

It has been very difficult to move people through the process, but I think it is going to get easier as home prices stabilize, Mr. Lewis said in an interview.

Overall, lenders originated $29.9 billion in HECMs in FY 2009, up from $24.7 billion in FY 2008. In terms of the number of loans insured, HECM originations were up 2.3%. Thanks to an increase in loan limits, refinancings of FHA reverse mortgages doubled as seniors could tap more equity in their homes.

Refinancings became more attractive because Congress established a nationwide HECM loan limit of $417,000 in November 2008 and raised it again to $625,500 in February 2009.

Seniors refinanced 8,985 HECMs, up from 4,435 refinancings in FY 2008. Congress also passed legislation last year that made it possible for seniors to purchase a home with a HECM for the first time. This new program allows seniors to downsize or move to a new area.

The new purchase option when into effect Jan. 1, 2009 and 550 seniors have used a HECM to purchase a home as of Sept. 30.

Mr. Lewis expects purchase activity will pick up next year as the housing market continues to stabilize and it becomes easier and faster to sell a home and purchase homes. The new HECM option allows seniors to use the proceeds from the sale of their home and a HECM to purchase a new residence and pay fees for only one loan transaction. Previously, seniors had to complete the purchase of the new home, which might involve taking out a forward mortgage, before applying for a reverse mortgage.

FY 2009 also was a difficult year because the Department of Housing and Urban Develop reduced the loan proceeds on HECMs by 10%.

The 10% haircut on FHA-insured reverse mortgages went into effect Oct. 1. And lenders rushed to get their clients to file applications before the deadline.

As a result, there should be a blip up in HECM closings in the current quarter. Despite that surge in activity, the Generation Mortgage chairman expects originations will be flat in FY 2010. Slightly lower applications but better pull-through because of more stabilization in housing prices, Mr. Lewis said.

He also predicted that some private products will become available in 2010 to provide reverse mortgages for seniors with more expensive homes.

But they will not be able to compete in the market served by FHA-insured HECMs. They will not be remotely competitive with the government product, Mr. Lewis said.

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By Jim Weiker

The growing use of reverse mortgages puts "millions" of seniors at financial risk, an advocacy group contended yesterday.

The National Consumer Law Center issued a report likening the reverse-mortgage industry to the subprime-lending industry and calling for increased regulation of companies offering the loans.

"Predators who once reaped profits from exotic loans have now focused on wresting more wealth from vulnerable seniors?" the report said.

Industry leaders said the report offered nothing new and little of substance.

"This is 40 pages of nonsense," said Jeff Lewis, chairman of Generation Mortgage, the nation’s fifth-largest originator of reverse loans.

"There is no proof or even a logical argument to explain why the reverse-mortgage industry is similar to the subprime-lending industry."

Lewis, along with National Reverse Lenders Association President Peter Bell and central Ohio credit counselor Richard Korn, said reverse mortgages have been a valuable financial tool for senior citizens who are house-rich but cash-poor.

Reverse mortgages allow seniors to borrow against the equity in their home, but unlike home-equity loans, reverse mortgages do not have to be repaid until the homeowner dies or moves.

"It really is a solid product for people who need to improve their cash flow," said Korn, a reverse-mortgage counselor with Consumer Credit Counseling Services in Whitehall.

The National Consumer Law Center, which champions low-income and what it calls "vulnerable" consumers, offered no evidence of abuses but warned that the products are ripe for misuse because of the age of the borrowers, complicated products, aggressive lenders and minimal counseling.

The report takes aim at misleading ads such as those suggesting that reverse mortgages are government programs.

It calls for increased regulation of the industry to prevent seniors from agreeing to loans that are not in their best interest.

"You can't wait for these problems to surface," said Rick Jurgens, a consumer advocate with the law center. "We can't afford to wait We have to be proactive about this."

Reverse mortgages have been around for decades but were not in common use until the federal government started to insure the mortgages in 1988. They remained a niche product until the early part of this decade, when their use dramatically accelerated. In the past five years, the number of federally insured reverse mortgages tripled to nearly 115,000 this year.

Although their popularity has risen in Ohio in recent years, they are still relatively uncommon. In the year that ended Sept. 30, 294 reverse mortgages were closed in central Ohio, down from 383 the year before.

According to a 2006 AARP survey, 93 percent of reverse-mortgage borrowers said the loan had a mostly positive impact on their lives. The survey did, however, find that misunderstandings about reverse mortgages are common.

U.S. Sen. Claire McCaskill, D-Mo., said she plans to introduce legislation tightening regulation on reverse mortgages.

"There are a lot of people taking out these loans that are just not suitable for them," she said in a teleconference announcing the report. "We have to make sure we don't have another subprime mess."

Among the report's recommendations: creating "suitability" standards for borrowers; strengthening credit counseling; and regulating reverse mortgages that aren't backed by the government.

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By Steve Bergsman

The reverse mortgage, which has proven very popular with the retirement-age crowd, has come under assault from two diverse groups: the government and scam artists.

Now I'm not going to argue with anyone who tries to say the government and scam artists are two sides of the same coin. That seems a bit mean.

After all, the government attempts (or is supposed to attempt) to do what’s best for the consumer and the country, although sometimes the net effect of legislation appears to be as wounding to some people as theft through fraudulent practices.

In regard to reverse mortgages, the government is, indeed, trying to protect their availability through conservative fiscal practices. Unfortunately, it could end up neutering them instead.

A reverse mortgage, which is available only to those 62 and older, allows homeowners to use the equity that has built up in a residence. In effect, the homeowner gets a loan in the form of a lump sum or multiple payments. Repayment, with interest, is deferred until the owner dies, or goes into aged care, and the home is sold. Or, in a worst-case scenario, if the homeowner fails to pay property taxes or homeowners insurance.

After being introduced with the new decade, reverse mortgages didn’t really gain any traction in the marketplace until 2005, when just under 50,000 were written. Growth came quickly since then, with totals surpassing 100,000 in 2007. The Wall Street Journal predicts the total number of federally insured reverse mortgages could run as high as 150,000 this year.

Here’s the problem: About 99 percent of reverse mortgages are FHA-insured. In scrutinizing the reverse mortgage loan outlook for fiscal year 2010 (which began Oct. 1, 2009), the Federal Housing Administration and Office of Management and Budget felt the reverse mortgage market — which had previously always paid its own way — would run about 130,000 loans (a more conservative estimate).

And the expectation was that over the life of those loans there would be losses in the range of $800 million.

That, of course, would mean an additional subsidy to cover the expected loss or, in the thinking of the Congress, to adjust the program so that it doesn’t require any further dollars.

Two questions arise: Is an additional subsidy necessary? And what would it mean to the efficacy of the reverse mortgage?

“The FHA and OMB did some calculations on what they believe the volume of originations will be in the next fiscal year and what they expect the behavior of the loans to be — most importantly, what will happen to housing prices,” explains Jeff Lewis, chairman of Atlanta-based Generation Mortgage Co., the largest independent reverse mortgage originator in the country.

“Presumably, if housing prices are weak next year, that means loans got originated at too high a loan-tovalue (ratio) and it would make the loans less creditworthy. We don’t know what they used as far as their assumptions, but it would appear their estimates are very draconian about housing prices.”

To make the loans more creditworthy, the U.S. House and Senate are considering reducing the amount of loan value that can be pulled from a reverse mortgage by 5 percent to 10 percent.

That could be a problem.

“If you have a $400,000 house, by today’s factor the consumer could get a $250,000 loan,” explains Lewis. “If Congress reduces that by 10 percent, or to $225,000, that makes the product inherently more creditworthy, but less attractive from the borrower’s perspective, as most of our borrowers are driven by a need for proceeds.”

According to calculations from the National Reverse Mortgage Lenders Association, the Washington, D.C.- based trade group for the industry, a 10 percent reduction would mean that 21 percent of 130,000 households, or 27,000 households, would be forced to give up their homes as a result of that cut.

“I don’t think anyone wants to be responsible for telling 27,000 seniors that they have to leave their homes,” says Peter Bell, president of NRMLA. “That’s a powerful argument politically.”

Bell proposes an alternative: to increase the income the program generates by raising the mortgage insurance premium (MIP). One of the criticisms of reverse mortgages is the large, upfront MIP. NRMLA’s recommendation is to lower the upfront, but raise the ongoing payments by borrowers.

Currently, the borrower pays 2 percent of the home value upfront and then another 1/2 percent per year on the actual balance being drawn down. The NRMLA would prefer to reduce the upfront from 2 percent to 1 percent but increase the ongoing to a full 1 percent.

The other problem facing reverse mortgages is a reported increase in scams. Although the occurrence of scams are still relatively small in number, they seem to be coming from two sources: third parties, such as a title agent involved in the process, but more often than not the relatives of the seniors who participate in a reverse mortgage.

“We just do the loan and the third parties taking advantage of the borrowers are usually financial advisers or someone selling a financial product whom we are not affiliated (with) and don’t know,” says Lewis.

That’s still just a small problem. The bigger fraud comes from the familial network.

“The largest source of scams and thefts with people who have gotten a reverse mortgage are family members who steal from the grandparent or parent,” says Bell. “More often than not, the theft is tied to substance abuse by the child or grandchild.”

It seems, once the senior gets the dollars from a reverse mortgage a whole new set of problems arise. The new predator is someone whom you know very well.

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Atlanta Business Chronicle

Atlanta-based reverse mortgage lender Generation Mortgage Co. named Scott Peters president and CEO.

Peters was recently with Nortel Networks Corp., where he led Nortel's Global Business Services division. He also has held senior leadership positions within General Electric Capital Corp., MassMutual, BellSouth Corp., The Profit Recovery Group International and CompuCredit Corp.

Peters replaces Joe Morris, who will become executive director of industry relations. Morris was president and CEO since the company's inception in 2006.

"Joe helped establish Generation Mortgage as one of the largest and most respected reverse mortgage companies in the U.S. and we are grateful to him for his service," said Jeff Lewis, chairman of Generation Mortgage, in a news release. "As Joe focuses his time on nurturing the decades-old strategic relationships he's built for Generation, Scott will take the helm to help manage our rapidly growing, national employee team and customer base."

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By Rachel L. Sheedy

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, it can be. For others, it's more perilous than promising. We're talking about a reverse mortgage, and if you're considering one, there's a lot you need to know before signing on the dotted line. This Q&A will help clarify how this complex transaction works.

What is a reverse mortgage? It's a loan on your house that lets you tap your home's equity. Like a cash advance, a bank fronts you the money-either as a lump sum, a line of credit or monthly draws-and you have to repay it eventually, with interest. Unlike a traditional mortgage, you don't have to repay the loan during the term of the reverse mortgage. Instead, you pay it off all at once at the end of the loan. There are no income or credit qualifications, but homeowners must be 62 or older. You retain title and ownership of your house. You are still responsible for paying the property taxes and the costs of insurance and repairs. If you still have a regular mortgage, you either have to pay it off before taking the reverse mortgage or use part of the proceeds from the reverse mortgage to retire it.

In this article, we'll focus on the most popular reverse mortgage: the Home Equity Conversion Mortgage, or HECM, which is insured by the Federal Housing Administration. Until the credit crunch, private reverse mortgages were also available. For now, lenders are not offering them.

Can my heirs keep the house? Sure, if they pay off the reverse mortgage. If the debt is more than the house is worth, though, the heirs would have to come up with the difference. The insurance that covers such a shortfall only kicks in if the house is sold. If your heirs decide to sell the house, they have at least six months to do so.

How do I get the money from a reverse mortgage? You can take a lump sum, open a line of credit to tap whenever you choose or receive monthly payouts (either for a set number of months or for as long as you live in the house). Or you can choose a combination of those options-say, a lump sum for part of the mortgage with the remainder in a line of credit. "If all else is equal, the line of credit is more advantageous. You use it when you need it, says James Joseph, vice-president of Financial Services Advisory, in Rockville, Md. The money that's not tapped won't rack up interest. The unused portion also grows larger over time, generally at the same rate as the loan's interest rate. Unlike a home equity line of credit, which can be reduced or frozen by a lender, a reverse mortgage line of credit is safe, thanks to the FHA insurance. Interest rates recently ranged from 5% to 6%, depending on the lender, the payout option and type of rate. A fixed rate is typically only available if you take a lump sum, which could be suitable to lock in costs for those who want to use all of the money at once. A line of credit or monthly payout comes with an adjustable rate, which can change monthly or yearly.

Are there non-interest costs? There is an origination fee, which is 2% on the initial $200,000 loan and 1% on the balance, with a cap of $6,000. (This cap will be adjusted for inflation.) You'll also pay closing costs, such as title insurance and recording fees, that will likely run several thousand dollars. You must also pay insurance premiums. The FHA insurance guarantees that you will receive your money and that the lender later receives its money. You'll be charged an upfront premium of 2% of the home value (or the lending limit, whichever is less) plus an annual 0.5% premium of the mortgage balance.

Finally, the lender sets up what’s known as the "servicing fee set aside." This is a pool of your money that the lender sets aside to ensure the loan's servicing fee, which typically is $30 to $35 a month, will be paid for. Drew Tignanelli, president of The Financial Consulate, in Hunt Valley, Md., says these costs could run upward of 10% of the loan. If you have a short-term need for the cash or you plan to move within the next five years, consider other options. Alternatives might include a home equity loan, a home equity line of credit, or selling the house and buying a cheaper one. It pays to shop around. Fees set by the government won't vary, but some costs, such as the interest rate and the monthly servicing fee, can differ by lender. Compare reverse mortgages from at least three lenders. Lenders will issue you a "total annual loan cost" or TALC, for each option to help you compare costs.

From the Editor - FOR YEARS, we have advised our readers to draw up living wills, durable powers of attorney and health-care directives. These documents enable you to make your own decisions on life-sustaining medical care, and give those you trust the right to make legal and financial decisions if you no longer can do so. Much has been made about provisions in the House health-care reform bill that would provide funding for "advance-care planning consultation." Opponents of the legislation argue it would create "death panels" that would determine which patients should live. No matter what you think of health-care reform, we can assure you this: There is nothing in the legislation that calls for the creation of a governmental body that would save money by ending care for the critically ill. The bill would provide money so that individuals could voluntarily seek information on advance-care planning, including directives such as living wills and powers of attorney.

How much equity can I tap? That's based on a calculation that factors in your age, the interest rate and the value of your home. The older you are, the lower the interest rate and the higher the house value, the more money you'll be able to tap. There is a limit on the amount of home value that can be taken into account for HECMs: $625,500until the end of2009. So if your home appraises for $1 million, a HECM will cap the home value in the calculation at $625,500. (That limit is scheduled to fall to $417,000 in 2010.)

You can't tap 100% of your equity. The calculation leaves plenty of room for accrued interest. Instead, you get a portion of the equity in your home and you pay interest on that, says James Joseph, vice-president of Financial Services Advisory, in Rockville, Md. A reverse mortgage must be set up at the maximum amount the homeowner is eligible to receive, says Rick Harper, vice-president of program services for the Consumer Credit Counseling Service of San Francisco.

For example, if you qualify for $250,000 in loan proceeds, you can't just set up a loan for $50,000. In this situation, Harper says, you could choose the line of credit option, which will let you tap $50,000 now and keep the remainder in the line for future use. If you truly only need $50,000, your best option may be to find an alternative to a reverse mortgage because many of the fees are based on the maximum loan amount. Reverse mortgages can be refinanced. You will pay loan costs for the new reverse mortgage, which will pay off the old reverse mortgage.

Do consumers have any protections? You can back out of the loan within three days of signing the paperwork. "It's a three-day cooling-off period," says Jeff Lewis, chairman of reverse-mortgage lender Generation Mortgage. Ask if you can repay the reverse mortgage early without penalty-usually you can. The government requires borrowers to attend a counseling session, either in person or over the phone. The counselor will explain how the reverse mortgage works, including the costs. Your lender will likely provide you with a list of counselors approved by the Department of Housing and Urban Development, but the lender should not direct you to a specific one. You can find a counselor on your own; HUD (www.hud.gov; 800-569-4287) can help direct you to approved counselors in your area.

How do I know if a reverse mortgage is right for me? Reverse mortgages are generally a last resort for seniors who have no other option to cover expenses. Think about what you plan to do with the proceeds. For instance, a reverse mortgage might be a good fit for a senior who wants to age in place, with the loan proceeds paying for home health care, instead of moving to assisted living, says D. Steve Boland, a senior vice president at Bank of America.

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By Mary Beth Franklin

Reverse mortgages have been around for nearly 20 years, but it wasn’t until the current financial crisis that they caught on. Seniors are turning to these loans to tap the equity in their homes and generate tax free income to help them ride out hard times. For Frank and Carol Rider, a reverse mortgage is providing a cushion, giving their investments time to recover from the bear market. The Riders, both in their early seventies, borrowed about $200,000 against their home in New Mexico. They used the money to pay off their traditional mortgage and to take $1,500 a month for the next 20 years to supplement their pensions and Social Security benefits.

"We're trying to maintain our lifestyle," says Frank, noting that he and Carol travel extensively year round. For Luther and Peggy Combs, their reverse mortgage is a lifeline that saved their home from foreclosure. The Combses, both in their early sixties, had high hopes for a comfortable life when they moved from Chicago to central Florida a few years ago. But Luther lost his job when the economy soured, and the couple found themselves deeply in debt. Although they had to use every penny of their home equity to pay off their bills, the reverse mortgage wiped out their monthly house payments and made it easier for them to sleep at night.

You can take it with you. A reverse mortgage can be a good option for people who want to relocate or move to a smaller home but who don't want to sink all their cash into a new house or who may not qualify for a traditional mortgage. In the past, the only way they could take out a reverse mortgage was to stay put. But new rules that took effect in January allow seniors to use a reverse mortgage to buy a new home. Say you own a house in Massachusetts worth $500,000 and you want to buy a $400,000 house in Florida. If you were to sell your house and pay cash for your new home, you’d have just $100,000 left to add to your savings. But now you can take out a reverse mortgage on the new home. For example, if you took a $100,000 reverse mortgage on the Florida house, you’d have twice the amount left--$200,000 - to add to your savings.

How it works. You must be at least age 62 to take out a reverse mortgage. Plus, your house (current or future) must be your primary residence, and your mortgage must be either paid off or have a small balance. Unlike a traditional loan, there are no income or credit-score requirements, and you may use the money as you wish. The older you are, the higher the appraised value of your home (up to the maximum federal loan limit) and the lower the interest rate, the greater the amount you can borrow. As part of the economic-stimulus package, Congress raised the reverse-mortgage loan limit to $625,500 through the end of 2009. After that, the lending limit reverts to $417,000, unless Congress intervenes. As a rough rule of thumb, a 65-year-old might be able to borrow up to 35% of a home’s value, says Eric Bachman, founder of Golden Gateway Financial, a reverse-mortgage lender in Oakland, Cal. The percentage rises to 45% for a 75-year-old, and 55% for an 85-year-old. You can take your payment as a lump sum, a monthly cash payout, a line of credit held in reserve or a combination of all three. No repayment is due until the last homeowner moves out or dies, at which point the home can be sold to pay off the debt. The loan repayment can never exceed the home’s market value (even if it declines), absolving your heirs of any liability.

High fees. Your personal "bailout plan" won’t come cheap. You’ll pay the usual closing costs, plus loan-servicing fees, an origination fee of up to $6,000 and interest over the life of the loan. But what makes a reverse mortgage really costly is an initial insurance premium equal to 2% of the home’s value (up to the reverse-mortgage loan limit) plus 0.5% per month of the mortgage balance. (The Federal Housing Administration insurance protects you and the lender if your home value declines and ensures that you won’t owe money if the loan balance exceeds the home’s value.)

On a $200,000 loan, the upfront costs could exceed $20,000, says Jeff Lewis, chairman of Generation Mortgage, in Atlanta. So a reverse mortgage makes sense only if you plan to stay in your house for several years. But if you do, now could be a golden opportunity for owners of high-priced homes. Interest rates are at historic lows and loan limits may never be as generous, boosting potential payouts. And, says Lewis, "Once you lock in a reverse mortgage, declining home values don’t matter."

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By Saul Friedman saulfriedman@comcast.net

To hear Sen. Claire McCaskill talk about federally insured reverse mortgages, you'd think the popular program is riddled with fraud and victimizing older Americans and costing the government billions.

Not to worry. Your reverse mortgage is safe, and so is the 20-year-old program that has insured such loans for more than 500,000 older homeowners, including 112,000 last year.

The government, AARP, Kiplinger (the business forecast and personal finance advice publisher) and others, still recommend the federally insured reverse mortgages as a good deal if you're at least 62, have sufficient equity in your primary residence and need a cash cushion.

Nevertheless, McCaskill, a Missouri Democrat, has been crusading for two years to clean up what she called at a June hearing in her home state, a "program that is leaving our seniors vulnerable to predatory practices leading to fraud and victimization."

While the industry acknowledges there are some problems with some agents' sales pitches and insufficient counseling of borrowers, government auditors have found scant evidence of fraud in the market for the most popular reverse mortgage, the Home Equity Conversion Mortgage (HECM). It is tightly regulated by the Federal Housing Administration (FHA) and the Department of Housing and Urban Development (HUD).

At the June 29 hearing of the Senate Special Committee on Aging, of which McCaskill is a member, she said, "The patchwork of regulation that is supposed to protect seniors and taxpayers has left both uncovered, resulting in a recent request by HUD for an additional $800 million of federal funds to cover losses that I had warned about."

But that's less than eight-tenths of 1 percent of the total of FHA insured loans, $105 billion, according the HUD inspector general.

For the first time, HUD has requested the $800 million for 2010, to cover possible losses based on assumptions that the value of some insured homes may have declined and are worth less than the mortgage. If the loan expires when the home is vacated, FHA would be liable for the difference and would protect the lender against loss. The homeowner-borrower that McCaskill worries about would not be liable.

I asked McCaskill's office for specific cases of fraud. McCaskill presented witnesses at the hearing, several of whom suggested that the lucrative reverse mortgage market was becoming a target for deceptive advertising, with misleading sales pitches. But no cases of fraud were cited in the HECM program. Daniel Claggett of the National Consumer Law Center warned that the reverse mortgage market could become a target for subprime lenders, who helped precipitate the crisis in conventional mortgages.

But FHA rigidly enforces strict guidelines for approving an HECM for only the most creditworthy primary residences. A Government Accountability Office report noted that there have been relatively few complaints about HECMs. One potentially misleading sales claim, according to the GAO, said the borrower "never owes more than the value of your home." But now, with declining home values, the total cost of an HECM's loan, interest and closing costs could exceed the value of the property, and it would fall to heirs to pay off the loan, if they wish to keep the property.

One complaint at the hearing involved a private reverse mortgage, which has no government guarantees. Two witnesses complained that homeowners were cheated by repair people because HUD requires properties be brought up to standards before a loan can be approved. The problems seemed to be the fault of the contractors, not the lender.

The most prevalent problem in the HECM program, according to the GAO and Peter Bell, president of the National Reverse Mortgage Lenders Association, is inadequate counseling of some prospective borrowers. Counseling is required by HUD before a loan is approved. Counselors are supposed to tell homeowners of the disadvantages and total costs of an HECM, as well as the advantages and alternatives.

The administration, HUD officials and lenders have sought to further tighten the HECM program. At the hearing, Bell said that, despite the potential for fraud, his organization has polled state law enforcement officials, and "no one has identified any incidence of widespread malfeasance specifically in reverse mortgage cases."

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By Eyal Levinter - Epoch Times Staff

Property agents talk with customers at their stall which is advertising home foreclosures for sale, during a property fair in Los Angeles (Mark Ralston/AFP/Getty Images)

ATLANTA- Jeff Lewis, Chairman of Generation Mortgage, knows of many, many people who would otherwise have been foreclosed upon had they not received a reverse mortgage.

"It happens every week, where we close a loan and get there just before the foreclosure would have taken place," he said.

The reverse mortgage method "reverses" the flow of money of a traditional mortgage-the homeowners receive payments from the bank in exchange for an increasingly larger mortgage. It's not for everyone, said Lewis, but it can be the perfect solution for homeowners age 62 or over, particularly if they have a lot of equity in their home and are not planning on moving for at least several years.

More and more seniors are taking out reverse mortgages, said Lewis, "because they're finding it harder to survive. And not only the current economic environment that we're in, but just based on cost of living these days-it's pretty high for seniors, and they may not put away enough money for retirement and/or they're living a little longer than expected."

Lewis said 80 to 85 percent of people pay off another debt when they get a reverse mortgage. The reverse mortgage system is not widely understood by seniors and one major misconception is that the bank will own the home, said Steven B. Horn Sr., president of Residential Reverse. "They think they can take all equity in their home, and that's not the case either-they are only allowed to take a percentage of the home," he said, adding that
no more than 50 percent is the allowable limit. "The older you are, the more access to the equity you have," he said.

"In most cases there is equity left over when they pass away to give to their heirs," said Mr. Horn Sr. "A lot of seniors are scared they are not leaving any equity for their children or grandchildren, when in most cases they are."
His said 20 to 30 people per day call his company to inquire about reverse mortgages.

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By Cheyenne Hopkins

Washington-Comptroller of the Currency John Dugan warned of the risks of reverse mortgages, which he compared to the dangers of subprime mortgages.

At a speech before an American Bankers Association conference in Orlando, Fla., last week, Mr. Dugan said the risks of reverse mortgages call for increased regulation.

While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages - and that should set off alarm bells, Mr. Dugan said.

I believe that now is the time to get out in front of this issue, before real problems develop, so that reverse mortgage providers make these loans in a way that is prudent for both lenders and borrowers.

Because reverse mortgages are attractive to elderly borrowers, they are prone to coercive sales, misleading marketing claims and substantial fees overlooked by the borrower, Mr. Dugan said.

The comptroller should not be comparing the reverse mortgage industry with the subprime industry, said Jeff Lewis, the chairman of Generation Mortgage, Atlanta.

This kind of ill-informed attack doesn't reflect well on an industry that has a record of doing the right thing and continues to examine itself and looks for ways to improve protections for the borrowers, Mr. Lewis said.

Reverse mortgages are subject to Truth in Lending Act and other consumer credit laws, but not all protections in the truth-in-lending law apply to reverse mortgages. In particular, the required escrow for taxes and insurance for higher-priced mortgages does not apply to reverse mortgages. Mr. Dugan said that should change.

We can debate the merits - and need for - escrows in connection with reverse mortgages, but my starting point is that they seem to make good sense from both the consumer's and the lender's perspective because of the significant home-loss risk that flows from nonpayment of taxes and insurance, Mr. Dugan said. It would be a major step forward for the Department of Housing and Urban Development to issue guidelines or requirements addressing the escrow issue for Home Equity Conversion Mortgages, and I would like to begin a dialogue with them on the issue.

Mr. Lewis said leaders in the reverse mortgage industry are well aware the issue of escrowing taxes and insurance needs to be addressed eventually.

However, Fannie Mae, the biggest investor in FHA-insured Home Equity Conversion Mortgages, is not evicting people or foreclosing on homes where people have not paid their taxes or insurance.

At least to date, borrowers have not been bearing the brunt of their failure to meet those obligations, he said.

HUD, Fannie Mae and reverse mortgage lenders are looking for an innovative way to deal address escrows, including ways to assist borrowers and keep them from defaulting.

Mr. Lewis noted that simply setting aside taxes and insurance in escrows will substantially reduce the proceeds and utility of reverse mortgages for seniors. It is a complex issue, Mr. Lewis said. What is really upsetting about the speech is the tone and the implication that the industry is incapable of taking the best interests of our borrowers to heart and incapable of addressing this issue. The comptroller also called for better counseling for the mortgages and limiting the amount of credit available.

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By Cheyenne Hopkins

Washington-Comptroller of the Currency John Dugan warned of the risks of reverse mortgages, which he compared to the dangers of subprime mortgages.

At a speech before an American Bankers Association conference in Orlando, Fla., last week, Mr. Dugan said the risks of reverse mortgages call for increased regulation.

While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages - and that should set off alarm bells, Mr. Dugan said.

I believe that now is the time to get out in front of this issue, before real problems develop, so that reverse mortgage providers make these loans in a way that is prudent for both lenders and borrowers.

Because reverse mortgages are attractive to elderly borrowers, they are prone to coercive sales, misleading marketing claims and substantial fees overlooked by the borrower, Mr. Dugan said.

The comptroller should not be comparing the reverse mortgage industry with the subprime industry, said Jeff Lewis, the chairman of Generation Mortgage, Atlanta.

This kind of ill-informed attack doesn't reflect well on an industry that has a record of doing the right thing and continues to examine itself and looks for ways to improve protections for the borrowers, Mr. Lewis said.

Reverse mortgages are subject to Truth in Lending Act and other consumer credit laws, but not all protections in the truth-in-lending law apply to reverse mortgages. In particular, the required escrow for taxes and insurance for higher-priced mortgages does not apply to reverse mortgages. Mr. Dugan said that should change.

We can debate the merits - and need for - escrows in connection with reverse mortgages, but my starting point is that they seem to make good sense from both the consumer's and the lender's perspective because of the significant home-loss risk that flows from nonpayment of taxes and insurance, Mr. Dugan said. It would be a major step forward for the Department of Housing and Urban Development to issue guidelines or requirements addressing the escrow issue for Home Equity Conversion Mortgages, and I would like to begin a dialogue with them on the issue.

Mr. Lewis said leaders in the reverse mortgage industry are well aware the issue of escrowing taxes and insurance needs to be addressed eventually.

However, Fannie Mae, the biggest investor in FHA-insured Home Equity Conversion Mortgages, is not evicting people or foreclosing on homes where people have not paid their taxes or insurance.

At least to date, borrowers have not been bearing the brunt of their failure to meet those obligations, he said.

HUD, Fannie Mae and reverse mortgage lenders are looking for an innovative way to deal address escrows, including ways to assist borrowers and keep them from defaulting.

Mr. Lewis noted that simply setting aside taxes and insurance in escrows will substantially reduce the proceeds and utility of reverse mortgages for seniors. It is a complex issue, Mr. Lewis said. What is really upsetting about the speech is the tone and the implication that the industry is incapable of taking the best interests of our borrowers to heart and incapable of addressing this issue. The comptroller also called for better counseling for the mortgages and limiting the amount of credit available.

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by admin Published in Generation Mortgage, News, Reverse Mortgage

The media continues to dwell on the speech given by Comptroller of the Currency’s John Dugan at the ABA’s Regulatory Compliance Conference and Generation Mortgage’s Jeff Lewis continues to
fight back.

I think it’s fair to say that Lewis has become the media’s go to guy for reverse mortgage commentary and over the past few days he started to take a stronger approach in dealing with Dugan’s comments. In Reverse mortgage compliance challenge looms for banks, the ABA Banking Journal details why Dugan’s speech leaves Lewis "fuming" because "there was no great urgency for him to opine on this topic," says Lewis.

When asked about Dugan’s concern over the sudden availability of cash available to seniors that take out reverse mortgages, Lewis said that, "there was almost a presumption that any product sold to a senior citizen is a ripoff." He added that the speech implied that "our customers are incapable of fending for themselves. These people are intelligent, independent, and capable of being adults." It doesn’t end with the ABA article either. Broker Universe published Lewis Angry With Dugan Speech on Reverses where he defends the industry and said, "We are an incredibly self-aware industry and we are working through the challenges that we face."

When asked about the concerns from using reverse mortgages to fund other investments, Lewis said, "We don’t sell life insurance, we don’t sell annuities, we don’t sell investments and we’re not responsible - we can’t be held responsible - if the people who do sell those things don’t treat their customers properly. We treat our customers properly in our industry."

It is amazing, he added, that if a senior citizen buys an inappropriate financial product, the blame is shifted to the reverse mortgage lender. The real issue is where is the oversight on those companies?

It continues in the Chicago Tribune’s Reverse mortgage debate in overdrive where Lewis argues that the whole purpose of the HECM program is to make loans to seniors who don’t fit into the traditional market. "Pointing that out as a harbinger of doom is ludicrous. Without this product, if people couldn’t get to the money in their house, they’d just have to sell them. It’s a complicated instrument but it’s not an instrument that takes advantage of anybody."

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Mary Ellen Podmolik | Chicago Homes: Local Scene

The warning bells sounded pretty loud and clear earlier this month when a top banking regulator compared the potential risks of reverse mortgages with the subprime lending crisis.

In a speech to bankers, John Dugan, comptroller of the currency, warned of concerns that seniors may fall victim to marketing pitches and investment schemes and be unaware of the high cost structure of these complicated financial instruments.

"I am struck by some of the similarities to the risks of subprime mortgages: a vulnerable customer class; complex product features that can be difficult to explain and can be susceptible to deceptive marketing; nontraditional, asset-based underwriting; and the potential for skewed incentives for key distributors of the product," Dugan said.

To reverse mortgage lenders, them's fighting words, particularly since the loan product -- and by extension their bottom line -- is expected to grow in popularity as the population ages.

In the next decade, more than 55 million people will be at least 62 years old, the minimum age at which a homeowner can receive a home equity conversion mortgage, a Federal Housing Administration-guaranteed loan. Reverse mortgages, the majority of which are HECMs rather than privately backed, let homeowners borrow against the value of their home and not repay the funds until the homeowners sell the home, permanently move out or die.

Last year, there were more than 115,000 such loans made, compared with less than 22,000 five years earlier, in 2003. In April alone, 11,660 loans were made, a new monthly volume record, according to the National Reverse Mortgage Lenders Association. The increase comes despite the fact that home values have slumped, which means that seniors aren't able to tap into as much equity as they could one, two or three years ago. Unfortunately, with times being tough and retirement nest egg shrinking, they need the funds more than before.

(Continued)

Atlanta-based Generation Mortgage, which closed 1,405 HECMs during the year's first quarter alone and expects those numbers to only increase, came out swinging a few days after Dugan's speech as executives sought to defend the industry and the product.

"The whole purpose of our program is to make loans to seniors who don't fit into the traditional market," said Jeff Lewis, Generation Mortgage's chairman. "Pointing that out as a harbinger of doom is ludicrous. Without this product, if people couldn't get to the money in their house, they'd just have to sell them.

"It's a complicated instrument but it's not an instrument that takes advantage of anybody." AARP begs to differ, based on anecdotal reports it's received from seniors who've been targeted by the unscrupulous once they've received a reverse mortgage. Their concern is that predatory lenders, now that they've been shut down in traditional mortgage loan markets, may be turning their attention to seniors and reverse mortgages.

"It's not the loans themselves that are problematic," said David Certner, AARP's legislative policy director. "The issue that is coming up in this environment is what is happening with the proceeds that people are getting with these loans."

Certner said one issue that has surfaced is with people trying to sell borrowers on annuity products, which for a senior functions similarly to a reverse mortgage payout. Another problem is attempts to get seniors to use their proceeds to purchase pricey long-term care insurance. It makes more financial sense for a senior to use a reverse mortgage payout for long-term care than for a long-term care policy.

In his speech, Dugan said making sure lenders adhere to current compliance standards may not be enough and that additional regulation protecting consumers may need to be put in place.

Until then, it's up to seniors and the people who care about them to make sure everything stays above board. To get a primer on how reverse mortgages work and what factors to consider from AARP, rather than a lender with a stake in the decision, go to aarp.org/money/personal/articles/reverse_mortgage_basics.html.

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Dugan speech leaves reverse mortgage lender fuming
By Steve Cocheo , executive editor
[This article was posted on June 24, 2009 on the website of ABA Banking Journal]

The commercials say, "A diamond is forever." Unfortunately, says Jeff Lewis of Generation Mortgage Co., so is a Google entry. In particular, entries relating to a recent cautionary, sometimes critical speech by Comptroller of the Currency John Dugan on the subject of reverse mortgages. And that has Lewis worried.

"There was no great urgency for him to opine on this topic," says Lewis, whose nonbank reverse mortgage company is one of the largest participants in that market. Reverse mortgages, sometimes called annuity mortgages, or, when part of a special FHA program, "home equity conversion mortgages," have at times been controversial. They enable the elderly to convert a paid-off home into fresh money they can tap for major expenditures or simply for living expenses when other income sources don’t amount to enough to support their lifestyle. At the end of the arrangement, the home belongs to the lender. No payments need be made during the life of the borrowers.

Lewis says in spite of perceptions some have, America’s elderly do plenty of web surfing, and he worries that every time an interested reverse mortgage candidate does a web search, Dugan’s early June remarks will surface.

Referring to the Comptroller’s reference to soon-to-be-released guidelines, Lewis said the FHA’s Home Equity Conversion Mortgage (HECM) program "has been regulated quite effectively for 20 years by the Department of Housing and Urban Development."

He also noted that Dugan’s indicated that many potential problems have not actually developed. "And he doesn’t point out any issues that are not addressed," Lewis adds.

Here and there have been indications that commercial banks are becoming more interested in this product, which ties in with the graying of America, the decimation of many American’s conventional retirement savings and income, and the rising cost of health care and the need for long-term health care coverage by the elderly.

What Dugan said
The speech that’s giving Lewis angst was presented during ABA’s Regulatory Compliance Conference on June 8, in Orlando, Fla., to hundreds of assembled bank compliance officers, attorneys, and auditors. (ABA BJ will be presenting a July 7 special edition of ABA Banking Journal Report dedicated to extensive coverage of the conference. This will be sent to all recipients of the regular edition of report. If you have a compliance colleague who does not subscribe to Report, they can sign up at http://tinyurl.com/BJReportNow)

Dugan had opened his presentation reflecting on the need for regulators to act earlier on new and evolving products, before compliance problems and consumer protection gaps arise. Indeed, a number of conference sessions dwelled on heading off problems before they became compliance violations, or worse.

Acknowledging the current subprime crisis and similar developments, Dugan said, "we have learned the hard way that many of our current economic problems were at least in part precipitated by the failure of lenders to adhere to basic consumer protection and underwriting standards, especially for certain mortgage products. I believe the critical lesson here is to act early, before problems escalate." He noted that OCC did http://www.ababj.com/briefing/reverse-mortgage-compliance-challenge-looms-for-banks.html take some actions to curtail abusive lending by national banks. He also pointed to the interagency guidance issued on nontraditional mortgages, issued several years back.

From this, he segued to reverse mortgages, a product that "(1) has not yet been widely accepted in the market, (2) has the possibility for rapid growth in the very near future, and (3) poses significant compliance risks."

"I believe that now is the time to get out in front of this issue-before real problems develop-so that reverse mortgage providers make these loans in a way that is prudent for both lenders and borrowers," said Dugan. [You can read the entire speech at http://www.occ.gov/speeches.htm] Dugan reviewed the appeal of the reverse mortgage concept, and then noted that while there are proprietary programs available, about 90% of the outstanding reverse mortgages are FHA HECM loans (coming to about 112,000 at the end of 2008). FHA’s program limits lender credit risk and the loans are eligible for purchase by GSEs, he said, adding that Congress recently raised the HECM maximum loan amount to $625,500, which expands eligibility.

"Nevertheless," said Dugan, there are reasons to anticipate growth of proprietary reverse mortgages in the future as well." These included a potential boom in demand that would include homeowners not eligible for the FHA program.

Dugan branded reverse mortgages as "fraught with consumer compliance problems."

Dugan expressed concern with the huge and sudden availability of cash to the elderly.

"This substantial pot of cash can tempt lenders to simultaneously and aggressively market investment, insurance, or annuity products or, worse, attempt to condition loan approval on the purchase of such products," Dugan said. "Indeed, with access to large lump sums, elderly borrowers can be particularly vulnerable to coercive sales of annuity and long-term care insurance products that are expensive and may not be appropriate to the borrower’s needs."

This section of the speech especially concerned reverse mortgage Chief Jeff Lewis. "There was almost a presumption that any product sold to a senior citizen is a rip off." He added that the speech implied that "our customers are incapable of fending for themselves. These people are intelligent, independent, and capable of being adults."

Lewis also indicated that products such as long-term care insurance have legitimate roles in today’s medical and old-age care picture.

Lewis noted that the FHA program includes consumer protection elements, and Dugan acknowledged these in his speech. One such protection is HUD restrictions on use of reverse mortgage proceeds for paying certain third parties, such as loan arrangers and "so-called ‘estate-planning services’," said Dugan. HECM borrowers are also required to receive financial counseling prior to committing to the special loans.

Dugan also expressed concern with the size of the fees that can be charged for reverse mortgages. And he noted that some recent truth in lending changes made by the Federal Reserve don’t address reverse mortgages, although he said the Fed is monitoring these loans to consider further rulemaking.

Federal guidance coming
"In sum," Dugan said, "consumer compliance risks with reverse mortgages are real, and indeed, I am struck by some of the similarities to the risks of subprime mortgages: a vulnerable customer class; complex product features that can be difficult to explain and can be susceptible to deceptive marketing; nontraditional, asset-based underwriting; and the potential for skewed incentives for key distributors of the product."

In his speech Dugan said OCC and other federal banking regulators, as well as several state banking agencies, were attempting to get out in front of the risks they perceive in further bank involvement in reverse mortgages by issuing guidance. http://www.ababj.com/briefing/reverse-mortgage-compliance-challenge-looms-for-banks.html

"I believe that any final guidance should direct banks to apply to proprietary reverse mortgages the same types of consumer protection standards applicable to HECMs, including the requirement for independent counseling," said Dugan.

Speaking for OCC itself, Dugan said special attention would be paid to misleading marketing of reverse mortgages by banks, as well as to illegal conditioning of availability of the credits based on purchase of other services. Likewise, national banks’ compensation policies in regard to reverse mortgages would also be examined.

A postscript regarding timing and details:
Interviewed by ABA BJ directly after his June 8 presentation, Dugan predicted that the federal guidelines would be released in a matter of weeks-certainly within the third quarter. (He added that he did not see much abuse at this point, and that his intent was to move faster to avoid possibilities of abuse.
However, later in the ABA conference’s program, Ann F. Jaedicke, deputy comptroller for compliance policy at the OCC, indicated that the interagency effort wasn’t moving quite that fast. Jaedicke said that she expected the guidelines to be published in the next couple of months, and said that the guidelines would be issued for comment, rather than being imposed without industry input.

Richard Riese, ABA senior vice-president in charge of the Center for Regulatory Compliance, moderating the panel discussion that Jaedicke participated in, commented that he wouldn’t be surprised if the pending interagency staff guidelines would include aspects of UDAP-unfair or deceptive acts and practices- philosophy. Jaedicke indicated that one point the document will make is that all consumer protection laws
and regulations that apply to "forward" mortgages also apply to reverse mortgages. (Dugan did note Cross selling from the reverse mortgage base will also be addressed.

"It’s mostly general guidance," said Jaedicke. "There’s nothing in there that should shock people." [Editor’s Note: Longtime observers of compliance debates know that there can be a gap between what regulators think bankers know and what they see when such "guidance" or "guidelines" are published.]

Jaedicke also added her own summary of Dugan’s remarks to what the bankers had heard directly.

First, she said, the key message was, "if banks are going to do the reverse mortgage product, they need to get it right."

Second, she said, Dugan expects the compliance fraternity to do more than just make sure proper disclosures are handed over to prospects and borrowers on a timely basis. She said he expects the compliance function to help ensure that banks’ potential push into reverse mortgages not produce any new risks.

We attempted to contact the National Reverse Mortgage Lenders Association for this article, but no spokesman was available by publication time. The NRMLA website does contain numerous consumer-protection related items, including an extensive code of ethics and professional responsibility. See www.nrmlaonline.org
[This article was posted on June 24, 2009 on the website of ABA Banking Journal,
www.ababj.com, and is copyright 2009 by the American Bankers Association.]

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By Brad Finkelstein

ATLANTA - Recent comments by John Dugan, the Comptroller of the Currency that compared reverse mortgages with subprime mortgages set off an angry response by the chairman of Generation Mortgage here.

Mr. Dugan told a meeting of the American Bankers Association in Orlando that OCC is willing to adopt "definitive standards" for reverse mortgages. The speech talked about lenders marketing insurance or annuity products with reverse mortgages.

But Jeffrey Lewis of Generation Mortgage said that almost every single item raised in the speech has been addressed except for the tax and insurance issue. "But it is not like T&I defaults are rampant," he continued.

In Generation's servicing portfolio, the rate of T&I delinquency is under 2%, and in every case the company was able to forward the money and clear up the problem for the borrower.

Still it is a big issue for industry to figure out. One of the biggest things the industry does draw flack on, Mr. Lewis continued, is the "upfront costs" such as the servicing set aside. If T&I were to be taken out upfront as well, it would further cut into the proceeds.

Failure to pay T&I, he added, constitutes an event of default under the loan documents, although the leading investor in these loans, Fannie Mae does not foreclose. But if a traditional securitization market were to develop, it could become a problem.A diverse pool of investors will be healthier for the industry, but he is not sure those investors would have the flexibility to not avail themselves of their rights to protect against future losses.

"We are an incredibly self-aware industry and we are working through the challenges that we face," Mr. Lewis said, adding one of the biggest is the allegations of product tying.

"We don't sell life insurance, we don't sell annuities, we don't sell investments and we're not responsible - we can't be held responsible - if the people who do sell those things don't treat their customers properly. We treat our customers properly in our industry."

It is amazing, he declared, that if a senior citizen buys an inappropriate financial product, the blame is shifted to the reverse mortgage lender. The real issue is where is the oversight on those companies.

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By Kate Berry
National Mortgage News
NMNW
(c) 2009 National Mortgage News and SourceMedia, Inc. All rights reserved.
NEW YORK-Reverse mortgage lenders say that with stricter eligibility requirements looming, they are bracing for a potential pullback in the industry. Department of Housing and Urban Development secretary Shaun Donovan indicated that with home prices falling, a tougher approach may be needed to slow the growth of such loans.

David Cesario, executive vice president of the reverse lender 1st Reverse Financial Services LLC in Westmont, Ill., said that "if and when" HUD changes requirements, "fewer borrowers will qualify."

Confronting declines in home prices, HUD has asked Congress for a $798 million subsidy in 2010 to boost its loan-loss reserves for the Federal Housing Administration's Home Equity Conversion Mortgage program.

The program, which insures lenders against losses, allows borrowers 62 and older to convert the equity in their home into monthly payments or a line of credit with the loan repaid when the home is sold.

Jeffrey Lewis, chairman of Generation Mortgage Co., an FHA-insured reverse mortgage lender based in Atlanta, questioned HUD's projections for losses on the program, which he said anticipate a 15% drop in housing prices next year - far higher than the industry's projections.

"When you're in the insurance business, sometimes there's a hurricane," he said. "This is an asset-based loan, so when asset prices are weak, you occasionally have years when you lose money. If it turns out they're overly conservative on housing prices," then the amount of subsidy that HUD needs "will change a lot."

Raising insurance premiums or loan-to-value ratios could shut out about a third of potential borrowers, Mr. Lewis said.

Mr. Cesario, whose lender is a unit of the $3.5-billion-asset Wilmington Savings Fund Society, said that "if HUD chooses to raise insurance premiums in light of limited product availability and increasing rates, those two factors will cause a lot more people not to qualify." He added, "That may not be a bad thing if they're looking to slow down those they're insuring, but the seniors need more help now than they need more barriers."

Lenders also will start turning homes over to the FHA if the outstanding balance on the loan exceeds a home's value, Mr. Cesario said.

That would increase the agency's exposure to real estate-owned properties at a time of swelling inventories.

"FHA is concerned about paying higher claims in a depreciating market, particularly the insurance claims for loans that have to be repaid over the next year or so," he said.

Reverse lenders also are bristling over remarks last week by Comptroller of the Currency John Dugan, who compared reverse mortgages to subprime loans and warned that "now is the time to get out in front of this issue before real problems develop."

"Reverse mortgages could be the next subprime mortgage product to experience rapid growth while taking advantage of a vulnerable segment of the population," Mr. Dugan said in a speech to the American Bankers Association conference in Orlando.

John LaRose, the chief executive officer of Celink, a Lansing, Mich., subservicer of reverse mortgages, said there is always concern when a regulator makes such comments, "particularly when they place subprime in the same context as reverse mortgages."

"All people hear about are high origination fees and half of those are due to HUD's insurance program," he said.

Last year's $300 billion housing bill contained several changes to the reverse mortgage industry, including a 2% cap on origination fees for the first $200,000 borrowed, and 1% on the balance above that amount, with a total cap of $6,000.

In February, Congress approved a higher loan limit, $625,000, on reverse mortgages, up from $417,000, expanding the eligibility requirements.

The National Reverse Mortgage Lenders Association announced in April that it planned to roll out a certification program this year for brokers and originators, starting with an accreditation process and exams.

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HECM Market Grows, Pullback Expected

Lending of FHA Home Equity Conversion Mortgages set a single-quarter record in early 2009, but declining house prices, prevailing concern about the niche product’s exposure to fraud and predatory practices, and recent talk of eligibility changes have many reverse mortgage lenders expecting the worst.

The first quarter of 2009 produced a record $7.774 billion in HECM originations, which make up about 90 percent of the total reverse mortgage market. That total is up 30.5 percent from the 4Q08 mark of $5.959 billion and 17.5 percent from the year-ago level. Wells Fargo accounted for 19 percent of HECM production in the first quarter, originating $1.479 billion in such loans, according to an Inside FHA Lending analysis of HUD data. No other lender holds more than a 7 percent market share.

But Department of Housing and Urban Development Secretary Shaun Donovan again drew attention to issues confronting the HECM program last week, telling Congress that he is considering several alternatives for tightening product guidelines, including raising premiums. Donovan has argued in the past that FHA shouldn’t raise HECM premiums because of the program’s benefits for seniors, but he told a Senate appropriations subcommittee that something may have to be done to shore up the program financially.

HUD revealed in its 2009 budget that it will need $798 million from Congress to break even on the HECM program, the first time in its 20-year history that it will need taxpayer money. Declining house prices are eroding the collateral backing the loans at a time when new production is growing. Fiscal year 2008 cranked out 112,154 HECM loans and 69,515 have been made through the first half of FY 2009, according to the agency’s numbers.

Donovan expressed concern that raising premiums or tightening eligibility restrictions on the program could lead to lower participation. “We do have options for changes to the HECM program,” he said, noting that the HECM program is far more sensitive to house values than traditional products. “We have not chosen to raise premiums given the stress that seniors are under right now.”

Donovan said the agency is looking at premiums, loan-to-value ratios and other factors that would restrict program eligibility. “Those are choices between how many seniors we want to help versus the cost of the program,” he said.

‘The Best of Times’ for HECM Lenders

Housing legislation enacted just last year expanded the reverse mortgage market, setting a 2 percent cap on origination fees for the first $200,000 borrowed and a 1 percent limit on the remainder of the loan up to $6,000. Then Congress increased the reverse mortgage loan limit from $417,000 to $625,000. But the good times may not roll for much longer.

“Someday before I apply for [a reverse mortgage], they are going to make it worse than it is today,” said Jeff Lewis, chairman of Generation Mortgage Co., the eighth-largest HECM originator in 1Q09, according to the latest Inside FHA Lending ranking. “I don’t know whether it’s going to be next month or next year or 5 years from now, but these are the good old days. We have recently reduced lender fees, recently increased home value limits, and we have the same LTV calculation that we’ve had for 20 years when people didn’t live as long and housing price expectations were more robust.

“At some point, something’s got to give,” Lewis continued. “Is it going to get a little worse or a lot worse? I don’t know. But what I can tell you for sure is the only direction this is going is worse for the consumer.”

Lewis noted that the declining house prices driving the reverse mortgage dilemma have caused HUD to overestimate the subsidy it will need to cover the HECM program, saying the depreciation estimates from Capitol Hill were done conservatively to account for a worst possible scenario. Nevertheless, he said the industry is bracing for a change.

“If the FHA is losing money, even a dollar, then the premium isn’t high enough,” Lewis said. “The only thing that’s holding us back right now is the direction of housing prices. I have to believe that there will be a lot of people in the Senate and the House who want to be seen as champions of these folks, so maybe we’ll be able to get the air taken out of this. I can tell you that there are a lot of advocates for our customers, and I hope their voices will be very loud when they try to change this program. Our loan provides a whole series of benefits for the borrower that are unique.”

OCC Director Calls for More Reverse Mortgage Regulation

Meanwhile, John Dugan, director of the Office of the Comptroller of the Currency, told industry participants at an American Bankers Association conference last week in Orlando that reverse mortgages pose significant compliance risks and said regulators should step in to examine the issue before real problems develop.

“While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages – and that should set off alarm bells,” Dugan said. “We need to learn the right lessons from this very negative [subprime] experience, because it clearly demonstrates the link between compliance and safety and soundness.”

Dugan said regulatory agencies should ensure that interagency guidance now being worked on is sufficiently robust to ensure that consumers are adequately protected, and he said the OCC would examine national banks to ensure compliance with the guidance as well as relevant existing regulations. But he said it may turn out that guidance alone is not enough to address the consumer protection issues surrounding reverse mortgages.

The ability of consumers to access their home equity through large lump sum payments can pose substantial risks, Dugan noted. For example, lenders may simultaneously and aggressively market investment, insurance, or annuity products or, worse, attempt to condition loan approval on the purchase of such products. Likewise, with access to large lump sums upon closing, elderly borrowers can be particularly vulnerable to coercive sales of annuity and long-term care insurance products that are expensive and may not be appropriate to their needs.

Lewis, however, was quick to respond. “We in our industry are of precisely the opposite mindset,” he said. “Unlike subprime mortgages, reverse mortgages do not threaten the well-being of our customers or the system; rather they serve as an antidote to the shortcomings of subprime for a senior who would otherwise have been subject to foreclosure.”

Another risk is that reverse mortgage borrowers, because they have no immediate repayment obligations, may overlook substantial fees that are attached to the loan, Dugan said. And consumers who spend their loan proceeds quickly or unwisely may end up short of the funds they need for home maintenance or property taxes, “with disastrous consequences: the failure to make those payments can result in foreclosure,” he noted.

Dugan said one area that deserves particular attention is whether to impose additional requirements with respect to escrows of taxes and insurance. Nonpayment of taxes or insurance can trigger foreclosure. However, the new Federal Reserve Board escrow requirements for “higher-priced” mortgages do not apply to reverse mortgages, and HUD does not require escrows to be established in connection with HECMs.

“Given the predominance of the HECM product in reverse mortgage lending, I think it would be a major step forward for HUD to issue guidelines or requirements addressing the escrow issue for HECMs, and I would like to begin a dialogue with them on the issue,” Dugan said. “Once they set the standards for escrows, we would ensure that they are followed by national banks for HECM products, and would ensure – by regulation, if necessary – that comparable standards apply in connection with proprietary reverse mortgages offered by national banks.”

But Lewis argued that the market has operated for 20 years under significant federal oversight and many companies in the industry do only reverse lending, working specifically with seniors. The reverse product is complex, but it benefits the borrower and was built precisely to provide liquidity to borrowers who are vulnerable and do not fit into the traditional mortgage underwriting process, he noted.

“There’s no news in the Comptroller’s speech,” Lewis said. “Our resemblance to subprime is nonexistent. Our sales practices are exemplary. We operate in a regulatory environment that already prohibits the behaviors about which he is warning. Should the fire marshal yell ‘fire!’ in a crowded theater when there isn’t one?”

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By Brandon Ivey

Reverse mortgages pose "significant compliance risks," according to Comptroller of the Currency John Dugan. However, Jeff Lewis, chairman of reverse mortgage lender Generation Mortgage, said Dugan essentially yelled "fire" in a crowded, fire-less theater.

In remarks last week at the American Bankers Association’s Regulatory Compliance Conference, Dugan delivered what he called "an early warning" regarding reverse mortgages and suggested pending federal guidance on the products could be insufficient.

"While reverse mortgages can provide real benefits, they also have some of the same characteristics as the riskiest types of subprime mortgages - and that should set off alarm bells," Dugan said. He said the OCC will immediately use the FTC Act to prohibit national banks from engaging in unfair or deceptive practices regarding reverse mortgages.

"We will use this authority to require immediate correction of any potentially misleading marketing claims by a bank in connection with reverse mortgage products, in particular ones that use terms such as ‘income for life,’ ‘no payments ever,’ and ‘no risk,’" Dugan said.

National banks are also prohibited from conditioning availability of a reverse mortgage on a borrower’s purchase of certain non-banking products, such as an annuity or life insurance product. Dugan said the OCC will take action to prevent any illegal cross-selling activities.

He added that the OCC expects national banks to have written procedures and internal controls to guard against conflicts of interest regarding reverse mortgages and the sale of ancillary products. "And we would expect national banks to have compensation policies that do not create inappropriate incentives for loan officers and third parties such as mortgage brokers, correspondents, and intermediaries," Dugan said.

Growth in Conventional Reverse Market

He noted that the dominant reverse mortgage product - the FHA’s Home-Equity

Conversion Mortgage - already has fairly adequate protections, but proprietary products are less regulated. "If demand for reverse mortgages mushrooms, lenders are likely to develop more attractive proprietary products that will compete with HECMs and also become available for consumers who don’t qualify for HECMs," Dugan said.

The OCC has been working with the other federal banking regulators and state representatives on the Federal Financial Institution Examination Council to develop supervisory guidance on reverse mortgages. Dugan said the final guidance should direct banks to apply all protections required for HECMs to proprietary reverse mortgages, including the requirement for independent counseling.

While Dugan said the guidance is a "work in progress," he offered some provisions he finds particularly important. He said required escrow of taxes and insurance for higherpriced mortgages appears to be an appropriate protection for reverse mortgages, both proprietary and HECMs.

While counseling is necessary for a borrower to receive a HECM, Dugan raised concerns that counseling via telephone is allowed. In addition, a HECM borrower may draw down his or her line of credit in a single lump sum at any time, including at loan origination. Dugan said the option can lead to borrower coercion and create opportunities for mortgage fraud.

He also warned that implementation of the guidance and enforcement of existing regulations might not be sufficient to address all consumer protection concerns. "In these circumstances, more definitive regulatory standards may need to be adopted, and the OCC is prepared to do that - even if the standards we advocate initially apply only to reverse mortgage lending by national banks," Dugan said.

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By Kate Berry - American Banker

Are reverse mortgages going into, well, reverse?

Reverse mortgage lenders say that with stricter eligibility requirements looming, they are bracing for a potential pullback in the industry. Last week Department of Housing and Urban Development Secretary Shaun Donovan indicated that with
home prices falling, a tougher approach may be needed to slow the growth of such loans.

David Cesario, executive vice president of the reverse lender 1st Reverse Financial Services LLC in Westmont, Ill., said that "if and when" HUD changes requirements, "fewer borrowers will qualify."

Confronting declines in home prices, HUD has asked Congress for a $798 million subsidy in 2010 to boost its loan-loss reserves for the Federal Housing Administration's Home Equity Conversion Mortgage program.

The program, which insures lenders against losses, allows borrowers 62 and older to convert the equity in their home into monthly payments or a line of credit with the loan repaid when the home is sold.

Jeffrey Lewis, chairman of Generation Mortgage Co., an FHA-insured reverse mortgage lender based in Atlanta, questioned HUD's projections for losses on the program, which he said anticipate a 15% drop in housing prices next year - far higher than the industry's projections.

"When you're in the insurance business, sometimes there's a hurricane," he said. "This is an asset-based loan, so when asset prices are weak, you occasionally have years when you lose money. If it turns out they're overly conservative on housing prices," then the amount of subsidy that HUD needs "will change a lot."

Raising insurance premiums or loan-to-value ratios could shut out about a third of potential borrowers, Lewis said.

Cesario, whose lender is a unit of the $3.5 billion-asset Wilmington Savings Fund Society, said that "if HUD chooses to raise insurance premiums in light of limited product availability and increasing rates, those two factors will cause a lot more
people not to qualify." He added, "That may not be a bad thing if they're looking to slow down those they're insuring, but the seniors need more help now than they need more barriers."

Lenders also will start turning homes over to the FHA if the outstanding balance on the loan exceeds a home's value, Cesario said.
That would increase the agency's exposure to real estate-owned properties at a time of swelling inventories.

"FHA is concerned about paying higher claims in a depreciating market, particularly the insurance claims for loans that have to be repaid over the next year or so," he said.
Reverse lenders also are bristling over remarks last week by Comptroller of the Currency John Dugan, who compared reverse mortgages to subprime loans and warned that "now is the time to get out in front of this issue before real
problems develop."

"Reverse mortgages could be the next subprime mortgage product to experience rapid growth while taking advantage of a vulnerable segment of the population," Dugan said in a speech to the American Bankers Association conference in Orlando.

John LaRose, the chief executive officer of Celink, a Lansing, Mich., subservicer of reverse mortgages, said there is always concern when a regulator makes such comments, "particularly when they place subprime in the same context as reverse
mortgages."

"All people hear about are high origination fees and half of those are due to HUD's insurance program," he said.

Last year's $300 billion housing bill contained several changes to the reverse mortgage industry, including a 2% cap on origination fees for the first $200,000 borrowed, and 1% on the balance above that amount, with a total cap of $6,000.

In February, Congress approved a higher loan limit, $625,000, on reverse mortgages, up from $417,000, expanding the eligibility requirements.

The National Reverse Mortgage Lenders Association announced in April that it planned to roll out a certification program this year for brokers and originators, starting with an accreditation process and exams.

Joseph Mason, a finance professor at Louisiana State University, said the Federal Deposit Insurance Corp. was the first regulatory agency to express concern about reverse mortgages, a year ago, but "the size of the industry was small enough
that it didn't demand immediate attention." (More)

FHA-insured reverse mortgage originations grew 6.4% is fiscal 2008, to 115,176 loans.

Mason said he is concerned that if the FHA pulls back, reverse lenders will "take up the slack from" the agency.

"I don't see that as a good move," he said. "Without firm regulation, then we're going to have the same outcome as insubprime."
With the securitization market still frozen, lenders said it is unlikely that reverse lenders could offer conventional conforming loans with private mortgage insurance.

"That product does not exist," Cesario said. "The industry would welcome a conventional loan with private mortgage insurance with open arms but mortgage insurers right now are struggling to stay alive."

Under a worst-case scenario, a pullback by the FHA would mean "there is no other option" for lenders, he said.

Some lenders said they are still waiting for HUD to finalize rules from last year's housing law that prohibit the cross-selling of other financial products such as annuities as a condition for getting a reverse mortgage.

"We've been told by our lawyers that because the [HUD] rules haven't come out, we can't do anything," said Lewis, referring to marketing agreements that Generation Mortgage has with financial planning groups and insurance networks.
"There are all these people out there in contact with seniors who need this product, and we're not supposed to talk to them. We have to find customers on our own.

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POSTED BY: BILL LISS

For many seniors, times are tough.

"There is a lot of need out there; a lot of pain out there; a lot of seniors have lost their 401k, so they need a backup," says Joseph Morris, CEO of Generation Mortgage.

And that backup is a Reverse Mortgage.

Up to $625,000 for homeowners over 62 with the money not due back to the lender until the homeowner dies or sells the house.

But Mr. Morris says it's not for everyone. "People who want the money for just a short period of time should not get a Reverse Mortgage because there are closing costs involved. If you are just going to get it out for one or two years it probably is not the best vehicle to get."

And to avoid family inheritance disputes, Mr. Morris says: "We want all the children to be involved in the process to make sure everyone is in agreement that this is the best for their parents."

For Atlanta homeowner Doris Sears, 85, the Reverse Mortgage has opened new options.
"I have bought things that I was not able to buy before now and I don't have fear of running out of money," Ms. Sears said.

And does her family support the Mortgage move?

"Absolutely," she says.

And for seniors caught up in the subprime mortgage crisis and facing foreclosure, the reverse mortgage has become a home saver.

"We have a lot of seniors actually saved out of foreclosure. We save 4 or 5 seniors out of foreclosure every week," Mr. Morris said.

"Unfortunately some seniors have gotten into low interest rates that go up over a long period of time. And now they can't make the payments," he added.

So far Mr. Morris says he's saved more than 200 homeowners from foreclosure.

One thing for sure--federally backed Reverse Mortgages are here to stay.

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By NICK TIMIRAOS

Here's one segment of the mortgage market that's still hot: federally insured reverse mortgages, which enable senior citizens to take money out of their homes.

In March and April, the number of reverse mortgages backed by the government jumped nearly 20% from the same period last year. In April alone, the government insured 11,660 reverse mortgages, the highest monthly total since the government-backed program began in 1990. By contrast, the number of new home-equity loans, which similarly allow homeowners to tap the equity in their homes, fell around 70% in the first quarter from the prior-year period, according to Inside Mortgage Finance.

More seniors are turning to reverse mortgages to supplement their retirement savings, which in some cases have been decimated by stock-market losses. At the same time, more seniors now qualify for a reverse mortgage since Congress in February raised the maximum home value that seniors can borrow against to $625,500 from $417,000. The bill also capped reverse-mortgage origination fees at 2% on the first $200,000 and 1% on any amount over that, with fees not to exceed $6,000. Other upfront costs include an insurance premium and closing costs.

In a reverse mortgage, the bank makes payments to the homeowner instead of the homeowner making payments to a bank. To qualify for such a mortgage, a senior must be at least 62 years old and have a lot of equity in the home.

The way it works is this: Say a senior owns a house worth $500,000 that has a $50,000 mortgage. The senior might get a $250,000 reverse mortgage to pay off the existing loan and then have $200,000 left over. The homeowner could get that as a lump sum or a line of credit, and wouldn't have to pay it back until he moved or died and the house was sold. The bank is repaid, including interest, from proceeds of the sale.

For lenders, the risk is that when it is time to sell the home, it will be worth less than the amount lent. As housing prices have plummeted, concern has grown that losses from these loans have mounted. Nearly all private offerings of reverse mortgages have disappeared, leaving the Federal Housing Administration as the only game in town. The FHA doesn't make any loans, but it insures lenders against any losses on federally-insured loans, called Home Equity Conversion Mortgages.

Congress's decision to raise the loan limits allowed Suzanne Huntington, 64, to get a $285,000 reverse mortgage on her $480,000 home in Laguna Nigel, Calif., last month. She used the proceeds to pay off the existing mortgages on the house, which totaled $282,000. Now she no longer has to make monthly payments.

As a result, the recently retired accountant says her husband, a heavy-equipment operator, will be able to retire this month. While they would have had enough in savings and pensions to pay their mortgage after retiring, "we wouldn't have a lot left over," says Ms. Huntington, who says her 401(k) retirement savings took a hit in the stock-market downturn.

While reverse mortgages are more popular than ever, more borrowers are finding that their homes are worth much less than they believed, and they may be unable to qualify. Around one-third of borrowers who might have closed reverse mortgages two years ago no longer have enough equity in their homes to qualify, says Jeff Lewis, chairman of Generation Mortgage Co., an Atlanta brokerage. Around 85% of his reverse-mortgage customers are retiring their existing mortgages.

The amount of losses in the reverse-mortgage business as a result of the housing bubble won't be known for years. But the Department of Housing and Urban Development, which runs the FHA, asked for nearly $800 million in taxpayer money next year to boost its loan-loss reserves due to deteriorating home prices. It is the first taxpayer subsidy in the 20-year history of the program. "Needless to say, this program is very sensitive to the projected path of long-term house price appreciation," HUD Secretary Shaun Donovan told industry leaders last month at a conference.

Some say that the subsidy is a sign that the FHA needs to raise the insurance premiums borrowers pay that normally cover losses. "The government is giving people too much money," Mr. Lewis says. Mr. Donovan says the agency opted against increasing insurance premiums on seniors "given the current pressure on retirement savings."

Indeed, brokers point to retirement savings gutted by stock-market declines as a big reason for renewed interest in reverse mortgages. "People are trying to recover or buy some time before their retirement holdings need to be liquidated," says Eric Bachman, chief executive of Golden Gateway Financial, an Oakland, Calif., brokerage.

After he heard about friends having their lines of credit pulled by their lenders, Lou Grushen, 77, in April used his reverse mortgage to secure a new line of credit on his Fullerton, Calif., home. The new line, worth $320,000, extinguished $122,000 in debt on an existing line of credit. He had been using that credit line to pay taxes that resulted from withdrawing from his retirement account, which had fallen around 30% in value. "When the stock market went down, I was really in trouble," says Mr. Grushen.

Another reason for the growing demand: A tough housing market has made it harder for seniors to sell their homes and downsize. Brokers also say seniors are increasingly using reverse mortgages to pay off loans that have reset to higher payments. "There's definitely an increased cognizance of its value as...a bailout option," says Peter Bell, president of the National Reverse Mortgage Lenders Association.

Actuarial tables determine how much money borrowers can withdraw from their home. While a 62-year-old borrower might qualify for a loan worth 57% of the home's value, a 94-year-old borrower could receive as much as 85% of the property's value, says Michael Branson, chief executive of All Reverse Mortgage Co. in Garden Grove, Calif.

But financial advisers say that reverse mortgages aren't for everyone and shouldn't always be a first choice, particularly because the loans are expensive. That means the loans "make the most sense for somebody that doesn't have much in the way of other savings," says David Certner, legislative policy director for the AARP. He says that the loans can cost as much as 10% of a home's value over the life of the loan in fees.

Policymakers have also warned that seniors may be particularly susceptible to aggressive marketing that encourages them to use cash from a reverse mortgage for risky and fee-laden insurance or annuity products. Comptroller of the Currency John C. Dugan called for more consumer protections for reverse mortgage borrowers in a speech Monday.

Also, fees for the mortgages are steep, and restrictions are tightening. Fannie Mae is the predominant buyer of the government-insured mortgages. But the mortgage-finance giant has been trying to encourage private investors to buy reverse mortgages by steadily boosting the amount of money it makes by purchasing the loans, which reduces the size of the reverse mortgage.

But brokers say this has been causing a problem. Sudden pricing changes by Fannie have disrupted transactions because borrowers sometimes qualify for less money at closing than they did when they applied for the loan, they say.

If the size of the loan falls below the amount needed to extinguish a borrower's existing mortgage, then the borrower may be unable to do a reverse mortgage. "It can cause a hardship," says Mr. Bell of the National Reverse Mortgage Lenders Association. "Now it means they need to come up with other cash to cover the shortfall or they can't go ahead and do the reverse mortgage."

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By Glenn McCullom

Year over year, originations of FHA reverse mortgage are growing at a 4% rate, although refinancings have retaken off in the past four months.
But it is difficult to say how much the reverse mortgage business is going to grow this year and the next with all the stress in the economy, including recently rising interest rates and declining house prices.

However, the number of applicants continues to grow at a pretty healthy rate, according to Peter Bell, president of the National Reverse Mortgage Lenders Association, Washington. Of that number, some don't qualify or choose not to follow through since the value of their home is low and less than their existing debt, he said.

In some cases, lenders are willing to take a "short payoff" on a forward mortgage so seniors can refinance into a reverse mortgage, Mr. Bell said. This allows the senior to pay off the existing debt and live in their home without having to pay a mortgage. It is one way to help seniors avoid foreclosure.

Meanwhile, FHA lenders originated 36,709 HECMs in the first four months of this year, up 3% from the last four months of 2008. However, HECM refinancings are up 225% as seniors take advantage of low interest rates and the higher loan limits.

Reverse mortgage lenders have been expecting a refi boom since Congress raised the HECM loan limits to $625,000 nationwide. FHA endorsed 4,013 refinanced HECMs from Jan. 1 through April 30 compared to 1,248 refinancings from Sept. 1 through Dec. 31.

Jeff Lewis, the chairman of Generation Mortgage Co., Atlanta, the nation's sixth-largest funder of reverse mortgages, said, "I think we're going to see growth continuing to accelerate."It would certainly be an issue for the industry if our current loan limits are not renewed at the end of the year."

The economic stimulus bill that President Obama signed in February raised the loan limit on FHA-insured reverse mortgages from $417,000 nationwide to $625,500 for the rest of the calendar year. About 1,200 to 1,500 lenders offer reverse mortgages and that number includes those doing only a couple of loans.

Mr. Lewis noted there are a lot of new entrants to the reverse mortgage space and "we see people go in and out of the market a lot. The reason, he said, is you can't just apply what you know in the traditional mortgage realm to the reverse mortgage industry.

Reverse mortgage customers are different, their needs are different and the transactions themselves are different. Reverse mortgages are not a "slam dunk" for traditional mortgage originators, he said. Mr. Bell added "It's not so easy" and it requires a different skill set and training.

"Only those who make the investment find it a worthwhile growth area," the NRMLA president said.

The Federal Housing Administration offered the first reverse mortgage in 1991, which it calls a Home Equity Conversion Mortgage.

Fannie Mae launched a reserve mortgage product in 1996 called Home Keeper. When it was introduced in 1996, Fannie Mae had higher loan limits than FHA, which gave Home Keeper reverse mortgages a competitive advantage. Plus, the Home Keeper program had a "shared appreciation" feature.

But the feature generated a lot of negative publicity for Fannie when it was discovered the mortgage giant was reaping a windfall when the reverse mortgages had to be paid off. This forced Fannie to drop that feature.

Home Keeper never gained much market share and Fannie closed the program at the end of 2008

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Borrowers may sell their current residence and use a reverse mortgage to buy a new one in a single transaction.

By Lew Sichelman

Reporting from Washington -- That Ralph and Plum Smith bought a house last month in Brookings, Ore., is not terribly remarkable, at least not until you learn that he's 84 and she's 77. But what is even more noteworthy is that the couple didn't pay cash for their new $240,000 home, yet they will have no mortgage payments.

The Smiths are among the first seniors in the country to close on a Home Equity Conversion Mortgage (HECM) for Purchase, a form of federally insured reverse mortgage authorized in the Housing and Economic Recovery Act of 2008. The law took effect Jan. 1.

The program is aimed largely at persons 62 years or older who want to move down the housing ladder. The idea is to allow them to sell their current residence and use a reverse mortgage to buy a new one, all in a single transaction that eliminates the need for two sets of expensive closing costs.

The Smiths don't exactly fit that profile. But then Monte Howard, director of affinity marketing for Generation Mortgage, the Smiths' lender, believes it will be the nation's burgeoning legion of seniors, not the lending community,"who are going to teach us how this product really works."

The Smiths sold their house last May and moved into an apartment to mark time until they decided what they wanted to do with the rest of their lives. But when their real estate broker showed them they would have paid $68,000 in rent in six years and "have nothing to show for it," they decided to rejoin the ranks of owners.

The Oregon couple used proceeds of the sale of their old house as a down payment for the new one, and took out a reverse mortgage for the rest. They still had to cover the expenses for two closings but, except for a review of their financial obligations, they didn't have to meet any income, credit or asset qualifications for their new loan.

Better yet, they'll have no monthly payments because the loan doesn't have to be paid back until they leave their new home.

"We're just delighted," says Plum Smith. "We accomplished what we wanted to do, and that was downsize."

The loans are called reverse mortgages because, instead of you paying the lender, the lender pays you. The amount you receive is based on the age of the youngest borrower, the value and location of the home and current interest rates. You can take the proceeds in a lump sum, as the Smiths did to pay for their new house; as a line of credit to be tapped as needed; in monthly installments; or in any combination of the three.

Interest and mortgage-insurance premiums accrue on the borrowed amount, but no payments are necessary until the home is no longer occupied or owned by the borrower. In other words, a reverse mortgage need not be repaid until you sell, move out or pass away.

And since these are nonrecourse loans, you'll never owe more than the value of the property. You'll owe the sum of the amount you borrowed plus the accrued interest and insurance. If the house is worth more than that when you leave, you or your heirs will receive the difference. And if it is worth less, the lender eats the difference, not you or your estate.

About the only eligibility requirements are that you must be at least 62 and the home must be your primary residence and held in your name.

Cooperatives, second homes, vacation properties and some manufactured houses are not eligible.

There is a limit on how much you can borrow: $625,500 until the end of the year, when it falls back to $417,000 unless Congress decides otherwise.

Instead of allowing seniors to unlock the equity they have in their current residences without having to move, the Home Equity Conversion Mortgage for Purchase is designed for older owners who want to scale down their housing, perhaps to a place that's not just smaller but also meets their changing physical needs, has a better climate or is closer to their children.

"Since the product is brand new, there really isn't a typical scenario just yet," Howard of Generation Mortgage says. "But one of the most exciting is that seniors like the Smiths who have been out of the housing market will be able to come back and consider homeownership again. This is their chance, especially with prices as low as they are."

However you choose to use your Home Equity Conversion Mortgage for Purchase, you don't have to use all your borrowing power to buy another place. If the house costs less than you can borrow, you can use the difference for other purposes. Or, like a regular reverse mortgage, you can take the rest as a line of credit.

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Written by Atare E. Agbamu, CRMS

Wall Street and Main Street are joined at the hip: One cannot prosper without the other. This is a take away from the current mortgage and credit crisis.

For Reverse-lenders, the exit of jumbo programs causes hardship for customers who live in homes valued higher than the recent national HECM limit of $417,000.*   Many of these customers need relief from forward-mortgage monthly payments now.  While HECM reverse mortgage is their only hope of keeping their homes, they cannot get relief because FHA’s puzzling $417,000 national limit for HECM (HERA 2008 had approved up to $625,000) defies reality in the reverse-mortgage marketplace today: jumbo reverse mortgages are nonexistent. Jumbo is simply in limbo.

Meanwhile, industry conventional wisdom assumes that as soon as investors start buying mortgage-backed securities, jumbo reverse programs will come back, and all will be well again.

Not so soon says Wall Street veteran, Jeffrey M. Lewis. A senior managing director at Guggenheim Partners, Lewis is Chairman of Atlanta-based Generation Mortgage Company, a top-12 independent reverse mortgage lender/servicer. Guggenheim Partners, the controlling shareholder of Generation Mortgage, is a global financial services company, managing more than $125 billion in assets.

Before helping to build Generation three years ago, Lewis formed and ran the fixed income derivatives group at Donaldson, Lufkin, & Jenrette (DLJ), where he also managed the mortgage arbitrage unit and co-led residential mortgage trading. Lewis earned a BA in Government and an MBA in Finance from Cornell University in New York.

We spoke recently about the jumbo reverse market, Wall Street, and other industry issues.

AEA: Jeff, what is the short-term and long-term outlook for reverse mortgages in the secondary market?

JML: We’ve got a lot of issues. In the short term, there will not be a market for jumbo products for years. That is the result of the enormous overhang of distressed mortgage paper in the marketplace. Investors who want to buy mortgage assets have return hurdles that are consistent with what is available for them to buy. Those are much higher rates than those at which people want to borrow money today.

One of the consequences of what has happened recently is that we’ve got this great disconnect between where assets that are government-backed trade versus assets that rely on their own characteristics and credit quality. 

Interestingly, in the traditional mortgage market, there are a couple of things working for people that are not present in our market: One, they have much larger loan limits on government loans. Unfortunately for us, we don’t have the benefit of the same limits. Two, there are many large banks who believe that making jumbo mortgage loans at rates where they could not resell the loans, but where they still make reasonable ROE [return on equity], is a good subsidy to provide to their large consumer businesses. That explains the availability of money at off market rates for people with jumbos in the traditional forward space. It is a very large market, and it has a lot of other connections in terms of the other products and services they want to purvey to those clients. But I think it will be some time before they are available in our market.

The other critical issue we have today is that Wall Street has basically disappeared. There is no securitization market. And as an industry, our volumes [reverse] are so small that we are really not worth anybody’s attention from the standpoint of even purchasing our government loans or Ginnie Maes.

So, we are in a world where Fannie Mae knows they are the only game in town. They have been reducing their level of aggressiveness in the last several weeks. We very much appreciate that Fannie Mae has been acting as a bellwether for our industry.

AEA: You said we are not going to have jumbos for years. That is a little disturbing. How many years are we talking about?

JML: There are two things that have to happen to allow a jumbo market to come back. First, housing needs to bottom. Apparently, I am a bull because I believe housing could bottom within six months. Second, spreads on existing assets have to normalize. They have to get back to a level where we can issue 350, 400, 450 [margins] over jumbo to a customer and be able to get par for it.  We are so far away from it right now that it is hard to imagine when the spreads will narrow. Even if there were no concerns about future housing price declines, the rate issue is just a killer.

AEA: The spreads, right?

JML: Yes, the spreads. The spreads that are out there.... We have to remember that portfolios of uninsured reverse mortgages will always have a lower rate of return than the stated coupon [rate].  So, when we were making loans that were 350 [margin] over on a stated rate, we knew some people would move out of their homes when their houses were still covering the loan. And that some percentage, by definition, would live long enough that they would cause you to not earn the full coupon. Their houses will no longer satisfy the balances when the loan matures. So, everyone’s estimate of how many losses there might be would be different, but everybody would say that a portfolio of jumbo reverse mortgages would always have a lower return than the stated coupon. And my guess is that most of the loans we are making on the assumptions we had, if they were 350 over stated, we probably thought might earn 200/225 over net of the losses that will take place in the portfolio.

In a world where triple-A bonds could be issued at very low spreads, 200 over was a good enough starting point in terms of the overall yield. They were securitize-able and they were securitized. But nowadays, when you think of what that expected return would need to be to starting out in order to have enough raw materials [loans are raw materials for Wall Street’s securitization factories] to work with in the investor community, I can’t even begin to imagine what that number is --- 500, 600, 800? I don’t know what that number is. It is many, many, many points wider than where we were before.

AEA: We are still talking near term. You talked about the overhang and the size of existing portfolios of reverse-mortgage-backed securities.  What is the size of the overhang in dollars?

JML: The overhang is in the mortgage market in general. The issue is not that there are too many reverse mortgages around. We are a tiny, tiny, tiny subset of the mortgage market. And we price off the rest of the mortgage market. If you are a mortgage investor, you are going to segment different parts of the market, and demand returns depending on what segment you are in. We would be considered an off-the-run, illiquid segment with small volume. So that already puts a little bit more yield in there.

AEA: Our products, though, have some very good investment characteristics that make them more attractive than forward mortgage-backed securities, right?

JML: They are extremely different. At the end of the day, returns are returns. As we love to say in the bond market, "There is no such thing as a good or bad bond, only a good or bad price." Reverse mortgages have a lot of characteristics that are unusual relative to traditional loans that make them a little bit difficult to sell. They also have a lot of characteristics that, when people understand them, make them attractive. It is a mixed bag. I don’t think it is safe to say it is all good.
The lack of current interest [cash flow?] is a big deal because most investors are basically match-funding when they buy these kinds of assets, and they have to pay interest when they purchase something. Whether they have to pay interest on a deposit or a debt instrument or whatever, they have to pay when they buy. So if they buy an instrument that accrues rather than pays interest; that creates problems.

The offset to that, of course, is that these loans do repay for a variety of reasons. And when you look at a portfolio of reverse mortgages, they actually have a fair amount of cash flow and can service some kind of liability. But it takes a lot of work and analysis to really understand that.

AEA: Isn’t that an opportunity for those of you in the secondary market who have done your homework?

JML: Yes.

AEA: Let’s look at long-term. What do you see long-term for our market?

JML: Long-term? We obviously have a set of circumstances where our product is going to become part of the mainstream. When we started Generation three years ago, I would still say, we were talking about a fringe financial instrument. And I feel that with the necessity that is out there in the world with respect to people’s needs for funds, the fact that other retirement assets have been decimated by what is taking place in the capital markets, the need is as acute as it has ever been in our industry.

Every year, more new seniors pass through the turnstiles and join the ranks. That trend is in place, and there is nothing that can be done to change that. And most importantly for our product, I think the level of satisfaction that our customers have had has been off the charts. It has been very, very positive. A lot of the misperceptions and misconceptions that people had about the product, that might have made them hesitate in the past have really been put aside. The combination of all those things is a really good value proposition for the customer.

And the number of potential customers that we have is growing and growing. I think it means our industry is going to continue to grow rapidly. I wouldn’t be surprise to see that 2009 calendar year is 40-50 percent higher than 2008 calendar year as far as unit volume.

AEA: We also talked about the HECM loan limit. It has gone up a bit under HERA (Housing and Economic Recovery Act of 2008). Why do you believe it hasn’t gone up enough?

JML: I am a free-markets guy. I don’t want the government to do everything for everybody. I’d prefer that the markets should take care of as many things as possible. But the fact is that, as I have described, the jumbo market is unlikely to function in the near future. In the interim, it would have made more sense for us to have the kinds of loan limits that the traditional mortgage market has. It was our view that that was the intention of the housing bill that was passed in the fall (HERA). The intention of that bill was to make the HECM limits one and the same as the Freddie Mac limits.

It was a complicated piece of legislation that was put together pretty quickly. The language in the bill left an opening. The bill said the HECM limit - "will not exceed"-- the Freddie Mac limit. That made it sound that it could be anywhere between the Freddie Mac limit and one dollar, and that it is up to HUD to decide what that number is. I think a lot of constitutional scholars will tell you that there was undue delegation by the legislative branch to the executive if the limit was really that open-ended. Many of the legislators who voted on that bill believed that what that language meant was that the HECM limit will be the same as the Freddie Mac limit

There was this discussion that took place behind closed doors with Republican Senators and HUD regulators and other people, which didn’t include us, which somehow decided that a completely random number other than the Freddie Mac limit should be our limit.

AEA: And these would be in markets such as California, Florida, and others with high-priced homes, right?

JML: It not just in the high-priced areas, it is also in some of the moderately-priced areas where we have people who are still house-rich and otherwise poor. It is not uncommon to find people who are in that situation at all levels of house value. It is not just at the lowest levels.

AEA: So what do you think really happened?

JML: I can’t speculate, but I can tell you that when we read the bill, we were very happy. We thought that the language was a little strange "...shall not exceed ...," but it still seemed to indicate that the intention of it was to give us those limits. When they did the temporary limit increase in the traditional market a few months earlier, we were specifically excluded by the language in the bill from that increase. Again, I don’t understand the reason for that, but we were. So, I thought it was pretty clear by the fact that we were not excluded, that we were meant to be included. The intention was to give us the Freddie limit. I am hopeful that at some point in the next administration, some folks will take a look at this and realize that, perhaps, a mistake was made.

Often in our industry, Atare, especially on the refinancings, we’d see that we are just short on available proceeds to be able to repay the existing debt. We are in a tough time and the appraisals are falling very, very rapidly.
AEA: A lot of people have jumped out of the business. We’ve seen some consolidation. Are we going to see people coming into reverse mortgages from the secondary market as the credit situation improves?

JML: I think for the time being, institutions aren’t really thinking offensively; they are thinking defensively. In time, people will probably start thinking more strategically. I think it would be a while before you see a lot of entry. It is an industry that is idiosyncratic; it’s different. It requires a lot of commitment. It requires a lot of patience. Right now, I think

people’s resources and attention spans are stretched by the other things that are happening.

AEA: What do you like about HERA and the changes it has brought to reverse mortgages?

JML: We are certainly happy to go from a range of $200,000/$362,000 to $417,000. It is an improvement, and it is going to help a lot people. From that perspective, sure, we are happy. We’d have been happier if what was implemented was what was enacted.

AEA: Is it possible that part of the reason the government didn’t raise the limit higher is the presumption that most people who have those kinds of homes don’t need cash?

JML: It is not true. And as I said, your proceeds are not the limit. If the limit is $417,000, your proceeds are a percentage of that based on your age and interest rates at the time. So, roughly speaking, a 70-year-old might be looking at a maximum, if their house is worth $417,000 or over, something like $250,000. So when you are talking of people having a mortgage obligation over $250,000 that doesn’t necessarily make that person a rich person.

AEA: You are right. Let’s talk about your company. What is going on at Generation?

JML: We are growing very rapidly at Generation. We are a national company. I guess we are the most significant independent company left in the industry. Everybody else is pretty much part of a larger company. I think our reputation for service and for taking care of our clients is really our best asset. There is a wonderful culture in the company, and we are very pleased to have survived the worst of the turmoil. [Now] we are looking forward to being a market leader in this industry as we come out of this turmoil.

AEA: You hired Jack Kemp as your spokesperson. Is he still your spokesperson?

JML: He is. Unfortunately, there was a press release out of his office today [January 7, 2009]. He’s not really our spokesperson; he is an investor in our company. He’s not a pitch guy like these other companies have. Secretary Kemp is having some health-related issues right now, and our thoughts are with him and his wonderful family as they work through them.

AEA: He’s good man. He was HUD Secretary when the program started. The opening quotation in my recent book came from his words in the first guide to HECM in 1989. He’s definitely part of reverse mortgage history in this country.

JML: That’s true. He is a giant in the fight for affordable housing in this country.

AEA: What advice do you have for new entrants into this business?

JML: My advice would be to make sure you understand the instrument. It is a complicated instrument. Make sure you understand all your obligations in the regulatory framework. It is a highly-regulated and highly-protected customer with whom we deal. Make sure you understand your moral obligation in this arena when all your customers are retirees and senior citizens. In the industry to date, my competitors generally have maintained very high standards with respect to how they have serviced our client base. I’d be very disappointed if people who didn’t understand that culture of commitment to clients got into our industry and mess that up.

*Author’s Note:
At press time, the Obama’s stimulus law contains language that raised the HECM national loan limit to $625,000 for 2009, bringing it in line with forward mortgage FHA limit.

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By The Star Ledger

Generation Mortgage Reverse Mortgage Helps Senior Avoid Last-minute Foreclosure

Short Hills, NJ - When Annette Roseberry, 65, learned that a bank foreclosure on her Irvington, NJ, home of 23 years was imminent, she saw it as the latest of a long string of misfortunes that had befallen her family. However, a fast-acting Reverse Mortgage Professional from Generation Mortgage Company^TM, a nationwide top-ten HECM lender, prevented that foreclosure with a reverse mortgage.

Only seven years earlier, she lost a daughter who had been waiting for a second kidney transplant. That left Annette to take care of her two grandchildren, one of whom had special needs. Annette was living on a meager disability check and a small pension, and had been unable to make her mortgage payments for about eight months. Luckily for her, she had received-and held on to-information from Patricia Repetti, a Reverse Mortgage Professional with Atlanta-based Generation Mortgage.

"I don’t know why I kept Pat’s letter or what motivated me to call her when I did," Annette said, "but it had to be one of the best decisions of my life."

Repetti, also a senior, was able to put Annette’s worries to rest. After explaining how a reverse mortgage differs from a traditional "forward" mortgage and from a home equity loan, Pat contacted Annette’s bank and halted the impending foreclosure proceedings. Repetti was able to convince the bank that, within a short time, Annette would have a reverse mortgage in effect which would enable her to use the equity she had in her home to pay off the $180,000 mortgage in full.

The officers at the bank saw the wisdom in waiting a few weeks and getting paid back in full versus having the house put up for sale and having to wait perhaps many months to take in a far lower return.

The immediate benefit for Annette Roseberry was that she could stay in her home without the worry of ever having to make another monthly mortgage payment. Unlike a home equity loan, a reverse mortgage requires no monthly mortgage payments.

"For my family and me, keeping my home was the most important thing," Annette said. "Having a very caring person like Pat handle all this for me was such an added-and unexpected-bonus. She truly got me through what could have been more hard times."

Repetti, who had many years in the financial business, began selling reverse mortgages through Generation Mortgage only a few years ago. "My husband, Paul Ladell, also sells reverse mortgages with Generation Mortgage," she added. "We both agree that any program that enables older Americans to tap into all the equity they’ve built up in their homes-and use the money for whatever the need may be-is the best thing that’s come along since Social Security."

Today, in an environment where foreclosures are taking place by the hundreds of thousands in every corner of the United States, senior citizens are especially vulnerable. Unfortunately, many are losing homes where they’ve lived for 40 or 50 years, completely unaware that a simple and safe financial tool - a reverse mortgage - may be able to help them stay in their homes. "It doesn’t have to be like this," Pat Repetti said. "A reverse mortgage may enable these folks to live the rest of their lives in the homes that mean so much to them and their families."

A reverse mortgage allows homeowners age 62 or older to tap into the significant equity they have in their home, enabling the house to pay them back. Reverse mortgages have no income, credit or health qualifications and the homeowners retain the title to the home. Homeowners are expected to continue to pay taxes, insurance and maintain their home. The borrowers are never required to make monthly mortgage repayments.

With its sole focus on reverse mortgages, Generation Mortgage offers seniors "A New Generation in Reverse Mortgages" and pledges to deliver outstanding customer service. Their culture is to "respect our seniors, listen to their needs, and ultimately help them reach a decision that is right for them."

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