Responding to concerns that seniors obtaining reverse mortgages are not fully informed about those loans, the Department of Housing and Urban Development (HUD) has issued new requirements for the counseling sessions that are mandatory for FHA-insured Home Equity Conversion Mortgages (HECMs), which represent the lion’s share of reverse mortgage originations.
The new rules, outlined in a mortgagee letter issued last month, require counselors to ask 10 specific questions designed to ensure that borrowers understand the critical issues related to reverse mortgages. These include:
- How the loans are structured;
- How much they cost;
- Alternatives borrowers might consider;
- The financial and tax implications;
- The borrower’s responsibilities; and
- The risks, including the scams reverse mortgages have spawned.
If borrowers are unable to answer at least 5 of the 10 questions correctly, counselors are required to withhold the counseling certificate borrowers must present to lenders in order to obtain a loan. Counselors have several options at that point: They can give the borrower more time to review the loan materials provided before the counseling session; or they can ask if the borrower wants someone to accompany him/her at a subsequent counseling session that can be held either in person or via telephone.
HUD officials have acknowledged that under the new counseling standards, some borrowers may not be able to obtain reverse mortgages or may face delays in the application process. “But perhaps that is best, considering the litigious society we live in,” Sherry Apanay, senior vice president of Generation Mortgages at HUD told Reverse Mortgage News in a recent interview.
HUD’s new counseling rules come on the heels of a study by the General Accounting Office (GAO) that identified multiple problems with HUD-approved counseling programs. Based on an under-cover review of 15 counseling sessions, the study found that while the information counselors provided was generally accurate, none of the counselors covered all the required topics, some “exaggerated” the length of their counseling sessions, almost half (7 of the 15) did not discuss reverse mortgage alternatives (which they are required to do); and some encouraged borrowers to use their reverse mortgage proceeds to purchase inappropriate financial products, such as insurance or annuities. Overall, the GAO concluded, HUD lacked “effective controls” over the reverse mortgage counseling process.
GSE DEBATE BEGINNING
The much-anticipated, long-deferred debate over the nation’s housing finance system is about to begin. Central to that debate is the question of what role, if any, Fannie Mae and Freddie Mac, the battered mortgage financing giants, should play, how they should be structured, and how large they should be.
So far, several hundred individuals and trade groups have weighed in with comments illustrating what anyone who has been following the rise and fall of the government services enterprises (GSEs) already knows: The issues are complex, the politics are radioactive and consensus is hard to find.
The comment letters, submitted over the past several weeks, responded to a set of questions the Treasury Department published in advance of a conference the department is hosting August 17, to solicit input from “stakeholders” – consumer advocates, community development organizations, and housing industry trade groups.
“The future of our housing finance system is critical not only to our economic recovery, but also to millions of American homeowners in every corner of our country,” Treasury Secretary Timothy Geithner said in a press statement announcing the conference. “Now is the time to build on the foundation we had with the historic Wall Street reform legislation,” he added.
That legislation set a January, 2011 deadline for the Administration to present blueprint for housing finance reform it had initially promised to introduce earlier this year. But Administration officials have made Fannie and Freddie a cornerstone of their efforts to bolster the sagging housing market and have been reluctant to do anything that might upset a recovery that remains slow, fragile and uncertain.
Critics of Fannie and Freddie have long argued that the two quasi-governmental entities should be eliminated or privatized and their implicit federal guarantee severed. But a consensus of sorts seems to be forming around the idea that the federal government must continue to play a role in the housing finance system. Comment letters from several different interest groups proposed variations on a process through which the government would explicitly guarantee some mortgages or securities backed by them.
“The urge to ‘slay the dragon’ should not cause collateral damage that would eliminate or make impossible the beneficial impacts” federal support of the housing markets has provided since the Depression, the Securities Industry and Financial Markets Association argued in its comment letter.
Although Administration officials haven’t offered any details about the options they are considering, Geithner has made it clear that a federal guarantee in some form is likely to be part of any plan they propose.
The Administration “won’t preserve Fannie and Freddie in anything like their current form,” Geithner said in a recent appearance on NBC’s “Meet the Press.” But he also noted that “there is going to be a good case for taking a look at preserving or putting in place a carefully designed guarantee, so, again, homeowners have the ability to borrow to finance a home, even in a very difficult recession.”
Home buyers and real estate industry professionals have been complaining for the past two years that increasingly restrictive underwriting policies were preventing many qualified borrowers from obtaining loans. It’s not terribly surprising that some of those complaints have begun to trigger discrimination complaints.
The Department of Housing and Urban Development (HUD) is investigating reports that some mortgage lenders are denying mortgages to pregnant women and to individuals suffering short-term disabilities. Those complaints were reported recently in a New York Times article that detailed several examples of loan officers saying they couldn’t consider a pregnant woman’s income because there was no guarantee that she would return to work after her baby was born.
Federal Housing Administration (FHA) rules require lenders to verify that a borrower can reasonably be expected to continue making mortgage payments for the first three years after obtaining the loan. But fair housing rules also specifically prohibit lenders from asking if borrowers are planning to start a family. If a borrower is on maternity or short-term disability leave at the time of the closing, lenders must document the borrower’s intent to return to work, verify that the borrower has the right to return, and verify that any leave-related reduction in income will not affect the borrower’s eligibility for the loan.
“Lenders have every right to ascertain the incomes of families to determine whether they are eligible for a mortgage loan, but they have no right to use a pregnancy or a short-term disability as a cause to deny that family a mortgage [for which] they would otherwise qualify,” HUD Secretary Shaun Donovan said in a press statement.
Vice President Joe Biden, chair of the White House Task Force on Middle Class Families, also blasted the practice. “Denying a mortgage to people just because they’re having a baby is flat wrong,” he stated. “Mothers on maternity leave have jobs, they have income, and they shouldn’t have to lose their deal to close on a house because they had a baby.”
In addition to launching multiple investigations based on the Times report, HUD officials said they are reviewing Fannie Mae and Freddie Mac’s underwriting guidelines “to determine if they satisfy the Fair Housing Act, including income verification of persons taking parental or disability leave.”
The rich may be different, but that doesn’t prevent them from staying awake nights working about their financial future. More than half of the affluent individuals responding to the Merrill Lynch Affluent Insights Quarterly said one or more financial concerns are keeping them up at night. A major source of pressure for many of the respondents was the responsibility to support a parent or other elderly relative (45 percent) an adult-age child (36 percent) or grandchildren (16 percent). Of those still supporting adult-age children, 40 percent said they were doing so because their child was still in school, but 28 percent were trying to help maintain their child’s standard of living, 27 percent were helping the child pay off significant debt and 21 percent were assisting children unable to obtain employment after graduating from college or graduate school.
“Affluent households are struggling with how to address the financial responsibilities they face today without compromising their family’s current quality of life or future plans,” Sallie Krawcheck, president of Bank of America Global Wealth and Investment Management, said in a press statement. “Additional family obligations, many of which are unforeseen, make it increasingly challenging to stay focused on or on track with their financial goals, such as saving and investing for their children’s education and their own retirement,” she added.
Perhaps because of their own financial stress, more than half of the respondents view teaching their children about financial management issues as just as important as maintaining family ties and more important than selecting the right spouse or being physically fit.
Increasing the financial stress for many households is the failure of husbands and wives to agree on such key issues as:
- Establishing and adhering to a family budget (45 percent);
- Purchasing luxury items, such as cars, boats, and second homes (33 percent);
- Management of credit cards or repayment of debt (28 percent);
- Making investment decisions (20 percent);
- Formulating retirement savings strategies (19 percent); and
- Deciding whether to send their children to public or private schools (15 percent).
It’s hard to find a silver lining in the dark clouds hanging over the housing industry, but the apartment market may qualify. MPF Research reports that rental occupancy rates jumped in the largest 64 markets in the first half of this year, as landlords filled 215,000 previously vacant units – the largest six-month jump since MPF began tracking these numbers in1992. Vacancy rates meanwhile declined to 6.6 percent in June from 8.2 percent in December, the company reported.
Reflecting increasing investor optimism that a recovering employment market will continue to fuel demand for rental housing, the Bloomberg REIT Apartment Index has increased by 24 percent so far this year, according to a Business Week report. The Standard & Poor’s “Supercomposite Homebuilding Index, by contrast, has declined by 5.4 percent.
The rental market is also benefiting, perversely from the continuing flood of foreclosures which has pushed the nation’s homeownership rate down from its peak of 69.2 percent in the fourth quarter of 2004 to 67.1 percent in the first quarter of this year.
“As homeownership continues to decline, people need to live somewhere,” Henry Cisneros, executive chairman of a Los Angeles-based real estate investment firm, and former Secretary of HUD in the Clinton Administration, told Business Week. With the home purchase market likely to remain anemic for the foreseeable future, Cisneros predicts, “the rental market will be robust for the next few years.”