Financial industry regulators are becoming increasingly concerned about abuses in the reverse mortgage arena. Consumer advocates have been warning for years that these loans pose huge risks for seniors, because of inadequate and often misleading disclosures and abusive underwriting practices, but federal and state regulators “are documenting new instances of abuse as smaller mortgage brokers, including former subprime lenders, flood the market after the recent exit of big banks and as defaults on the loans hit record rates,” the New York Times reported recently.
Reverse mortgage originations have plummeted during the housing downturn as falling home prices have reduced the equity available to borrowers, but default rates have soared, totaling 9.4 percent of outstanding loans last year compared with only 2 percent a decade ago, according to statistics compiled by the consumer financial protection bureau.
The complaints regulators have received and the abuses they have identified echo the red flags presaging the disaster in the subprime mortgage market, including “explosive growth and the fact that these loans are often peddled aggressively without regard to suitability,” Minnesota Attorney General Lori Swanson told the New York Times.
The Times article highlighted the plight of borrowers who were encouraged by loan originators to put only one spouse on the reverse mortgage, leaving the surviving spouse literally out in the cold when the named borrower died, forced either to repay the loan or relinquish the house.
That is just one of the abuses regulators have identified. Another is the common but misleading promise that borrowers can remain in their home, protected from foreclosure until they die or choose to move. In fact, borrowers must maintain the home and continue to pay property taxes and insurance; failure to do so is grounds for foreclosure and a leading cause of rising delinquency and default rates, the CFPB noted in a June report.
The report notes, among other concerns:
- Reverse mortgages are complex. Counseling, while required for reverse mortgage borrowers, is often inadequate – failing to explain how the loans work, the risks they create and the planning they require, and leaving borrowers vulnerable to misleading advertising.
- Reverse mortgage borrowers are taking out the loans at a younger age and are taking the loans in lump sums rather than as lines of credit. Lump sum loans are more lucrative for originators but higher risk for borrowers, often leaving them without the resources they need to meet other expenses (including paying taxes and insurance on their home) and unable to finance a ‘next step’ move when they are no longer able to live independently. Some 70 percent of reverse mortgages were taken in lump sums last year, up from 3 percent in 2008, according to the CFPB report.
- The reverse mortgage market is increasingly dominated by small originators, most of which are not depository institutions. Major reverse mortgage lenders (including MetLife, Bank of America and Wells Fargo) have left the industry, creating a void filled in part by some less scrupulous players, including many brokers who dominated the subprime market, according to the Times article, which noted: “Some of [these entities] steer seniors into expensive, risky loans with deceptive sales pitches and high-pressure tactics....”
- Misleading advertising remains a problem in the industry and increases risks to consumers. “This advertising contributes to consumer misperceptions about reverse mortgages, increasing the likelihood of poor consumer decision-making,” the report warned.
EVENLY DISLIKED
If being even-handed means no one is happy with what you’ve done, then the “Qualified Mortgage” rules the Consumer Financial Protection Bureau (CFPB) is drafting will probably qualify.
Preliminary reports indicate that the agency is likely to offer “safe harbor” protection from borrower and investor law suits to loans with “prime” interest rates to borrowers whose debt-to-income ratio does not exceed 43 percent. Loans that fall within these and other underwriting criteria (they can’t have ‘risky’ features, such as negative amortization or interest only payments and can’t have points and fees exceeding 3 percent of the loan amount) will be presumed to meet the base-line qualified mortgage requirement: Lenders must verify that borrowers have the ability to repay their loan.
The Dodd-Frank Financial Reform legislation established that ‘ability-to-repay’ requirement and directed the CFPB to issue rules defining the standards qualified mortgages must meet.
The agency has been wrestling with two challenges:
- How to establish standards that promote prudent underwriting without severely curbing access to mortgage credit and undermining the housing recovery; and
- How much legal protection to give lenders that meet the qualifying mortgage standards.
The latter issue (legal protection) has proven to be particularly difficult. Mortgage industry executives have demanded the broadest possible “safe harbor” from legal challenges, arguing that anything less will unduly restrict lending activity. Consumer advocates have argued for a “rebuttable presumption” rather than a safe harbor, allowing borrowers to challenge loans, even if lenders assert that they meet the QM standards.
Preliminary reports indicate that the agency is leaning toward a ‘tiered’ approach, offering a safe harbor for the highest quality loans and a rebuttable presumption for loans that fall outside that circle. Those reports drew fire from both sides.
Anything less than a comprehensive safe harbor would create “extraordinary” risks for lenders, David Stevens, president and CEO of the Mortgage Bankers Association, told American Banker. "If there are discussions around a tiered approach, it's recognition that a safe harbor really is needed at least for a large portion of the segment," he added. "So the question is where would you draw the line?"
While industry executives say the QM rule the CFPB is reportedly considering provides too little protection for lenders, consumer groups say it provides too much and doesn’t do enough to prohibit the lax underwriting that triggered the housing market implosion.
"The safe harbor is a very blunt tool,” Mike Calhoun, president of the Center for Responsible Lending, said in the same American Banker article. “And while we want to encourage lending, there is a real risk of providing immunity to a lot of unaffordable loans, and actually taking a step back from what the statute was trying to do. Everybody wants to see more lending,” Calhoun added, “but they also don't want to see a return to the predatory lending that got us into this whole mess to start with."
Mark Zandi, chief economist for Moody’s Analytics, who has favored strong protections for mortgage lenders, called the CFPB proposal “a very good and creative compromise.” Although he thinks lenders are over-estimating the risk of borrower lawsuits, Zandi told the Wall Street Journal he understands their concerns.
“Lenders are just so shell-shocked by all the litigation and regulatory actions that have taken place in the wake of the recession, it’s understandable that they’re concerned about this.”
As details about the CFPB’s QM regulation were leaked (or floated) prematurely, an agency spokesman issued a statement saying, “The CFPB is currently in the process of determining the parameters of these loans, with the goal of protecting consumers from risky mortgages that they cannot afford in a way that does not interfere with access to affordable credit.” Unidentified “observers” commenting on the rules, told reporters that the rulemaking process is still ongoing and emphasized that the final standards to be issued in January, could differ from those described in these preliminary reports.
FHA GETS IT (MOSTLY) RIGHT
The Federal Housing Administration’s latest effort to revise the certification requirements for condominium associations appears to have hit the marks – or at least some of them. The revisions, detailed in a mortgagee letter , address most of the concerns industry executives have raised during a three-year battle that produced three different versions of the requirements community associations must meet to make individual condominiums in those communities eligible for FHA-insured mortgages.
“We hoped this would happen a lot sooner,” Thomas Skiba, the Community Association Institute’s chief executive officer, said in a press statement, but the revised guidance represents “an important step in the right direction,” and “excellent for sellers, buyers, condominium communities and the housing market across the country.”
The most significant changes:
- Scale back the assurances association representatives must make in the certification applications they sign;
- Eliminate the requirement that community associations specifically name the manager or management company covered by their fidelity insurance policy;
- Ease the delinquency limits to specify that no more than 15 percent of a community’s units can be more than 60 days delinquent – up from 30 days in the earlier guidance; and
- Allow a single entity to own a maximum of 50 percent of the units in an existing condominium development or a non-gut rehab conversion – up from 10 percent and a major source of relief for developers and the condominium market, industry executives say.
Since the new rules were unveiled, FHA-insured condominium mortgages have increased by 20 percent, according to industry reports, an indication that the new guidelines are having the desired effect. “There might be some complaints that they didn’t go far enough in some areas and didn’t address every concern,” one industry executive said, “but what the FHA changed, they changed for the better.”
NOT SO AFFORDABLE
The declining home prices that have left many exiting homeowners with negative equity have also improved housing affordability for many prospective buyers. But that benefit has not been universally shared.
A recent analysis of affordability factors in the 25 largest U.S. cities found that housing was really “affordable” in only half of them. The study, by Interest.com looked at the obvious (median prices and median incomes) but it also considered peripheral factors, such as property taxes and home insurance in the mix, and found that affordability ratios varied widely as a result.
“Despite all of the talk about how homes are more affordable than they have been in decades, buying a home is still a big challenge for many American households,” said Mike Sante, managing editor for Interest.com, said in a press release.
The company used Census data and a variety of other sources to calculate an affordability grade for each city. C or above indicated that individuals earning the median income could afford a median-priced home; grades below C indicated that housing was not affordable. A separate “Paycheck Power” rating measured the amount by which the median income exceeded or fell short of what would be required to purchase a median-priced home.
In Atlanta, extremely low home prices combined with lower-than-average property taxes and insurance costs and above average incomes to produce the highest affordability grade (A-) and a paycheck power rating of 40 percent (more than the amount needed to purchase a median-priced home).
High affordability rates did not always reflect positive conditions, however. Detroit earned the second-highest affordability grade because abandoned houses have pushed its median price to around $60,000.
Boston, which ranked fifth on the list of cities with the most expensive housing, earned a D affordability grade and a paycheck power rating of negative 7.6 percent.
“In many communities there is a fundamental disconnect between the income families have and the costs of buying a home,” Jeffrey Lubell, executive director for the Center for Housing Policy, notes in the Interest.com report. “Falling house prices haven’t solved the problem,” he noted. They’ve helped, but they haven’t solved it.”
STILL SAVING
The economic clouds appear to have lifted, at least somewhat, but American consumers are still saving for rainy days. More than 80 percent of the respondents to the quarterly Wells Fargo-Gallup Investor and Retirement Optimism Index survey said they have set aside emergency funds, with both retired investors and those who are still working attaching roughly equal importance to having reserves to cushion against an unexpected disruption in their income.
Emergency reserves ranked second in importance for both retirees and non-retirees, following saving for retirement, which ranked first for both groups. Despite the important they attach to having rainy-day funds, half the respondents said their reserves would last six months or less; only 30 percent said they have sufficient savings to get them by for more than a year if other income sources are depleted.
The poll results indicate that investors have learned an important lesson from the recent economic downturn, the survey summary notes: “When property values are plunging and jobs are disappearing, credit tends to dry up. That is, credit lines make a lousy source of emergency funds since they tend to disappear when most needed.”
The continued emphasis on saving is a positive indicator in one sense, the report notes, because “stronger balance sheets make consumers more credit-worthy over time and provide a substantial financial base for the overall economy.” More saving also means less spending, of course, which will be problematic in the near term for an economy that relies so much on consumer spending as a source of growth. But this also bodes well for the long-term, the report notes. Notwithstanding any -term drag on the recovery rate, “when investors do feel confident enough to start spending more aggressively ― perhaps after the election and after the fiscal cliff issues are resolved ― there is the potential for rapid economic growth.”
