Wells Fargo has joined a growing list of financial institutions that are withdrawing from the reverse mortgage arena. Bank officials cited “unpredictable home values” and new restrictions on the loans that make it difficult to assess a borrower’s ability to meet payment obligations” as their primary reasons for shedding this product line.
“The government’s HECM (Home Equity Conversion Mortgage)…program was designed in a different economic time,” the bank’s press statement explained.
Similar concerns have led Bank of America and One West to end their reverse mortgage involvement. Both banks described their decisions as “strategic,” allowing them to shift resources to other business areas. But the departure of these lenders creates a large gap in the reverse mortgage origination channel. One Financial Freedom, the reverse mortgage division One West acquired from IndyMac after that institution failed, originated nearly $1.4 billion in reverse mortgages in 2009, making it the third largest reverse mortgage lender that year, according to press reports.
In what could have been another blow to the industry, Fannie Mae announced a few months ago that it would no longer purchase reverse mortgages. But Fannie’s share of the market had already plummeted (from 68 percent in the second quarter of 2009 to less than 2 percent in the second quarter of 2010) because of pricing changes the company implemented and Ginnie Mae appears to have picked up the slack through its HMBS (Home Equity Conversion Mortgage Backed Security) program.
After temporarily suspending its purchase of reverse mortgages last year “to reevaluate the risks” in the program, Ginnie increased the net worth and capital requirements for reverse mortgage lenders. “These changes are designed to ensure that all Issuers of Ginnie Mae HMBS have adequate capital and liquidity to protect the program and taxpayers from undue risk,” Ginnie Mae President Ted Tozer explained. “We believe the new requirements provide a measure of safety for our program; they reflect the significant capital and liquidity required to manage an HMBS portfolio in a financially sound manner.”
Since making those changes, Ginnie’s HECM purchases have increased steadily, topping $1 billion in April. Those statistics reflect the continued strong consumer demand for reverse mortgages, which the National Reverse Mortgage Lenders Association (NRMLA) says, will offset the reduction in the number of lenders originating the loans
"Demand for HECM loans remains strong,” Peter Bell, president of the trade group, told Housing Wire recently. “In fact,” he added, “the HECM program has evolved to meet the changing economic times with the recent introduction of the HECM saver, a new product that reduces costs and increases consumer protections."
Complaints about inadequate disclosure and misleading marketing practices (AARP recently sued HUD over an allegedly unclear policy regarding the rights of surviving spouses of HECM borrowers) have created additional concerns about the program. But NMRLA officials say they have been working with HUD on revisions in the HECM rules to address these problems.
The changes specifically target the need for lenders to assess the ability of reverse mortgage borrowers to make tax and insurance payments as required by the loan. Failure by borrowers to make those payments has triggered an increasing number of reverse mortgage foreclosures, a trend that has concerned HUD officials and lawmakers.
The elimination of federal funding for homeowner counseling programs, including $9 million allocated for reverse mortgage counseling that is a requirement of the HECM program, has raised additional concerns about the adequacy of consumer protections for reverse mortgage borrowers.
FORCING THE ISSUE
Consumer lawsuits and regulatory concerns have propelled force-placed insurance into the spotlight, and this long-standing, rarely questioned industry practice may not survive the scrutiny, at least, not in its current form.
Mortgage policies typically require home buyers to purchase property insurance and allow the lender to purchase ("force place”) coverage at the borrower’s expense if the homeowners’ policy lapses. Consumer advocates have complained that lenders purchase high-priced policies more expensive than the borrowers had in place and in some cases, more expensive than they can afford. Those complaints have become louder and more insistent as the housing bust and recession have strained the finances of many homeowners. Critics say the large commissions lenders earn on the policies they force-place give them an incentive to opt for high-cost coverage.
A Florida borrower is making that claim, among others, in a law suit filed against Wells Fargo for which the borrower is seeking class action status. The plaintiff says Wells Fargo charged him more than $25,000 for a new policy after his coverage lapsed. The insurer – QBE – sells so-called “surplus line” coverage that is not subject to state regulation and not covered by limits on insurance rates – another problem with lenders’ force-placed practices critics say.
The issue has attracted the attention of state regulators. A draft of the agreement state attorneys general have proposed to resolve complaints against mortgage servicers includes a provision that would prohibit servicers from accepting “commissions, referral fees or kickbacks” on insurance policies, would require lenders to try to renew a borrower’s lapsed policy before force-placing a more expensive one, and would require them to obtain a “commercially reasonable price” for the force-placed coverage they buy.
"Generally, we have concerns about consumers being compelled to pay substantially overpriced insurance premiums, particularly in cases where consumers are already under financial stress," Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, who is leading the AGs’ investigation, told American Banker. "The force-placed insurance issue is one of many concerns we intend to raise — and seek to change — with servicers as we begin negotiations."
The restrictions the state regulators are proposing would “overturn long-standing industry practice,” Diane Thompson, of counsel for the National Consumer Law Center, noted in the same American Banker article. She predicts that financial institutions “will fight as hard as they can against oversight and enforceability on this.”
Force-placed insurance isn’t just a consumer protection issue. Mortgage investors have also raised questions about the practice, suggesting that the commissions lenders earn from insurers create a conflict of interest for them and leave investors on the hook for the costly coverage if borrowers default on their loans. For that reason, Laurie Goodman, a mortgage bond analyst for Amherst Securities, views the AG proposal as “very positive” for investors. “It will lower [their] eventual loss severities,” she told American Banker.
NOT YET
State attorneys general are still trying to formulate a settlement agreement that loan servicers will accept and that will overcome disagreements among the AGs themselves about how to resolve allegations of widespread abuses and procedural lapses in the foreclosure process. So far, they haven’t managed to overcome either hurdle.
Financial institutions have balked at initial proposals, objecting particularly to requirements that they reduce the principal balance on some loans. Some attorneys general have also objected to that requirement and to demands to impose stiff financial penalties as part of the settlement. Others are insisting that both principal reductions and hefty penalties should be part of any agreement. According to recent press reports, the principal reduction provision has been eliminated from the most recent proposal.
Iowa Attorney General Tom Miller, who is leading the state negotiations, says he remains confident that “there’s a settlement everyone can agree to. There are still some major obstacles between here and there,” he acknowledged in a recent interview with the Washington Post, “and something like this can always get off track. But I still think we can come to a resolution.”
Perhaps, but after more than a year of trying, that resolution remains elusive.
Separately, Senate Democrats are urging federal regulators to work cooperatively with the attorneys general to “fix the broken foreclosure processes,” The federal bank regulators negotiated consent orders with 14 leading mortgage servicers, requiring them to overhaul their foreclosure processes. Critics have complained that the federal agreement undermines the AGs’ negotiations, which are still ongoing.
The letter to Walsh, signed by 12 Senators, urges the OCC to “use the full scope of its authority” to ensure that servicers “not only account for past harms, but also take steps to prevent future servicing deficiencies, so that homeowners going forward are treated fairly.”
The OCC and the Office of Thrift Supervision recently agreed to extend the deadline by which 12 of the 14 servicers must submit their plans for reviewing past foreclosures -- one requirement of the consent agreement. The other two servicers are regulated by the Federal Reserve, which has not announced a deadline change. The agencies indicated that the delay, requested by the Department of Justice, will permit coordination between federal and state regulators dealing with the foreclosure complaints.
SCHIZOPHRENIC VIEW
Consumers apparently think these are simultaneously the worst of times for the economy and the best of times to buy a home. That is the somewhat schizophrenic result of a recent survey, which found that nearly two-thirds of Americans agree that this is a good time to buy a home, even though half of them are worried about the economic outlook and about their future job security.
The survey, commissioned by Genworth International, interviewed more than 9,000 current and prospective homebuyers in eight countries -- the U.S., Australia, Canada, India, Ireland, Italy, Mexico and the United Kingdom.
Concerns about housing affordability, the interest rate outlook and the economy were widely shared, but Americans, as a group, were more optimistic about their home buying prospects than residents of the other countries.
Nearly 90 percent of Americans who bought their first home in the past 12 months said they were confident of their ability to manage their mortgage payments in the coming year, up slightly from the 85 percent who held that view in last year’s survey.
One trend evident in all the countries covered (except India) – the average age of first-time homebuyers has been increasing over the last 40 years, rising from 27.3 in the U.S. in the 1970s to 31.6 in the current decade.
Among the other findings:
- Although Americans are most upbeat about home buying, residents of other countries are more optimistic about their economies, with optimism particularly high in developing countries. India was the most positive country (two thirds of Indian respondents said they feel good about economic prospects), followed by Mexico, where 42 percent of respondents were optimists.
- Indebtedness colors how households around the world view their financial situation and how they approach buying a home. Western countries tended to have higher levels of debt, but were also more comfortable taking on debt than residents of other countries.
- In almost all of the countries surveyed, the lack of affordable housing attributable to high house prices, the cost of living, the cost of financing, or some combination of these factors, is keeping first home buyers out of the market.
BLEAK OUTLOOK
Americans who are upbeat about home buying haven’t read the most recent “State of the Nation’s Housing” report issued by Harvard’s Joint Center for Housing Studies. Or maybe the authors of that report didn’t talk to many of those optimistic Americans. In any event, the report finds the current state of the nation’s housing to be bleak, with more households choosing – or being forced to choose – to rent, many existing owners stuck in homes worth less than they owe on them, and would-be buyers waiting on the sidelines for evidence that prices have stabilized.
Although the number of households in what are traditionally the prime home-buying years (25-34) increased by about one percent between 2007 and 2009, the number of households who purchased their first home during that period fell by 14 percent, while the number of first-time buyers between the ages of 35 and 44 declined by 21 percent, according to the annual report.
Plummeting home prices and continued low interest rates have mad homes in many markets “more affordable than they have been in decades,” Eric Belsky, managing director of the Joint Center noted in a press statement, “stubbornly high unemployment and tightened lending standards have limited the ability of many first-time buyers to capitalize on the situation.” As a result, “the state of the nation’s housing is sobering.” Belsky said.
Foreclosures (turning many former homeowners into renters) have combined with the decline in home buying activity to boost demand for rental housing while pushing U.S. homeownership rates to near decade lows.
