[Senate Hearing 111-262]
[From the U.S. Government Publishing Office]
S. Hrg. 111-262
REVERSE MORTGAGES: LEAVING SENIORS AND TAXPAYERS ON THE HOOK?
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HEARING
before the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
UNIVERSITY CITY, MO
__________
JUNE 29, 2009
__________
Serial No. 111-10
Printed for the use of the Special Committee on Aging
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
----------
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54-129 PDF WASHINGTON : 2010
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Washington, DC 20402-0001
SPECIAL COMMITTEE ON AGING
HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon MEL MARTINEZ, Florida
BLANCHE L. LINCOLN, Arkansas RICHARD SHELBY, Alabama
EVAN BAYH, Indiana SUSAN COLLINS, Maine
BILL NELSON, Florida BOB CORKER, Tennessee
ROBERT P. CASEY, Jr., Pennsylvania ORRIN HATCH, Utah
CLAIRE McCASKILL, Missouri SAM BROWNBACK, Kansas
SHELDON WHITEHOUSE, Rhode Island LINDSEY GRAHAM, South Carolina
MARK UDALL, Colorado
KIRSTEN GILLIBRAND, New York
MICHAEL BENNET, Colorado
ARLEN SPECTER, Pennsylvania
Debra Whitman, Majority Staff Director
Michael Bassett, Ranking Member Staff Director
(ii)
C O N T E N T S
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Page
Opening Statement of Senator Claire McCaskill.................... 1
Panel I
.................................................................
Statement of Ann Jaedicke, Deputy Comptroller for Compliance
Policy, Office of the Comptroller of the Currency, Washington,
DC............................................................. 6
Statement of Mathew J. Scire, Director, GAO, Financial Markets
and Community Investment, Government Accountability Office,
Washington, DC................................................. 21
Statement of Anthony G. Medici, Special Agent in Charge, Criminal
Investigation Division, Office of Inspector General, U.S.
Department of Housing and Urban Development, Washington, DC.... 40
Panel II
Statement of Buz Zeman, MSW/LCSW, Director, Housing Options
Provided for the Elderly (HOPE), St. Louis, MO................. 57
Statement of Peter H. Bell, President, National Reverse Mortgage
Lenders Association, Washington, DC............................ 58
Statement of Daniel Claggett, Managing Attorney, Legal Services
of Eastern Missouri, St. Louis, MO............................. 100
APPENDIX
Prepared Statement of Senator Mel Martinez....................... 119
Testimony submitted by John A. Courson, President and Chief
Executive Officer, Mortgage Bankers Association (MBA).......... 120
Statement of the Financial Counseling Research Roundtable........ 122
(iii)
REVERSE MORTGAGES: LEAVING SENIORS AND TAXPAYERS ON THE HOOK?
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MONDAY, JUNE 29, 2009
U.S. Senate,
Special Committee on Aging,
University City, MO
The Committee met, pursuant to notice, at 9 a.m. in OCHS
Senior Center, 975 Pennsylvania, University City, MO, Hon.
Claire McCaskill, presiding.
Present: Senator McCaskill [presiding].
OPENING STATEMENT OF SENATOR CLAIRE McCASKILL
Senator McCaskill. Good morning, everyone. Welcome to a--
this is a Special Field Hearing for the Senate Special
Committee on Aging that we are having today here in St. Louis.
I want to thank Chairman Herb Kohl and the Ranking Member
of the Aging Committee for allowing us this opportunity to hold
this hearing in St. Louis. I think it's important that we get
out of Washington and have hearings in the rest of the country
because, after all, that's what we're supposed to be focused
on, right? Not just the people who hang out in Washington, DC.
So this is the second hearing we've had in St. Louis on
this topic. It has become, I think, even more important that we
continue to focus on reverse mortgages and the pitfalls and
problems associated with them.
I should begin by saying that these are appropriate tools
in limited circumstances. There are some situations where a
reverse mortgage can in fact be a helpful assistance to seniors
in terms of the equity in their home and the financial
circumstances that they're facing.
But they're expensive, they're complicated, and the other
looming issue out there, in spite of what you see on
television, this is not a government benefit. What this is is
it's a program that pulls your equity out of your home and
gives it to you now and if things go south and at the end of
the obligation when it's time to repay the government--excuse
me--when it's time to repay the mortgage company, if the value
of the home is not sufficient to pay the mortgage company, then
taxpayers pay the rest. So the only place the government comes
in is in fact it's the government that's taking the risk.
So once again we have a program where the people who are
executing these loans and closing these loans have no risk as
to whether or not the loans are ultimately repaid and the last
time we had a situation where the people who were closing loans
that took no risk, the last time that happened was obviously
with the subprime bubble where we had lots and lots of folks
that were closing loans and that were subprime and then they
were reselling those loans to other institutions.
Now in that example, it was not the government they were
selling them to but it went so badly that the government ended
up loaning all those institutions that had sliced and diced and
sold those subprime mortgages that now taxpayers have invested
heavily in those financial institutions to try to allow them to
continue to exist because of the financial losses that were
suffered as a result of these complicated derivative investment
tools that were made up of these subprime mortgages.
In this instance, the government is directly on the line if
these loans do not turn out to be a good risk. So that's why
it's also important. So it's a double-edged problem.
First, are the seniors getting the information they need to
make good decisions as it relates to reverse mortgages? Have we
done everything possible to give them protection and, most
importantly, make sure there no fraud?
Second, are we looking at a price tag for taxpayers that is
higher than the benefit that these particular financial
instruments offer, and should we re-evaluate whether or not the
government should be the one taking the risk on these loans?
Should it in fact be the financial institutions that are
getting the fees for executing the loans?
I'm going to give a brief opening statement and then I
will--after I give the brief opening statement, I will
recognize our panels, as soon as I can find the opening
statement. Ah, here it is, and then we will go to our panels of
witnesses to testify, and we have two panels of witnesses, and
I think you will find the information that they have is very
important and hopefully we can ask some great questions of
them.
I want to thank all of our witnesses that are here today.
As I just explained, the reverse mortgage is a type of loan
that allows elderly homeowners to convert the equity in their
homes to cash. It is different than a home equity loan or a
second mortgage because the borrowers do not have to repay the
loans as long as they meet certain conditions.
For many elderly homeowners, the equity in their homes
represents their largest asset, created through a lifetime of
hard work and savings. Unfortunately, this makes seniors a
target for predatory lenders and fraud perpetrators who seek to
take advantage of them.
We convene today to discuss serious concerns about lax
oversight in this program that is leaving our nation's seniors
vulnerable to predatory practices, leading to potential fraud
and victimization.
Further, not only are seniors the victims of a reverse
mortgage fraud but taxpayers are also, because, as I just
indicated, we in fact are on the line as insuring these
mortgages. I'm deeply concerned about these issues.
Ten thousand baby-boomers become eligible for reverse
mortgages every day. Eighty-one percent of them own their own
homes. These seniors are sitting on $4 trillion of equity in
their homes. That equity is of great interest to some mortgage
entities. Some have the best interests of seniors involved but
others do not.
When it comes to our nation's seniors, this is a
particularly troubling position. As we all know, many seniors
are more vulnerable than the average population. They may be
lonely or afraid, not have family members nearby that they can
consult. They may have diminished capacity. They are trusting
and believing in the integrity and honesty of others who may
not always have their best interests at heart.
We have a responsibility to make sure this incredibly
important part of our population are not preyed upon and we
should not create mechanisms that allow this to happen.
Among the predatory practices we are learning about are
misleading advertising directed at our seniors using mailing
lists whose titles tell us all we need to know who their
targets are. I'm talking about lists of names that are headed
by titles such as ``Suffering Seniors'' or ``Elderly
Opportunity-Seekers.''
I'm pleased to have with us today Daniel Claggett from the
National Consumers Law Center which will soon release a report
that documents many reverse mortgage abuses and warns seniors
of scams to avoid. I applaud the center for its important work
on behalf of our seniors and look forward to the report.
We are also now seeing predators of a different nature.
These persons target the very program itself, trying to gain
the system in the same fashion that has previously caused
turmoil in our housing market.
Let me explain. Like the subprime market, lenders and
originators in the reverse mortgage market reap large
commissions but face little risk when writing these mortgages.
This is because nearly all reverse mortgages are insured by the
Department of Housing and Urban Development, your government.
Once the value of the loan reaches the value of the home,
lenders assign the loan to HUD who then becomes responsible for
the differences in the loan amount and the fair market value of
the house. This leaves the program vulnerable to fraud schemes,
like flipping, and the recruitment of sham buyers which HUD's
Inspector General has been fighting.
I look forward to hearing from Mr. Medici. Did I pronounce
it correctly?
Mr. Medici. That's fine.
Senator McCaskill. From the HUD Inspector General's Office
about these issues and thank him for the superb work that HUD
IG is doing in this field.
Further, the patchwork of regulation that is supposed to
protect seniors and taxpayers appears to have left both
uncovered, resulting in a recent request by HUD for an
additional $800 million in Federal funds to cover losses that I
warned about in earlier hearings.
What is also deeply concerning is that Congress continues
to add to the patchwork rules governing the reverse mortgage
program. Under the Housing Economic Recovery Act of 2007,
reverse mortgage loan limits were raised from 362,000 to
625,000, making seniors even more lucrative targets for
potential scammers.
Further, the Mortgage Reform and Anti-Predatory Lending Act
recently passed in the House of Representatives could
exacerbate the problem because it shockingly excludes reverse
mortgages nearly 10 times from tighter duty of care standards
for originators, truth-in-lending requirements, consumer fraud
protections and prohibitions on predatory practices.
I cannot understand why they would pass an Anti-Predatory
Lending Act in the House of Representatives and exclude the
reverse mortgage program.
We have also been made aware of problems with the manner in
which loan balances and servicing fees are calculated. In
effect, servicers pile on fees that are complicated for seniors
to understand and they may not have seen coming when they
decided to obtain a reverse mortgage.
There are also concerns that what are known as yield spread
premiums are padding the pockets of lenders while reducing the
equity available to seniors and driving up the tab for which
HUD could ultimately be responsible.
We will also hear from Mathew Scire from the Government
Accountability Office or GAO about the GAO's newly released
report that documents egregious marketing materials aimed at
seniors that claim to offer ``a government benefit'' in reverse
mortgages, even though this is not a government program at all.
Mr. Scire will also tell us about the failure of the
responsible government agencies, such as the Federal Trade
Commission, HUD, the Federal Reserve, and the Office of the
Controller of the Currency, to seriously engage in the
regulation of false or deceptive reverse mortgage marketing.
The GAO also found that counselors face serious barriers in
meeting their important consumer protection obligations.
In conclusion, we are pleased that the collective agencies
are here today, as well as others in government, are beginning
to realize the enormous financial issues involved with reverse
mortgages and the potentially deceptive practices that continue
to proliferate in the market with some of our nation's most
vulnerable citizens, our seniors, as the victims.
I commend them and thank them for their work as well as the
work of private organizations and the citizens who join us
today, and as we continue this discussion, we must not lose
sight about what and really who we are talking about. These are
our parents, our grandparents, our neighbors, our friends. It
is the individual reports about how these seniors are targeted
that gives me the most passion and the most drive to continue
to investigate these issues and so it is people like Mary
Heinzer of St. Louis, MO, a 79-year-old who was persuaded to
take out a reverse mortgage in order to repair her leaky roof
and they relied on the sales agent to arrange for the repair
but was ultimately left without any remaining home equity and a
roof that continues to leak.
It is Mary I will be thinking about throughout today's
hearing as we all continue to work on the issue of reverse
mortgages, and I look forward to the testimony of our witnesses
today.
Now, I'm going to make a stab at giving you an example of a
reverse mortgage, a hypothetical example, as we begin, and I
will call on some of our witnesses today to correct me if I
don't get it exactly right.
But let me just give you some ballpark figures on what a
potential reverse mortgage might look like. A widow at the age
of 70 who decides to take out the value of their home in a
reverse mortgage, let's say the home value is $200,000 and they
owe nothing against the home but, rather, it is worth $200,000
free and clear and they're 70 years old.
The closing costs on the loan will be $9,800 to receive a
$100,000 from the equity in the home. They can either get that
$100,000 in a lump payment or they can take a $700 a month
payment from the proceeds of the loan. The variable rate on
this loan is 3.5. The expected rate right now would probably be
around 6.7.
After they move out and there's regulations surrounding
this, you cannot continue to have a reverse mortgage if you do
not occupy the home continuously and you are only allowed to
leave the home for up to a year, and if you're out of the home
for more than a year, then the mortgage comes due, after they
move out, two things can happen. The heirs or family members
can pay off the loan or they can sell the home and they can
keep the remaining equity, if there is any, and HUD makes up
the difference.
Now, how much would they owe on this $100,000 after 10
years? They would owe a minimum, if they were taking the
annuity payments, a minimum of a 150,000 and they easily could
owe more than 200,000. So you get an example of how expensive
this can actually be to execute one of these reverse mortgages.
So I will depend on my witnesses, if I didn't get that
exactly right, I will depend on my witnesses to--the Director
of the Housing Operations--Options Provided for The Elderly,
HOPE, one of our counselors is here, Buz Zeman, and he can help
us on his panel. He is one of the witnesses on the second
panel.
Let me begin with the first panel and introduce our
witnesses.
First, Ann Jaedicke----
Ms. Jaedicke. Jaedicke.
Senator McCaskill. Jaedicke. Ann Jaedicke is the Deputy
Comptroller for Compliance Policy in the Office of Controller
of the Currency.
She is responsible for the policy and examination
procedures relating to consumer issues and anti-money-
laundering. Ms. Jaedicke--say it again for me.
Ms. Jaedicke. Jaedicke.
Senator McCaskill. Jaedicke, like a Jedi.
Ms. Jaedicke. Right.
Senator McCaskill. Jaedicke.
Ms. Jaedicke. Something like.
Senator McCaskill. There you go. Jedi Knight. Also sits on
the OCC's Enforcement Committee and its National Risk
Committee. Thank you for being here, Ms. Jaedicke.
Mathew Scire, am I saying that correct?
Mr. Scire. Scire.
Senator McCaskill. Oh, my gosh. You guys did this to me on
purpose. All these names are hard. Scire.
Mr. Scire. Yes.
Senator McCaskill. Is the Director in GAO's Financial
Markets and Community Investment Team. He is responsible for
leading GAO's audit work involving housing programs. His team
is focusing on a wide range of issues, including HUD's Reverse
Mortgage Program, Treasury's Loan Modification efforts and
Public Housing Agency's use of Recovery Act Funds.
Anthony Medici is the Special Agent in Charge of the
Criminal Investigation Division, Office of Inspector General,
Department of Housing and Urban Development, in Washington, DC.
He's responsible for oversight, coordination, assessment,
and analysis of the Office of Inspector General's Office of
Investigation Field Activities and initiatives throughout the
country. He is substantially involved in policy, program and
operations issues for the Office of Investigation.
I am particularly grateful to Mr. Medici for being here
today. He is retiring from the OIG, but I know he's not really
retiring.
Mr. Medici. Right. I'm going to take up another position
with TARP Funds.
Senator McCaskill. Yes. So he is now with the Office of
Inspector General at HUD and has done a lot of work in this
area and has been invaluable to us in preparing for this
hearing today. This is his last bit of official business for
HUD and then he is moving over to work with the Inspector
General on the TARP Funds. So I am very familiar with Mr.
Barofsky.
In fact, I wrote the legislation that put the SIG TARP in
place and I am thrilled that someone with your skill and
background is going to help Mr. Barofsky look at the TARP Funds
because we need a lot of work there, also.
Thank you all three for being here, and we look forward to
your testimony.
Ms. Jaedicke.
STATEMENT OF ANN JAEDICKE, DEPUTY COMPTROLLER FOR COMPLIANCE
POLICY, OFFICE OF THE COMPTROLLER OF THE CURRENCY, WASHINGTON,
DC
Ms. Jaedicke. Thank you. Good morning, Senator McCaskill.
My name is Ann Jaedicke, and I'm the Deputy Comptroller for
Compliance Policy at the Office of the Comptroller of the
Currency or the OCC.
I've worked for the OCC for 32 years and since 2003 I've
been responsible for the examination policies and procedures
for the country's national banks relating to consumer issues.
It's a real pleasure to be here in St. Louis this morning
to talk about reverse mortgages. As you know, reverse mortgages
can provide a financial benefit to older consumers who have
equity in their homes. As the baby-boom population ages, the
economy stabilizes and home prices begin to recover, we are
expecting this product to grow in popularity.
Reverse mortgages are unique and complex financial
products. Unlike a traditional mortgage, a reverse mortgage
does not require the borrower to make payments on an ongoing
basis. Instead, the home itself is a source of repayment and no
repayment is required until the homeowner dies, moves out of
the home, or fails to maintain the property or pay property
taxes or insurance.
Used correctly, these products can provide funding for home
improvement projects or medical needs or provide long-term
financial security to older consumers. However, like many
mortgage products, without proper underwriting and strong
consumer protections in place, there's also the potential for
their misuse.
The OCC is concerned that the reverse mortgage product, if
not properly managed, can raise consumer protection concerns.
For instance, reverse mortgages allow elderly consumers to
access their home equity through immediate and large lump sum
payments.
Although some consumers may use the lump sum payment to pay
off their existing mortgage, others may choose this option for
medical expenses or home improvements. Accessing a large amount
of cash may leave some consumers vulnerable to unscrupulous
lenders, other bad actors, or fraud.
In addition, if consumers who receive a lump sum payment do
not adequately plan for future home maintenance costs or
property taxes or insurance payments, they may eventually find
themselves in foreclosure.
Other consumer risks include misleading marketing claims or
difficulty understanding the complexities and costs associated
with reverse mortgages.
There are two basic types of reverse mortgage products in
the market: the home equity conversion mortgage, also called
the HECM, that is insured by the Federal Housing
Administration, and proprietary products offered by individual
lenders.
While national banks may originate HECMs, the OCC doesn't
have a role in the administration of the HECM Program. The OCC
does, however, have a role in ensuring that national banks
comply with the laws and regulations that are applicable to the
HECMs.
Federal standards and regulations are currently in place to
address potential consumer compliance concerns for HECMs which
currently account for about 90 percent of the entire reverse
mortgage market. If a HECM borrower receives their proceeds in
a lump sum, these regulations restrict the use of the funds to
pay for certain third party services, such as loan arrangers or
so-called estate planning services.
Procedures are also in place to improve consumer
understanding of the costs and structure of HECMs, and
borrowers are required to receive independent financial
counseling about alternatives to reverse mortgages and about
the financial tax and estate tax consequences of the
transaction before they take out a HECM.
Because the proprietary products are not subject to these
same Federal regulations, the OCC is working to expand the
regulatory protections built into the HECM Program to the
proprietary mortgage market. To accomplish this, the OCC has
been leading an interagency workgroup to develop supervisory
guidance for managing the risks in proprietary reverse
mortgages.
We expect this guidance to apply to proprietary reverse
mortgage lenders and to address our concerns that consumers may
not understand the costs, the risks, and the consequences of
reverse mortgages; that counseling may not be provided or may
not be adequate; and that conflicts of interests and abusive
practices may arise in connection with these transactions.
The guidance should be issued for public comment later this
summer.
At the OCC, we'll also rely on regulations currently in
place to address consumer protection risks relating to
misleading marketing or to conditioning the mortgage on the
purchase of other non-bank products. If necessary, we'll use
our authority to require immediate correction of any
potentially misleading marketing claims about this product and
to prevent inappropriate and illegal cross-selling activities.
Finally, at the OCC, we're developing public service
announcements on reverse mortgages, including print and radio
spots that will run in both English and Spanish, to advise
consumers about the potential risks of this product. These
public service announcements should be issued in the coming
weeks.
I want to thank you, Senator McCaskill, for convening this
hearing and for your leadership on these important issues, and
I'd be happy to answer any questions.
[The prepared statement of Ms. Jaedicke follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator McCaskill. Thank you very much, Ms. Jaedicke.
Mr. Scire.
Mr. Scire. Scire.
Senator McCaskill. Scire, Scire, Scire. OK. I'll get that
right. Thank you.
Mr. Scire. Just thank hurray and then you'll have it.
Senator McCaskill. Hurray, hurray.
STATEMENT OF MATHEW J. SCIRE, DIRECTOR, GAO, FINANCIAL MARKETS
AND COMMUNITY INVESTMENT, GOVERNMENT ACCOUNTABILITY OFFICE,
WASHINGTON, DC
Mr. Scire. Senator McCaskill, thank you for the opportunity
to be here today to present the results of our analysis of
HUD's Home Equity Conversion Mortgage Program.
Last year HUD insured over a 110,000 HECMs across the
country. Through these mortgages, seniors may access the equity
in their homes without having to make monthly mortgage
payments. For many, this provides the chance to remain in their
homes while using the lifetime of equity that they have
accumulated. Because of this, it is critical that seniors have
accurate and complete information on the costs and benefits of
these complex mortgage products.
You have brought to light questionable practices of some
lenders highlighting the importance of effective consumer
protections. This includes effective consumer counseling which
is a requirement for obtaining a HECM from HUD.
At your request and that of this committee, we have been
assessing the costs and benefits of HUD's HECM Program and the
effectiveness of certain consumer protections. Today, we are
issuing the report you requested. In it, we record a number of
risks that require further attention, particularly in the areas
of HECM marketing and counseling.
We also make a number of recommendations aimed at improving
controls over counseling and for financial institutions to
raise lender and consumer attention to potentially misleading
marketing claims.
I will highlight a few of the more significant findings.
First, we reviewed marketing material that we obtained by
reviewing the Internet and public information provided by the
most active HECM lenders. We found that some material made
claims that were potentially misleading because they were
inaccurate, incomplete or employed questionable sales tactics.
For example, we found marketing material promising lifetime
income but HECMs do not provide income and only permit
borrowers to receive payments for their home's equity while
they stay in their home and meet all of the loan requirements.
We have referred these potentially misleading marketing
material to the Federal Trade Commission and various Federal
financial regulatory agencies responsible for overseeing
certain lenders.
Second, we found that some of the states that GAO contacted
reported cases of inappropriate cross-selling involving
violations of state laws governing sale of insurance and
annuities. However, Federal agencies have had a limited role in
addressing concerns about the sale of potentially unsuitable
insurance and other financial products in conjunction with
HECMs.
HUD is now in the process of implementing provisions that
you placed in ARRA to protect consumers from inappropriate
cross-selling.
Third, we found that HUD's internal controls do not provide
for reasonable assurance that counseling providers comply with
program requirements. To test these controls, we acted as
secret shoppers and called counseling providers to determine
whether they provided complete and accurate information as
required by HUD.
In our 15 counseling sessions, we found that none of the
counselors covered all of the topics that HUD required and some
overstated the length of the sessions in HUD records. Although
we found that counselors generally conveyed accurate and useful
information, some of the content that was often not covered
included alternatives to HECMs, the option of requiring the
lender to establish escrow for property taxes and other fees,
whether the homeowner had signed a contract or agreement with
an estate planning service, and the advantages and
disadvantages of each payment plan.
Finally, we found that counselors often did not determine
that the secret shopper had sufficient means to pay for
counseling by asking for debt and income information, for
example. Overall, our findings raised questions about the
effectiveness of HUD's process for ensuring seniors have full
information as they consider whether and how to borrow against
the equity in their homes.
We recommend that HUD take a number of actions. We
recommend that HUD implement methods to verify the content and
length of HECM counseling sessions and issue detailed guidance
for HECM counseling providers about how to record counseling
time.
We also recommend that the FTC and others caution HECM
industry participants about potentially misleading claims.
In summary, Senator McCaskill, HECMs are an increasingly
popular way for seniors to access equity in their homes. As
more homeowners become eligible for this complex mortgage
product, its potential for further growth is clear, as is the
potential for misleading seniors.
We believe that HUD should move to address the
recommendations we make in today's report. We're committed to
providing the Congress with effective oversight of the HECM
Program. We look forward to supporting this committee's
continuing efforts.
This concludes my opening remarks. Thank you for the
opportunity to speak today and I'd be glad to take any
questions that you may have.
[The prepared statement of Mr. Scire follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator McCaskill. Thank you, Mr. Scire.
Mr. Medici.
STATEMENT OF ANTHONY G. MEDICI, SPECIAL AGENT IN CHARGE,
CRIMINAL INVESTIGATION DIVISION, OFFICE OF INSPECTOR GENERAL,
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, WASHINGTON,
DC
Mr. Medici. Senator McCaskill, thank you for inviting me to
testify today on HUD's Federal Housing Administration's Home
Equity Conversion Mortgage Program.
As you know, in the last few years this FHA product has
proven extremely popular. In Fiscal Year 2001, FHA endorsed
only about 7,750 reverse mortgages. In Fiscal Year 2008 alone,
over a 112,000 reverse mortgages were endorsed and demand this
year does not appear to have abated. FHA's insured over a $105
billion in reverse mortgage HECM loans to date.
Furthermore, Ginnie Mae, which securitizes FHA loans,
issued $228 million in HECM mortgage-backed securities in May
alone this year.
Senator McCaskill. Would you repeat that? If you could
speak up just a little bit, we're having a little difficulty
hearing you.
Mr. Medici. Sure. Ginnie Mae, which is the--securities FHA
loans, issued $228 million of HECM mortgage-backed securities
in May of this year alone. It's the highest month on record and
$699 million in mortgage-backed HECM securities this year-to-
date.
The HUD Office of Inspector General has had some concerns
about the HECM Program, including potential risk to the FHA
Insurance Fund as housing prices have devalued. These concerns
are reflected in the department's budget for Fiscal Year 2010
with a request for almost $800 million to cover potential
losses.
Some key factors have increased the potential vulnerability
of the HECM Program to fraud. First, the recent popularity of
the program has brought in many more people and turned it from
a specialty item into a mainstream loan product. Second, the
recently increased loan limits to $625,500 may also be making
it more lucrative to those who would exploit the program.
Let me tell you about some of the schemes we have
discovered.
Unauthorized individuals, including family members, friends
or even neighbors, may keep payments after the authorized
recipient dies or permanently leaves the residence. When the
person leaves the residence, that should terminate the loan.
In one recent OIG audit, it was found that FHA did not
ensure that lenders reported borrowers' deaths in accordance
with Federal requirements.
Another activity that we currently have under investigation
involves financial professionals convincing borrowers to invest
HECM proceeds in a financial product, such as an annuity, in an
improper way. These financial professionals receive increased
fees and in case of some annuities the victims are unable to
get access to their savings for many years or even past their
projected life expectancy. These HECM borrowers are thus
effectively deprived of the equity from their house.
Another OIG investigation led to an indictment recently
where an elderly woman complained that her former health
insurance representative stole approximately 200,000 from her
HECM by convincing her that she needed to pay him a fee to
process her loan application and to repay him the reverse
mortgage loan amount.
Borrowers in possession of large equity amounts can often
be the targets of consumer fraud. Also, perhaps most
significantly, we have observed various solicitation efforts
directed at recruiting straw buyers aged 62 or over. Straw
buyers are lured by the promise to live rent-free. In some
cases, the straw buyers are not fully aware of the scheme.
Often, they are public housing residents or even homeless
individuals.
Here's how the scheme typically works. Organizers obtain
abandoned, foreclosed, or dilapidated properties for little
money and inflate the appraisals by sometimes making merely
cosmetic improvements and sometimes not. This creates the basis
for a larger HECM loan. The house is then quit claimed to one
of the straw buyers who is actively recruited for the scheme.
The quit claim deed is accomplished by the mechanism by which
the scheme organizer can draw up the HECM funds.
In some cases, the quit claim deed comes with a promissory
note executed by the straw buyer. In other schemes, it's a
lien. The organizer may even create a fake mortgage company
which lends money to the borrower, although no loan is given
but a mortgage is filed.
The subject refinances the borrower into a HECM. At
closing, the title company pays all outstanding debt, including
the fraud organizer's promissory note, lien or fake mortgage,
and the organizer walks away with the pay-off.
Once the straw buyer occupies the home, an application is
made for the HECM. When the HECM is endorsed, the straw buyer
typically requests a lump sum pay-out which goes to the same
organizer. In essence, really, the property has been flipped.
The straw buyer is typically left in possession of the
property and is often unaware that they must pay property taxes
and fees. In many cases, they do not have the resources to
maintain the property, leading to abandoned properties and
eventual defaults.
There are some things we can do to defer fraud in this
program. The HECM counselor could be a valuable first line of
defense against fraud. We have asked FHA officials to require
that HECM counselors report suspected fraud to FHA and the OIG.
We have also recommended that FHA instruct counselors to
withhold certificates of counseling in suspected cases. The
certificate of counseling allows a potential buyer to go to a
lender and obtain the loan. They need to have that document.
We also believe that in most instances face to face
counseling should be required to curb the allowance for
telephone counseling which was designed perhaps with the best
of intentions. Unfortunately, it can facilitate fraud schemes.
Finally, FHA may need to require at least basic credit and
financial histories for prospective buyers to screen out those
clearly incapable of carrying forward the terms. We also think
RESPA should be fully applied to the HECM Loan Program.
The repercussions of the abuse I described above are long-
reaching. It can lead to the degradation of an older person's
well-being and it also reaches to the health of the overall FHA
program. I know from the HUD Secretary's recent testimony that
he is committed to trying to deal with any emerging problems in
this program and the Office of Inspector General also will
remain vigilant in our efforts to protect the taxpayers' funds
from predatory practices and to safeguard participants of the
department's programs.
We look forward to working with you to develop legislative
safeguards to ensure an effective response at this present
time.
Thank you.
[The prepared statement of Mr. Medici follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator McCaskill. Thank you, Mr. Medici.
Let me start with you, Ms. Jaedicke, about the recent
Truth-in-Lending Act and Real Estate Settlement Procedure Act
that was passed in the House, the Mortgage Reform and Lending
Act that recently passed the House.
It's now been referred to the Senate Banking Committee and
exempts reverse mortgages from its requirements.
Do you have any insight as to why reverse mortgages were
not included in the House version of this bill?
Ms. Jaedicke. No, Senator McCaskill, I don't.
Senator McCaskill. OK. Tell me what--how would you describe
the current regulatory environment over the HECMs, over the
part of these loans that are in fact insured by the American
taxpayer?
Ms. Jaedicke. There are a lot of consumer protections in
place for the HECM Program today and at the OCC, our emphasis
is on making sure that the national banks that we regulate
comply with those consumer protection guidelines that apply to
the HECM mortgages.
We are also, though, extremely interested in the
proprietary reverse mortgage market which at the moment is
virtually dormant. This is the market that would operate
outside of the HECM-FHA-HUD Program. We want to make sure that
if banks pursue the proprietary reverse mortgage market, that
they balance both the financial risks and the consumer
protection risks because the banks will be on the hook for that
financial risk, just as the government's on the hook for the
HECM mortgage.
Senator McCaskill. Why are the proprietary reverse
mortgages dormant right now?
Ms. Jaedicke. I think there's a general lack of interest in
the proprietary product because of the real estate market
today, and the fact that housing prices are depressed. There's
less equity in people's homes than there might have been two or
three years ago.
Senator McCaskill. So I want to make sure I understand
this. When the banks are on the line and have the risk, right
now they're not doing these kinds of loans?
Ms. Jaedicke. No, banks are not doing proprietary reverse
mortgages. Banks are doing the HECM reverse mortgages.
Senator McCaskill. Where they have no risk?
Ms. Jaedicke. No, the HECM mortgage is insured by FHA, but
the banks are responsible for making sure that the consumers
understand the risks, that the consumers get proper disclosure,
and that the advertising's not misleading.
Senator McCaskill. I guess the point I'm making is right
now in this real estate market, because of the fluctuation of
home valuation, these are too risky for most banks to engage in
right now because of the fluctuating home values in the housing
market, but yet we are, if I understand the testimony so far,
we are at a record pace for reverse mortgages that the
government takes the risk on, is that correct?
Mr. Scire. That's correct, Senator.
Senator McCaskill. So what the bank doesn't want to do
because it feels risky, they're more than happy to do when the
taxpayers are on the line is what I--am I characterizing that
correctly, Mr. Medici?
Mr. Medici. I think you are, Senator.
Senator McCaskill. OK. I want to also ask you, how are you
prepared to respond to if the housing market recovers? Are you
prepared to respond to--because, really, your regulatory reach
is really more over the proprietary market than it is the HECM,
is that correct, at the Office of the Comptroller?
Ms. Jaedicke. We don't administer the HECM Program, but we
are concerned that our banks who pursue HECM mortgages follow
the consumer protection guidelines that are in place.
For proprietary mortgages, though, those same kinds of
guidelines don't exist as they do today for the HECMs. Now,
there are other laws that are in place that would help us
achieve some of the same protections. For example, we can
enforce Section 5 of the FTC Act against misleading advertising
and we would be prepared to do that.
There are rules, like Reg. Z and RESPA, that would apply to
reverse mortgages in some context. We have anti-tying rules
that we can enforce that would prevent a bank from predicating
the proprietary mortgage on purchasing some other product that
the bank was offering.
So we have a variety of different tools that we can use,
including the supervisory guidance that I talked about that
we're working on on an interagency basis, to protect both the
consumers and the banks from financial risk when the
proprietary market returns.
Senator McCaskill. Explain for the purposes of the record
what authority you have or don't have over mortgage bankers.
Ms. Jaedicke. If they're non-bank mortgage lenders, we
don't have authority over them.
Senator McCaskill. So you--if a company begins to--if
there's an existing company or a new company thats business is
just mortgage lending and is not a bank that is insured by the
FDIC and it has other types of banking that it is engaged in,
you have absolutely no authority?
Ms. Jaedicke. They would be regulated by the states.
Senator McCaskill. So there is no Federal oversight over
the mortgage banking industry when it relates--relating to
reverse mortgages?
Ms. Jaedicke. Well, there is if the reverse mortgages are
being made by state or national banks.
Senator McCaskill. But not by mortgage bankers?
Ms. Jaedicke. By independent mortgage companies that are
not part of a state or national bank, right, they would be
supervised by the states themselves.
Senator McCaskill. Do any of you have--I'll also ask the
second panel this--have any sense of what kind of oversight is
going on on these mortgage bankers that do not have any Federal
requirements at all in terms of oversight that have the ability
to enter into these instruments?
Mr. Scire. Well, you have state banking regulators, too,
and we did talk with some of them and they have some concerns
about cross-selling, for example. So there's----
Senator McCaskill. Let's make sure everybody understands
what cross-selling is. Cross-selling--and I'm going to give an
example and then you all need to correct me if I've gotten it
wrong.
Cross-selling, when you get a reverse mortgage, you have
the option of either taking the money in a lump sum or taking
out payments. You can take, you know, a certain amount every
month.
Now,----
Audience Member. There's a line of credit, too.
Senator McCaskill. All three. A line of credit you can draw
down on, you take a monthly amount every month, or you can take
a lump sum.
Now, cross-selling, what we're referring to is if someone
takes the lump sum and then turns around and buys an annuity
product, which will pay them a monthly amount, which they could
have done in the first place without entering into another
expensive financial tool to give them an annuity payment when
they had that option of taking a monthly payment in the
original loan, is that--am I correct with that, Mr. Medici?
Mr. Medici. That's correct. It could be an annuity. It
could be some type of long-term care. It could be, you know, a
mortgage--a stock investment or anything where, you know, a
promise is made. They may get a certain yield or a certain
income, but you're right, I think the purpose of that reverse
mortgage is to provide just that kind of secure continuity of
payment supposedly at less risk.
So it sort of in many ways cuts across the initial purpose
of the loan, but when people are in possession of that amount
of equity, some individuals are going to try to cross-sell
financial products because that money is available.
Senator McCaskill. So there may be seniors that don't
understand they have the option of a monthly payment in the
first place. They didn't have to pay for a new product to get
the monthly payment because they may have been convinced that
the lump sum payment is the right thing for them to take on the
mortgage. Am I correctly describing that problem?
Mr. Scire. That's exactly right, and the state insurance
regulators have uncovered some of this. We report examples from
eight different state insurance regulators, one in Maine which
describes an example, a horrendous example just as you're
describing, where an 81-year-old widow took out a HECM and the
proceeds were used to buy an annuity which actually paid a
lower rate than she was paying on the HECM.
Senator McCaskill. So she could have gotten more money just
by taking the monthly payment option under the HECM but instead
paid for an expensive annuity and she was in fact 81 years old?
Mr. Scire. That's correct.
Senator McCaskill. I don't know how that salesman sleeps at
night.
OK. Mr. Scire, does the GAO have concerns about the
reported problems with the yield spread premium and the service
fee set-aside, and can you explain those two problems
associated with these loans?
Mr. Scire. Well, I can tell you that we're doing work right
now as a result of the ARRA mandate where we're taking a look
at the impact of some of the fee changes in ARRA, including the
impact or the reaction that lenders have to that, and so we are
taking a look right now at whether or not they're compensating
for changes in origination fees by charging higher margin
rates.
Senator McCaskill. So the way I understand it, there used
to be some predictability in terms of the lock-in of the rate
and now this rate is now floating, is that correct?
Mr. Medici. That's correct, Senator.
Senator McCaskill. We're not going to take testimony from
the crowd. We'll get--we have--at the end of two panels, if
there are questions that you think that need to be asked, we'll
be happy to address them.
There's a fixed rate but then there's an add-on now that
floats, correct?
Mr. Medici. Right. The lenders are allowed to float the
rate and although we haven't done the homework we need to on
this area, we have heard at the HECM Counselors Conference,
this area can serve borrowers and counselors alike.
What they're talking about is the rate that the lender or
broker gets the money at and the rate they charge to consumers
and this could be a one-one and a half percent rebate off the
mortgage amount. So that could be a substantial add-on to the
lender or the broker's revenue on that loan. So that is an area
of increasing concern that we are addressing.
Senator McCaskill. What, if any, concerns does GAO have
with the private reverse mortgage loan market?
Mr. Scire. We didn't look at the private reverse mortgage
loan market. It's a fairly small part of the market right now.
The focus, as you know, is on the HECM Program and there, our
concerns are principally with the controls that HUD has in
place to ensure that counseling, which it considers a major
consumer protection feature of the program, actually is
performing what it expects to do. So our concerns are more with
the HECM Program.
Senator McCaskill. We estimated there was a 110,000 of
these loans last year. Do we know how many there are this year
so far? Do we have the numbers so far?
Mr. Scire. The last number I saw was around 70,000. I think
that was in--I want to say March, but I'm not certain of that.
I can get that number for you.
Senator McCaskill. Is it a fair assumption to say that
we're on track to double the number of reverse mortgages that
are under the HECM Program this year as opposed to last year?
Mr. Medici. As of May 14, FHA had endorsed approximately
68,000 HECM loans. So we think we're on pace with last year's.
Over the last several years, the pace has been well over a
110,000 loans. I think we're on pace to meet that again.
Senator McCaskill. OK. You mentioned that the FHA, Mr.
Medici, does not ensure that the lenders report the borrower's
death according to the rules. The Social Security
Administration maintains a Death Master File which I know is
used by many government agencies as it relates to social
security payments, Medicare, Medicaid, and it can even be
purchased by the private sector since privacy rights terminate
at death.
It would seem like that this would be a simple way for HUD
to detect unreported deaths as quickly as possible.
Do you know if HUD is planning on doing routine matches as
it relates to reporting of deaths since that should trigger a
repayment on the mortgage?
Mr. Medici. Well, according to our Audit Division, HUD had,
I think, about half the cases not picked up on that. I think
they used a contractor to service the loans after they've been
endorsed and according to a recent audit, it doesn't look like
that's 100 percent effective at this point.
Senator McCaskill. So that's something that we need to
follow up on.
You mentioned the straw buyer fraud scheme. Part of that
scheme depended on, as they usually do in mortgage fraud, an
inflated and fraudulent appraisal.
Mr. Medici. That's correct.
Senator McCaskill. That troubles me because these
appraisers are supposed to be HUD-certified.
Mr. Medici. That's true.
Senator McCaskill. So what is being done to ensure that
HUD-certified appraisers are not in fact part of a con?
Mr. Medici. Well, that's a great question. From the
investigation point of view, we look into specific allegations
and where an appraiser is involved or complicit in a scheme, we
do try to prosecute them, try to have them removed.
Right now, these are ongoing investigations. So I can't go
into too much detail, but, you know, we have to deal with the
specific evidence in the particular cases, and, you know,
despite the fact that appraisers may be FHA-approved, I mean,
we've had periods where flipping has been epidemic back to 1999
to 2002 and continues to be a problem in the program.
There are a lot of appraisers, many of them are excellent
appraisers and do an honest product, but there are always going
to be some, I suppose, who see a chance to make additional
money or to basically be compliant with what the lenders are
asking them to do.
Senator McCaskill. Is there an aggressive program in HUD
when you determine that there has been a fraudulent appraisal
that you all go back and pull all the appraisals done by that
individual and look/examine all of those transactions? Are you
pulling that thread?
Mr. Medici. Well, usually an investigation, if we see that
the evidence is going in that direction, we will look at--we'll
try to uncover as much of the pattern of activity as we
possibly can.
Senator McCaskill. How are these straw buyers being
recruited, and what are they being told? Have some of these
cases been prosecuted?
Mr. Medici. We're working toward that goal right now. They
are actually substantial. So we're still peeling back the
onion, so to speak, in these cases, but we understand they're
being recruited on the Internet, through, you know, free
seminars, through flyers, signs on the street, typically with
the promise, you know, live rent-free forever or get a free
home from the government through a government program, only
have to be 62 or older really to meet the qualifications.
You're recruited in to be a nominee or front for the scheme
organizer.
Senator McCaskill. Does typically the person who's
recruited, do they get a cut of the fraudulent proceeds?
Mr. Medici. Well, it depends. Right now we're trying to
sort out what level of complicities there are, but in some
cases they just have to get the property. If they're left in
that, that would be the pay-off. So in that sense there is a
proceed from that.
In other cases, we're looking at the possibility of where
they may have been nominees for more than one property in which
case then we would have a higher level of responsibility.
Senator McCaskill. So what actually happen is that there's
a tail on this fraud, right, because if you recruit someone and
put them in a home with a false appraisal and you pull the
money out of the house based on the false appraisal and the
person gets the money and walks away, the perpetrator of the
fraud, leaving the straw buyer in the house, that when the--
that really no one figures out that the house is not worth what
the appraisal said until that person either dies or moves out
and then the only person left holding the bag is the taxpayer?
Mr. Medici. That's correct, and that's one of the
peculiarities of reverse mortgages. It could be some time----
Senator McCaskill. Right.
Mr. Medici [continuing]. Before we become aware of what
happened in that particular instance. The house can end up
being abandoned, be flipped to another individual. We may not
know that. It may take awhile and maybe by some occurrence that
brings that information to light. We're also taking some
proactive measures in terms of data-matching to help us
proactively target, but that is correct. I mean that is one of
the challenges in looking into these cases, you know, who's in
that property, what happened to that property and who the
people are that are involved.
I mean, typically, the HECM laws are designed for the
classic case of someone who lived in the home for 20-30 years,
built up the equity through hard work and through maintenance
of the property and that's the classic case and that's what I
think FHA is trying to accomplish in the HECM Program.
Now we're having people just brought in off the street who
meet the minimum qualification, 62 years old, no credit
history, no financial background history. They can get into a
property through one of these subterfuges or mechanisms and
pull down a HECM loan. So there's some vulnerabilities.
Senator McCaskill. Unlike a mortgage where a payment is due
every month,----
Mr. Medici. That's right.
Senator McCaskill [continuing]. Sometimes the fraud
unravels because the mortgage payments aren't made. In this
instance, there is no mortgage payment due, so you don't find
out about the problem until maybe years after it has occurred.
Mr. Medici. That's exactly right. You put your finger right
on really the big problem.
Senator McCaskill. I just want to make sure, the reason I
asked you to repeat the mortgage-backed securities, I want to
make sure that everybody understands what mortgage-backed
securities are. It's in fact mortgage-backed securities that
created your next job opportunity because if it were not for
mortgage-backed securities being sliced and diced, subprime
loans being sliced and diced into traunches of complex
derivatives that were being sold and churned in mammoth
proportions in our financial sector, that is why literally our
financial sector shut down and why we're facing huge economic
problems right now in this country.
I want to--you know, is this the first time that they have
packaged securities like this for sale this year?
Mr. Medici. Yes, I think this is a recent development on
Ginnie Mae's part. You're quite right. I mean, in many ways the
subprime mortgage meltdown was fueled by mortgage-backed
securities, the sale of mortgage-backed securities.
It turned out that a lot of mortgage-backed securities were
basically points of mortgages that are pulled together. In
Ginnie Mae's case, it's a million dollars more for each pull.
These pulls are pulled together by Ginnie Mae issuers. Often
the loan or the lenders themselves may be Ginnie Mae issuers or
be associated with a Ginnie Mae issuer.
They pull these loans, the mortgage-backed security loan.
They sell them to investors in the investment market. So Ginnie
Mae, I think, has reached about $700 million in mortgage-backed
securities through reverse mortgages and I think one of the
questions is basically the quality of the loan pulls that are
being securitized.
Senator McCaskill. OK. I thank all three of you for your
testimony this morning. It's been very helpful and we're going
to continue. We will come out with some specific
recommendations based on the testimony today. Some may be
agency-driven, some may be from more work at GAO, some may be
some help with trying to get the FTC more actively involved,
and obviously the HUD IG is going to continue to be very
involved in this trying to track the potential problems with
these very specialized financial tools that can be a help and a
life-saver to some people but also can be a nightmare of huge
proportions.
So thank you all three for being here. We appreciate it
very much. [Applause.]
Thank you for your cooperation. We have another three
witnesses.
Let me make an announcement. For those of you who are in
the audience that want to give testimony, anyone who wants to
give testimony, who wants us to have information, we want all
information from all sources, and I want to give you--we're not
going to have an opportunity for public testimony today, but we
want to give everyone an opportunity.
If you have information you want us to have and consider,
we would ask you to submit any written testimony on this
subject matter to us and we will continue to look at this
problem. I am certainly aware that there lots of good guys in
this business and Peter Bell is on the panel because he's here
representing a lot of the good guys that are using these tools
appropriately and marketing these tools appropriately.
So this hearing isn't about saying that every reverse
mortgage is bad. It's about saying that there are dangers and
cautionary as to some of the consumer pitfalls that are out
there.
If you would like--excuse me?
Audience Member. Why is it not open to questions from the
audience?
Senator McCaskill. Because----
Audience Member. You insult our intelligence, Senator.
Senator McCaskill. Sir, let me explain. I'm here as a
member of the Senate Committee on Aging and if you've ever
watched a Senate hearing on television, there are very strict
rules and procedures around Senate hearings.
They are not ever an opportunity for public testimony at a
Senate hearing. I have lots of town halls. In fact, I just had
one a couple of weeks ago. We'll have many more where I welcome
everyone's questions from the audiences, but I'm not here as
the Missouri Senator today. I'm here as a member of the Senate
Committee having a hearing under the rules of the Senate and
under the rules of the Senate, when there is a committee
hearing, testimony is taken from the witnesses, questions are
asked only by Senators of the witnesses, and then there is a
record kept of that hearing that public can in fact look to,
comment on, and contact their Senator.
All of you, I represent. If you have something you need to
say to me about this subject or any other subject, I am here
for that. I cannot do it in the context of a Senate hearing
where the rules prohibit the testimony from people who are not
members of the witness panel.
So that is why. We can make copies of those rules available
for anyone and I know it feels awkward because generally when
I'm in Missouri and I have a room like this, everybody gets to
talk. I don't think we ever do this where everyone doesn't get
to talk when I come back from Washington and have meetings like
this.
But this is not a town hall. This is not a forum for
Senator Claire McCaskill. This is in fact a hearing of the
Senate Aging Committee and I am required under the rules of the
Senate to follow those rules. .
But if you have anything you want to get to us, Michelle,
will you raise your hand? We are happy--this is Michelle who
works here in St. Louis. Mattie who is here, who works here in
St. Louis for my office. Who else is here from St. Louis? OK.
They went back to the office.
Then I have Melissa Garza who's here from my office in
Washington. I have Sam Dresla who's here from my office in
Washington.
So you have a number of people here. If any of you want to
get specific information to us, please talk to them. They'll
get you the right phone number, the right e-mail address, so
that we can get all the information from everyone. I just
didn't want anyone to think we were cutting people off because
I wanted to. It's the rules I'm required to follow.
So I apologize to you, sir. I certainly don't want to
insult your intelligence. I would never want to do that with
folks I work for, and I understand that there are some strong
opinions about this because there are people who use these
tools and use them wisely and they work and so I don't want to
leave the impression that this is about a bunch of bad guys.
This is about a few bad guys that we need to make sure that
we're paying attention to so they do not victimize people
needlessly.
Let me introduce the second panel. First on the panel is
Daniel Claggett, is a Staff Attorney with Legal Services of
Eastern Missouri, which provides legal aid to low-income
clients. His practice focuses primarily on foreclosure defense
and assisting borrowers who have victims of predatory lending.
Mr. Claggett is here today representing the National Consumer
Law Center, a not-for-profit organization specializing in low-
income consumer issues.
Buz Zeman is the Director of Housing Options Provided for
the Elderly (HOPE) in Missouri. He has conducted over 3,000
reverse mortgage counseling sessions since 1993. He supervises
other reverse mortgage counselors. He teaches reverse mortgage
training sessions for Neighborhood Works America, participated
in AARP's Reverse Mortgage Education Project, and is a
consultant trainer to the National Council on Aging.
Finally, Peter Bell, who is President of the National
Reverse Mortgage Lenders Association, a trade association for
lenders involved in the origination and servicing of reverse
mortgages. Mr. Bell has served on numerous housing industry
committees and HUD task forces and has testified before
Congress on aging, housing and tax issues.
Peter can tell you we don't let people testify from the
audience in the Senate in Washington because he's been at many
of those hearings and has testified and knows that that is the
situation.
Mary Heinzer was invited to be part of this panel. That is
the elderly woman I referred to in my opening statement, who
was victimized. She is not well and has submitted written
testimony for the record that we will make part of the record
because she was not physically able to make it here today to
talk about her situation, and as I briefly talked about in the
opening, maybe you all can speak to that, I know that, Daniel,
I think, is familiar with her case, this is a situation where
money was set aside of the proceeds to fix the roof, so it
would pass HUD inspection for a HECM reverse mortgage, and
unfortunately the repairs that were done were substandard,
didn't work.
Instead of replacing the roof, they merely spread tar in a
couple of places, so the leak was not fixed. So as a result,
the leak continued, the money had been spent, and she still has
a leaky roof which was the main reason she got the money in the
first place, was to do that, and that was just a matter of the
lender in that instance not supervising the repair work and
certifying that the repair work had been done correctly prior
to paying the people who had done the repair work, and they had
taken on the responsibility that repair work as part of the
mortgage agreement and then they failed to supervise it
appropriately and withhold the payments until it had been done
right and then she kind of got left holding the bag.
So that was her situation and her written testimony will be
made part of the record.
Senator McCaskill. Let's begin with Buz Zeman. Thank you.
STATEMENT OF BUZ ZEMAN, MSW/LCSW, DIRECTOR, HOUSING OPTIONS
PROVIDED FOR THE ELDERLY (HOPE), ST. LOUIS, MO
Mr. Zeman. Good morning, Senator McCaskill. I'm talking
about a couple of issues that have been raised already: reverse
mortgage counseling and the recent dramatic changes in the HECM
marketplace.
The role of the reverse mortgage counselor is often
misunderstood. Here's how I explain it to my clients. My role
is to help you understand all the ins and outs of a reverse
mortgage. I am your independent coach. My role is not to tell
you what to do but rather to inform you fully so that you can
make your own well-informed decision about whether or not to
get a reverse mortgage.
In addition, I will be discussing with you alternatives to
getting a reverse mortgage, including public benefit programs
and other services that you may be eligible for but currently
not receiving.
It is extremely difficult to do a great job at this
counseling. Counseling is one of the key ways to protect
seniors but only some of the counseling being done is
excellent. Most counseling could stand improvement and,
tragically, as we heard from the previous speaker, some
counseling is downright terrible.
An easy indicator of terrible counseling is counseling that
is way too brief. I have heard from a few clients that the
counseling that they have had previous to mine took 15 minutes
or less. Without inquiring further, I know that that is
terrible counseling. Of course, the time spent is not a
sufficient indicator of the quality of counseling, which brings
me to Recommendation Number 1, expand the--well, I had down
here implement the Secret Shopper Project, but having heard
about the GAO study, expand the Secret Shopper Project.
The basic idea in my model would be for skilled trainers to
pose as seniors in order to evaluate the counseling service.
Listening to counseling is really the only way to determine
fully what counselors are actually doing.
My second recommendation is to provide great support and
training to reverse mortgage counselors. Make use of available
new technology to do so. We need to expand counselor training
by using frequent webinars and providing a high-quality, well-
staffed website. The AARP Counselors website is an excellent
prototype.
My third recommendation is to fund the counseling
adequately. Our current funding methods have problems and are
probably not sufficient for the future, especially if the
quality of counseling is to improve.
I recommend forming a think tank to examine carefully how
reverse mortgage counseling would best be funded. This is a
complicated but critical and solvable problem. I volunteer to
be a member of the think tank.
Before I end, I want to address the dramatic impact of
recent marketplace changes.
In April 2009, Fannie Mae changed the way it purchased
reverse mortgages. One of the consequences was that most
lenders stopped allowing rate locks at loan application. At the
same time rates increased dramatically and have generally been
rising ever since.
Rates now vary considerably from one lender to another,
making it a very difficult marketplace for the consumer.
Without a rate lock, borrowers do not know what the loan will
cost when they close, nor do they know the amount that they can
borrow until close to closing.
Here's what's going on behind the scenes. The lender who
sells a reverse mortgage to a borrower at a margin above par
gets paid a premium or bonus when they sell the loan to Fannie
Mae. Last year, with the help of this committee, legislation
was passed to limit origination fees. Most of us thought this
meant that the lender's profit was limited. Now we learn
otherwise.
It is now possible for lenders to make thousands of dollars
more than the origination fee cap. The availability of this
bonus may not be predatory per se, but in this environment the
opportunity for predatory practices has certainly increased.
As you can imagine, counseling clients about these
developments is quite a challenge. My fear is that most
counselors do not even address these issues at all. I note that
there has been no guidance to counselors from HUD on this
issue. This would be an ideal subject for one of those training
webinars I mentioned earlier.
I have focused here on just a few problems. My written
testimony relates to many more, but they are all solvable.
Abuses are a small percentage, wise but even a small percentage
affects many thousands of seniors. So we need to be ever-
vigilant at addressing problems and making improvements.
Thank you for this opportunity.
Senator McCaskill. Thank you very much.
Mr. Bell.
STATEMENT OF PETER H. BELL, PRESIDENT, NATIONAL REVERSE
MORTGAGE LENDERS ASSOCIATION, WASHINGTON, DC
Mr. Bell. Senator McCaskill, thank you for the opportunity
to appear at this hearing.
I would like to request that my written testimony be
included for the record and I'll try to summarize it in the
time allocated. Because this hearing is focusing on counseling
and most people, other than those who have been through
counseling and the counselors themselves, don't really know
what goes on in a counseling session, I would like to request
that this copy of our magazine, Reverse Mortgage, be included
in the record. We had the opportunity recently to have both a
counselor and a client agree to allow us to sit in on a
session, record it and transcribe it. We have a complete
counseling session verbatim in here that illustrates the whole
flow of the conversation, illustrating the set of topics that
are covered in a properly conducted session.
Senator McCaskill. The publication will be made part of the
record.
Mr. Bell. Thank you.
While demographics might point to growth opportunities in
our business, our members recognize that this will only occur
if consumers believe that reverse mortgage products are safe
and fair and that those who deliver them are trustworthy. As a
result we have a number of core values that we possess as an
organization and we require all our members to abide by our
Code of Conduct and Professional Responsibility.
What I'd like to do here, is focus on the counseling since
that was what I was asked to cover and then, if there is time,
perhaps I could address some other points that were made
earlier.
Counseling is a vital consumer safeguard. It really is what
separates reverse mortgages from all other products. In fact, I
don't think you could come up with any business in America in
which every potential customer is referred to an independent
third party specialist, a counselor at a HUD-approved agency,
to review the transaction under consideration and its
implications for the borrower before a decision is made.
In fact, if this had been the case throughout the mortgage
sector, we'd probably be in a very different economy today.
For consideration, to be entirely effective there must be
knowledgeable counselors. Achieving this requires effective
training to keep their knowledge up to date, technological
systems for managing the workflow, and funding to pay for
personnel and overhead. Providing all that has been a
challenge.
Nevertheless, the network of HUD-approved non-profit
organizations has stepped up to the plate to try and fulfill
the demand, despite the limited resources.
One of the biggest obstacles to supporting counseling is
funding. This year the cost of HECM counseling is estimated to
be $16 million to $18 million. The appropriation that Congress
has provided is $8 million. Some of the shortfall is being
covered by payments from consumers.
Despite the appropriated funds and borrow payments, there
is still a significant shortfall. This has led some agencies to
discontinue offering HECM counseling, resulting in longer lead
times for consumers seeking it or agencies having to cram more
appointments into less time to make the counseling work from an
economic standpoint.
Training for counselors needs to be enhanced. Not every
counselor takes formal courses. Some are trained within their
own organizations. Some learn simply by reading the protocols
and other pertinent literature on their own in the interest of
helping their agencies fulfill the growing demand for reverse
mortgage counseling in their communities.
HUD has plans underway to improve counseling and will soon
be implementing three very important changes. One is a new
counseling protocol. The protocol is the guideline, the script,
that counselors use in conducting a session. The second chapter
is a roster of approved HECM counselors, all of whom will have
had to have passed an exam to be included on that roster. The
third is enhanced oversight and monitoring of counselors,
including the use of mystery shoppers.
Until now, it has been the counseling agency, not the
individual counselor, that has been approved by HUD. The roster
is a major step forward in that individual counselors will now
be tested for their knowledge and competency and approved by
HUD as well as the agency.
Another new aspect is a requirement in the new counseling
protocol for a review of the client's recurring financial
obligations, including taxes and insurance, as well as their
income. This is designed to help them decide if they can afford
to stay in the home, even with the reverse mortgage.
HUD is to be commended for the sharp eye it keeps on issues
in the program and the thoughtfulness its staff has put into
developing solutions. An example of this is the department
dealing with the concern about borrowers' ability to pay taxes
and insurance.
On the surface, it seems like an easy solution--collect an
escrow--but it's not that simple. That's forward mortgage
thinking being applied to a reverse mortgage, which is a very
different situation.
In many cases, homeowners are overburdened with payments
for mortgage and other debt. Much of their income is siphoned
off to make those loan payments. If the mortgage and debts are
eliminated with a reverse mortgage, funds that have been used
for loan payments become available for other purposes,
including paying taxes, insurance and maintaining the property.
Instead of simply imposing an escrow, HUD is looking at
utilizing the financial assessment tool to determine if the
lender and counselor should work with the borrower to establish
an escrow, amend the drawdown schedule, limit payment options,
disallow a lump sum payment or take any other steps appropriate
to help borrowers avoid tax and insurance defaults.
Recognizing the different circumstances of borrowers and
allowing the appropriate solution for each individual case is a
key aspect of the approach that HUD is taking.
Controller Dugan, Inspector General Donahue, and others
have all pointed out that seniors are vulnerable, that scams
and fraud are frequently perpetrated against older folks, and
that reverse mortgages can potentially be a source of problems.
However, they have not identified any incidents of
widespread malfeasance specifically in reverse mortgage cases.
In fact, there have been few reported. We have been polling
state Attorneys General Offices, bank regulators, and the FTC,
and found the incidence of complaints about reverse mortgage
lenders to be minimal or non-existent.
We received a similar response to an inquiry to the
Conference of State Banking Supervisors. Several weeks ago I
was in Kansas City to address a conference of the Consumer
Complaint Office's of all the Federal bank regulatory agencies,
including the Federal Reserve, OCC, OTS, and FDIC. When asked
during a panel discussion, the representatives of each agency
reported that they had no complaints about reverse mortgages.
At the same time we must recognize that once a senior has
gotten a reverse mortgage, no matter how protected she or he
might have been during the loan origination process, there is
now access to what could be a substantial amount of money
potentially attracting others looking to swindle the
homeowners. These are societal problems. They're not reverse
mortgage lending problems.
There is a highly consumer-centric industry here looking to
help seniors monetize the equity in their homes so they can
live more comfortable, secure, and fulfilling lives. We are
committed to only making loans after a homeowner makes an
informed decision that the reverse mortgage is a tool
appropriate for their needs.
We' be happy to work with you, Senator McCaskill, to
address any shortcomings or potential consumer pitfalls that
can be identified, similarly to what we've been doing in
partnership with HUD and FHA for many years.
Thank you for the opportunity to testify today.
[The prepared statement of Mr. Bell follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator McCaskill. Thank you, Mr. Bell.
Mr. Claggett.
STATEMENT OF DANIEL CLAGGETT, MANAGING ATTORNEY, LEGAL SERVICES
OF EASTERN MISSOURI, ST. LOUIS, MO
Mr. Claggett. Chairwoman McCaskill----
Senator McCaskill. Oh, excuse me. Before you begin, Mr.
Claggett, I was asked to make an announcement.
There's a couple of folks who parked their cars in the
drive and we need you to move them. A Mazda with License Plate
AAA 6U2D and a Buick with Plate 922 SLR, if you all would move
your cars, I think there's a larger vehicle that needs to get
through and they can't get through. A Mazda and a Buick parked
in the drive, if you would please move them.
Thank you. Go ahead, Mr. Claggett.
Mr. Claggett. Thank you. Chairman McCaskill, Chairman Kohl,
Ranking Member Martinez, and Members of the Special Committee,
thank you for inviting me to testify today on the important
topic of reverse mortgages.
I'm a staff attorney with Legal Services of Eastern
Missouri which provides legal aid to low-income clients,
including many low-income seniors, and I testify here today on
behalf of Legal Services of Eastern Missouri, the National
Consumer Law Center and the low-income clients that these
organizations serve.
Ms. Chairwoman, Mr. Chairman, and Members of the Committee,
as you are aware, this country is in the midst of the worst
foreclosure crisis since the Great Depression. This crisis has
been driven in significant part by improvident subprime lending
that has resulted in a credit crunch of historic proportions.
But despite the grim economic outlook, the mortgage
industry has found a bright spot: the reverse mortgage market.
More than 100,000 seniors used reverse mortgages in 2008 to tap
more than 17 billion in home equity. Loan volume has more than
doubled since 2005 and since 2001 the number of reverse
mortgages originated has increased an incredible 1,500 percent.
The continued availability of reverse mortgages in these
tough economic times is good news for seniors who need to cash
out some of their home equity to supplement social security to
meet unexpected medical costs or to make needed home repairs.
But the relative strength of the reverse mortgage market is
unleashing other less scrupulous forces. The same players that
fueled the subprime mortgage boom ultimately with disastrous
consequences are turning to the reverse mortgage market.
Lenders, brokers, and even Wall Street know that there are
currently 15 million potential reverse mortgage borrowers
sitting on trillions of dollars of equity, a gold mine waiting
to be excavated, and the graying of the baby-boomer generation
will make that gold mine deeper and richer.
As a result, there is now an urgent need for more resources
at the Federal and state level to protect consumers from
reverse mortgage abuse and to help seniors preserve their home
equity and to ensure that reasonably priced and fairly
structured reverse mortgages are available for those who truly
need them.
The National Consumer Law Center will be releasing a report
in the coming weeks that will detail needed protections and
improvements in the reverse mortgage market. These
recommendations will include strengthening borrower counseling
which today remains inconsistent and under-funded, banning
yield spread premiums which incentivize brokers to make loans
more profitable for lenders and investors at the expense of the
borrowers, regulating proprietary reverse mortgages which are
developed and sold by private financial institutions.
While the use of these products has slowed to a trickle,
economic recovery over the next few years is likely to
reinvigorate proprietary reverse mortgage products. To date,
they remain almost entirely unregulated at the Federal level
and subject to widely varying state regulations.
Improving data collection on reverse mortgages and other
equity conversion products that are not currently reportable
under the Home Mortgage Disclosure Act, and, last and most
importantly, a suitability standard for reverse mortgages must
be created.
Seniors frequently depend on lenders, brokers, and other
third party intermediaries for guidance through a market that
offers multiple distribution channels, a welter of
``educational'' resources and many complex products and
financial choices.
Brokers and lenders often use impressive-sounding
credentials to imply special knowledge and expertise. But
because mortgage lenders are considered business transactions
where each party ostensibly protects its own economic
interests, in most states brokers and lenders owe no fiduciary
duty to borrowers and when problems arise, brokers and lenders
disavow any relationship of trust and confidence with
borrowers.
The same market forces that rewarded volume business with
huge profits in the subprime market are growing in the reverse
market. Some of the nation's largest banks are expanding their
reach in the reverse mortgage market.
Mortgage brokers, who once reaped profits from subprime and
exotic loans, are now turning to reverse mortgages, and
securitization, which allowed subprime loan originators to
disassociate themselves from the downside risks of abusive
lending, is becoming more commonplace in the reverse mortgage
industry.
The subprime mortgage crisis was driven by profiteering
among all players in the industry and without regard to its
impact on the lives of millions of Americans saddled with
inappropriate mortgages. It is important to act now to save our
seniors from the same scourge. We cannot wait until millions of
elderly homeowners have been victimized to address the problems
we know already exist.
Thank you for the opportunity to testify here today. We
look forward to working with the Special Committee to address
these issues.
[The prepared statement of Mr. Claggett follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Senator McCaskill. Thank you, Mr. Claggett.
Let me start with a question, Mr. Bell, that I kind of
raised with the last panel.
If the market right now--would you agree with the previous
testimony that there are really no proprietary reverse
mortgages being marketed right now?
Mr. Bell. Yes, and I believe there probably won't be any
for many years to come.
Senator McCaskill. OK. But yet, we are increasing the
number of HECM mortgages, reverse mortgages that are actually
being closed?
Mr. Bell. We are growing. This year we're up about four
percent from last year.
Senator McCaskill. OK.
Mr. Bell. We are growing some.
Senator McCaskill. There used to be proprietary reverse
mortgages, correct?
Mr. Bell. There were a handful. The market was always 90
percent HECM and there was a fledgling propriety market that
served a population that HECM didn't serve because they had
homes of much higher value, typically values of a million
dollars and up.
Senator McCaskill. OK. Well, but if this is a good lending
tool, if this is a good value for the Federal Government, why
isn't there a proprietary market?
Mr. Bell. There are a lot of reasons there is not a
proprietary market. First of all, it's a small market. Even
with the growth we've had, we're doing a 100,000 loans a year
nationwide.
Now, in the forward mortgage business, if you look at the
major companies, any one company alone might make millions of
loans a year, not a 100,000. So it's really a product that does
not have the kind of market demand for it at this point to draw
other players into it. It's very complex to do. It's time-
consuming. You need to invest in different systems. You need to
invest in different personnel and train them differently.
So there are a handful of major companies that have done
it, but they've done it because they are consumer-oriented
companies and found that they had demand from some of their
clientele to help them with their finances at the later stages
in their life and they were unable to fit them into another
forward mortgage product or a home equity loan because they did
not have steady enough income or likely prospect of their
income continuing to make a loan that requires payment, so they
chose to get involved in the FHA reverse mortgage product.
Senator McCaskill. But there's very little regulation over
proprietary reverse mortgages compared to others.
Mr. Bell. Well, I would say to the contrary, that I don't
agree that there's very little regulation, because we're
subject to the rules that other mortgages are. We're subject to
FTC rules, to RESPA rules. Bank examiners look at what loans
lenders are making from a safety and soundness, standpoint.
There are not specific laws for proprietary reverse
mortgages, except in several states, and more and more states
are looking at implementing them now. We're actively working
with a number of different states on various pieces of state
legislation. Also, within the industry, there's an awful lot of
self-regulation and self-policing.
By the way, we have a Code of Ethics and Professional
Responsibility that requires all members of our organization to
follow a number of procedures in effect, making the same rules
as HECM applicable to all other reverse mortgage products.
When there was activity in proprietary products out there,
every proprietary product had counseling. It wasn't required by
law, but it was required by NRMLA, and as a result, any company
that wanted to be a member of our organization, had to require
counseling on their products.
Senator McCaskill. What percentage of the reverse mortgages
that have been closed in the last 18 months have been done by
members of your organization?
Mr. Bell. My guess would be that probably upwards of 70
percent of the HECMs, because the last 18 months there have
only been HECMs, have been made by our members. If they haven't
been made by our members, at some point they transferred to a
member because of the way the industry is structured.
There are essentially two players in a reverse mortgage
transaction, actually three. There is a company that originates
the loan. They're the one that finds the deals with the
customer.
Senator McCaskill. The marketers.
Mr. Bell. Well, they're all FHA-approved correspondents.
The marketers could be separate from the correspondents.
Correspondents may buy leads from a lead generation company
which is a whole other topic that we can get into.
Then there is the seller servicer who operates the loan
during the life of the loan. Once a loan is closed, the seller
servicer is the company that operates the loan. Then, of
course, on top is the investor which at this point is usually
Fannie Mae. Fannie Mae purchases 100 percent of the HECM loans
at this point, with the exception of the small number that have
been going into Ginnie Mae securities, which is emerging as an
alternative to Fannie Mae. This is a very important
alternative, I might add, because Fannie Mae has been pushing
its yield requirements upward and that's had an adverse impact
on consumers.
So the introduction of the Ginnie Mae, which it was said in
the prior panel, just started this year but it's actually been
in effect for a couple years now, provides major relief and an
opportunity to work with other investors than Fannie Mae.
Senator McCaskill. OK. I guess the point I'm trying to make
about proprietary versus--you know, you just went through the--
you got the front group--I shouldn't call it the front group.
The originating organization, you have the servicing
organization, and then you have the investor.
Mr. Bell. Right.
Senator McCaskill. The investor is us, right?
Mr. Bell. No.
Senator McCaskill. It's the taxpayers?
Mr. Bell. No, not true at all.
Senator McCaskill. Well, it----
Mr. Bell. Well, I guess now that we own Fannie Mae, yes,
but prior to the taxpayers taking over Fannie Mae,----
Senator McCaskill. Well, we own it now. The success of
Fannie Mae is completely dependent upon the American taxpayers,
right?
Mr. Bell. Well, the success of Fannie Mae is based on its
prudence in acquiring loans.
Senator McCaskill. I should say the risk associated with
Fannie Mae is the taxpayers' risk.
Mr. Bell. That is correct.
Senator McCaskill. We learned that. We've learned that.
Fannie Mae began to go belly up and we had to step up and
provide the money. So we've learned unequivocally that the
taxpayer is the one that has to step in if Fannie Mae
flounders.
So what I'm trying to figure out is if this is a good
product--you know, I get people calling me all the time and say
to me, you know, Claire, why doesn't the Federal Government get
its big nose out of the private market? You know, we just get
government out of business, business would thrive in this
country.
But clearly this is a product that people are making money
off of, but the only risk really if these mortgages don't work
is with the government right now.
Does the originator have any risk? Is there any risk at all
associated with the originator?
Mr. Bell. There is risk right down the line. There's the
risk that if the loan is not made properly, HUD might not issue
an insurance certificate on it. If the investor purchased a
loan that it thought was to be an FHA-insured loan and it turns
out that it is in fact not an FHA-insured loan, the seller
servicer would be required to purchase that loan back from
Fannie Mae. So it is at risk for funding it there and then
would have some recourse back to the correspondent that it
acquired the loan from, as well. So there is risk along the
way.
Senator McCaskill. There's risk if they don't do it right?
Mr. Bell. There's risk if they do not do it right.
Senator McCaskill. OK. But I'm talking about risk in terms
of investment risk, in terms of the loan not being able to in
fact be repaid. Is there any risk at all with the originator--
--
Mr. Bell. Well,----
Senator McCaskill [continuing]. In terms of the loan not
being repaid?
Mr. Bell. Well, let's talk about the loan itself as opposed
to the origination. There is a chance that when the loan
becomes due and payable, that the balance due on it could be
greater than the value of the house at that time. In a normal
market, we're not in a normal market now but let's assume a
normal market for a moment, that might occur if there were a
confluence of three factors.
The borrower living longer and staying in the home longer
than had been anticipated, outliving the actuarial tables, or
(2) the property value declining below the expectation at the
time of underwriting, or (3) interest rates shooting up beyond
the expected interest rate which is based upon a long term
interest rate. While you might have any one of those factors
occur in any particular loan, the chances of having all of
those factors in a loan are rare and, once again, this is a
pooled insurance program.
It's not the taxpayer that's at risk. It's the FHA
Insurance Fund. The Insurance Fund----
Senator McCaskill. Well, why aren't proprietary--then why
aren't there proprietary loans being made now----
Mr. Bell. Because----
Senator McCaskill [continuing]. If there's no risk?
Mr. Bell. Because there's not enough volume out there for
somebody to make the investments--to pursue this.
Senator McCaskill. Well, these companies have the
investment. They're doing HECMs now. Why don't they do
proprietary?
Mr. Bell. They are not the same systems that required for
HECMS as for proprietary loans because HUD provides software
for HCMS. The other reason is that the proprietary market, when
it was there, once again I mentioned before it was for much
higher-value homes.
The difference is on FHA, because there is mortgage
insurance, if the loan is upside down at the end, the investor,
the lender, has the opportunity to file a claim with FHA for
the difference. It means that they advance more money than they
would on a proprietary product that didn't have that insurance.
Senator McCaskill. Yeah. Because the government is on the
hook, they can make more money upfront.
Mr. Bell. No, no.
Senator McCaskill. Yes.
Mr. Bell. No.
Senator McCaskill. Because they can make--they can loan
more money because they're not taking the risk, Mr. Bell.
That's exactly the point. That's the whole reason this front
end has become incredibly scrutinized right now, because the
back end--and by the way, as we pointed out in the last panel,
there's a long tail here.
We have lots of reverse mortgages that have been made that
we will not know in this current market whether or not they are
upside down maybe for another 5 or 10 year, when we could have
interest rates up and property values down.
Mr. Bell. We do know that we've had reverse mortgages that
we've made since 1989 that have paid off completely and have
been extremely profitable to the U.S. Government putting
billions of dollars into the FHA Fund. This year, for the new
budget, the Secretary has decided to ask for credit subsidy
based on some new changes to the assumptions of home price
depreciation for the 2010 book of business as well as interest
rate assumptions. But, if you look at prior years, the program
was considered to be extremely cash positive, so much so that
the Department itself, under the prior Administration which was
a pretty fiscally conservative Administration,----
Senator McCaskill. We might quarrel about that.
Mr. Bell. Right. I guess--as I heard myself saying that.
Senator McCaskill. I don't think so.
Mr. Bell. But in this particular program, it was. They were
even talking about reducing the mortgage insurance premium
because one of the criticisms of the program is that consumers
pay a large upfront charge to get involved in these loans and
the most significant portion of that upfront charge is the
mortgage insurance premium that's paid to the Federal
Government. It is not the fees that are paid to the lender
which are capped.
Senator McCaskill. Which, by the way, this is an equal
opportunity sin. You are exactly right. I discovered when we
started looking into this product that part of the problem was
Congress's voracious appetite for more money to spend. They
love this product, the appropriators do, because we're able
with CBO scoring to actually create money for us to spend today
based on these loans being executed.
So it is--and that's why I think it is another reason that
we need to take a careful look at this product because I ran
into appropriators when I was trying to limit this, they were
wanting to take the roof off because they love having this
money to spend and they're spending it every year. We're
spending it every year that are coming from these loans. This
is not sitting off in some insurance fund. They're spending it.
They're spending it.
So I think that--but I think the overall point I was trying
to make was that the risk here for these loans being upside
down is not being borne by the private market, even though the
private market is out there marketing them.
Let me ask you this. Do any of your members do commercials
that say this is a government benefit?
Mr. Bell. A government benefit, no.
Senator McCaskill. None of your members have any
commercials----
Mr. Bell. If they do that--if they did that and--it is to
be reported to us, we would take swift action through our
Ethics Committee. We have done that on a number of occasions.
Now, some of them may say that it is an FHA-insured reverse
mortgage, which is factually correct, but to say it's a
government benefit is completely unacceptable, misleading. It's
a violation of our Code of Ethics and Professional
Responsibility. It's part of our Ethics Advisory Memoranda, and
we do take action against anybody that does have ads of those
sorts.
Senator McCaskill. I promise I've got questions for both
Mr. Claggett and Mr. Zeman, but I have one more question, Mr.
Bell.
Are you aware why in the recently passed legislation the
House exempted reverse mortgages on all the Truth-in-Lending
requirements?
Mr. Bell. Yes, there has been a tendency over time to adopt
legislation to deal with mortgages across the board and
includes reverse mortgages. Then we find very often it doesn't
work because reverse mortgages are so different.
For instance, a lot of the concern about predatory lending
is with negative amortization mortgages. So if you were to say
that reverse mortgages come under a prohibition on negative
amortization mortgages, that would be the immediate end of
reverse mortgages. A reverse mortgage is a negative
amortization mortgage by definition. That's the whole concept
behind it.
So because of that, lawmakers have decided that rather than
just taking forward mortgage concepts and applying them across
the board to reverse mortgages, reverse mortgages really need
to be handled differently. They're a very different product.
The only thing they have in common with mortgages, with
forward mortgages is the word ``mortgage''. They are very, very
different type of instruments.
Senator McCaskill. Well, both of them embrace an obligation
to pay.
Mr. Bell. They do, but they have a lot of different
aspects. Once again, just taking a forward mortgage policy--I
use the taxes and insurance escrow as an example, just taking a
forward mortgage concept and applying it to a reverse mortgage
means that consumers that might benefit from the reverse
mortgage would be precluded from getting it, so that really
doesn't serve anybody's purpose.
Instead the decision has been to deal with reverse
mortgages in a separate regime than is handled for forward
mortgages.
Senator McCaskill. Well, the AARP brought this to our
attention, that they had been left out of the legislation,
reverse mortgages, and I'm sure that you will be happy to work
with us in the Senate to make sure that we put appropriate
measures in this consumer-oriented bill in terms of protecting
consumers that do appropriately apply to reverse mortgages.
I think the problem is, is that if we're dealing with the
subject matter of consumer information and making sure a
consumer is informed, you may be well and right that an escrow
for insurance and taxes is not something that must be included
in reverse mortgage, but it would not surprise you to know that
there might be people that may not realize that the reverse
mortgage did not include the payment on insurance and taxes and
those go unpaid and then you've got a situation where that
homeowner is in fact--has not been fully informed.
Mr. Bell. Right. We do try to make sure that all borrowers
understand their obligations to pay taxes and insurance. There
is a form that is often part of the closing package that
reminds them of that. It is something that comes out with
reminder notices and servicing notices that go out monthly.
In fact, we're working with HUD to make that a required
practice, rather than a voluntary practice. Counselors also are
another backstop in making sure that people understand their
taxes and insurance are an obligation.
Senator McCaskill. Well, the motivation for the insurance--
I know when I entered into mortgages, the bank requires that
they can document the insurance is paid, but the problem with
reverse mortgages is if there's no insurance on the home and
the home burns down, who is responsible for paying back the
loan?
Mr. Bell. That would probably be a claim to FHA at that
point.
Senator McCaskill. It would be the taxpayer's.
Mr. Bell. The loan would become due and payable.
Senator McCaskill. The taxpayers have an interest in that
piece of property being insured. They're on the hook.
Mr. Bell. Once again, it's not the taxpayers' money, it's
the Insurance Fund, which has been paid for by those people who
have utilized the program through the mortgage insurance
premiums that they pay into the Fund.
Senator McCaskill. But the point is, is that that money is
not being provided, I mean, and by the way, it's just like
social security or any other government-insured program. If the
money is not there, the taxpayers pay. If those insurance
premiums are not sufficient to cover the losses, the taxpayers
pay and so what I'm saying is there is a great motivation on
the part of the government to make sure that the tax--not just
the taxes are paid but clearly the insurance is paid. That
would be important.
Mr. Bell. There's no question there's a great motivation on
everybody's part to make sure the taxes and insurance are paid.
I have no argument with you on that.
Senator McCaskill. OK. Let's talk about this rate spread
and the rate lock.
Would you go into that a little bit more, Mr. Zeman, and
explain what has happened recently that has changed the rate
payment and the cost of these loans to the consumer?
Mr. Zeman. Peter may be of some help here, too.
Frankly, I never had to know about this. I learned about it
in January and February, about rate locks, the elimination of
rate locks and the introduction of yield spread premiums.
As I said in my testimony, I thought the cap on origination
fee meant that was the most a lender could earn, but I have
come to understand that that's entirely different and it's very
complicated.
Fannie sets a price, par price for the loans it will
purchase from the lenders. It used to be that they'd lock in
that rate. We'd know what that rate was in plenty of time for
the loan to close. Now we don't know that rate.
As a counseling problem,--I realize I'm jumping around
here. As a counseling problem, I can't know what Fannie Mae's
par rate is. I don't know why that's not public information,
but I can't know that. If I can't know that, how can I
adequately advise my borrowers? If the rates change, how does
the borrower know the reason for that rate change? Is it
because of the marketplace pressures? Very likely it could be,
but it's a chance for an unscrupulous lender to make more
money.
An interesting quirk to this that I've learned is that a
borrower taking out a lot of money at closing potentially
benefits the lender who has sold the loan at a higher rate than
par in a great way.
An abuse I heard of from a lender was that one of their
sales people encouraged the borrower to take out a lot of money
at closing, money that the borrower didn't need, did not need
access to at that point. Well, that's a very unwise decision
for the borrower. They'd be better off perhaps leaving the
money in the line of credit in their HECM loan. To take it out
would seem to have only benefit then in that case to the lender
who now gets a payment of a yield spread premium.
But again, Peter, I know you've got more knowledge about
this yield spread premium issue than I do.
Senator McCaskill. I'm really interested as to why it
changed.
Mr. Bell. Well, what changed are, first of all, a number of
things. Getting back to our conversation a few minutes ago
about Fannie Mae, the taxpayers being on the hook for Fannie
Mae, Fannie Mae is under legislative mandate to reduce its
holdings. They can grow through 12/31 of this year and
beginning next year, they have to shrink by 10 percent every
December. When Fannie Mae buys a reverse mortgage, they're
buying a loan that grows in asset value as the balance grows.
Therefore, Fannie has decided that it really needs to not
be as actively involved in the reverse mortgage business as it
has been and the only way to do that is to draw other investors
into the market. Other investors felt they've been crowded out
because Fannie Mae had such a lower cost of funds that other
investors were unable to compete with them to enter the market.
So Fannie decided that it was going to push its yield
requirements upwards in order to reach a level where other
investors may be interested in coming in and purchasing HECM
assets.
But the other part of that is not just a matter of picking
a number and pushing it there, they moved to live pricing.
Capital is a commodity. It's no different than gold, wheat, and
soybeans. It has a market price. That market price is
constantly moving. The cost of capital is constantly moving.
So Fannie moved, as part of this effort to draw other
investors into the marketplace, to a live pricing system
whereby their yield requirements are constantly changing in
responses to market movement.
When a lender commits to an interest rate on a loan, it
does not know exactly what the price will be on the day that
the loan closes because you don't know exactly the amount of
time--a HECM typically takes 6 to 8, sometimes 10 weeks--to go
from application to closing. So, therefore, you can have a lot
of movement in the pricing.
So the lender may end up earning a correspondent fee that
gives it some benefit if the yield requirement is lower on the
day they finally close and deliver the loan. They might also
pay a discount and lose money on that loan if it happens to be
higher on that day.
It's a dynamic market. Believe me, nobody's happy about it.
It's made it more challenging for just about everybody involved
in the business and it's made it much more challenging for us
to serve seniors, but it is----
Senator McCaskill. But it is----
Mr. Bell [continuing]. Just a fact of reality of the
capital markets.
Senator McCaskill. But it is true that it creates an
incentive for someone who is not scrupulous to push a borrower
to pull more money out because they will make more money if
they do, correct?
Mr. Bell. That could be. That would be a violation of our
Code of Ethics and Professional Responsibility. Once again, a
responsible lender would not do that and we would take
sanctions on any reports of lenders doing that.
Usually when the borrower's taking out the full amount of
money, there's one of two things going on in probably upwards
of 90 percent of the cases where this happens.
One is they're paying off an existing mortgage amount and
they need that full amount of money to eliminate that other
mortgage. The other thing is it might be a fixed rate HECM
which is a relatively new development in the marketplace and
the lenders require a full withdrawal on a fixed rate HECM for
the following reason.
If I know how much money you're taking, if I know you're
taking a $150,000 from your HECM and that's it, that's the
amount available, I could price that, I know my cost of money.
But if you have a $150,000 available and you say I want to take
$50,000 today and I don't know when I'm going to take the rest,
I'll leave the rest in a line of credit, I might come back in
three years, I might come back in six years, I might come back
in nine years and draw it down, I can't do that on a fixed rate
because I don't know what my cost of money will be at that
point in time.
So I could lock and fix today for the full amount you're
going to take, but I can't do that if it's going to be a line
of credit.
The department just asked us to work with them to come up
with a hybrid HECM that will give a fixed rate for the amount
that's drawn upfront but a variable rate for the future draws
which would accommodate that issue.
Senator McCaskill. Is there any sense of the people in the
rooms you're sitting with in Washington that--I mean, I'm--I'm
not a dumb person. I'm pretty smart. I've got a law degree.
I've spent a lot of time in law practice and in the
legislature, and I have spent a year and a half trying to
completely understand this and this is complicated and the
yield spread issue is complicated and what Buz is telling you
is that he's a good counselor and he is telling you that he
cannot counsel seniors with any certainty about how much these
loans are even going to cost him prior to the time they sign
away their life savings.
Mr. Bell. Well, no, they know prior to closing. There's a
full disclosure with full numbers----
Senator McCaskill. Do they get counseling again?
Mr. Bell [continuing]. Prior to counseling. They can go
back to the counselor----
Senator McCaskill. No.
Mr. Bell [continuing]. If they choose to.
Senator McCaskill. But they're not required to.
Mr. Bell. They are not required to.
Senator McCaskill. So what----
Mr. Bell. You can add a second step to the counseling
process if that would be desirable.
Senator McCaskill. How about if we just make lock-in rates?
Mr. Bell. Well, the problem with locking-in rates, as, you
know, that's been done----
Senator McCaskill. We used to do it.
Mr. Bell [continuing]. Historically--yes, and then we had
periods where no money was available because the locks were
below where the cost of capital was.
Senator McCaskill. Well, I----
Mr. Bell. That's why most governments do not set interest
rates anymore. In fact, that's why HUD does not set the
interest rates or the margin rates on HECMs.
Senator McCaskill. They're using Libor?
Mr. Bell. I'm sorry?
Senator McCaskill. Are they using Libor? Is that what
they're using?
Mr. Bell. HECMs are allowed to be done with either a CMT, a
Treasury, based on the 1-year Treasury, or based on the Libor.
However, Fannie our sole investor announced earlier this year
that they will no longer buy CMT based loans. Therefore, they
have forced the whole industry to use Libor, but Libor actually
yields lower interest rates and as a result a higher benefit to
borrowers than did the CMT.
Senator McCaskill. Well, I think that obviously the follow-
up to this hearing, once of it is with Fannie to talk about
what is going on as relates to these loans because I worry that
in the process of adjusting to this market, that we're shifting
the risk to taxpayers completely and totally, and second, we're
making it so much more complex for seniors to truly understand
where they stand and what they're getting into and what the
consequences are to them and their families.
After all, that's how we began down this road. It started
as an idea to make it a simple, understandable transaction that
would be affordable for seniors to access some of their equity
to deal with the problems they're facing, and if we get to the
point that one of the best counselors in the country on this,
first of all, doesn't even understand what's going on, doesn't
understand how to explain it to the people as to what's going
on with the rates, and the rate is a pretty important component
of this whole thing, I think we've got an issue.
I think somebody in Washington needs to go, wait a minute,
I think we are so caught in the weeds of this market and the
cost of money and what's going on in this economy that we're
losing sight that seniors aren't getting the information they
need and deserve before they enter into these instruments.
Mr. Claggett, would you comment on that in terms of the
people you're talking to? Have you dealt with clients that have
had problems with these mortgages?
Mr. Claggett. Your Honor, we have--currently, we have two
cases that involve some of the issues we're talking about
today. One is a client who didn't understand that she would
have to escrow her taxes and insurance and that's went for
several years and ultimately the lender paid it and now is
insisting that she pay it back, so there's a threat of
foreclosure there.
We have another client that didn't understand that she
wasn't going to get the full appraised value of her house when
she took out a reverse mortgage and was understandable upset
when she learned it was about half of that money, and on a
variation of the case that you mentioned with Mary Heinzer
who's being represented by Lewis Rice and Fingersh under our
Legal Services Pro Bono Program, on a variation of that
situation, this particular client that we're handling, she took
out a reverse mortgage that paid off a forgivable loan that was
for home repairs and sort of to add insult to injury that work
was done in connection with that forgivable loan was done in a
shoddy workmanlike manner.
So as in Ms. Heinzer's case where the money was released
and all leverage over the contractor to fix the problem is now
gone, that's similar to what was happening in this client's
situation, as well.
Senator McCaskill. Mr. Zeman, let me try to finish up here.
Right now with the rate not being locked and knowing that
you're counseling, what's the average amount of time that
passes between the time you counsel someone and the time they
close one of these loans?
Mr. Zeman. We usually don't know that for sure. The
approach to counseling that I take is to do an intake, set up a
counseling session probably about a week later. It gives me a
chance to get a packet to them ahead of time so that they can
review the materials. Then we do the main counseling session. I
follow up a few days later to follow up on any specific
questions.
But most typically, that's the end of the counseling
process. The client is on their own, if you will, from then on
and may or may not decide to proceed with the loan. I'm
available to be called. In some cases, I will make it a point
to call. The cases I follow up and make such points are usually
cases that involve somebody eligible for public benefits. I
want to make sure that they pursued those.
So I typically will not know how long it takes or when the
loan closes.
Senator McCaskill. How did you discover that you could no
longer tell someone what the comparative price of this
obligation was going to be as compared to, for example, a home
equity loan? I mean, I would assume that's part of the
counseling, that there's a variety of ways you can try to get
at your equity in your home.
One is a traditional home equity loan, and I would assume
that these people would want to know how much is a home equity
loan going to cost versus how much is a reverse mortgage going
to cost.
Mr. Zeman. Absolutely. Now, I can tell them a lot. I work
up comparisons, but they really are guesses. I don't know,
can't know exactly what they're going to encounter when they go
to the marketplace to choose a lender.
In some cases, they've talked to a lender first and so they
may have an idea of what that lender offers. In this current
marketplace, though, the variety of costs, the variety of
margins out there from lender to lender could vary considerably
and you may find a few that still offer lock-ins or you may
not.
So again, the challenge for me to explain it to a client is
I don't know exactly what the marketplace is going to be like.
I don't know what you're going to get charged as far as a rate.
I can give you these estimates and projections, but, boy, is it
a challenge.
I would have a difficult time--I'm pretty knowledgeable,
and I would have a difficult time knowing whether or not I was
going to get the best deal from a given lender in this
marketplace.
Senator McCaskill. I do think we've still got work to do on
the counseling and the testimony today and, Mr. Bell, I
appreciate the efforts that your organization is making in
regards to counseling. I certainly know that counseling is
incredibly important in this area.
I think it's important to remember that we're not there. I
mean, when the GAO does a secret shopper program and I believe
his testimony was 14 out of 15 or 15 out of 15? 15 out of 15
counseling sessions that GAO sat in were not sufficient in
terms of information that was provided, whether or not they
were actually counseling for the amount of time they were
charging for, all of those issues.
If you're 15 for 15 in a secret shopper program, then I'm
not sure the seniors are getting the kind of help they need
before they enter into one of these loan agreements, and I
think Congress has a responsibility to make sure that we
continue to maybe institutionalize the GAO Secret Shopper
Program so that the counselors know that in any given moment
the person sitting across from them could be someone that is
going to be passing judgment on whether or not they're doing an
adequate job of informing seniors of all the risks and the
rewards that come with the reverse mortgage.
Mr. Zeman. There's actually a well-thought-out Secret
Shopper Program that AARP has been working on since 2006. It's
on the shelf now, but I was involved in it. It's ready to go.
It's not just targeted at finding inadequate counselors--
although that would be a major important step to find all the
egregious errors, but the effort is designed to work with HUD
and improve counseling.
A second shooper would have the occasion to praise a
counselor for the great work, he covered everything, or you
might have missed these few things and here's how to do it
better, or you need to go back to a training session, and we've
got one to offer to you to help you get all this information
down a little bit better.
So it doesn't necessarily have to be totally punitive, but,
boy, once this study gets out, I guarantee you that most
counseling agencies are going to be looking a lot more closely
at HUD regulations and what is required.
Senator McCaskill. I'll be anxious to follow up with HUD IG
on a follow-up to the GAO's efforts at assessing counseling.
It's a little bit like the appraisals. If we aren't getting
good appraisals, we have fraud. If we aren't getting good
counseling, we're going to have people that get caught up in
situations that they're not prepared to handle.
I want to thank all of the witnesses today. I appreciate
you being here. I think that my closing comments would be that
to any senior that is looking at a reverse mortgage go
carefully, go thoroughly, make sure you understand all the fine
print, and remember the most important thing that you can ever
know whenever you're embarking upon any kind of financial
transaction, if it sounds too good to be true, it usually is.
Thank you very much.[Applause.]
[Whereupon, at 11:07 a.m., the hearing was adjourned.]
A P P E N D I X
----------
Prepared Statement of Senator Mel Martinez
Good morning. Thank you, Senator McCaskill, for holding
this important hearing today. Reverse mortgages are unique
financial instruments that have risen in popularity in recent
years. Although these products have been around since the
1970's, they are little understood by the general public. I
hope that we can use today's hearing to shine some light on
reverse mortgages and the positive effect they can have on our
aging population.
According to the American Housing Survey, nearly twenty-
five million American homeowners have no mortgage debt, and
more than twelve and a half million of them are sixty-five or
older. For many elderly homeowners, the equity in their homes
represents their largest assets. Reverse mortgages offer unique
financial flexibility for America's fast-growing aging
population. While traditionally, reverse mortgages have been
used to provide for the most basic living expenses, such as
food, medicine or home repairs; today's retirement-age
population is seeking more creative financial planning tools to
help guide them through their golden years.
A reverse mortgage is a smart, accessible option for older
adults in need of long term care. Long term care is expensive.
An average nursing home stay costs more than 70,000 dollars a
year in my home state of Florida and in many states across the
country. The average cost for a home health aide ranges from
$19 to more than $30 dollars an hour. When one is in need of
these services, it is comforting to know that a reverse
mortgage can be utilized to help pay for these valuable
services.
By using financial planning tools like reverse mortgages,
life insurance, and long term care insurance many seniors are
able to afford the quality care they need without relying on
Medicaid for long term care. By ensuring these options are
available, the federal and state governments are helping
seniors age with the dignity and independence all older
Americans deserve.
As with many financial tools, I understand that there have
been instances of predatory practices involving reverse
mortgage products. Congress must have absolutely no tolerance
for the unscrupulous actions of individuals or companies.
The recent housing crisis has shed light upon the fact that
many consumers entered into complex financial arrangements that
they did not fully understand. It is important to recognize
that consumers are only able to make sound decisions when armed
with good information. Instead of limiting financial options,
we should ensure the transparency, availability, and accuracy
of financial information.
Reverse mortgage programs are an important tool used by
many Floridians. In fact, in the last fiscal year alone,
Florida witnessed a one-hundred and sixteen percent increase in
the number of home equity conversion mortgages. As these
products continue to increase in popularity, Congress has a
responsibility to ensure that our elderly are properly
protected while still given every opportunity to make the
personal financial decisions that are right for them.
Thank you.
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