[Senate Hearing 113-61]
[From the U.S. Government Publishing Office]
S. Hrg. 113-61
LONG-TERM SUSTAINABILITY FOR REVERSE MORTGAGES: HECM'S IMPACT ON THE
MUTUAL MORTGAGE INSURANCE FUND
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
HOUSING, TRANSPORTATION, AND COMMUNITY DEVELOPMENT
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING HECM'S IMPACT ON THE MUTUAL MORTGAGE INSURANCE FUND
__________
JUNE 18, 2013
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon MARK KIRK, Illinois
KAY HAGAN, North Carolina JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota
Charles Yi, Staff Director
Gregg Richard, Republican Staff Director
Dawn Ratliff, Chief Clerk
Kelly Wismer, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
______
Subcommittee on Housing, Transportation, and Community Development
ROBERT MENENDEZ, New Jersey, Chairman
JERRY MORAN, Kansas, Ranking Republican Member
JACK REED, Rhode Island BOB CORKER, Tennessee
CHARLES E. SCHUMER, New York PATRICK J. TOOMEY, Pennsylvania
SHERROD BROWN, Ohio MARK KIRK, Illinois
JEFF MERKLEY, Oregon TOM COBURN, Oklahoma
JOE MANCHIN III, West Virginia DEAN HELLER, Nevada
ELIZABETH WARREN, Massachusetts RICHARD C. SHELBY, Alabama
HEIDI HEITKAMP, North Dakota
Jason Lallis, Subcommittee Staff Director
William Ruder, Republican Subcommittee Staff Director
(ii)
?
C O N T E N T S
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THURSDAY, JUNE 18, 2013
Page
Opening statement of Chairman Menendez........................... 1
Opening statements, comments, or prepared statements of:
Senator Moran................................................ 2
WITNESSES
Lori A. Trawinski, Senior Strategic Policy Advisor, AARP Public
Policy
Institute...................................................... 3
Prepared statement........................................... 22
Odette Williamson, Staff Attorney, National Consumer Law Center.. 5
Prepared statement........................................... 27
Ramsey L. Alwin, Senior Director, Economic Security, National
Council on Aging............................................... 6
Prepared statement........................................... 35
Peter H. Bell, President and Chief Executive Officer, National
Reverse Mortgage Lenders Association........................... 8
Prepared statement........................................... 39
(iii)
LONG-TERM SUSTAINABILITY FOR REVERSE MORTGAGES: HECM'S IMPACT ON THE
MUTUAL MORTGAGE INSURANCE FUND
----------
TUESDAY, JUNE 18, 2013
U.S. Senate,
Subcommittee on Housing, Transportation, and
Community Development,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 10:05 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Robert Menendez, Chairman of the
Subcommittee, presiding.
OPENING STATEMENT OF CHAIRMAN ROBERT MENENDEZ
Chairman Menendez. Good morning. This hearing of the
Subcommittee on Housing, Transportation, and Community
Development will come to order. Thank you all for being here
today to help us address the long-term sustainability of
reverse mortgages and better understand their impact on the
Mutual Mortgage Insurance Fund.
The bottom line from my perspective and where I come from--
certainly for the people of my State of New Jersey--is about
protecting seniors. We all see television commercials promoting
reverse mortgages, and we all know that they are becoming
increasingly popular, and rightfully so.
We also know that because of declining home values and
longer loan life than expected, there are real concerns about
HECM and its portfolio, that it could lead the FHA to draw on
Treasury to fund the Mutual Mortgage Insurance Fund.
In the 1980s, the need to provide housing assistance as
individuals aged became an important issue, and Congress
responded with the creation of the Home Equity Conversion
Mortgage, or HECM, as part of the Housing and Community
Development Act of 1987. The goal was to allow seniors to age
in place, to have the option of remaining in their homes and
pay for expenses that they may not otherwise have been able to
afford. It is an important financing tool for seniors and
clearly, in my view, is a good program. But as always, someone
seems too willing to game the system and take advantage of
seniors to turn a profit.
As a result, too many seniors have found themselves victims
of fraudulent and deceptive lending practices. I anticipate our
witnesses will help us answer some of these questions. How do
we get a handle on this problem? And what can we do to ensure
seniors are able to age in place? What can we do to promote
long-term sustainability for reverse mortgages as well as the
Mutual Mortgage Insurance Fund?
In November, the FHA released its Mutual Mortgage Insurance
Fund report showing a shortfall in FHA loan programs, including
the HECM reverse mortgage program. HUD called for enactment of
legislative authority to adopt by Mortgage Letter three reforms
to improve loan performance in the FHA reverse mortgage
program: financial assessments of borrowers, tax and insurance
set-asides where necessary, and limiting the draw at
origination to mandatory obligations.
One of the challenges HUD has faced in managing the HECM
program has been its inability to move swiftly in making
programmatic changes that could enhance the security and
financial performance of the Mutual Mortgage Insurance Fund.
Under current law, changes to HECM program would have to go
through the rulemaking process, which could take up to 2 years
to be implemented, and it seems to me we simply do not have the
time to wait for this process. In my view, we have to give FHA
the authority to modify the HECM program through the issuance
of Mortgage Letters, which could be implemented in a matter of
months, not years.
Because HUD insures these loans for lenders, the increasing
cost to taxpayers has also grown, potentially forcing HUD to
consider scrapping the popular program, so Congress must act
now.
To protect our seniors, I introduced S.469, allowing the
FHA to implement much needed reforms, give them the authority
via Mortgage Letter to reduce the amount of money borrowed to
sustainable levels, perform financial assessments to determine
if a HECM loan is affordable, and establish tax and insurance
set-asides through escrow accounts with lenders to prevent
foreclosures.
I firmly believe that giving FHA the authority to make
these much needed changes will expedite FHA's ability to ensure
long-term sustainability for reverse mortgages, and I hope our
panelists will address this issue.
While we certainly understand that there is much more work
to be done to address the issue of reverse mortgages, I believe
we must pass this legislation to begin the debate, not end it.
With that, let me welcome--I think this is our first
hearing--my distinguished Ranking Member, Senator Moran. I look
forward to working with him on this and other issues and his
remarks, and then we will proceed with our panel.
STATEMENT OF SENATOR JERRY MORAN
Senator Moran. Mr. Chairman, thank you very much. I look
forward to working with you on this and other issues as well on
our Subcommittee and the full Banking Committee and on the
Senate floor, and I thank you for calling this Subcommittee
hearing to discuss the Home Equity Conversion Mortgage program.
For generations, Americans have had the impression that
homeowner is the financial cornerstone of our society. A 30-
year fixed-rate mortgage remains one of the country's most
solid investments, yet an American's ability to access the
wealth they have accumulated in their home may be damaged if
steps are not taken to improve the administration of the
reverse mortgage program.
Since the first reverse mortgage program was made more than
50 years ago in Fairway, Kansas, American seniors have utilized
this program in increasing numbers, and it is clear that it is
a very popular program. It is critical that the potential
tremendous strain that the HECM program has placed on the FHA
Insurance Fund is addressed in a very meaningful way.
When FHA operates in a safe and viable manner, many
deserving borrowers get the assistance they need to make their
homeowner dream a reality. That assistance is jeopardized by
the current financial status of the Mutual Mortgage Insurance
Fund and the role that the HECM program has played in that
function.
So I think that you are right, this conversation is
critical. We need to make certain that not only is home
ownership possible for millions of Americans but that the value
and equity in that home can be accessed without tremendous
exposure on the part of the American taxpayer.
I look forward to hearing the testimony of our witnesses,
and I thank you for that opportunity.
Chairman Menendez. Thank you, Senator Moran.
All right. Well, let me welcome and introduce our
panelists:
Dr. Lori Trawinski is the senior strategic policy advisor
at AARP's Policy Institute. She is an economist and an expert
on the bond market.
Odette Williamson is a staff attorney with the National
Consumer Law Center, where she heads the Elder Rights
Initiative.
Ramsey Alwin is senior director of economic security at the
National Council on Aging.
And Peter Bell is the president and CEO of the National
Reverse Mortgage Lenders Association.
Thank you all for being here. I am going to ask you to more
or less summarize your written testimony in about 5 minutes or
so. Your full testimony will be included in the record, without
objection, and we will start with Dr. Trawinski.
STATEMENT OF LORI A. TRAWINSKI, SENIOR STRATEGIC POLICY
ADVISOR, AARP PUBLIC POLICY INSTITUTE
Ms. Trawinski. Chairman Menendez, Ranking Member Moran, and
Members of the Subcommittee, thank you for the opportunity to
testify on behalf of AARP on the long-term sustainability of
reverse mortgages and HECM's impact on the Mutual Mortgage
Insurance Fund.
As the largest nonprofit, nonpartisan membership
organization representing people age 50 and older, AARP
advocates for policies that enhance and protect the economic
security of older Americans. AARP has had a long history of
involvement with the Home Equity Conversion Mortgage program.
Throughout the life of the program, we have continued to
advocate for consumer protections and to develop policy
recommendations to address the changes in this market. We are
honored to be here today to present our views.
The fact that the Mutual Mortgage Insurance Fund may
require an appropriation from Congress in fiscal year 2013 is a
serious matter. The largest driver of MMI Fund losses is the
sharp decline in house prices, combined with the large number
of loans originated during the height of the market, higher
loan proceeds and the lower mortgage insurance premiums that
existed previously, the fund experienced a major shock. HUD has
already taken steps to address this by lowering principal
limits in 2009 and again in 2010 and also by raising up-front
mortgage premiums on the standard product and ongoing premiums
on both standard and saver products.
It is important to understand that making changes to the
current program will shore up the fund going forward, but these
changes are unlikely to eliminate losses from loans made in the
past.
We suggest the following steps be taken to strengthen the
HECM program and the MMI Fund:
Tax and insurance defaults must be addressed. Nearly 10
percent of active HECM loans were in technical default for
nonpayment of property taxes and/or homeowners' insurance as of
2012. Given that defaults have been a problem since the
beginning of the HECM program and that this problem has been
well documented for over a decade, a resolution, while not an
emergency, is long overdue. AARP supports the use of financial
assessments to examine a borrower's ability to pay property
charges and ongoing expenses. However, we do not believe that
credit scores should be part of the financial assessment;
rather, the determination should be whether borrowers have the
ability to meet their obligations, and this should be
determined after taking the cash-flow from the potential
reverse mortgage into consideration.
We believe the public should have the opportunity to
comment on the specifics of proposed changes during the normal
rulemaking process to ensure that proposals contain adequate
consumer protections and are reasonable.
AARP recommends that HUD be required to evaluate the HECM
program every 2 years and report to Congress. HUD has failed to
act to address problems with the HECM program in a timely
manner. We believe that regular evaluation and reporting to
Congress will provide HUD with much needed encouragement to
address problems that will ultimately protect the program and
taxpayers.
Regulations are needed to ensure that consumers receive a
loan that is best suited to their needs. To that end, the
Consumer Financial Protection Bureau should promulgate
suitability rules. In the current environment, lenders are
permitted to recommend any loan product without regard to the
needs or objectives of the borrower.
Lenders have also been able to control access to products
in this marketplace without having to provide complete
information regarding product availability and loan types of
consumers. By the time consumers reach a housing counselor,
they have already made a decision about which loan to pursue.
Consumers need more information up front about the full range
of products that are available.
HUD should also conduct a study on HECM for purchase fraud
to determine its prevalence and should develop stronger
consumer protections for borrowers who engage in HECM for
purchase transactions.
And, finally, AARP urges the Consumer Financial Protection
Bureau to conduct a study on the appropriate marketing of FHA-
insured reverse mortgages. Recent changes in the marketing of
these mortgages indicate a shift from advocating their use as a
tool to help older Americans age in place to a financial
planning tool to be used as a type of investment portfolio
insurance when investment values fall, or, to put it another
way, to hedge their portfolios.
Another suggested use has been as a means to finance a
delay in filing for Social Security benefits. Here, consumers
are encouraged to leverage their homes to be able to collect
higher Social Security benefits later--a risky strategy at
best.
AARP supports making changes to the HECM program to ensure
its long-term sustainability and to protect both borrowers and
taxpayers. We strongly believe that the program changes should
occur through the regular public rulemaking process. Consumers,
stakeholders, and the general public deserve to have the
opportunity to provide comments on proposed rules. AARP
supports the continuation of the HECM program, and we look
forward to working with Congress and stakeholders to ensure
that older Americans can tap their home equity with Government-
insured reverse mortgage loans that enhance their ability to
age in place.
Thank you for the opportunity to share AARP's views. I
would be happy to answer any questions.
Chairman Menendez. Thank you.
Ms Williamson.
STATEMENT OF ODETTE WILLIAMSON, STAFF ATTORNEY, NATIONAL
CONSUMER LAW CENTER
Ms. Williamson. Mr. Chairman, Ranking Member Moran, and
Members of the Subcommittee, thank you for the opportunity to
testify regarding the long-term sustainability of reverse
mortgages and HECM's impact on the Mutual Mortgage Insurance
Fund. We offer our testimony on behalf of our low-income
clients.
Reverse mortgages can enhance the economic security of
older homeowners, especially those who lack sufficient income
or assets to meet their everyday needs. The very purpose of the
HECM program, as outlined by the statute, is to reduce the
effect of economic hardship caused by increasing costs of
health care and housing and to provide for subsistence needs at
a time of reduced income. When used as designed, reverse
mortgages allow older homeowners to age in place and remain in
their community indefinitely until they need skilled care or
other housing.
Reverse mortgages, however, are expensive when compared to
other options. The costs and terms are not easily understood by
even the most sophisticated consumer. The challenges consumers
face in the reverse mortgage market have only increased in the
past few years as the long-term costs of the loans have
increased and the range of options offered have become more
complex. Thousands of older homeowners have taken out reverse
mortgages that are unsuitable to meet their needs. Many such
homeowners face premature eviction from their homes because
they often do not have sufficient resources to pay for taxes
and insurance, to maintain the property, or to meet unexpected
expenses.
The long-term sustainability of reverse mortgages and the
HECM program will depend on how we address the risks that are
posed by the aggressive marketing and sale of these complex
financial products to older Americans. Strong protections for
consumers are essential to minimize the risk of default and
fraud. We support efforts to fully fund and strengthen the
quality and content of the counseling that is provided to
homeowners. However, counseling alone is not adequate to
protect consumers. Without additional protections, the older
homeowners the program is designed to help will be seriously
harmed, and the HECM program will continue to be destabilized
and weakened.
HUD has stated that it will take actions in the near and
long term to ensure that consumers are protected and able to
sustain their reverse mortgages and to better protect the fund.
We support HUD's efforts in this regard and urge even more
action to better protect consumers in the marketplace.
Specifically, we recommend that HUD make changes to the
HECM program to ensure that future borrowers are able to afford
property taxes and insurance on an ongoing basis and that
existing homeowners facing default are given a better
opportunity to save their homes.
In addition, protections must be added to the HECM program
to prevent the eviction of the nonborrowing spouse. These are
often the younger spouses of the homeowner who is titled on the
mortgage.
Protecting the homeowner for whom the program was designed
will strengthen the economic value of the program and stop the
depletion of resources from the fund.
In conclusion, we believe that reverse mortgages provide a
real benefit to many older homeowners struggling to meet day-
to-day expenses. However, these mortgages are complex and
subject to abuse, and stronger measures are needed to protect
consumers, stabilize the program, and prevent further depletion
of the fund.
Thank you. I look forward to your questions.
Chairman Menendez. Thank you.
Ms. Alwin.
STATEMENT OF RAMSEY L. ALWIN, SENIOR DIRECTOR, ECONOMIC
SECURITY, NATIONAL COUNCIL ON AGING
Ms. Alwin. Chairman Menendez, Ranking Member Moran,
esteemed Members of the Subcommittee, my fellow witnesses, and
guests: On behalf of the National Council on Aging, I
appreciate the opportunity to testify today.
NCOA is a nonprofit service and advocacy organization whose
mission is to improve the health and economic security of
millions of older adults, especially those who are vulnerable
and disadvantaged.
The HECM product is an important tool for retirement
planning. With the right consumer protections and comprehensive
counseling, it can be a lifeline for some older adults,
allowing them to age in place with dignity.
Today I am here to talk about important ways to sustain and
improve the HECM program and the required counseling. If I may,
I would like to start by sharing a brief note from one of
NCOA's HECM counseling clients.
``After completing our session today, I breathed a sigh of
relief. I told my son that it feels so good to have someone who
is advocating for me instead of for the company. I understand
so much more after speaking with you. I absolutely agree that
reverse mortgages are not for everyone, but after listening
today to you and after all my research, I think I am a very
good candidate. Sincerely, Mrs. Violet P.''
My remarks today are grounded in our research and our
experience as a HECM counseling intermediary assisting older
homeowners like Mrs. P., a mother and a widow.
There are three issues that I will discuss:
First, as you examine the HECM, remember that it was
designed for seniors with modest incomes, many of whom are
underserved by the financial industry. We estimate that about
44 percent of our reverse mortgage borrowers have income below
200 percent of the Federal poverty level, or roughly $23,000
annually for a single individual.
Changes to the HECM should not come at the expense of
seniors of modest means for whom the program was originally
designed. As people live longer, there is an increased
responsibility to adequately plan for future financial
security, and home equity is a part of the solution.
The issue for many low- to modest-income seniors today is
not whether to tap this asset but when and how. Older
homeowners considering a HECM loan, many of whom are widowed or
divorced, do so for many reasons, including additional income
to plan ahead for emergencies and to pay for home repairs or
improvements. When used wisely, these loans can help people
stay independent longer.
Second, HECM counseling is critical to the product's long-
term viability. Access to unbiased counseling ensures that
consumers are protected. NCOA has been a HUD-approved HECM
counseling intermediary for 6 years. We view our role in
consumer education to be of utmost importance. Growing numbers
of older homeowners will need guidance on reverse mortgages, so
we urge you to adequately fund HECM counseling.
Additional support for research using the data collected
through the counseling process will help strengthen consumer
protections and reduce the risk of loan default. As the baby-
boomer generation ages and the age for reverse mortgages
declines, we know that these loans are becoming a part of
retirement planning.
Of course, borrowers must meet their ongoing obligations,
including paying property taxes and insurance. However, it will
be important to ensure that changes to the program, such as
financial assessments, tax and insurance set-asides, or
limitations on the up-front draw, do not become overly
restrictive so a HECM remains a viable option for seniors with
modest incomes for whom the program was originally designed.
Third, increasing the strength and sustainability of HECM
requires greater consideration for counselor training. As
policy changes impact the industry, adequate time and resources
for HECM counselor training must be considered.
HUD has made important improvements to the counseling,
strengthening the consumer protections. For instance, recently
HUD made it easier for homeowners to learn about public and
private community benefits by requiring HECM counselors offer
an NCOA BenefitsCheckUp screening. This has helped identify
over $378 million worth of annual benefits for seniors, helping
some defer or avoid a HECM altogether. For those who have
difficulties paying property taxes or insurance, the
BenefitsCheckUp tool screens borrowers for 160 tax relief
programs across the country and in every State, and 31
insurance programs. It also screens for prescription drug,
utility, food, and transportation assistance. The average
potential borrower identifies over $5,000 in annual reoccurring
benefits.
In conclusion, NCOA believes that the long-term viability
of the HECM program will be enhanced through a balanced
approach that ensures strong oversight but also supports
continued collaborative research and development. We need
strong consumer protections, but also want to give the older
homeowner the flexibility to meet their evolving financial
needs.
We thank Senator Menendez for his leadership and the
introduction of bill S.469, which would give HUD the tools it
needs to act quickly to ensure we continue on the right path.
Thank you again for this opportunity to share NCOA's
research and insights into HECM and the older homeowners who
consider these loans. I welcome the opportunity to answer any
questions you may have.
Chairman Menendez. Thank you very much.
Mr. Bell.
STATEMENT OF PETER H. BELL, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NATIONAL REVERSE MORTGAGE LENDERS ASSOCIATION
Mr. Bell. Mr. Chairman, Ranking Member Moran, thank you for
convening this hearing.
The issues surrounding reverse mortgages bring a key
question into consideration: How do we finance longevity?
Most Americans have inadequate savings. The Bi-Partisan
Policy Commission noted recently that older homeowners had at
least 55 percent of their net worth tied up in home equity.
HECM is a critical tool for utilizing that equity.
I was asked to address five topics in 5 minutes, so I am
going to roll through them very quickly.
One, programmatic challenges of HECM. The complex economic
environment the past few years has had a significant impact on
how homeowners utilize reverse mortgages. Individuals
approaching retirement found themselves unexpectedly out of
jobs prematurely and facing mortgage payments they could no
longer afford. As a result, HECMs were used to pay off their
mortgage and eliminate monthly payments, preserving their
ability to sustain themselves in their homes.
While this strategy has helped numerous some, it has also
caused stress to the program. The combination of up-front lump
sum draws and diminished income from job loss left some
borrowers challenged in meeting their obligations to pay taxes
and insurance. When coupled with diminished home values, the
HECM program has experienced new stresses, previously
unforeseen, as a result of this confluence of factors.
Number two, need to address and improve consumer
protections. The HECM program has several important consumer
protections inherent in its design. Every prospective borrower
must go through a counseling session prior to submitting a
formal application to a lender. The program also has other
consumer protections, including required disclosures and limits
on fees. That being said, three changes that HUD would like to
implement--financial assessment, principal limit restrictions,
and tax and insurance set-asides--would not only protect the
fund but also provide another level of safeguards for
consumers. These provisions might preclude some applicants from
obtaining HECMs, forcing them to make the difficult decision to
move out of their homes. However, these changes are designed to
eliminate prospective borrowers who are less likely to have a
successful experience with their HECM loans.
Number three, benefits of HECM loans to seniors who are
able to age in place. America faces a growing crisis. By 2030,
there will be 72 million adults 65 and older, accounting for 19
percent of the population. Social Security replaces only 40
percent of preretirement earnings, and most Americans have
inadequate savings to sustain themselves through retirement, a
phase that is growing in duration as longevity increases.
In some cases, homeowners utilize a HECM to pay off an
existing mortgage, freeing up cash that has been used for
monthly payments so it could be used for other expenses. Other
homeowners are establishing lines of credit as a standby
reserve for expenses they might have trouble paying otherwise.
Some utilize HECMs to make home improvements designed to create
an environment in which they can age in place. Some borrowers
choose to receive fixed monthly payments to supplement their
other income on an ongoing basis.
Number four, the impact of HECM on the Mutual Mortgage
Insurance Fund and potential changes to protect taxpayers. The
HECM program was the product of much forethought, and the
program's designers at HUD did a tremendous job in developing a
helpful and flexible loan product. The Department should be
commended for this.
What could not be foreseen when the program was conceived
was the deep drop in home values that recently occurred,
coupled with widespread loss of jobs. This tandem occurrence
led to an increase in the number of HECM borrowers utilizing
the program in emergency situations. To deal with the stress
this has created, HUD would like to implement three changes:
First, financial assessment of loan applicants. This would
be a form of underwriting, assessing each applicant's sources
of funds and expenses to ascertain that the prospective
borrower has sufficient resources to meet their obligation to
pay property charges, including taxes and insurance, while
having enough money left to cover normal living expenses.
Second, principal limit utilization restriction. HECM loans
perform best when funds are drawn down slowly over a longer
period of time. Unfortunately, a confluence of factors over the
past few years has resulted in a disproportionate number of
borrowers drawing down all available funds at closing. This
results in loan balances growing larger than if funds are drawn
over time.
A principal limit utilization restriction would allow
borrowers to only draw enough at closing to pay off existing
liens, plus the costs associated with obtaining the loan and
some modest stipend for current expenses. NRMLA believes this
is a sensible change that will lead to a higher degree of
success among borrowers and reduce the risk to the fund.
Third, set-asides for taxes and insurance. To help avoid a
situation where a borrower is unable to pay taxes and insurance
in the future, FHA is planning to important the requirement for
a set-aside of some of the proceeds. A set-aside is essentially
the reverse mortgage equivalent of an escrow in a forward
mortgage.
Five, other opportunities to improve the Home Equity
Conversion Mortgage to ensure long-term sustainability for the
program, consumers, and the fund. The changes to the program
under consideration by HUD should address the shortcomings that
have been identified. The challenge is that these changes must
be made by the full regulatory development process. This
typically takes a year and a half or more to complete.
The most productive action Congress can take right now is
to provide HUD with the authority to make changes on a more
expeditious basis so it has the ability to respond in real time
as it observes trends in the economy and patterns of behavior
among HECM borrowers and lenders.
The House recently passed a bipartisan bill to do this,
and, Senator Menendez, your bill, S.469, would do the same.
Some are concerned with vesting too much authority with FHA
by granting them the ability to make program changes via
Mortgagee Letter in lieu of regulations. I do not share this
concern.
I have worked with HUD on HECM issues for nearly 15 years
now and have always found the Department to be a responsible
steward of the program. HUD has collected feedback and
consulted with stakeholders before modifying any procedures. I
have no reason to doubt that such responsible leadership would
continue if HUD is given the authority to fine-tune the program
as economic conditions and program performance require it to do
so.
Thank you for the opportunity to appear here today. More
importantly, thank you for your support of the HECM program
over the years. I appreciate the opportunity to be here.
Chairman Menendez. Well, thank you all very much, and let
us start with exploring some of the issues.
I note items of conversion and items of diversion here in
terms of views, so let me try to see where maybe those
differences might be broached and if they are possible. And,
clearly, this is an important program because with the aging of
America, the explosion in the number of individuals who clearly
would look to use the equity in their home as a continuing
security for themselves and to be able to age in place is a
value, I believe, in our society. So we need to get it right.
So in that respect, it has been brought to the Congress'
attention--and some of you have mentioned it in support and
some of you I think have mentioned it in opposition, and so I
would like to flush it out a little bit--that assessing a HECM
applicant's financing may help lenders provide better product
options, though it may keep some households from receiving
access to what is a very popular program.
How can HUD and lenders develop an assessment framework
that balances HUD's fiscal solvency issues with fair access to
borrowers? What do you believe should be some of the factors
that should be addressed when assessing a borrower's ability to
pay back--or to afford, I should say, a HECM loan? And I open
that to anyone on the panel who wants to refer to it. Mr. Bell.
Mr. Bell. Basically what we are talking about here is
creating a new type of underwriting that is different than
forward mortgage underwriting. In forward mortgage
underwriting, what you look at is the income coming in and the
payment, and you basically see whether it is in a ratio that is
acceptable, that it is not consuming--that the payment does not
consume too much of the borrower's monthly income.
But when we are dealing with retirees, it is a very
different picture. First of all, there might not be income.
There might just be assets. So what we are looking at is not an
income underwriting but, rather, a cash-flow underwriting, and
the concept that is emerging is what we refer to as a residual
cash-flow analysis, where we start with the sources of income,
so there might be Social Security, there might be pension,
there might be income from employment still. Then we look at
the assets, which are presumed to be spent down in a straight-
line basis over the expected life expectancy--the expected life
of the borrower using the same life span that is used in the
TALC disclosure, which is a requirement of the HECM program.
And then we add in the funds that would be available from the
reverse mortgage. So that is their cash-flow coming in.
From that we would look at the costs for taxes and
insurance, deduct those out, and what we are left with is a
residual cash-flow. So the question becomes: Is that amount a
believable amount, can somebody live on that amount of money
that is left and cover all their other expenses?
Now, that would be a very subjective decision if we just
left it open for each lender to make that decision. So our
recommendation is that there is a standard for this in VA
underwriting, and that has been used for many years and that
works, where VA puts out an amount of income that is required
or what expenses are for various quadrants of the country. So
we would use that as the remainder, so that if the balance
after doing--if you take the income and assets and you deduct
out the property charges, is that amount left consistent with
what VA says somebody needs to live in that part of the
country? And if it is, we can make the loan. If not, then we
need to dig further.
Now, it may be that it turns out that that is negative, but
we have an allocation for groceries, but the individual may be
eligible for food assistance, which would eliminate their need
to pay that. Or there may be--even though we subtracted taxes,
they may be eligible for a tax deferral program, so then we
would be able to add that back in.
But the concept is to create this residual cash-flow
analysis so that we could ascertain the likelihood of success
for a prospective borrower.
Chairman Menendez. So let me ask you, Ms. Alwin, because I
listened to your testimony and you said that changes should not
come at the expense of modest-income seniors. Do you think that
that type of approach Mr. Bell just described would meet the
concerns of your association?
Ms. Alwin. NCOA feels that if the financial assessment does
account for the access to benefits program that were
mentioned--food assistance, utility assistance, property tax
relief--if that were considered along with the income, the
assets, that it would ensure modest-means individuals would
still have access to the tool. As I mentioned in my testimony,
the average potential borrower going through counseling
identifies about $5,000 worth of annual reoccurring public and
private community benefits. If you factor those benefits into
the equation of what they have available to ensure the
sustainability of the HECM, I think we would adequately address
and remain viable for modest-income individuals.
Chairman Menendez. I do not know if anyone else wants to
opine on this or not. I have another question or two, and since
it is only Senator Moran and I at this point, I am going to
extend the time a little bit, and then I will turn to Senator
Moran. Go ahead.
Ms. Williamson. Sure. I just wanted to comment. We, too,
would support using the VA's residual income test as a model,
with one key distinction to what has been said prior, and that
is, we would look at actual benefits that the homeowner
receives, not theoretical. So even though they may qualify for
a particular program, that does not mean that after the
application that they will actually receive that benefit. So if
they do get that benefit, then, of course, it should be
considered.
Chairman Menendez. Let me ask, most of reverse mortgage
loans are HECM loans, and the insurance provided by FHA on
these loans protects lenders from losses. The FHA Actuarial
Review says that without the loss protection provided by FHA
insurance, lenders would need to increase interest rates or
reduce the amount of equity borrowers can access in order to
cover the financial risks proposed by reverse mortgages.
What would be the impact on senior borrowers if the FHA
loss protection was, in fact, lost? Mr. Bell.
Mr. Bell. Yes. We did have a fledgling but growing
proprietary reverse mortgage market before the crash in
property values a few years ago, and there were some very good
attractive products that were brought to market. However, they
self-insure, so to speak, by doing a much more conservative
loan-to-value. And a lower loan-to-value works well without a
higher-value home, but if you apply a lower loan-to-value to
the lower-value homes that we do under the HECM program, you
are really not coming up with enough benefit to pay off the
existing indebtedness that people typically have on their
properties. So, therefore, you are unable to service them.
So the proprietary market really served homeowners with
homes that had values approaching $1 million and upwards, in
some cases perhaps $800,000, but for the most part it served
the higher end of the market. And you just do not get enough
benefit with enough security to entice investors if you do not
go conservatively on your loan-to-value.
Chairman Menendez. Very good. Senator Moran.
Senator Moran. Chairman, thank you.
How many lenders are in the reverse mortgage business? Is
this a wide group of businesses of lenders?
Mr. Bell. There are roughly, I believe, about 1,200
companies who have originated a HECM loan in the past year or
so. However, the large majority of them have done a handful of
the loans, and probably the top 40 lenders in the market
probably account for upwards of 50 percent.
Senator Moran. And is this the primary business of those
lenders.
Mr. Bell. It is a mix. Some of them are specialized
companies that focus on serving seniors in their communities.
Others are banks, credit unions, mortgage companies that offer
an array of products, but because they do have some clients to
whom the HECM would be beneficial, they choose to make those
available.
Senator Moran. How does a typical senior access this
program? What is their entree into originating a loan?
Mr. Bell. Very good question. They have two entry points.
They could start by talking to a lender. They may read an
article in the newspaper. They may see an ad on television.
They may talk to people. They may be referred by somebody at a
senior center. And they will go in and talk to a lender first.
Other times, some people do go directly to a counselor first.
A lender can explain to somebody how a HECM works and can
take some preliminary information from them to show them how it
might work in their case. But we are not allowed to actually
take and process a formal application nor are we allowed to
have the prospective borrower incur any expense until they go
out to counseling and meet with an independent counselor at a
HUD-approved counseling organization, complete the counseling,
and return to the lender with a counseling certificate signed
by both the counselor, and then when the prospective borrower
basically signs that certificate themselves, then they turn it
to the lender, and that can begin the process.
Chairman Menendez. Let me interrupt you, if I may. So that
means that every borrower----
Mr. Bell. Every single borrower, 100 percent----
Chairman Menendez. ----has to first have counseling before
they could ever----
Mr. Bell. Before they could formally apply and before they
could actually be subject to any expenses whatsoever. And then
once they have been through counseling, if they choose to go
ahead, then they return to the lender. They turn over the
counseling certificate, and at that point an appraisal is done
because everything is based on the value of the property. So
prior to that, there is no exact--you know, there is no
knowledge of exactly how much money will be available. It is
pretty much hypothetical at that point, perhaps based on some
statistical analysis of what the property's value is. But until
they come back from the counseling, we do not--we are not able
to incur the expense of the formal appraisal to really give
them a formal proposal and then have them make the full
application.
Senator Moran. Maybe to our other witnesses, the indication
by Mr. Bell was that some people see a counselor first. How
does that relationship develop?
Ms. Alwin. So as the only national aging organization that
is a HUD-certified intermediary providing HECM counseling, NCOA
works very closely with Area Agencies on Aging, AAAs, and Aging
and Disability Resource Centers, ADRCs. And our goal is to get
the word out about a HECM early and often to ensure that the
product is not an emergency crisis management tool. So our Area
Agencies on Aging and our ADRCs are out in the community. They
are the designated planning and coordinating entity in their
community as it relates to aging services and supports. They
are providing older Americans across the country supports on a
regular basis, and through their outreach efforts, they talk
with their vulnerable older adults about a range of public and
private economic assistance options. And so we try to get them
to engage older adults early to have a conversation about what
HECM is, what it means for their economic security, and when
and how they might infuse a HECM into their financial planning.
More often than not, those that come to our Area Agencies
on Aging to receive HECM counseling have already been touched
by a borrower, but our goal is----
Senator Moran. Touched by a lender?
Ms. Alwin. Excuse me, by a lender. Thank you. But our goal
is to provide some basic outreach so that individuals can
learned about the tool before they are touched by a lender.
Senator Moran. And a senior citizen in Kansas, they would
have an option of discussing this with somebody at the Area
Agency on Aging, somebody at a meal site, somebody at a
seminar. If you went to your local community bank across our
State, would somebody be there to describe this mortgage? Or is
it more likely that--I mean, my assumption is that you see the
ad on television, you get something in the mail. What do you do
with that? Does the typical senior pick up the phone and--I
have never paid attention. I assume there is an 800 number you
call.
Ms. Alwin. Lenders are required to share information on all
nine national intermediaries providing the HECM counseling.
NCOA, for instance, has a 1-800 number. We also have
information on our Web site. When a lender touches a potential
borrower, they are encouraged to inform them of all of their
counseling options.
Senator Moran. Again, this may be for Mr. Bell. I do not
mean to have you dominate the answers to my questions, but what
are the underwriting standards? Why is a loan made to someone
who is unable or unwilling to pay for their insurance on their
home or taxes? Is it that it starts out that they are capable?
I mean, the analysis done by the lender indicates that the
payments will be made for taxes and insurance, but financial
conditions change?
Mr. Bell. Yes, that is often the case of what we find on
the tax and insurance defaults. Of the universe of loans in
default now, one-third of them are tax defaults, one-third are
insurance defaults, and one-third are a combination of the two,
roughly. The insurance defaults tend to be in places like
Florida after hurricane seasons when insurers have either
dropped clients, dropped out of the market, or significantly
raised insurance rates; the flood areas in the Midwest. So
oftentimes we find the insurance defaults are a function of
them having an inability to obtain the insurance, not
necessarily through any willfulness to do it.
The taxes, we tend to, in underwriting--most lenders do--
take a look at their history of paying their taxes, and if
there have been problems in the past, then they may choose to
pass on that particular borrower. But if they have been paying
them all along, then there is no reason to determine that they
might not be able to pay them, particularly since their
financial situation should presumably be enhanced as a result
of getting the HECM and getting rid of the current mortgage
payment that they have.
Senator Moran. What is the average amount of the amount
advanced--what is the average amount advanced under a reverse
mortgage? What kind of dollars are we talking about?
Mr. Bell. It really varies. What we start with, a little
bit technical here but a quick lesson, we start with a concept
that we call the ``maximum claim amount,'' which is essentially
the value of the property at the time the loan is made, and
everything is calculated off of that. That is also the largest
amount that FHA will end up paying in a claim should--there is
where FHA's liability is--you know, that is the maximum they
are allowed to pay.
Then from that we have what is called a ``principal limit
factor,'' which is a percentage of that value that is available
to the individual borrower, and that comes from a table that
HUD provides. It is the same at every lender. And what that
table has is, down one side it has every possible interest
rate, 5, 5\1/8\, 5\1/4\, 5\3/8\, and across the top every age,
62, 63, 64. So what that table gives us is the percentage of
value that would be available to a borrower of a certain age at
the particular interest rate that is being used to underwrite
the loan. And that is the amount that is available to them in
the gross amount. From that they may have their fees for the
loan deducted, and that leaves a net amount that is available.
And then that net amount, they could either say I want to take
it all, I want to set it up as a line of credit, I want to take
fixed monthly payments, or any combination thereof.
Senator Moran. I may have missed this. Is there a maximum
amount that HUD guarantees?
Mr. Bell. HUD will allow a HECM to be underwritten against
the lesser of the actual value of the property or the FHA
national loan limit of $625,500. So if a home is worth
$400,000, the loan is based on $400,000. That is the maximum
claim amount, and there is a percentage of that value. If a
home is worth $700,000, then it is based on that $625,500.
Senator Moran. So the $625,500 is the maximum----
Mr. Bell. That is the top, and that is a temporary limit
that was set in place by the stimulus. That is 150 percent of
what the limit had been otherwise at $417,00.
Senator Moran. Thank you, Mr. Chairman.
Chairman Menendez. Thank you.
Just a couple of final questions. To follow up on Senator
Moran's questions about taxes and insurance, why would it not
make sense, since this seems to be collectively the most
significant element of default, why would it not make sense to
include just as in a typical mortgage payment taxes and
insurance so that seniors do not find themselves at the end of
the day hit with this challenge?
Mr. Bell. Well, the major difference is that we are not
collecting mortgage payments on a monthly basis. On a forward
mortgage, you are paying the taxes and insurance as part of the
monthly payment you pay in; whereas, the reverse mortgage does
not have a monthly payment feature. So there would be a
significant cost to putting that in place, and it raises a
number of other issues. For instance----
Chairman Menendez. You mean the collection of it would have
a cost?
Mr. Bell. Yes. If a borrower fails to pay their taxes and
insurance, that is a default situation. And the lender is
required to do a few things at that point. The lender is
required to advance the taxes on behalf of the borrower to
cover the property with insurance on behalf of the borrower and
to notify the borrower that it has done so and ask them to get
in touch with the supervisor about creating a repayment plan.
And also the lender is required to go to HUD at that point and
request permission to accelerate--in other words, to call the
loan due and payable, because that is a default.
So if we would move to an escrow where we would collect the
one-twelfth each month, if a borrower pays January and February
and misses the March payment, where are we? What does that
mean? April, they may pay a payment. They may pay two. June,
they miss again. So there are a lot of questions about how do
you handle defaults, how do you work those situations.
The reverse mortgage counterpart to an escrow, rather than
paying in, is what we call a set-aside. We do set-asides for
other things. For instance, if the appraisal says that the home
is not up to the minimum standards, and it says there is
$15,000 of repairs required, for instance, we set aside some of
the funds that would be available, and the owner can only use
those funds to make those repairs.
So what is being discussed is a set-aside for taxes and
insurance. It still remains to be seen whether you would do
that for what is the expected life of the loan entirely. Of
course, if you do that, then you are reducing the benefit to
the borrower, and they may not get enough money. Or do you do
that for a 2-year period or 3-year period so that if they fail
to pay, at least you have some other resource to work with
while you try to mitigate the situation?
So rather than collecting it in an escrow, the reverse
mortgage equivalent is basically to work with the funds
available through a set-aside.
Chairman Menendez. So how do others feel about the idea of
a set-aside? Ms. Alwin.
Ms. Alwin. So, again, it is a reasonable proposition to
ensure and protect all stakeholders involved. But, of course,
we would want consideration for those who are eligible and
enrolled in property tax relief programs. It is more economical
to stay in the home, to utilize the HECM as a part of your
broader economic security portfolio. But for those that are
eligible and enrolled in property tax relief, we would want to
make sure that is a part of the set-aside formula.
Ms. Williamson. We would also support having a set-aside,
especially for the homeowners who do not have residual income
on a going-forward basis to pay the property charges. So we
would support that as well.
Chairman Menendez. Does AARP have a position?
Ms. Trawinski. We support the concept of a set-aside for
taxes and homeowners' insurance. But you also have to
understand that some of the highest defaults of HECM loans are
in, for instance, Queens, New York, where the property taxes
are extremely high. So there is a balance; if you are going to
set aside taxes, you may eliminate the loan proceeds entirely,
depending on how you structure that. And that is why we believe
that proposals to change things like that should involve public
input.
Chairman Menendez. Now, Ms. Williamson, obviously, the
reason I interrupted Senator Moran, I just wanted to make
crystal clear that every borrower ultimately has to first go
through counseling before they ever get to actually borrow,
assuming they qualify. Yet in your testimony, while you support
counseling, you also said counseling is not enough to protect
seniors. Could you enumerate what you mean by that?
Ms. Williamson. Sure, absolutely. In our work on reverse
mortgages, we actually conducted a survey last August. This
survey was sent to thousands of elder advocates nationwide, and
we received responses from well over 100 reverse mortgage
counselors, elder advocates, some consumers as well. And one of
the trends that we noted from those responses is that there is
tremendous pressure from lenders when consumers walk into their
office on a variety issues, some of which we have highlighted
in our testimony today.
One of them is the pressure to remove the often younger
spouse from the title to the house so that the older spouse can
get a larger amount of proceeds. Those homeowners are inundated
with pressure from the lenders and other originators to say
that this is a good idea. They hardly ever understand that the
risk of doing that is that when the spouse who is on the
mortgage dies, the younger spouse would be evicted.
In our responses to that survey, a number of counselors
noted that homeowners are counseled, and if they follow up with
the homeowner 2 or 3 months later, they are oftentimes
surprised that the homeowners express, for example, an intent
to take out an adjustable-rate--or to exercise their
adjustable-rate option, but instead they went with the fixed-
rate, full-draw option. They are surprised that the homeowners
later on are not able to keep up with their property taxes and
insurance. So while we think that strong and effective
counseling is definitely necessary, we think that that is not
enough, and that there should be more substantive protections
added to the program to protect consumers in every aspect of
the lending process.
Chairman Menendez. Any other views on that issue? Ms.
Alwin.
Ms. Alwin. There is a rich data set behind the counseling
through the financial interview tool, which is a required
aspect of the counseling. The counseling has a 200-plus-page
protocol that is required. The financial interview tool was
implemented recently. It is a very robust questionnaire. Its
intent is to inform, and it asks questions in regard to the
potential borrower's intent. And then there is a 60-day follow-
up that counselors are required to conduct to see what the
outcome was.
At NCOA, we believe that if we take a closer look, spend
some time combing through that data, that could inform some of
the risk indicators in regard to the default. So I would really
encourage, as we move forward, a closer look at some of the
data collected through counseling, cross-walking it with some
of the default data so that we can begin to develop a data-
driven understanding of the risk factors.
Chairman Menendez. Mr. Bell, do you want to opine on that?
Mr. Bell. On the issue of the nonborrowing spouse, I would
like to follow up on something that Ms. Williamson said. Her
indication is that this is something that lenders are leading
borrowers into inappropriately. The issue of the nonborrowing
spouse is the subject of a lawsuit right now that is being
handled by the AARP Foundation on behalf of a couple of
plaintiffs. Our organization has filed an amicus brief on this,
and we have done quite a bit of research on it, and we have
filed, along with our brief, a number of affidavits from
borrowers who have basically come out and said that they have
done this for any number of reasons, that they have decided to
remove a spouse from title. Oftentimes it is because one member
of the couple is under the eligible age, is under 62 years old,
but they still are facing foreclosure on their current
mortgage, and the only way they could get the reverse mortgage
is to remove title to be able to stay in.
Other times they need a larger amount of money for one
reason or another. There might be a disparity of ages. You
might have one member of the couple that is, say, 66 and one
that is 72, and there is a considerably larger amount of money
available at age 72 than if you include the 66-year-old.
So this is a conscious decision that gets made in a number
of cases for purposes of generating a large amount of money. We
do not take it lightly. Lenders for the most part do not like
doing this. We urge prospective borrowers that are doing this
to discuss it thoroughly with their counselors. We generally
have disclosures that they sign acknowledging it, and in some
cases, we even--besides the disclosure, since we all know when
you close a mortgage, you sign tons of papers and who really
knows what they say? We actually have them write a handwritten
note explaining that they are doing this and why. We filed
examples of all of those along with our legal brief.
So it is a tough issue because there are a lot of reasons
people do it, and it is not necessarily a sinister thing that
goes on within the industry.
Chairman Menendez. Which brings me to one of three last
questions. Counseling seems to be obviously not only a
necessity here in order to qualify but so critically important.
Do we have enough resources for counseling for people in the
country?
Ms. Alwin. Unbiased counseling is essential, and HECM is
unique in that the counseling is required. We need adequate
funding to be appropriated to ensure that we have no-cost, low-
cost available counseling for all consumers.
In the current marketplace, it really is a mixed result in
that some of the counseling intermediaries do charge, and you
get what you pay for. And they charge at various rates,
anywhere from $125 down to, we have heard, $75 for a counseling
session that is intended to be quite comprehensive and robust.
And our counselors are very proud of the fact that their
counseling sessions often take 90 minutes or more to go over
the full range of issues and implications.
The reality is, with limited amounts of housing counseling
dollars over the past several years, our capacity has shrunk,
and, therefore, some of the counseling intermediaries must
charge. And that does have implications.
Chairman Menendez. Yes, Dr. Trawinski.
Ms. Trawinski. I just wanted to weigh in on the housing
counseling issue from a different perspective. Housing
counselors are not allowed to give advice or make
recommendations to borrowers. Their role is solely to educate.
And so this creates a somewhat unlevel playing field in that
lenders have the ability to recommend and suggest and say
whatever they would like to the borrower. But the counselors
are restricted in that regard, so it is important to understand
counseling is a vital tool, but the counselor's hands are tied
as to what they are able to say to a borrower.
Chairman Menendez. But if they give them a 90-minute
session in which you talk about the range of considerations you
should have, I would think it would be pretty significant,
because if we were to, to use your terms, you know, untie the
hands of counselors, we also would have to worry about a
counselor or counselors who would want to lead a potential
borrower to a certain product.
Ms. Trawinski. Right. I mean, it is----
Chairman Menendez. It is a mix.
Ms. Trawinski. It is a mix.
Chairman Menendez. My final two questions are--and maybe
Mr. Bell is the right person, but anyone is welcome to answer
it. As the housing market rebounds, is that going to take off
some of the pressure or create greater opportunity? Because,
obviously, you have referenced several times that part of the
challenge has been a housing market that has lost value. As the
housing market rebounds, what does that mean for this program?
Mr. Bell. Well, certainly, recovery in housing values helps
shore up the value of the fund. You know, a HECM relies solely
on the future value of the property for repayment. Unlike a
forward mortgage where there are payments coming in every month
and the balance is going down, in a reverse mortgage there is
no payment and the balance is going up.
So to the extent that the home appreciates over time, you
have a greater cushion. You have higher collateral. So, of
course, rising home values will put the fund in a much stronger
position.
Chairman Menendez. And then, finally, for any other
panelists--and I say this only--I have my own idea of what this
is, and I think it is pretty universal. But since we are
developing a record here, why is a program like HECM a good
public policy? What does it mean, for example, to all of us
collectively as a Government to allow people to age in place
versus maybe end up having to seek either public housing or a
nursing home or an assisted living facility in which the
Government obviously many times would contribute to that?
Anybody want to pursue that? Ms. Alwin.
Ms. Alwin. HECM really is an example of a public-private
success. The FHA insurance provides a protection for all
stakeholders, the ability to orderly--to allow a modest-income
individual the orderly drawdown on their home equity to
supplement their fixed income, allows them to age in their
home, as most seniors desire, and often staves off or avoids
institutional care, which often has implications for spend-down
in Medicaid. So it is a very cost-efficient solution that
allows our seniors to stay in their homes, stay in their
community, mixing public and private supports.
Chairman Menendez. Senator Moran.
Senator Moran. Is the only recourse on a reverse mortgage
loan the equity in the home? There is no personal liability
upon the death or departure of a person from their home?
Mr. Bell. That is correct. It is a nonrecourse loan.
Senator Moran. And I did not get an answer to the average
rate--or, I am sorry, the average amount of a reverse mortgage.
But what is the cost of a reverse mortgage as compared to the
cost of a traditional mortgage? If I borrow $100,000 on my home
or I am a senior and get an advance of $100,000 in a reverse
mortgage transaction, are the interest rates comparable? Are
the origination costs similar?
Mr. Bell. Yes, they are very comparable. An FHA forward
mortgage and an FHA reverse mortgage will have similar costs
associated with them. There is an origination fee, which is
formulaic by a formula set by the Congress, with a maximum of
$6,000. It is 2 percent of the first $200,000 of value and 1
percent of the balance of the value, with a cap of $6,000. So a
$400,000 home would be the max. Then there are your normal
costs for appraisal, title recording, and then there is
interest on the loan, and the interest rates, depending on what
type of loan people choose, will be more or less comparable to
what they are on forward mortgages.
Senator Moran. Are those interest rates fixed or variable?
Mr. Bell. The consumer has a choice of fixed or variable.
Historically, all HECMs had been variable, and Fannie Mae was
the investor, and they acquired all those loans and held them
in portfolio. As they received the mandate from Congress to
begin reducing their assets, they backed away from the reverse
mortgage business, and Ginnie Mae stepped up to the plate and
put a program in place, HMBS, a HECM mortgage-backed security.
The Ginnie Mae program paved the way for offering fixed-
rate HECMs, which seniors by and large seemed to want to get.
You know, people who remember the 1980s--I know I closed on my
home in September 1981, and my first mortgage was 16\5/8\
percent. People that remember that are often afraid of variable
rates, even though in a HECM situation it may be more
advantageous for the borrower to get that.
However, here is the catch: To get a fixed rate, the
borrower has to agree to take down all the funds up front. It
is a closed-end loan. They take the money at once. They could
pay it back at any time, but they cannot borrow it out again.
It is not open-end credit. It is closed-end credit. And the
reason for that is if I am a lender, if you come to me and say,
``I want my whole $250,000 that I am entitled to today,'' I
know my cost of funds, so I could give that to you. But if you
say, ``I am entitled to $250,000 and I want to take $50,000
today and I will come back at some unknown point in the future
for some amount of it,'' I cannot make a loan like that on a
fixed rate on today's interest rate. So if you want the line of
credit option, it needs to be variable rate; whereas, if you
want the fixed rate, then you have to take it all out up front.
And that is part of the issue we are dealing with right now.
The consumers are drawn to that. The execution on the Ginnies
is better, providing revenue to the investor, to the
originator. And as a result of the investor demand for those
products, there is an ability to waive all the fees to the
borrower. So the $6,000 origination fee that we discussed,
perhaps even the up-front mortgage insurance premium that needs
to be paid, in the current market, if someone was to take a
fixed-rate, full-draw loan, they may find that they do not have
to pay any of those fees.
Senator Moran. Are almost all the reverse mortgages paid at
the time of death as compared to--or departure from your home
as compared to somebody prepaying that loan?
Mr. Bell. No. I do not know the current statistics. At the
moment people tend to be staying in their homes longer than
they have historically just because it is harder--or had been
harder until the last couple months to sell homes. But
historically, as many ended in a mobility event, a move-out, as
did in a mortality event, a death.
Senator Moran. OK. And, finally, are these loans--well, two
questions. One, can you make a reverse mortgage without the FHA
backing? Do banks do that? Is that legally permissible?
Mr. Bell. Yes, it is legally permissible, and as I said,
there had been a proprietary market emerging back in 2007,
2008, and then it has gone away. My guess is we will begin to
see that return later this year or as we get into 2014,
assuming that home price stabilization continues.
Senator Moran. And, finally, do States regulate these
mortgages?
Mr. Bell. Yes, many States do have State laws that are
layered on top of Federal laws.
Senator Moran. Mr. Chairman, thank you.
Chairman Menendez. Well, let me thank all of our witnesses
for a pretty complete review of the issues related to HECM. I
think this is an important public policy option, one that we
need to preserve and enhance. We look forward to looking at the
House's legislation. Ours has a little bit more specificity
about some of it, but the opportunity to move forward may be
one that we will have to consider.
The record will remain open for 2 additional days for any
Member who wishes to submit any questions for the record. And
with the thanks of the Committee, this hearing is adjourned.
[Whereupon, at 11:11 a.m., the hearing was adjourned.]
[Prepared statements supplied for the record follow:]
PREPARED STATEMENT OF LORI A. TRAWINSKI
Senior Strategic Policy Advisor, AARP Public Policy Institute
June 18, 2013
Chairman Menendez, Ranking Member Moran, and Members of the
Subcommittee, thank you for the opportunity to testify on behalf of
AARP on the long-term sustainability of reverse mortgages and HECM's
impact on the Mutual Mortgage Insurance Fund. I am Lori Trawinski,
Senior Strategic Policy Advisor in AARP's Public Policy Institute.
As the largest nonprofit, nonpartisan membership organization
representing people age 50 and older, AARP advocates for policies that
enhance and protect the economic security of older individuals. AARP
has a long history of involvement with the Home Equity Conversion
Mortgage (HECM) program. In the mid-1980s, AARP supported the creation
of the HECM pilot program. Recognizing the need to protect older,
potentially vulnerable consumers from loss of home equity, AARP
advocated for the requirement that HECM borrowers obtain housing
counseling from HUD-certified providers prior to applying for a reverse
mortgage loan.
Throughout the life of the HECM program, AARP has continued to
advocate for consumer protections, conduct research on reverse mortgage
issues, and develop policy recommendations to address the changes in
this market. We are honored to be here today to present our views.
1. Programmatic Challenges of the HECM Program
Choice of Loan Proceeds Payout
The HECM program was designed to provide access to cash by allowing
homeowners age 62 and older to tap a portion of their home equity
without having to repay the loan as long as they lived in the house. It
was viewed as a tool to assist homeowners who wanted to age in place.
Borrowers could choose to receive their loan proceeds as a monthly
payment over time, a payment for a set period of years, or as a line of
credit to be used as needed. Within the line of credit option is the
option to take all proceeds in a single lump sum payment. At the onset
of the program, it was expected that most borrowers would choose to
receive a monthly payout over time to supplement their income. However,
by 2006 it was noted that borrowers more frequently chose the line of
credit option, and many borrowers drew a large amount of loan proceeds
early in the loan term. \1\ The HECM market changed further in 2009 as
securitization of HECM loans contributed to a major shift in borrowers
choosing loans with a fixed interest rate, which required them to take
all proceeds in a single lump sum payment at the onset of the loan. By
2010 nearly 68 percent of borrowers took proceeds in a lump sum and the
fixed-rate product has continued to dominate the HECM market.
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\1\ Donald L. Redfoot, Ken Scholen, and S. Kathi Brown, ``Reverse
Mortgages: Niche Product or Mainstream Solution?'' AARP Public Policy
Institute, December 2007, p. 56.
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Research indicates that many borrowers take lump sums because they
have existing mortgages that must be paid off as a condition of getting
the HECM loan. In addition, many borrowers are interested in using the
proceeds to pay off other forms of debt. \2\ Some of this need derives
from higher amounts of forward mortgage debt being carried later in
life than in the past, and an increase in the overall indebtedness of
Americans in general. \3\ Increasing use of full-draw lump-sum payouts
could also reflect a change in how reverse mortgages are marketed.
Whatever the underlying reason, borrowers who take the full draw on day
one of the reverse mortgage loan exhaust their borrowing capacity
immediately and have no access to future funds. In addition, interest
accrues on a large balance and accumulates rapidly.
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\2\ Barbara Stucki, ``Changing Attitudes, Changing Motives,
National Council on Aging and MetLife Mature Market Institute'', August
2011, p. 14.
\3\ Lori A. Trawinski, ``Assets and Debt Across Generations: The
Middle Class Balance Sheet 1989-2010'', AARP Public Policy Institute,
January 2013.
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Average Age of HECM Borrowers Is Decreasing
Also notable has been a decrease in the average age of borrowers
from 76 years old in fiscal year 2000 to 72 years old as of September
2012. Recent research found that of potential borrowers who received
reverse mortgage counseling in 2010, 46 percent were under age 70. \4\
These changes may indicate that people have a need for higher amounts
of money earlier in retirement, or even prior to retirement. Younger
borrowers who take out reverse mortgages have access to a smaller
percentage of their home's value, since the amount that can be borrowed
is based on the life expectancy of the youngest borrower. The concern
is that by drawing down home equity earlier, people will have no access
to additional cash later in life when they may encounter major health
problems or other emergencies that require financial resources. Also,
by waiting until later to take out the reverse mortgage loan, borrowers
would have access to a larger amount of funds.
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\4\ Ibid, p. 8.
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Tax and Insurance Defaults
Reverse mortgage borrowers are responsible for paying property
taxes, homeowner's insurance, and homeowners' association dues and
assessments as a condition of the loan and as specified in the mortgage
note. Failure to do so places the loan into default (delinquency)
status and unless these charges are paid, the loan will become due and
payable and the loan will go into foreclosure. According to HUD, 57,600
loans or 9.8 percent of active HECM loans were in technical default for
nonpayment of property taxes and/or homeowners insurance as of June
2012. Borrowers' nonpayment of property taxes and insurance is a
problem that has been well known for many years. In its evaluation
report of the HECM program to Congress in March 2000, defaults were
noted and it was suggested that HUD develop a loss mitigation strategy
for handling these situations. \5\ In 2010, the Inspector General of
HUD conducted an internal audit of the HECM program and found HUD was
not tracking almost 13,000 defaulted loans and that HUD had granted
deferrals on these loans and had no formal procedures in place
regarding how servicers should manage defaulted loans. \6\ In January
2011, HUD issued Mortgagee Letter 2011-1 that provided loss mitigation
guidance and procedures for dealing with delinquent loans.
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\5\ David Rodda, Christopher Herbert, and Hin-Kin Lam,
``Evaluation Report of FHA's Home Equity Conversion Mortgage Insurance
Demonstration'', Final Report, Abt Associates, March 31, 2000, pp. 53
and 62.
\6\ HUD Office of the Inspector General, Audit Report 2010-FW-
0003, August 25, 2010.
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Modeling Assumptions for Reverse Mortgages
Reverse mortgage models include assumptions about future home
prices, loan termination speeds, and mortality. The collapse of the
housing market and its aftermath was unanticipated and thus was not
accurately captured in the models used to calculate program risk. Since
many loans were originated during the height of the run-up in house
prices, many HECM loans are likely underwater, meaning the value of the
loan exceeds the value of the home. Sharp price declines translate into
higher loan losses if loans terminate prior to house prices recovering
to their level at the time of loan origination. This is the major
source of projected losses going forward. In addition, HUD's earlier
assumptions regarding mortality rates were too high, as it appears
borrowers have been living longer than originally projected and the
interaction between two borrowers was not estimated accurately. \7\ HUD
found that surviving borrowers are living longer and staying in the
home longer than predicted. As loans terminate more slowly than
predicted, the likelihood that loans will reach their maximum claim
amount and be assigned to HUD increases, and thus will require support
from the insurance fund. Future interest rates will also impact the
growth rate of loan balances for adjustable rate loans, and if interest
rates rise sharply, loans will reach their maximum claim amount sooner
and will be more likely to be assigned to HUD.
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\7\ National Reverse Mortgage Lenders Association Webinar on the
President's FY2014 Budget, April 12, 2013. Charles Vetrano, Deputy
Assistant Secretary, Risk Management and Regulatory Affairs, HUD
discussed this issue during the Webinar.
---------------------------------------------------------------------------
2. Need To Address and Improve Consumer Protections To Ensure Long-Term
Sustainability
Tax and Insurance Defaults
AARP believes the tax and insurance default situation must be
addressed. Given that this has been a problem since the beginning of
the HECM program, and this problem has been well documented for over a
decade, a resolution--while not an emergency--is long overdue. While we
support the idea of tax and insurance escrows or set-asides, the public
should have the opportunity to comment on the specifics of such program
changes during the normal rulemaking process to ensure that changes
contain adequate consumer protections and are reasonable regarding the
amounts to be escrowed or set aside.
Financial Assessments
One of the main features in the design of the HECM loan was that
income and credit history were not part of the underwriting process.
The thought was that older Americans--who have accumulated equity in
their homes over a period of many years--should have access to that
equity without having to sell their home or take out a home equity
loan. Many older homeowners with limited incomes would not qualify for
a traditional home equity loan, since it would require monthly
payments. Since the HECM loan did not require repayment as long as the
borrower lived in their home, the underwriting process was largely
based on the life expectancy of the youngest borrower, existence of
current liens on the property, and a verification that the borrower was
not in default on any Federal debt.
AARP supports the use of financial assessments to examine a
borrowers' ability to pay property taxes, homeowners insurance,
homeowners' association dues and assessments, and to be able to
maintain the property. However, we do not believe that credit scores
should be part of the financial assessment. Rather, the determination
should be whether borrowers have the ability to meet their basic living
expenses, financial obligations and property charges, and this should
be determined after taking the cash flow from the potential reverse
mortgage into consideration.
AARP believes it is important to ensure that following a reverse
mortgage, a borrower will have the ability to maintain payments for
their obligations; if not, the reverse mortgage should not be made.
Denying a loan may enable some homeowners to retain any equity they may
have, instead of merely staving off the inevitable loss of a home with
a loan that is destined to fail.
Suitability
AARP believes that the Consumer Financial Protection Bureau should
develop suitability standards and regulations regarding lender
responsibilities to provide assurance that borrowers take out loans or
find other alternatives that are best suited to their needs. Housing
counselors are prohibited from recommending any loan or other course of
action. Their role is to educate, answer questions and verify that the
borrower understands the basics of the loan. Lenders, on the other
hand, are able to recommend reverse mortgage loan products without
regard to the needs of the consumer.
Product Availability
In the past, many lenders only offered certain reverse mortgage
products to borrowers. The available loan products were: fixed-rate
standard loan, adjustable-rate standard loan, fixed-rate saver loan,
and adjustable-rate saver. However, many lenders only offered borrowers
the fixed-rate standard product. The National Reverse Mortgage Lenders
Association (NRMLA) recently issued Ethics Advisory Opinion 2013-1,
which directs its members to ``offer and describe the full range of
products and programs generally available in the marketplace that may
provide a bona fide advantage to such consumers.'' For the HECM
program, this means lenders would describe the standard adjustable,
fixed-rate saver, and adjustable-rate saver with potential borrowers.
Previously, the NRMLA Code of Ethics required its members ``to describe
to consumers the range of programs and products offered by the Member
that may provide a bona fide advantage to such consumers.'' While we
commend NRMLA for making this improvement, there is no enforcement
mechanism to ensure that this advisory is followed. In addition, all
reverse mortgage lenders are not NRMLA members. AARP recommends that
the Consumer Financial Protection Bureau consider promulgating rules in
this area to ensure that consumers are aware of all available products.
Housing Counseling
Housing counseling is a major component of the consumer protections
for reverse mortgages. We believe that opportunities to improve HECM
counseling remain. HECM counselors tell us that they often require two
or more hours to cover all topics required by the HECM counseling
protocol. In contrast, other counselors, and specifically many who
conduct counseling via telephone, manage to conduct a session in less
than one hour. We believe that this discrepancy may highlight a
potential problem with the consistency and quality of counseling, and
we urge HUD to monitor this situation.
HECM for Purchase Program Fraud
Older Americans are often targets of fraud and financial
exploitation. The reverse mortgage housing counseling program is
designed to help protect older homeowners from fraud. Unfortunately,
fraud sometimes occurs despite this safeguard. It seems that the HECM
for Purchase program provides an opportunity for fraudsters to convince
people to take out reverse mortgages on low-value, uninhabitable homes
based on inflated appraisals. People are told they can get a home for
free, fraudsters provide the downpayment funds and create a gift letter
as the source of the downpayment, and then obtain reverse mortgage
proceeds--in an amount that exceeds the amount of the downpayment they
had provided. \8\ Victims are then left with uninhabitable homes and
bills for property taxes, unaffordable repair and maintenance needs,
and homes that cannot be insured. AARP encourages HUD to conduct an
evaluation of the HECM for Purchase program to determine how to
strengthen safeguards in this area. Working with HUD fraud
investigators, the FBI, and the Financial Crimes Enforcement Network
(FinCEN) of the U.S. Department of the Treasury, HUD should be able to
measure the amount of fraud that has occurred within this program and
to modify the program to better protect consumers.
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\8\ Andrew Carswell, Martin Seay, and Michal Polanowski, ``Reverse
Mortgage Fraud Against Seniors: Recognition and Education of a
Burgeoning Problem'', Journal of Housing for the Elderly, Vol. 27: pp.
146-160, January-June 2013.
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Loss Mitigation
Additional funds should be allocated to foreclosure mitigation
counseling. Every effort must be made to assist borrowers who have the
capacity to become current on their property taxes, homeowners
insurance and homeowners association dues and assessments so that they
will not lose their home to foreclosure. HUD should expand the
repayment timeline for borrowers who are in default beyond the current
24 month repayment period. The current program has not reached the vast
majority of borrowers who are in technical default for failure to pay
property taxes, homeowners' insurance premiums, or both. Attention must
also be paid to borrowers who have failed to pay their homeowners
association dues and assessments, as these payments are vital to the
ongoing operation and maintenance of condominium associations.
Advertising and Marketing
Mass advertising of reverse mortgage loans should not be misleading
or deceptive. Advertisements for reverse mortgages should contain
explicit language that these products are loans, that borrowers must
meet certain obligations under the terms of the loan or they can be
foreclosed upon, and that celebrities are paid spokespersons.
Marketing of reverse mortgages through ``free lunch'' seminars
should be closely monitored, since reverse mortgages are often
presented as a means to pay for investment products at these seminars.
\9\ AARP urges the Consumer Financial Protection Bureau and State
financial regulators to monitor the use of free lunch seminars to
ensure that no inappropriate marketing or cross-selling of other
financial products is occurring.
---------------------------------------------------------------------------
\9\ AARP research found that reverse mortgages were mentioned in
the marketing materials or in the presentation 24 percent of the time.
See Lona Choi-Allum, ``Protecting Older Investors: 2009 Free Lunch
Seminar Report'', AARP Knowledge Management, November 2009.
---------------------------------------------------------------------------
Recent changes in the marketing of reverse mortgages have occurred
and may warrant further monitoring. Some lenders have suggested that
borrowers take out a reverse mortgage to delay claiming Social Security
at age 62. By allowing the Social Security benefit to grow, they
suggest that borrowers are better off. But these marketing tactics
often do not adequately present the long-term cost of the reverse
mortgage, and downplay the fact that the person is leveraging their
house. AARP is concerned about the negative impact on consumers that
may result from marketing reverse mortgages for this purpose.
3. Benefits to Seniors Who Are Able To Age in Place
AARP research has found that nearly 90 percent of people over age
65 want to stay in their home as long as possible. \10\ Aging in place
is the ability of people to live in their home as they age and retain
their independence in an environment that is safe and comfortable. The
benefits of aging in place to an individual include: the ability to
maintain a familiar environment; be part of a community; have
opportunities for social interaction to prevent isolation; higher life
satisfaction, happiness and self-esteem; and better physical and mental
health outcomes. To put it simply: people prefer to stay where they are
for as long as possible.
---------------------------------------------------------------------------
\10\ Teresa A. Keenan, ``Home and Community Preferences of the 45+
Population'', AARP Research and Strategic Analysis, Washington, DC,
2010, p. 4.
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But the benefits of aging in place do not accrue solely to
individuals, as Government budgets also benefit. The longer people can
remain at home, the less need there is for institutional care, such as
nursing homes. This translates into lower governmental costs. By
providing home and community-based services to assist people who wish
to remain in their homes, studies have shown that the costs are lower
compared with institutional care. \11\
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\11\ Wendy Fox-Grage and Jenna Walls, ``State Studies Find Home
and Community-Based Services To Be Cost-Effective'', AARP Public Policy
Institute, Washington, DC, Spotlight 2, March 2013.
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Reverse mortgages, when used properly, can provide some homeowners
with a source of funds to help them to age in place. Reverse mortgages
are often used to fund home modifications like ramps or other health-
related renovations and maintenance and repairs, or to pay for home
healthcare assistance.
4. Impact of the HECM on the Mutual Mortgage Insurance Fund and
Potential Changes To Protect Taxpayers
The FHA Mutual Mortgage Insurance (MMI) Fund only includes HECMs
issued since FY2009. HECMs issued in prior years are included in the
General Insurance Fund, and are not analyzed in the actuarial review of
the MMI Fund. Approximately 300,000 loans were included in the FY2012
actuarial review. While actuarial reviews provide a much needed
assessment of the health of the insurance fund at a moment in time, it
is important to keep in mind that the report is based on many
assumptions that may not prove to be true over time. If house prices
recover, the outlook for the MMI fund will greatly improve. As market
dynamics change, the outlook for the future also changes.
For example, the FY2012 actuarial review assumes that HECM saver
loans will make up 7.5 percent of HECM loans through 2019. However, HUD
recently eliminated the HECM fixed-rate standard product, which
accounted for 65-70 percent of HECM loans. If borrowers shift to the
HECM fixed-rate saver product, this will greatly impact the MMI Fund
projections. One impact will be lower inflows into the MMI fund as a
result of the much lower up-front mortgage insurance premium on the
saver product. However, the lower principal limits of saver loans will
decrease the long-term risk to the fund since saver loan proceeds are
lower.
Alternatively, if borrowers shift to the adjustable-rate standard
product, up-front premiums collected will be higher, but so will loan
payouts, and increased interest rate risk will affect the fund. In
short, there are a number of ever changing variables in a continually
evolving marketplace that impact the measure of the health of the MMI
Fund at any moment in time.
Problems with the current HECM program were discussed in Part 1
above and solutions are presented in Part 2 and Part 5 below. The fact
that the MMI Fund may require an appropriation from Congress in FY2013
is a serious matter. But it is important to understand that the largest
driver of MMI Fund losses is the sharp decline in house prices, the
large number of loans originated during the height of the market, and
the higher loan proceeds and lower mortgage insurance premiums that
existed previously. HUD has already taken steps to address these issues
by lowering principal limits in 2009 and again in 2010, and by raising
both up-front (on the standard product) and ongoing mortgage insurance
premiums (on both standard and saver products).
During a recent Webinar, HUD's Risk Manager indicated that the need
for funds from Treasury is a result of loans issued prior to 2009 and
it is unlikely the gap can ever be closed. \12\ Given this assessment,
the situation is not likely to be improved with a quick fix. It is
important to make changes to the current program that are responsible
and reasonable, with the understanding that shoring up the fund going
forward is unlikely to eliminate losses from loans made in the past.
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\12\ National Reverse Mortgage Lenders Association Webinar on the
President's FY2014 Budget, April 12, 2013.
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5. Opportunities To Improve the HECM Program
Implement Changes To Strengthen the HECM Program Including: Financial
Assessments, Tax and Insurance Set-Asides or Escrows and
Limitation of Up-front Draws for Certain Purposes Through
Public Rulemaking
AARP supports making changes to the HECM program that will enhance
its long-term sustainability by promulgating rules through the public
rulemaking process. We look forward to evaluating and commenting on the
specific program changes proposed to ensure that consumer protections
are adequate and access to credit remains for all qualified borrowers.
Require HUD To Evaluate the HECM Program Every Two Years and Report to
Congress
This testimony demonstrates that HUD has failed to act to improve
the HECM program when problems were identified. The tax and insurance
default issue should have been addressed years ago. Major shifts in
loan product usage should have led HUD to investigate and question why
this shift was happening so quickly. The management of this program
needs to be active and responsive when changes are observed. We believe
that regular evaluation and reporting to Congress will provide HUD with
much needed encouragement to address problems that will ultimately
protect the program and taxpayers.
Implement a Suitability Standard
Regulations are needed to ensure that consumers receive a loan that
is best suited to their needs. The CFPB should promulgate suitability
rules. In the current environment, lenders are permitted to recommend
any loan product, while housing counselors are prohibited from
providing advice. Consumer protections need to be strengthened in this
area.
Require Lenders To Present All Loan Products
Lenders have been able to control access to products in this
marketplace, without having to provide complete information regarding
product availability to consumers. Consumers need more assurance that
they are being treated fairly and have access to the full range of
products that are available.
Conduct a Study of HECM for Purchase Fraud
HUD should conduct a study on HECM for Purchase fraud to determine
the prevalence of this type of fraud. Working with HUD fraud
investigators, the FBI, and FinCEN, HUD should be able to measure the
frequency of fraud that has occurred within this program and to develop
stronger consumer protections for borrowers who engage in HECM for
Purchase transactions.
Urge the CFPB To Conduct a Study on the Appropriate Use of Reverse
Mortgages
Recent changes in the marketing of reverse mortgages indicate a
shift from advocating their use as a tool to help older Americans age
in place to a financial planning tool to be used as a type of
investment portfolio insurance when investment values fall, or as a
means to delay filing for Social Security benefits. The idea is that if
investment values fall, a borrower can use their reverse mortgage line
of credit to obtain funds, while not depleting their investment account
when asset prices are low. When asset prices recover they can repay the
loan. The inherent risk in this strategy is that the asset price
recovery must exceed the costs of the loan, which cannot be known in
advance. Likewise, the suggestion that someone should leverage their
house to obtain a higher Social Security benefit requires an analysis
that is dependent on many factors and might not result in a net benefit
to the borrower when loan costs are factored in. While use of reverse
mortgages for these purposes is not illegal, care must be taken to
ensure that the HECM program remains true to its original mission to
provide older homeowners with access to home equity through FHA-insured
reverse mortgages so they can age in place.
Conclusion
AARP supports making changes to the HECM program to ensure its
long-term sustainability and to protect both borrowers and taxpayers.
We strongly believe that program changes should occur through the
regular public rulemaking process. Consumers, stakeholders and the
general public deserve to have the opportunity to provide comments on
proposed rules. We urge Congress to require HUD to evaluate the HECM
program every 2 years and to act expeditiously to implement changes to
the program through the rulemaking process. AARP supports the
continuation of the HECM program and we look forward to working with
Congress and other stakeholders to ensure that older Americans can tap
their home equity with safe, affordable, Government-insured reverse
mortgage loans that enhance their ability to age in place.
Thank you for the opportunity to share AARP's views. I would be
happy to answer any questions.
______
PREPARED STATEMENT OF ODETTE WILLIAMSON
Staff Attorney, National Consumer Law Center
June 18, 2013
Introduction
Mr. Chairman, Ranking Member Moran, and Members of the
Subcommittee, the National Consumer Law Center thanks you for inviting
us to testify today regarding the long-term sustainability of reverse
mortgages and HECM's impact on the Mutual Mortgage Insurance Fund. We
offer our testimony here on behalf of our low income clients. \1\
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\1\ The National Consumer Law Center, Inc. (NCLC) is a nonprofit
organization, founded in 1969, specializing in consumer issues on
behalf of low-income people. On a daily basis, NCLC provides legal and
technical consulting and assistance on consumer law issues to legal
services, Government, and private attorneys representing low-income and
elderly consumers across the country. NCLC attorneys have written and
advocated extensively on all aspects of consumer law affecting elders
and low-income people, conducted trainings for tens of thousands of
legal services, private, and Government attorneys on the law as applied
to consumer problems facing elders, including housing, debt collection,
the electronic delivery of Government benefits, predatory lending, and
reverse mortgages, and provided extensive oral and written testimony to
numerous Congressional committees on these topics. NCLC attorneys
regularly testify in Congress and provide comprehensive comments to the
Federal agencies on regulations under consumer laws that affect elders.
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The long-term sustainability of reverse mortgages and the Home
Equity Conversion Mortgage (HECM) program will depend on how we address
the risks posed by the aggressive marketing and sale of these complex
financial products to cash-strapped, often debt-laden older Americans.
The market for reverse mortgages has changed dramatically in the last
few years and strong protections for consumers are essential to
minimize the risk of default and fraud. Without these protections the
seniors the program is designed to help will be seriously harmed, and
the HECM program will continue to be destabilized and weakened.
HUD has stated that it will take action in the near and long term
to ensure that consumers are protected and able to sustain their
reverse mortgages, and to better to protect the Fund. \2\ We support
HUD's efforts in this regard and urge even more aggressive action to
better protect consumers in the marketplace. We suggest changes that
will protect the FHA Mutual Mortgage Insurance (MMI) Fund from losses
and better align it with the goal of the program, which is to ensure
that elders age in place. Specifically, we suggest additional
protections on two key subject areas:
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\2\ See Dep't of Hous. and Urban Dev., ``Annual Report to Congress
Fiscal Year 2012 Financial Status of the FHA Mutual Mortgage Insurance
Fund'', November 16, 2012.
1. Taxes and Insurance. For both existing reverse mortgage borrowers
and future borrowers, HUD's requirements should ensure that
sufficient funds are available--either reserved from the
proceeds of the reverse mortgage, or from other assets of the
---------------------------------------------------------------------------
homeowner--to meet ongoing obligations for taxes and insurance.
2. Protecting Widowed Spouses. Reverse mortgages made to married
homeowners should comply with the law's requirement to treat
both spouses as borrowers, and ensure that the survivor is not
evicted upon the death of the spouse, even when the surviving
spouse was not an owner of the property.
Background: The Need for Enhanced Protections for Reverse Mortgage
Borrowers
Reverse mortgages provide a significant benefit to many older
homeowners, especially those who lack sufficient income or assets to
meet their everyday needs and do not qualify for lower cost options.
However, changes in the marketplace, including the aggressive marketing
of unsuitable loan options to cash-strapped, debt-laden older adults,
has put economically vulnerable homeowners at risk of default and
foreclosure. HUD has proposed a slate of interim and long-term measures
to stabilize the HECM program and shore up the Fund. \3\ While some of
the proposed changes are a good start, considerably more must be done
and stronger measures are needed to protect older homeowners, to
stabilize the program, and to prevent further depletion of the Fund.
---------------------------------------------------------------------------
\3\ See Written Testimony of Secretary Shaun Donovan, Hearing
before the Senate Banking Committee, Status of FHA Programs and the
FY2012 Annual Review of the Mutual Mortgage Insurance Fund, December 6,
2012; Dep't of Hous. and Urban Dev., Annual Report to Congress Fiscal
Year 2012 Financial Status of the FHA Mutual Mortgage Insurance Fund,
November 16, 2012.
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The HECM program was designed to meet the needs of older homeowners
by reducing the economic hardship that results from the increasing cost
of health care and housing, and by providing for subsistence needs at a
time of reduced income. \4\ Congress put in place safeguards to protect
economically vulnerable reverse mortgage borrowers from being forced
from their homes, paying more than the home is worth, and being denied
funds if the lender goes out of business. These and other protections
were designed to keep older adults housed in their community until they
die or need skilled care outside the home.
---------------------------------------------------------------------------
\4\ 12 U.S.C. 1715z-20(a).
---------------------------------------------------------------------------
The needs identified by Congress when it created the HECM program
still exist today and are exacerbated by the economic downturn in
recent years. Older adults, like the general population, are struggling
to deal with job loss, reduced wages, erosion of retirement savings,
and increased expenses, including those related to health care. \5\ The
unemployment rate for older adults (age 55 and over) has reached the
highest level in 60 years. \6\ At least one-third of older adults are
considered economically insecure, meaning that they are in danger of
outliving their resources. \7\ The situation is particularly dire for
African American and Latino elders, with 52 percent and 56 percent
respectively, considered economically insecure. \8\
---------------------------------------------------------------------------
\5\ See, e.g., Fidelity Brokerage Services, Retirees face
estimated $240,000 in medical costs, May 16, 2012, (a couple retiring
in 2012 at age 65 would on average face $240,000 for medical care and
health insurance expenses over their lifetimes, up from an estimated
$160,000 in 2002), available at www.fidelity.com/viewpoints/retirees-
medical-expenses.
\6\ AARP Public Policy Institute, ``Recovering from the Great
Recession: Long Struggle Ahead for Older Americans'', May 2011.
\7\ Tatjana Meschede, Laura Sullivan, Thomas Shapiro, ``From Bad
to Worse: Senior Economic Insecurity on the Rise, Research and Policy
Brief'', Brandies Institute on Assets and Social Policy, July 2011
available at http://iasp.brandeis.edu/pdfs/FromBadtoWorse.pdf.
\8\ Tatjana Meschede, Laura Sullivan, Thomas Shapiro, ``The Crisis
of Economic Insecurity for African-American and Latino Seniors'',
Research and Policy Brief, Brandies Institute on Assets and Social
Policy, September 2011 available at http://iasp.brandeis.edu/pdfs/
InsecuritySeniorsOfColor.pdf.
---------------------------------------------------------------------------
To bridge the gap between fixed incomes and escalating expenses,
older adults are turning to credit cards. The average credit card debt
for older adults is the highest of any age group. \9\ While older
adults are less likely to be seriously behind in debt payment than
younger peers, a 2010 Federal Reserve Bank survey of consumers showed
that the rate of serious nonpayment was rising most rapidly among older
adults. \10\
---------------------------------------------------------------------------
\9\ Amy Traub and Catherine Ruetschlin, ``The Plastic Safety Net:
Findings From the 2012 National Survey on Credit Card Debt of Low- and
Middle-Income Households'', Demos, May 2012, available at http://
www.demos.org/publication/plastic-safety-net.
\10\ ``Changes in U.S. Family Finances from 2007 to 2010: Evidence
From the Survey of Consumer Finances'', 98 FRB Bull. Table 17, June
2012 (showed that only 1.5 percent of 65 to 74 year olds 60 days late
paying a debt in 2001 and 6.1 percent were late in 2010. The 75+ group
rose from just to .8 percent to 3.2 percent in the same time span.).
---------------------------------------------------------------------------
The economic distress among this population is evidenced in the
continued uptick in bankruptcy filings. Older adults make up the
fastest growing group of bankruptcy filers. \11\ This trend is not due
simply to the increased percentage of seniors in the general
population. The rapid rise in bankruptcy filings by older adults is due
in part to credit card and medical debt. The bankruptcy filings show
that older adults are generally more indebted to credit card companies
than younger filers. \12\
---------------------------------------------------------------------------
\11\ John Golmant, ``Aging and Bankruptcy Revisited'', ABI
Journal, September 2010.
\12\ John Pottow, ``The Rise in Elder Bankruptcy Filings and
Failure of U.S. Bankruptcy Law'', The Elder Law Journal, Vol. 19, 2012,
June 1, 2011; University of Michigan Public Law Working Paper No. 210;
University of Michigan Law and Economics, Empirical Legal Studies
Center Paper No. 10-015, available at SSRN: http://ssrn.com/
abstract=1669298.
---------------------------------------------------------------------------
When used as designed, reverse mortgages provide a needed
supplement to the income of struggling homeowners. Reverse mortgages,
however, are expensive when compared to other options. The costs and
the terms are not commonly understood by homeowners, who do not pay
cash out of pocket for the origination of the loan and do not make
regular payments on the mortgage. The mortgages do not require payments
from homeowners during the term; rather they provide payments to
homeowners. Interest accrues on the rising amounts of principal owed on
the loan. As a result, reverse mortgages work counter-intuitively and
few homeowners truly understand the way the loans are priced, or how
the loan principal grows over time. This lack of transparency makes it
virtually impossible for homeowners to protect themselves from some of
the abuses associated with this product.
The challenges consumers face in the reverse mortgage market have
increased in the past few years as the long-term costs of the mortgages
increased and the range of options offered became more complex. This
added complexity has been coupled with aggressive marketing of
unsuitable loan options--primarily the Standard HECM which was
available until early 2013 and which required that the full amount of
funds available be withdrawn at the at the initiation of the mortgage.
This maximizes the profit to the mortgage originators, but it often
leaves homeowners in serious jeopardy of depleting their resources and
losing their homes.
Thousands of older homeowners have taken out reverse mortgages that
are unsuitable to meet their needs. Many of those borrowers are facing
foreclosure because of nonpayment of property taxes and homeowner
insurance. Borrowers, including those in the early years of retirement,
were encouraged to cash out all the available equity in their homes.
Home equity is the largest asset for most older homeowners. \13\
Depleting all the equity in a home early in retirement--or even before
retirement--has put these consumers on an unsustainable financial
course that may result in the premature eviction from their homes if
they do not have sufficient resources to pay for taxes and insurance,
maintain the property, or meet unexpected expenses.
---------------------------------------------------------------------------
\13\ See Lori Trawinski, ``Nightmare on Main Street: Older
Americans and the Mortgage Market Crisis'', AARP Public Policy
Institute, July 2012.
---------------------------------------------------------------------------
The counseling required by the HECM program has clearly been
insufficient to stem the tide of abuses associated with the program. As
evidenced by the massive defaults in taxes and insurance, and dominance
of fixed-rate standard reverse mortgages, good counseling cannot
overcome lender pressure. This was borne out by a survey NCLC did this
past August of elder and housing advocates nationwide regarding
consumers' use of reverse mortgages. \14\ This survey highlighted the
pressure originators put on borrowers to sign up for standard reverse
mortgages that require a full draw. According to one counselor, even
after she has educated potential borrowers regarding the drawback of
such mortgages, borrowers are ``convinced this is the best option
because it is what the lender is pushing.'' \15\ Another counselor
noted, ``Most of my clients usually tell me they are NOT doing a fixed-
rate lump sum once we go through the adjustable rate choices, credit
line features. I ask some of them 2 months later what they did and some
say that they decided after talking with a lender to get the fixed-rate
lump-sum after all.'' \16\
---------------------------------------------------------------------------
\14\ The online survey was created in response to the Consumer
Financial Protection Bureau's Notice and Request for Information
Regarding Consumer Use of Reverse Mortgages, Docket No. CFPB-2012-0026,
77 Fed. Reg. 39222 (July 2, 2012) (Notice). The 15 questions in the
survey--titled ``Survey of Consumers' Use of Reverse Mortgages'' were
taken verbatim from the Notice. Not all the questions included in the
Notice were used in the survey. Most notably, questions regarding the
market dynamics and business practices among brokers, correspondent and
retail channels for reverse mortgages were excluded. Three questions
were added to solicit demographic information. Of the 65 respondents
who completed the survey, the majority worked closely with older adults
in a variety of capacities; the respondents included reverse mortgage
counselors, elder advocates, legal services attorneys, and housing
advocates. The survey was emailed on July 27, 2012, to 1,877 people
with a deadline of August 3, 2012, to respond, and 119 people started
the survey and 65 people completed the survey. The survey was
anonymous; however respondents had the option of providing their
contact information for follow-up.
\15\ Excerpt from ``Survey of Consumers' Use of Reverse
Mortgages'', conducted August 2012, on file with the National Consumer
Law Center.
\16\ Id.
---------------------------------------------------------------------------
HUD has taken some steps to address the abuses associated with the
program. In early 2013, HUD issued a mortgagee letter suspending the
use of the Standard HECM Fixed Rate loan. \17\ The Standard HECM will
be combined with the HECM Saver which offers a lower initial mortgage
insurance premium, and reduced up-front fees. \18\ This is a good
initial step and will address some of the problems associated with the
Standard HECM. However, the other abuses still must be addressed. Given
the ongoing changes in the reverse mortgage industry, and the growth of
the elder population, it is essential that changes be put into place
now to address the range of abuses associated with HECMs.
---------------------------------------------------------------------------
\17\ Dep't of Hous. and Urban Dev., Mortgagee Letter 2013-01, Jan.
30, 2013, available at http://portal.hud.gov/hudportal/documents/
huddoc?id=13-01ml.pdf.
\18\ Dep't of Hous. and Urban Dev., ``Home Equity Conversion
Program--Introducing HECM Saver; Mortgage Insurance Premiums and
Principal Limit Factor Changes for HECM Standard'', Mortgagee Letter
2010-34 (Sept. 21, 2010).
---------------------------------------------------------------------------
Previous Reliance on Counseling To Protect Older Homeowners From
Displacement and Fraud Has Been Misplaced. Substantive and
Aggressive Measures Are Needed To Protect Older Homeowners and
Prevent Further Depletion of the Fund
The sustainability of the HECM program depends in large part on the
program's ability to fulfill its primary purpose: to allow older adults
to shelter in place as they age. As evidenced by the tens of thousands
of older homeowners who are now in default and facing foreclosure on
HECM reverse mortgages because of unpaid taxes and insurance, the
program is failing to fulfill its central mission. Additionally,
thousands of homeowners have been victims of fraud in the origination
process that leaves their loved ones homeless when they pass away or
move from the home.
Specifically, we recommend that HUD make substantive changes to the
HECM program to ensure that:
Prospective borrowers are able to afford property taxes and
insurance on an ongoing basis and that existing borrowers
facing default are given a better opportunity to save their
homes.
Reverse mortgages made to a homeowner who has a spouse who
is a nonowner of the home be considered to be made to both
spouses (as is required by the statute). This would protect the
younger spouse from eviction when the older spouse dies.
These changes will go a long way toward protecting elder
homeowners, which will strengthen the program, and ensure its longevity
and effectiveness in assisting older adults. Protecting the borrowers
for whom the program was designed will also strengthen the economic
value of the program and stop the depletion of resources from the Fund.
Homeowners' Ability To Pay Taxes and Insurance Should Be Evaluated
Before Origination, and Current Defaults Should Be Dealt With
in a Manner Designed To Prevent the Loss of the Home
Nearly 10 percent of homeowners with outstanding HECM loans are at
serious risk of losing their homes due to defaults on their property
taxes and insurance. \19\ Older adults who expected to age in place or
at least remain at home until they need skilled care are now facing the
prospect of premature displacement. Not only are older homeowners at
risk, but according to HUD the incidence of property tax and insurance
defaults has increased in recent years and this has put a major strain
on the program and Fund. \20\
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\19\ See Consumer Financial Protection Bureau, Reverse Mortgages,
Report to Congress, June 28, 2012, 6.6; 75 Fed. Reg. 58539, 58678
(Sept. 24, 2010).
\20\ See Dep't of Hous. and Urban Dev., ``Annual Report to
Congress Fiscal Year 2012 Financial Status of the FHA Mutual Mortgage
Insurance Fund'', November 16 2012.
---------------------------------------------------------------------------
Reverse mortgage borrowers are required to pay the taxes due and
the property insurance premiums throughout the life of the loan, even
though principal and interest need not be repaid until the borrower
dies or moves out of the home. \21\ Failure to make these payments
makes the loan ``deemed to be out of compliance with the FHA
requirements and . . . delinquent.'' \22\ When homeowners fail to pay
these charges, servicers are initially required to pay them from the
loan's available proceeds. \23\ If there are no available proceeds, the
servicer is required to advance these amounts and then try to collect
them from the homeowner. \24\
---------------------------------------------------------------------------
\21\ 24 CFR 206.205(a) (``The mortgagor shall pay all property
charges consisting of taxes, ground rents, flood and hazard insurance
premiums, and special assessments in a timely manner and shall provide
evidence of payment to the mortgagee as required by the mortgage.'').
\22\ FHA Mortgagee Letter 2011-01: Home Equity Conversion Mortgage
Property Charges Loss Mitigation, January 3, 2011.
\23\ 24 CFR 206.205(c) (``If the mortgagor fails to pay the
property charges in a timely manner, and has not elected to have the
mortgagee make the payments, the mortgagee may make the payment for the
mortgagor and charge the mortgagor's account.'').
\24\ 24 CFR 206.205(c) (``If the mortgagor fails to pay the
property charges in a timely manner, and has not elected to have the
mortgagee make the payments, the mortgagee may make the payment for the
mortgagor and charge the mortgagor's account.'').
---------------------------------------------------------------------------
Homeowners fail to make these payments for a variety of reasons,
ranging from not understanding that they are required to not having
sufficient discretionary income. \25\ The CFPB's report to Congress
regarding reverse mortgages noted confusion on the part of some
consumers regarding the obligation to pay taxes and insurance. \26\
Testing by the Federal Reserve Board revealed that some consumers do
not understand that the reverse mortgage loan would come due if they
failed to pay insurance and taxes. \27\ Moreover, as HUD has
acknowledged, the dominance of the fixed-rate standard reverse
mortgage, which required borrowers to take all eligible cash up front,
resulted in insufficient cash in later years for property upkeep,
taxes, and insurance. \28\
---------------------------------------------------------------------------
\25\ See Consumer Financial Protection Bureau, ``Reverse
Mortgages--Report to Congress'', June 28, 2012, 6.6.
\26\ See Consumer Financial Protection Bureau, ``Reverse
Mortgages--Report to Congress'', June 28, 2012, 6.6.1.
\27\ See ICF Macro, ``Summary of Findings: Design and Testing of
Truth in Lending Disclosures for Reverse Mortgages'', at 14 (July
2010).
\28\ See Dep't of Hous. and Urban Dev., ``Annual Report to
Congress Fiscal Year 2012 Financial Status of the FHA Mutual Mortgage
Insurance Fund'', November 16, 2012.
---------------------------------------------------------------------------
In 2012, HUD announced that it will introduce guidelines for
assessing whether reverse mortgage borrowers have the financial ability
to make ongoing payments for property taxes and insurance if they
obtain the loan. \29\ This is an excellent proposal which we
wholeheartedly support. We applaud HUD's efforts to tackle this growing
problem on a going-forward basis. However, the rules applicable to
existing borrowers who face foreclosure because of unpaid taxes and
insurance still need a complete overhaul to prevent unnecessary
foreclosures which not only displace elders but drain the Fund.
---------------------------------------------------------------------------
\29\ Letter from Acting Assistant Secretary Carol Galante, Dep't
of Hous. and Urban Dev., HECM Program Update (Oct. 5, 2011), available
at http://portal.hud.gov/hudportal/documents/
huddoc?id=FHACG_05OCT11_FINAL.PDF.
---------------------------------------------------------------------------
Assessment for Prospective Borrowers
An evaluation of borrowers' ability to pay taxes and insurance on
an ongoing basis is necessary before reverse mortgages are originated.
Currently there are no income or credit qualifications for reverse
mortgages, other than a general requirement that each mortgagor have a
``general credit standing'' satisfactory to HUD. \30\ Voluntary efforts
by reverse mortgage originators to underwrite or include loan reserves
have failed as these efforts put some originators at a competitive
disadvantage. \31\ The industry has already requested that FHA mandate
a ``baseline underwriting requirement.'' \32\ We support both HUD and
the industry in this regard.
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\30\ 24 CFR 206.37.
\31\ See discussion of MetLife's withdrawal from the market after
experimenting with underwriting requirements, Consumer Financial
Protection Bureau, Reverse Mortgages, Report to Congress, June 28,
2012, 6.6.4a.
\32\ Id.
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We suggest that every prospective reverse mortgage borrower be
evaluated to determine whether the borrower has sufficient income to
afford taxes and insurance, or the reverse mortgage must include
sufficient reserves to cover these costs for the entire expected term
of the reverse mortgage.
Stronger Protections for Existing Borrowers Facing
Foreclosure
The 54,000 homeowners at risk of losing their homes due to default
on property taxes and insurance need stronger protections. These are
homeowners who have failed to make payments for taxes or insurance and
do not have sufficient credit available on their loan account to repay
the servicer's advances and face default and loss of the home.
The prospect of foreclosure on these elderly homeowners with
outstanding reverse mortgages flows directly from a decision made by
HUD in January 2011. HUD issued a Mortgagee Letter that requires
servicers to collect advances they make for delinquent taxes and
insurance from homeowners within a very short time period. \33\ For
example, delinquencies of as much as $5,000 must be collected from the
homeowner on a repayment schedule of only 12 months, while amounts over
$5,000 must be repaid in only 24 months. \34\
---------------------------------------------------------------------------
\33\ Dep't of Hous. and Urban Dev., ``HECM Prop. Charge Loss
Mitigation'', Mortgagee Letter 2011-01 (Jan. 3, 2011). The Mortgagee
Letter required lenders to make loss mitigation options available to
borrowers by establishing a realistic repayment plan for the delinquent
property charges, referring the borrower to a HUD-approved housing
counseling agency to receive free assistance in developing a resolution
to the delinquency, or refinancing the delinquent HECM if there is
sufficient equity.
\34\ Dep't of Hous. and Urban Dev., ``HECM Prop. Charge Loss
Mitigation'', Mortgagee Letter 2011-01 (Jan. 3, 2011).
---------------------------------------------------------------------------
These repayment periods are burdensome to elderly homeowners who
are, in most instances, unable to afford the payments. Repaying a
$5,000 debt in 12 months requires a payment of more than $416 a month.
Similarly, a $15,000 debt in 24 months would require a payment of $625
a month. It is virtually impossible for struggling elderly homeowners
to afford these amounts.
HUD's position on this treats senior homeowners with reverse
mortgages much worse than it does homeowners with forward-mortgages.
Homeowners with forward-mortgages are permitted to repay advances for
tax and insurance over the entire remaining term of the loan. \35\ It
is difficult to understand why HUD would treat senior homeowners worse
than it does all other homeowners with FHA insured mortgages. The
National Housing Act requires lenders to engage in loss mitigation upon
the default or imminent default of an FHA-insured mortgage. \36\
Regulations and guidelines issued by HUD require that lenders evaluate
the borrower for alternatives to foreclosure before the borrower
becomes delinquent on four mortgage payments. \37\ This raises the
question of why HUD has not required the application of similar home-
saving strategies for reverse mortgages.
---------------------------------------------------------------------------
\35\ See Dep't of Hous. and Urban Dev., Mortgagee Letter 2010-04
(Jan. 22, 2010).
\36\ See 12 U.S.C. 1715u. A borrower facing imminent default is
defined as one that is current or less than 30 days past due on the
mortgage and is experiencing a significant reduction in income or some
other hardship that will prevent him or her from making the next
required payment on the mortgage in the month it is due. Borrowers
facing imminent default can take advantage of HUD's forbearance or FHA-
HAMP options. See Dep't of Hous. and Urban Dev., Mortgagee Letter 2010-
04 (Jan. 22, 2010).
\37\ 24 CFR 203.605. Notice to the homeowner about foreclosure
prevention options together with a HUD brochure on that topic must be
sent between the 35th and the 45th day of delinquency. See Dep't of
Hous. and Urban Dev., Mortgagee Letter 00-05 (Jan. 19, 2000); Dep't of
Hous. and Urban Dev., Mortgagee Letter 97-44 (Sept. 29, 1997).
---------------------------------------------------------------------------
For example, in standard, forward-mortgages, servicers are required
to evaluate homeowners for a special forbearance which allows
homeowners to reduce or suspend payments for a minimum of 4 months so
long as the arrearage does not exceed the equivalent of 12 monthly
mortgage payments. \38\ At the end of the forbearance period, the
homeowner must typically begin paying at least the full amount of the
monthly mortgage payment due under the mortgage. The repayment period
must last at least 4 months, but otherwise lenders and homeowners are
free to agree to any repayment plan for the accumulated arrears
throughout the remaining term of the loan. \39\ There is no maximum
length of time to repay.
---------------------------------------------------------------------------
\38\ HUD temporarily changed its guidelines to extend the minimum
forbearance period to 12 months. This change to the guidelines will
expire August 1, 2013, and the minimum forbearance period will revert
back to 4 months. See Dep't of Hous. and Urban Dev., Mortgagee Letter
2011-23 (July 7, 2011).
\39\ Dep't of Hous. and Urban Dev., Mortgagee Letter 2002-17 (Aug.
29, 2002).
---------------------------------------------------------------------------
Reverse mortgage homeowners should be afforded a similar
opportunity to repay the arrears on their loans. It simply does not
make sense for HUD to insist that reverse mortgage homeowners repay
delinquent amounts in 24 months or less, when it is the goal of the FHA
and HECM programs to help keep seniors in their homes and there are
reasonable alternatives that will protect the Fund from large losses.
We ask that HUD revise its guidelines for assisting homeowners
currently in default to lengthen the period for repaying arrears. Such
a home-saving strategy would by necessity, involve a repayment period
beyond 24 months for most homeowners.
Stronger Substantive Protections Should Be Added to the HECM Program To
Prevent Eviction of the Nonborrowing Spouses of Reverse
Mortgage Borrowers
A second serious problem is that nonborrowing spouses are being
forced out of their homes upon the death or move of the mortgagor-
spouse. \40\ The cause of this problem is that lenders and brokers
encourage the younger spouse (generally the wife) to deed over her
share of the house to the husband prior to originating a reverse
mortgage so that more funds or better terms will to be available from
the loan. This often occurs if one spouse is 62 years of age or older
and the other spouse is younger than the required age. Even when both
spouses are eligible for the reverse mortgage, the available proceeds
will be maximized by having only the older of the two listed as the
borrower. \41\
---------------------------------------------------------------------------
\40\ See e.g., Jessica Silver-Greenberg, ``A Risky Lifeline for
Elderly Is Costing Some Homes'', New York Times, Oct. 14, 2012; Norma
Paz Garcia, Prescott Cole, Shawna Reeves, ``Examining Faulty
Foundations in Today's Reverse Mortgages'', Consumers Union, at 19
(December 2010); ``As Complaints Increase, HUD to Address HECM Non-
Borrowing Spouse Issue'', Reverse Mortgage Daily, Apr. 29, 2010,
available at http://reversemortgagedaily.com/2010/04/29/as-complaints-
increase-hud-to-address-hecm-non-borrowing-spouse-issue/
\41\ This is because the available proceeds on a reverse mortgage
are determined based on the life expectancy of the younger spouse.
---------------------------------------------------------------------------
Couples rarely understand the consequences of taking the younger
spouse off the title and taking out the reverse mortgage only in the
name of the older spouse. Lenders and brokers often mislead or outright
lie to consumers regarding the consequences of leaving younger spouses
off the deed and reverse mortgage. \42\ Borrowers have reported to the
CFPB that brokers promised lower rates, additional funds or a more
favorable deal if the spouse's name was not on the deed or reverse
mortgage, and promised that borrowers would be able to add a spouse or
family member when they reached a certain age. \43\ According to
officials at HUD, who have received many complaints regarding this
practice, ``borrowers were told the loan was assumable, or a loan
officer said that it was alright to remove a spouse from title because
they could refinance or add the spouse back to title later without any
problem.'' \44\
---------------------------------------------------------------------------
\42\ See, e.g., Ellison v. Wells Fargo Home Mortgage, Inc., 2010
WL 3998091 (E.D. Mich. Oct. 12, 2010) (borrower told that by adding
nonborrower spouse's name to the mortgage agreement, spouse could
remain in home even after borrower died, and spouse's interest in the
property would be protected by borrower's quit-claim deed issued to
himself and spouse after execution of the reverse mortgage).
\43\ See Consumer Financial Protection Bureau, Reverse Mortgages,
Report to Congress, June 28, 2012, 6.7.1.
\44\ ``As Complaints Increase, HUD To Address HECM Non-Borrowing
Spouse Issue'', Reverse Mortgage Daily, Apr. 29, 2010, (statement of
Erica Jessup, Program Specialist at the Dep't of Housing and Urban
Dev.) available at http://reversemortgagedaily.com/2010/04/29/as-
complaints-increase-hud-to-address-hecm-non-borrowing-spouse-issue/
---------------------------------------------------------------------------
Our NCLC attorneys have worked with attorneys in many States who
are representing the widowed spouses in these situations. In every
single case the widow is shocked to find herself not only a widow, but
also about to be evicted from the home she thought the reverse mortgage
would preserve for her until death. The stories we hear are near
identical, despite the diverse geographical locations from which they
come: the couple was assured that when the older spouse died, the
younger one would be permitted to assume the mortgage and continue to
live in the home until her death. \45\
---------------------------------------------------------------------------
\45\ See, e.g., Jessica Silver-Greenberg, ``A Risky Lifeline for
the Elderly Is Costing Some Their Homes'', New York Times, October 14,
2012. Available at http://www.nytimes.
---------------------------------------------------------------------------
Contrary to this sales pitch, when the older spouse dies, sells, or
permanently relocates from the home, the reverse mortgage lender calls
the loan due and payable. Currently, neither HUD nor reverse mortgage
lenders permit the loan to be assumed by the nonborrowing spouse. This
position has led to many foreclosures, leaving bereaved spouses not
only widowed, but also homeless and generally penniless.
These blatant misrepresentations echo some of the false promises
that brokers made during the subprime boom. As with those earlier
practices, brokers stand to profit by putting pressure on consumers to
remove younger spouses from the reverse mortgage loan. Brokers earn a
percentage of the funded loan balance at closing. Any practice that
leads to an increase in that amount will put more money in the pocket
of the broker.
In the authorizing statute, Congress expressed its intent to
protect spouses. The HECM statute states that HUD may not insure a
reverse mortgage ``unless the mortgage provides that the homeowner's
obligation to satisfy the loan obligation is deferred until the
homeowner's death, the sale of the home, or the occurrence of other
events specified in the regulation of the Secretary. For the purposes
of this subsection, the term ``homeowner'' includes the spouse of
homeowner.'' \46\ The statute's broad definition of homeowner
anticipated the need to keep an elder housed even if the spouse passed
away or was forced to move.
---------------------------------------------------------------------------
\46\ 12 U.S.C. 1715z-20(j).
---------------------------------------------------------------------------
Though this statutory language indicates that nonborrowing spouses
have the same rights as the mortgagor-spouse to remain in the home,
HUD's regulation requires the mortgage to state that it is due and
payable upon the death of all surviving mortgagors. \47\ In a recent
decision in a case which challenged this regulation, the D.C. Court of
Appeals noted that it was ``somewhat puzzled as to how HUD can justify
a regulation that seems contrary to the governing statute.'' \48\
---------------------------------------------------------------------------
\47\ 24 CFR 206.27.
\48\ Bennett v. Donovan, 703 F.3d 582, 586 (D.C. Cir. 2013).
---------------------------------------------------------------------------
HUD has issued guidance requiring that nonborrower spouses and co-
owners receive HECM counseling. \49\ This is simply not sufficient.
Misinformation and sales pressure from lenders and brokers too often
override information provided by counselors, especially if consumers
are told that they need to remove the younger spouse from the deed and
reverse mortgage to receive more proceeds. Moreover, the couple simply
may not inform the counselor that they are considering removing one
spouse from the deed. As a result, the nonborrowing spouse is not fully
counseled and will not understand the risks posed by quitclaiming his
or her interest in the home.
---------------------------------------------------------------------------
\49\ See Dep't of Housing and Urban Dev. Mortgagee Letter 2011-31
(Aug. 26, 2011).
---------------------------------------------------------------------------
HUD should take more aggressive action to ensure that nonborrowing
spouses do not end up homeless. The removal of the younger spouse from
the title prior to origination of the reverse mortgage almost always
involves fraud. This fraud is compounded by HUD's regulation which is
consistent with neither the spirit nor the letter of the authorizing
statute. The regulation should be revised to ensure that if a couple is
married when the reverse mortgage is originated, the life expectancy
runs for the youngest member of the couple, and the termination of the
reverse mortgage for death applies to both spouses regardless of who
actually owns the home. This resolution furthers the traditional and
sensible homestead rule of preserving the home for the spouse after
widowhood, regardless of legal ownership of the home. Moreover, this
rule will not impact the MMI Fund as, going forward, loans will be
originated based on the youngest of the couple.
Eviction from the home puts the nonborrowing spouse, mainly women,
at risk not only for homelessness, but premature entry into long-term
care facilities, like nursing homes. The premature displacement of
elders is clearly counter to the purpose of the reverse mortgage
product, and to public policy, which supports having older adults ``Age
in Place.''
Conclusion
Reverse mortgages provide a real benefit to many older homeowners
struggling to meet day-to-day expenses. However, these mortgages are
complex and subject to abuse, and stronger measures are needed to
protect consumers, stabilize the program and prevent depletion of the
Fund. Thank you for this opportunity to testify. I look forward to your
questions.
______
PREPARED STATEMENT OF RAMSEY L. ALWIN
Senior Director, Economic Security, National Council on Aging
June 18, 2013
Chairman Menendez, Ranking Member Moran, esteemed Members of the
Subcommittee, my fellow witnesses, and guests. On behalf of the
National Council on Aging (NCOA), I appreciate the opportunity to
testify today.
NCOA (www.ncoa.org) is a nonprofit service and advocacy
organization headquartered in Washington, DC. NCOA's mission is to
improve the health and economic security of millions of older adults,
especially those who are vulnerable and disadvantaged. NCOA is a
national voice for older Americans and the community organizations that
serve them. Working with nonprofit organizations, businesses, and
Government, NCOA develops creative solutions to help seniors find jobs
and benefits, improve their health, live independently, and remain
active in their communities.
I would like to take this opportunity to talk about the current
Federal Housing Administration (FHA) Home Equity Conversion Mortgage
(HECM) program and to share with you our recommendations for sustaining
and improving this program, with particular emphasis on the vital role
of HECM counseling. My remarks are grounded in research, including what
NCOA has learned about the motivations and potential risks facing older
homeowners who consider these loans. My comments also reflect our
experience as a U.S. Department of Housing and Urban Development (HUD)
HECM counseling intermediary over the past 6 years. In this capacity,
our counselors have listened to the hopes and concerns of thousands of
older homeowners nationwide, as we have educated them about the
potential reverse mortgages may offer for their retirement plans.
NCOA recognizes the need for the FHA to shore up HECM by making
changes to the product that will, in turn, strengthen the Mutual
Mortgage Insurance Fund. The changes proposed could have a stabilizing
effect on the program, assuring its existence for years to come. NCOA's
primary concern is ensuring that vulnerable older adults have access to
appropriate resources to help them age in place with dignity, coupled
with strong protections against financial abuse and exploitation.
As the only national aging organization acting as a HUD-approved
HECM counseling intermediary, I'd like to highlight the positive impact
that unbiased third-party education has on this complex product. Going
forward, it will be important to consider the following:
Changes to the HECM Program Should Not Come at the Expense of Seniors
of Modest Means for Whom the Program Was Originally Designed
A financial assessment, tax and insurance set-asides, or limiting
the amount of cash available up front can be useful tools in assuring
that a borrower can sustain the financial obligations associated with
obtaining a HECM. It is an expensive product and is therefore best
suited for those wishing to age in place for years to come. The product
also can work well for those who plan for unexpected future expenses
and use the HECM accordingly. A financial assessment that considers
residual cash flow and future financial obligations could protect
borrowers from obtaining a loan that is not a good financial fit for
them. Flexibility to adjust for an individual's circumstance is
essential. NCOA has tools that allow seniors to visualize potential
future health and financial expenses, such as the NCOA
BenefitsCheckUp', which is a required component of the HECM
counseling session. This NCOA tool is online and free to the borrower
and counselor. It assists a potential borrower in identifying public
and private community resources that can help them pay for daily
expenses. For those who have difficulties paying property taxes or
insurance, the tool can identify if the borrower qualifies for any tax
relief or hazard insurance assistance. Currently, the tool screens
borrowers for 160 tax relief programs and 31 insurance programs. NCOA's
BenefitsCheckUp' also screens eligibility for up to 2,000
other community resources, including prescription drug, utility, food,
and transportation assistance, as well as programs that help with
Medicare premiums and copays. The average potential borrower screened
during a counseling session often identifies over $5,500 in annual
reoccurring public and private benefits.
HECM Counseling Is Critical to the Product's Long-Term Viability and
Wise Decision Making
Due to the widespread inadequacy of retirement savings, home equity
is becoming an increasingly critical component of economic security in
later life. As a result, the issue for many low- to moderate-income
seniors today is not whether to tap this asset, but when and how. NCOA
believes that the HECM program serves a unique and important role in
meeting these emerging needs. Access to unbiased counseling ensures
that consumers are protected. NCOA has been a HUD-approved HECM
counseling intermediary for 6 years, and we view our role in consumer
education to be of utmost importance.
Increasing the Strength and Sustainability of the HECM Program Requires
Greater Collaboration and Consideration for Counselor Training
While counselors do not determine eligibility, they must be
informed and knowledgeable about eligibility considerations in the
marketplace. It is essential that resources be made available for the
ongoing training of HECM counselors. If training is not taken into
consideration, the industry risks gaps in information between
originators/underwriters and what is discussed in the counseling
session.
The HECM Program Is an Important Retirement Planning Option for Lower-
to Middle-Income Older Homeowners
As people live longer, there is an increased responsibility to
adequately plan for future financial security. At the same time, many
older Americans have seen their hard-earned retirement savings and
assets diminish, with an unclear future ahead. When their financial
management strategies are limited, seniors' capacity to stay at home
becomes uncertain.
Older homeowners are looking for solutions to help manage their
financial situation. If used wisely, a reverse mortgage can help. These
loans are especially important for lower- to middle-income families.
Data collected by HECM counselors \1\ using the Financial Interview
Tool (FIT)--developed by NCOA and now required by HUD for all
intermediaries--suggest that about 44 percent of reverse mortgage
borrowers have incomes under 200 percent of the Federal poverty level
($22,980 for a single person). \2\ By increasing liquidity, these loan
funds can fill unmet needs and buffer against cash flow shortages that
may disrupt the family budget.
---------------------------------------------------------------------------
\1\ Demographic and other counseling client information presented
here are based on NCOA calculations using data from Financial Interview
Tool (FIT) reviews that were conducted by HECM counselors from August
2010 through April 2013. All responses reflect self-reported data. HUD
requires all reverse mortgage counselors to collect systematic data on
the risks and financial shortfalls facing their HECM counseling clients
during the counseling session, using the Financial Interview Tool.
\2\ In 2013, gross incomes at 200 percent of the Federal poverty
level are $22,980 for single households and $31,020 for couples. NCOA
calculations are based on the 2013 HHS Poverty Guidelines, available
at: http://aspe.hhs.gov/poverty/13poverty.cfml.
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Reverse mortgage counseling session data also show that reverse
mortgages are not a ``one size fits all'' solution. Instead, older
homeowners consider these loans for a wide range of reasons, including:
To support household consumption (33 percent)
To plan ahead for emergencies (26 percent)
To pay for home repairs or improvements (20 percent)
Reverse mortgages also can play an important role in helping older
adults stay independent longer. Among counseling clients:
About 44 percent were widowed or divorced. Among those
under age 70, 37 percent reported that they no longer have a
spouse.
12 percent had a hospital or nursing home stay in the 6-
month period before counseling.
8 percent were considering a reverse mortgage to deal with
out-of-pocket health expenses. Among those aged 80 and older,
18 percent were considering a HECM for this purpose.
Small infusions of cash can help older homeowners remain flexible
and adaptive, so they can respond to problems while they are still
manageable. Increasing seniors' discretionary income may encourage them
to maintain their home and participate in social activities and
programs that can lead to healthier lifestyle choices.
Recommendations to support older homeowners of modest means:
1. Adequately fund HECM counseling, so seniors can understand their
options and the financial implications of these loans. It is a
hardship for many lower-income homeowners to pay for counseling
up front. Charging fees for this counseling also discourages
seniors from getting unbiased information from a HUD-approved
counselor before they talk to a lender.
2. Assure that any HECM policy changes allow seniors of modest means
to continue to access a portion of their equity. For instance,
the HECM product may be a good, economical fit for a modest-
income individual if access to public and private benefits
programs and services, including local property tax relief
programs, are factored into the suitability determination.
3. Support ongoing consumer research to enhance the soundness of the
HECM program. FIT data collected through the counseling process
can be used to:
Rapidly assess the changing needs and vulnerabilities of
seniors who are considering a reverse mortgage.
Enhance consumer protections for different sub-groups of
borrowers and identify factors that could reduce the risk of
loan default.
Explore ways to appropriately use HECMs to help borrowers
with chronic conditions stay at home and avoid
institutionalization that can lead to reliance on Medicaid.
Reverse Mortgage Borrowers Are at the Leading Edge of a New Trend To
Use Home Equity To Deal With Cash Shortfalls
The reverse mortgage marketplace is very dynamic and must be
understood within the broader perspective of our Nation's current
housing and economic situation. Several years ago, many older
homeowners took out this loan as a way to improve their quality of life
(73 percent). \3\ Today, people who consider these loans are more
concerned about urgent financial needs, including lowering debt. Among
HECM counseling clients from August 2010 through April 2013, most of
these homeowners (70 percent) wanted to lower household debt. Only 28
percent were considering a reverse mortgage to enhance their lifestyle.
---------------------------------------------------------------------------
\3\ Redfoot, D.L., Sholen, K., and Brown, S.K. (2007), ``Reverse
Mortgages: Niche Product or Mainstream Solution?'' Washington, DC:
AARP.
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The aging of the Baby Boomer generation is another important
demographic trend, which is already reflected in the declining age of
reverse mortgage borrowers and counseling clients. Despite lower
available loan limits at younger ages, the average age of all HECM
borrowers has continued to decline, from 76.7 years in 1990 to 72.0
years in 2012. \4\ Among homeowners who went through HECM counseling
between August 2010 and April 2013, one in five (20 percent) were Baby
Boomers aged 60 to 64.
---------------------------------------------------------------------------
\4\ HUD Office of Evaluation. ``Home Equity Conversion Mortgage
Characteristics--March 2012'', Available at http://portal.hud.gov/
hudportal/HUD?src=/program_offices/housing/rmra/oe/rpts/hecm/hecmmenu.
---------------------------------------------------------------------------
The consequences of these market shifts are still unclear. On one
hand, as the Baby Boomer generation ages, reverse mortgages may be part
of a growing trend to include home equity as part of retirement
planning. For some older homeowners, orderly liquidation of home equity
could be a better option to sustain community living than preserving
this asset for financial emergencies. On the other hand, using a
reverse mortgage to address income shortfalls can increase financial
risks if borrowers do not manage their spending or if they rapidly draw
down their home equity.
Based on FIT data, about two-thirds (67 percent) of counseling
clients in 2010 had a conventional mortgage that would need to be
repaid if they decided to take out a reverse mortgage. \5\ For about
one-third (32 percent) of these counseling clients, their existing
mortgage exceeded 50 percent of the value of their home. About one in
four (27 percent) reported having both housing and nonhousing debt.
Borrowers with sizable existing debt may rapidly deplete home equity by
taking out a HECM loan to repay debt. The challenges of meeting
borrower obligations on a limited income already are reflected in the
numbers of reverse mortgage borrowers in default.
---------------------------------------------------------------------------
\5\ Stucki, B., ``Changing Attitudes, Changing Motives, The
MetLife Study of How Aging Homeowners Use Reverse Mortgages'',
Westport, CT: MetLife Mature Market Institute, 2012.
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Growing numbers of older homeowners will benefit from additional
support and guidance, since the decisions they make about this valuable
asset will have long-term ramifications for the well-being of
themselves and our Nation. Policy makers are concerned that older
adults who tap their home equity to pay for everyday expenses early in
their retirement years will have fewer resources to deal with declining
health in later life. Many States already struggle to pay for public
programs, such as Medicaid, that assist older adults with low incomes
and those who are impoverished by health expenses. Financial shortfalls
among middle-income older adults that accelerate the need for public
assistance could make these fiscal pressures even greater. An HECM at
the right time, for the right person, with the right supports can serve
as an important public-private solution to ensure older adults have the
financial resources needed to meet their own health needs.
Recommendations To Ensure Wise Decision Making
Ensure That HUD Program Changes, Such as the Proposed Financial
Assessments or Tax and Insurance Set-Asides, Do Not Become
Overly Restrictive So That the HECM Program Remains a Viable
Option for Moderate-Income Seniors
Reverse mortgages can bring new risks to people who may have
limited experience dealing with large sums of money. As the Consumer
Financial Protection Bureau indicated in its ``Reverse Mortgages:
Report to Congress'' in June 2012, 70 percent of the HECM marketplace
was fixed rate-full draw loans. \6\ HUD issued a moratorium on the HECM
Standard Fixed Rate product as of April 1, 2013. This is a step in the
right direction.
---------------------------------------------------------------------------
\6\ ``Reverse Mortgages: Report to Congress'', Consumer Financial
Protection Bureau. June 28, 2012, p. 8. Available at http://
files.consumerfinance.gov/a/assets/documents/
201206_cfpb_Reverse_Mortgage_Report.pdf.
---------------------------------------------------------------------------
Support and Strengthen Consumer Education To Ensure That Older
Homeowners Make Informed Decisions About the Most Appropriate
Use of Home Equity
Younger borrowers would especially benefit from working more
closely with financial advisors, senior advocates, housing specialists,
and other experts.
The HECM Program Is a Platform for Innovation
Over the past 10 years, reverse mortgages have evolved both as a
product and as a solution for many financial security concerns. We can
expect that both the reverse mortgage industry and the marketplace will
continue to change as the Baby Boomers represent a growing portion of
the pool of potential borrowers. With older Americans increasingly
relying on home equity to increase cash flow, our strategies for using
HECMs will need to shift from product-focused solutions to
comprehensive financial plans that include reverse mortgages as an
integral part of retirement security.
Older homeowners often are advised that home equity should be used
only as a ``last resort.'' However, our counseling experiences suggest
that cash-poor seniors who take out a reverse mortgage when they face
serious financial difficulties are at higher risk of defaulting on
these loans. Therefore, we believe that the long-term sustainability of
the HECM program rests on increasing the use of home equity as more
than a tool for crisis management.
Older homeowners also need multiple, affordable HECM products that
can meet both their long- and short-term financial goals. For example,
the HECM Saver loan, with its lower up-front costs, could be an option
for those who cannot stay in their home for many years. This approach
may be helpful for seniors with chronic conditions, so they can pay
out-of-pocket health expenses without disrupting their budget.
Meeting these challenges opens the door to a wide array of
opportunities for collaboration. For example, financial services
industry professionals could work with consumer advocates to find ways
to assist lower- and middle-income families who have not traditionally
used financial planning services. New tools and supports will be
essential to address the problems these older homeowners face as they
shift from a financial planning strategy that aims to preserve housing
wealth to one that uses this asset as a retirement resource.
Reverse mortgage counseling also offers a new pathway to reach
seniors who need help to live independently. Integrating this
counseling with assistance from social service agencies is important
for older homeowners who are unlikely to tap home equity without
guidance on how to use this asset for community living. As trusted
local resources, Area Agencies on Aging (AAAs) and Aging and Disability
Resource Centers (ADRCs) can help older homeowners access community
programs. These agencies also can facilitate the transition from the
home to other living arrangements, should these borrowers need to move.
For many homeowners living on a fixed income, combining a reverse
mortgage with public benefits also could improve their chances of
keeping up with their borrower obligations and staying at home. In
August 2010, HUD began requiring that all reverse mortgage counselors
conduct an NCOA BenefitsCheckUp' screening as part of HECM
counseling for clients with incomes under 200 percent of poverty. Since
the implementation of this mandate, reverse mortgage counselors have
used this Web-based service to screen eligibility for public and
private benefits for almost 103,000 clients. We estimate that these
screenings could help these older homeowners find over $378 million
worth of annual benefits in total, which could serve as a supplement or
alternative to a reverse mortgage. \7\
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\7\ NCOA data from the Reverse Mortgage Counseling Toolkit Web
site for HUD-approved HECM counselors. To view the consumer version of
BenefitsCheckUp', visit: www.benefitscheckup.org.
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Recommendations To Promote Innovation
Encourage HUD To Continue Using the HECM Program as a Platform To
Foster Innovation Through Collaborative Efforts With the
Mortgage Industry, Housing Programs, and Aging Services
Community
There is an urgent need to break down service silos and address
problems holistically to promote consumer confidence in these loans and
sustain older homeowners in their homes.
Enhance the Long-Term Viability of the HECM Program Through a Balanced
Approach That Ensures Strong Oversight To Promote Responsible
Lending, But Also Supports Continued Collaborative Research and
Development of This Emerging Financial Solution
We need strong consumer protections to reduce fraud and mitigate
risk, but we also want to give older homeowners the flexibility to meet
their evolving financial needs.
Thank you again for this opportunity to share NCOA's research and
insights into the HECM program and older homeowners who consider these
loans. For more information on our work in this area, please visit
www.ncoa.org/HomeEquity. I welcome the opportunity to answer any
questions you may have.
______
PREPARED STATEMENT OF PETER H. BELL
President and Chief Executive Officer, National Reverse Mortgage
Lenders Association
June 18, 2013
Mr. Chairman and Members of the Subcommittee, thank you for
convening this hearing to look into Long Term Sustainability for
Reverse Mortgages: HECM's Impact on the Mutual Mortgage Insurance Fund.
I am here today in my capacity as President and CEO of the National
Reverse Mortgage Lenders Association (NRMLA), a trade association of
over 300 companies involved in the origination, funding and servicing
of reverse mortgages. Our organization has been serving the reverse
mortgage industry as a policy advocate and educational resource since
1997. We also provide information about reverse mortgages to consumers
and members of the press.
NRMLA member companies are responsible for over 90 percent of the
reverse mortgages made in the United States. All NRMLA member companies
commit themselves to our Code of Ethics and Professional
Responsibility. Under that Code, placing the needs of the client takes
precedence over all other considerations.
This Subcommittee, including members from both sides of the aisle,
has been consistently sensitive to reverse mortgage issues and has
continually taken steps to improve and enhance FHA's Home Equity
Conversion Mortgage (HECM) program. For that, we are very appreciative,
as are the three-quarters of a million senior households who have
utilized the HECM program since its inception.
The issues surrounding reverse mortgages bring a key question into
consideration:
How do we finance our longevity?
There were 4.2 million Americans over 85 years old in 2000; there
will be over 9 million Americans over 85 years old in 2030. With life
carrying on for decades beyond our earning years, we must manage assets
and resources to sustain ourselves longer. Aging in place, remaining in
one's own home for the duration of life or as long as physically
possible, is simply the most cost-effective and financially sensible
housing option for many. This requires the strategic use of home equity
as a means of financial support.
Housing wealth, the equity accumulated in a home, represents the
largest component of personal wealth for many American households.
Typical retiree households might have Social Security income, a modest
pension, limited income from low-yielding fixed-income instruments,
and, perhaps, a diminished 401(k) account. The equity they have built
up in their home is often their greatest asset, an important resource
for funding their future.
The Bi-Partisan Policy Commission, in a report issued earlier this
year, cited that half of homeowners 62 years of age or older had at
least 55 percent of their net worth tied up in home equity.
Furthermore, according to the Commission report, 9.5 million households
headed by someone age 65 or older, spend more than 30 percent of their
income for housing expenses, including mortgage payments; 5.1 million
spend more than half their income on housing.
Congress recognized this when initially authorizing the HECM
program as part of the Housing and Community Development Act of 1987.
I would like to thank the Subcommittee and its staff for making it
relatively easy to prepare for this hearing by inviting me to address
five specific items. I have organized my testimony accordingly. In
addition to the testimony I am delivering today, I would urge the
Subcommittee to review the testimony I presented before the full Senate
Committee on Banking, Housing and Urban Affairs in a hearing on the
financial condition of FHA convened on February 28, 2013. That
testimony provides a background narrative on the history of the HECM
program and current issues.
Programmatic Challenges of HECM
HECM is a versatile personal financial management tool that was
designed to empower older homeowners (over 62 years of age) with the
ability to convert the wealth they have accumulated in the equity in
their homes into cash to meet a variety of needs as they age.
Each and every borrower has particular needs and intended uses of
the funds made available via a HECM; no two cases are the same.
Consumer research of reverse mortgage borrowers, conducted last summer
by ORC International, a global consumer opinion research firm engaged
by NRMLA, revealed that most borrowers utilize the funds from their
reverse mortgage to pay off existing mortgages and other consumer debt
(59 percent of respondents); establish a ``standby reserve'' of cash
for emergencies (53 percent) or uncovered health care expenses (24
percent); supplement monthly income (49 percent), repair or upgrade
their home (33 percent) and/or provide financial assistance to a family
member (14 percent). Most borrowers interviewed utilized funds from
their reverse mortgage for a few of these categories.
The complex economic environment that followed the meltdown of the
U.S. housing market in recent years has had a significant impact on how
and why U.S. homeowners utilize reverse mortgages. Individuals
approaching retirement, whom had intended to work a few years longer,
found themselves unexpectedly out of jobs prematurely and facing
significant payments on their existing mortgages--payments they could
no longer afford to make. As a result, in a number of cases, HECMs were
utilized to pay off the underlying mortgage and eliminate the need to
make monthly payments, preserving their ability to sustain themselves
in their homes.
While this strategy has helped numerous older homeowners sustain
themselves in their homes, it has also caused some stress to the HECM
program. The combination of up-front lump sum draws for the entire
amount of funds available--often required to pay off the existing
mortgage loans--and diminished income from job loss, has left some
borrowers with a deep challenge in being able to continue to meet their
obligations for paying taxes and insurance. With all of the funds from
the HECM already spent to cover the prior mortgage balance and few
additional financial resources left, some HECM borrowers have become
delinquent on their property charges. When coupled with diminished home
values, the HECM program has experienced new stresses, previously
unforeseen, as a result of this confluence of factors.
To address this going forward, HUD staff, with input from the
industry and other stakeholders, has been working on programmatic
changes that would promote more prudent utilization of reverse mortgage
funds. Restricting the amount of equity that would be available upon
closing of a HECM and encouraging that funds be drawn down slowly over
a longer period of time addresses the primary problem to some extent.
When this concept of a ``principal limit utilization'' restriction is
combined with a financial assessment of a prospective borrower's
ability to meet their obligations, and a ``set-aside'' for taxes and
insurance, the recently experienced stresses can be substantially
mitigated.
Need To Address and Improve Consumer Protections
The HECM program has several important consumer protections
inherent in its design. First and foremost is the requirement that
every prospective borrower must go through a HECM counseling session
prior to submitting a formal application to a lender. The counseling
sessions are conducted by ``exam qualified'' professional counselors,
employed by HUD-approved nonprofit counseling agencies that have no
business relationship with a lender or financial interest in the
transaction. The counseling is conducted in accordance with a
``counseling protocol'' that has been developed by a multidisciplinary
group of stakeholders, including senior advocacy organizations,
counseling agencies, reverse mortgage specialists and HUD personnel.
Counseling is continually monitored and improved periodically with
additional aspects added to the protocol when deemed necessary.
Counseling is an area where an intensified approach might be
beneficial for some prospective borrowers. However, it should be noted
that while some observers outside of the industry have been critical of
the efficacy of counseling, surveys of individuals who have actually
gone through the counseling and then obtained reverse mortgages
indicate a high degree of satisfaction with the process and information
presented. While some critics question whether consumers actually
understand reverse mortgages, those who have the loans feel that they
do and have indicated such feelings on various surveys.
That being said, the three primary changes that FHA would like to
quickly implement on the program, (a.) financial assessment of
borrowers; (b.) principal limit utilization restrictions; and (c.) tax
and insurance set-asides, would not only protect the FHA insurance
fund, but simultaneously provide yet another level of safeguards for
consumers. These additional provisions might preclude some needy
borrowers from obtaining HECMs, thus forcing them to make the difficult
decision to move out of their homes. However, these changes are
intended to eliminate those prospective borrowers who are less likely
to have a successful experience with their HECM loan.
The counseling protocol, of course, would have to be updated once
these changes are implemented, so that these three items can be
discussed as part of the counseling process.
In addition to the mandatory counseling for all prospective
borrowers, the HECM program has other important consumer protections,
including required disclosures and limits on fees that can be charged.
Benefits of HECM Loans to Seniors Who Are Able To Age in Place
America faces a growing crisis in the years ahead. It is estimated
that by 2030, there will be 72.1 million adults aged 65 and older,
accounting for 19 percent of the population. People are experiencing
longer life spans with the 85+ becoming the fastest growing demographic
group. Social Security replaces only 40 percent of preretirement
earnings and most Americans have inadequate savings to sustain
themselves through the retirement phase of their lives, a phase that is
growing in duration as longevity increases.
Only 42 percent of retirees have pensions. Sixty percent (60
percent) of U.S. workers report that their total household savings and
investments, excluding the value of their home and any defined benefit
pension, is less than $25,000. Making those meager resources last over
an unknown period of time is a primary stress factor for many older
Americans. They are one mishap away from facing a personal financial
disaster.
A HECM loan is not a complete solution to filling this retirement
financial gap, but it is a valuable tool that has been utilized by
nearly 800,000 older Americans to provide a degree of financial
stability that helps them maintain their homes and age in place. In
some cases, homeowners utilize a HECM to pay off an existing mortgage,
freeing up cash that has been going out the door every month for
mortgage payments, so that it can be used for other expenses. In other
cases, homeowners are establishing lines of credit to be used as a
stand-by cash reserve for expenses that they might have trouble
otherwise paying. These might include emergency repairs, taxes,
insurance or unanticipated, uncovered health care expenses, such as in-
home care. Others utilize the proceeds to make home improvements or
modifications designed to create a home environment in which they can
age in place. Some HECM borrowers choose to receive fixed monthly
payments to supplement their other sources of income on an ongoing
basis.
The HECM program offers enormous flexibility in how homeowners can
draw down their equity allowing the program to be utilized in a number
of different ways and enabling homeowners to plan and maximize the
benefit of their HECM loan proceeds. The stories we hear from HECM
borrowers are each individual and unique. What they share in common is
that, in each and every case, it is the story of an individual
homeowner, or a couple, who needs or wants to reorganize the way they
manage their personal living and health care expenses to achieve a less
stressful and more fulfilling life.
The Impact of HECM on the Mutual Mortgage Insurance (MMI) Fund and
Potential Changes To Protect Taxpayers
The HECM program was the product of much forethought and the
program's designers at HUD did a tremendous job in blazing the trail
and developing a very helpful and flexible loan product. The Department
should be commended for this.
What could not be foreseen at the time the program was conceived
was the deep diminution in home values that occurred in recent years,
coupled with widespread loss of jobs. This tandem occurrence led to an
increase in the number of HECM borrowers utilizing the program to
simultaneously eliminate a mortgage for which they could no longer
afford to make the payments and bolster their current cash flow.
Loans originated in the few years immediately before the housing
crash, when property values were at a historical high, and before FHA
reduced the amount of funds available under HECMs and increased the
mortgage insurance premium (MIP), have had a deleterious impact on
FHA's Mutual Mortgage Insurance (MMI) fund. Because a HECM loan relies
solely on the future value of the home for repayment--no other source
of payment from a borrower is expected--the projected economic value of
the HECM portion of the MMI fund has been disproportionately impacted
by diminished home values. As home price appreciation reverts to its
norm, some of the hypothetical projected loss will be mitigated.
Furthermore, FHA has taken steps to strengthen the HECM program
with more recent books of business. These steps include reducing the
``principal limit factors'' (the reverse mortgage equivalent of loan-
to-value factors) on two occasions and increasing the annual mortgage
insurance premium. As a result of these steps, more recent books of
business are projected to show a positive performance.
In addition to the steps previously taken to improve HECM program
performance, FHA, with industry concurrence, would like to implement a
few additional enhancements to the program. The changes under
consideration would both help protect taxpayers and further safeguard
consumers from entering into a loan transaction that might not be
beneficial to them.
The three changes under discussion include:
A. Financial Assessment of Loan Applicants
This would be a form of underwriting, assessing each applicant's
sources of funds and expenses to ascertain that the prospective
borrower has sufficient resources and income to meet their obligation
to pay property charges, including taxes and insurance, while having
enough money left to cover normal living expenses.
Underwriting for a reverse mortgage would be different than for a
forward mortgage. In a forward mortgage, underwriting essentially
focuses on ascertaining that income will be sufficient for making loan
payments and utilizes debt-to-income ratios to make this determination.
A reverse mortgage requires a slightly different approach. First of
all, there are no monthly payments to be made on the mortgage.
Secondly, a retiree might not have income per se, but instead might
have assets to be spent down, as well as cash advances from the HECM
loan. Accordingly, a ``residual cash flow'' analysis is an approach to
underwriting for reverse mortgage borrowers.
Under this concept, a lender would evaluate a prospective
borrower's income from all sources (Social Security, pensions,
employment), their financial assets (being drawn down on a straight-
line basis over their remaining life expectancy), and any cash
available from the reverse mortgage. The cost of taxes and insurance
would be subtracted from this available ``cash flow'' leaving a
``residual cash flow'' that must be sufficient for covering all other
normal living expenses. NRMLA suggests that FHA require lenders to
utilize a residual income table created by the Veteran's Administration
(VA) for its mortgage programs to determine if sufficient cash flow is
available to make the HECM loan.
B. Principal Limitation Utilization Restriction
HECM loans perform best when funds are drawn down slowly over a
longer period of time. Unfortunately, a confluence of factors over the
past few years has resulted in a disproportionate number of HECM
borrowers drawing down all available funds up front at closing. This
results in interest on the loan balance growing more quickly and loan
balances growing larger than if funds are drawn over time.
FHA is considering implementing restrictions on the amount of funds
that could be drawn down at closing. A Principal Limit Utilization
(PLU) restriction would allow borrowers to only draw enough at closing
to pay off existing liens on the property, plus the costs associated
with obtaining the loan and some modest ``stipend'' for paying other
current expenses. The balance of loan proceeds available would either
remain in a line of credit for future use or be paid out in fixed
monthly payments.
NRMLA believes this is a sensible program improvement that will
lead to a higher degree of success among HECM borrowers and reduce the
risk to the MMI fund.
C. Set-Asides for Taxes and Insurance
There has been some experience with HECM borrowers utilizing all of
their available resources and finding themselves eventually unable to
meet their obligation to keep their property insured and pay real
estate taxes. Under current program procedures, if the homeowner fails
to pay these items, the lender is required to advance its own funds to
cover them. The lender must then work with the borrower to establish a
repayment plan to be reimbursed for such advances. If the homeowner
fails to follow through on the reimbursement plan, the loan is in
default and the loan servicer must seek permission from HUD to call the
loan due and payable.
To help avoid such situations in the future, FHA is planning to
implement a requirement for a ``set-aside'' of some of the proceeds
available from the HECM loan to be used as a source for covering taxes
and insurance. A set-aside is essentially the reverse mortgage
equivalent of an escrow in a forward mortgage.
Other Opportunities To Improve the Home Equity Conversion Mortgage To
Ensure Long-Term Sustainability for the Program, Consumers, and
the MMI Fund
The aforementioned changes to the HECM program that are under
consideration by HUD and the reverse mortgage industry should address
the shortcomings that have been identified with the program. The
challenge is that, as of now, these types of changes can only be made
by the full regulatory development process. This typically takes a year
and a half or more to complete.
Therefore, the most productive action Congress can take is to
provide HUD with the administrative authority to make changes on a more
expeditious basis, so that it has the ability to respond in ``real
time'' as it observes various trends in the economy and patterns of
behavior among HECM borrowers and lenders.
Making the types of program changes outlined above, as well as
continually updating and enhancing reverse mortgage counseling, should
enable the Department to effectively manage the HECM program enabling
it to remain a useful tool for elderly homeowners, while minimizing
risks to the taxpayers.
It is my understanding that some parties are concerned with vesting
too much authority with FHA by granting them the ability to make
program changes via Mortgagee Letter, in lieu of regulations. I do not
share this concern.
I have worked with HUD on HECM program issues for nearly 15 years
now and have always found the Department to be a responsible steward of
the program. FHA has continually monitored performance, collected
feedback both informally and through various studies, and consulted
with many stakeholders before modifying any procedures. I have no
reason to doubt that such responsible leadership would continue if HUD
is given the authority to fine-tune the HECM program as economic
conditions and program performance require it to do so.
Thank you for the opportunity to appear here today. More
importantly, thank you for the support that the HECM program has
received over the years from Members of this Subcommittee from both
sides of the aisle.