Atare Agbamu's Think Reverse! Blog

HECM Lenders at Risk

Administrator — Fri, 20 Apr 2012 16:54:50 +0000

The Consumer Finance Protection Bureau (CFPB) is gearing up to enforce the nation’s equal credit laws, and reverse mortgage lenders could be in line of regulatory fire without uniform HECM needs-assessment guidelines from the US Department of Housing and Urban Development (HUD).

In the absence of uniform rules from HUD (HECM’s creator, insurer, and police), present every-lender-to-itself “financial assessment” is an invitation to claims of discrimination, regulatory headaches, and bad press for lenders and the industry.

As demonstrated by industry financial-assessment initiatives since last November, reverse mortgage lenders want to do the right thing , but they need to know what that “right thing” is from HUD. For more than 22 years, “financial assessment” was not part of the reverse mortgage origination process. Persistent and growing tax and insurance defaults have changed that. Some form of loan-sustainability assessment is now necessary for the good of borrowers, lenders, investors, and US taxpayers.

As I argued in my new column in NRMLA’s Reverse Mortgage Magazine (May-June 2012 issue), whole-person assessment guidelines are needed. With CFPB ready to enforce federal equal credit laws, absence of uniform rules that only HUD can propose could hurt lenders and the industry.

Protect Nonborrowing Spouses

Administrator — Mon, 20 Feb 2012 07:55:30 +0000

When non-borrowing spouses are subject to displacement upon their borrowing spouses’ death, the reputation of reverse mortgage products and the industry suffers. That is why it is good business for HUD and industry to find creative and humane ways to solve this structural problem.

Reverse mortgages have proven their worth in the lives of older American home-equity-rich homeowners who need extra cash to supplement their retirement income. In a 2007 AARP-sponsored national survey of actual borrowers, a majority credit reverse mortgages with:

* Giving them peace of mind, 94 percent;

* Helping them have a more comfortable lifestyle, 89 percent;

* Giving them improved quality of life, 87 percent, and

* Helping them remain at home, 79 percent.

It is noteworthy that the study was conducted at a time of presumed and actual excesses in mortgage lending in this country.

Non-borrowing spouses are influential points of influence in reverse-mortgage borrowing decisions. Because of life-expectancy and demographic realities, they are mostly women, giving the problem a disturbing gender flavor. Products that are perceived as structurally hostile to non-borrowing spouses who are generally women are unlikely to enjoy broad support, putting a damper on growth.

Although the Federal District Court for the District of Columbia dismissed Bennett et al v. Donovan last July, it may not be over. The raw human anguish and the legal issues raised in the case are still with us. Read more.

Failure to Protect: The Case against HUD, part 5

Administrator — Wed, 09 Nov 2011 05:49:20 +0000

Why “AARP” Lawsuit Matters

There are a few reasons why Bennett et al v. Donovan, the so-called “AARP” Lawsuit, is one of this year’s most important events in U.S. reverse mortgage industry.

It is the first case of its kind. No borrowing or non-borrowing spouse has ever sued HUD, an agency of the federal government, or challenged its interpretation of HECM laws and regulations. HUD can expect other challenges if its actions or non-actions hurt seniors who use HECM reverse mortgages.

The lawsuit raised a critical issue that has remained dormant for 22 years of the program and the industry’s history: Who is a HECM Homeowner? Because the key issues in the case were not addressed before its dismissal in July for “lack of standing,” that fundamental question will reappear, and it should be addressed either in the courts or in Congress.

Putting the plight of non-borrowing spouses on the map is a major achievement of the case. What is this plight? It is displacement of spouses from their marital homes when borrowing spouses die. Congress clearly wanted non-borrowing spouses protected; but HUD’s interpretation of the law, which, it believes, ensures the program’s actuarial survival, ruled that out.

Forcing HUD to take back the odious Mortgagee Letter 2008-38 is an important result of the lawsuit. It will take years to undo the damage the letter did to seniors, HUD, lenders, and the industry. HUD has the litigation to thank for compelling it to scrap a destructive policy. If HUD were not a federal government agency with a stranglehold on the reverse mortgage market and other mortgage insurance business, lenders could have tied it up in court for damages ML2008-38 caused them.

Although temporarily, the case pushed HUD to suspend foreclosures and evictions relating to issues raised in the lawsuit, giving many non-borrowing spouses some relief. Why do you think the case is important, or not important?

Failure to Protect: The Case against HUD, part 4

Administrator — Sat, 20 Aug 2011 00:31:32 +0000

High-cost Interpretations

HUD is a protector of consumers in the nation’s housing markets, yet it has been accused of failing to protect non-borrowing spouses in HECM reverse mortgage transactions in a recently dismissed federal case, Bennett et al v. Donovan, the so-called ‘AARP lawsuit.’

How did HUD get this stain on its reputation? There are several explanations but we focus on one: HUD’s interpretation of the word “homeowner.”

HUD’s interpretation says a homeowner in HECM reverse mortgages must be 62 and must be the person(s) who signed the mortgage note.

The plaintiffs — Robert Bennett, Delores Moore, and Leila Joseph — say a homeowner is the person who signs the mortgage note and their spouse, whether the spouse signed the loan papers or not.

Both definitions of HECM homeowner are found in the federal laws which govern the program. This is a new ground in reverse mortgages in this country. So whose definition of homeowner is correct?

HUD believes its interpretation is the correct one because it is the only interpretation that meets the twin goals of the program — more cash for seniors and safety of the federal insurance fund that makes HECM lending possible. It argues that the opposing interpretation will kill the program for all seniors and create financial losses for HUD and taxpayers.

Meanwhile, plaintiffs’ lawyers say “hundreds” of seniors across the country, in situations similar to the plaintiffs, have suffered foreclosures and evictions from their marital homes. And the harvest of litigation and bad publicity for reverse mortgages, an otherwise beneficial product for seniors to use their home equity to support their retirement income, may not be over.

So how did HUD the protector become HUD the tormentor of non-borrowing spouses in HECM reverse mortgages? It is by crafting and sticking with an interpretation of homeowner that excludes the non-borrowing spouse.

Failure to Protect: The Case against HUD, part 3

Administrator — Mon, 01 Aug 2011 16:35:57 +0000

Tulsa Detour : The Road to Hell

It began with good intentions at HUD.

But the results of good intentions can sometimes be anything but good: ” …hundreds of foreclosures on the homes of elderly widows and widowers …”(1), severe reputational blows to HUD and the HECM program, the resignation of an FHA chief, large legal and other costs to taxpayers, and it may not be over. What caused the “AARP Lawsuit” against HUD?

The immediate causes of the lawsuit were the foreclosures, evictions, and the raw human anguish the plaintiffs (and other elderly widows and widowers around the country) faced. But the origin of the litigation requires a little history.

From the beginning of the HECM program in 1989 until about 2006, HUD defined HECMs as non-recourse loans, meaning borrowers or their heirs can never owe more than the value of the home when the loan must be repaid. That was the commonly-accepted definition and rule in the industry. It helped HUD and lenders reassure nervous seniors that HECM reverse mortgages will not hurt their heirs and relatives when the borrower dies. It was a bed-rock policy. And it was not free: seniors paid (and continue to pay) a handsome insurance premium for that assurance.

By 2006, unknown to the public and the industry, high officials at HUD’s servicing unit in Tulsa, Oklahoma unilaterally forced dead borrowers’ heirs to repay the full loan balance if they want to keep the home, even if the loan balance exceed the home’s value. This practice, which radically changed long-held HECM non-recourse policy, was mentioned to HECM counselors during a February 2006 training session by an official of HUD’s servicing. Let’s call it the Tulsa Detour.

Stunned HECM counselors who attended the Tulsa training sought clarification from HUD. In July 2007, a lawyer at HUD said the long-held definition of non-recourse was “not quite accurate.”(2) Essentially, HUD lawyers blessed the odd practice of their servicing colleagues in Tulsa. Except for some HECM counselors, the public and the industry was largely unaware of this massive shift in non-recourse policy. Lenders and their loan officers were still telling seniors, their relatives, and the public that they “can never owe more than the home’s value” when they take HECM loans.

Enter AARP. In a major national report on reverse mortgages released in December 2007 (3), AARP flagged the difference between HUD’s stated and long-held non-recourse policy and the Tulsa Detour. The seniors’ group asked HUD to match its practice with its policy. Instead of blending practice with policy, HUD worsen the problem.

On December 5, 2008, in the waning days of the Bush administration, HUD issued the controversial Mortgagee Letter (ML) 2008-38, which approved the Tulsa Detour as a “clarification” of existing policy. Besides changing HECM non-recourse policy, ML 2008-38 inexplicably barred heirs and relatives of HECM borrowers from bidding for their homes at loan termination, the so-called “Arms-length Rule.” Within a month of the AARP-led litigation, HUD hurriedly revoked ML 2008-38 in April, 2011.

Why the Tulsa Detour and ML 2008-38? The officials at HUD servicing (and the lawyers at HUD General Counsel’s office who provided legal cover) thought they were closing a legal loophole in the original non-recourse policy. How did I know that? An email to me from a high official at HUD (in response to my March 2009 Op-Ed in Origination News calling for the revocation of ML 2008-38) said as much (Click here) . It is the classic good intentions leading straight to hell: foreclosures, evictions, human anguish, lawsuits, lawyers, fees, resignations, bad press, and pure hell for all.

Good intentions! Thus a short-sighted attempt to close a potential “loophole” drove HUD and the HECM program into a human, legal, financial, and reputational gaping-hole that it must now dig itself out of. The dismissal of the lawsuit on technical grounds on July 15th offers HUD an opportunity to solve the core problem: Protection for the non-borrowing spouse in HECM transactions as decreed by Congress more than 22 years ago.

Notes:

(1) Robert Bennett et al v. Shaun Donovan, in his capacity as Secretary of The United States Department of Housing and Urban Development (Complaint, paragraph 7, page 3)

(2) Robert Bennett et al v. Shaun Donovan,, in his capacity as Secretary of The United States Department of Housing and Urban Development (Complaint, paragraph 44, page 9)

(3) Reverse Mortgages: Niche Product or Mainstream Solution? PP. 111-112

Failure to Protect: The Case against HUD, part 2

Administrator — Fri, 22 Jul 2011 23:17:37 +0000

A Pyrrhic Victory?

Last Friday (July 15), the Federal District Court for the District of Columbia bought HUD’s argument and dismissed a lawsuit brought by two widows and a widower, spouses of dead reverse mortgage borrowers who faced foreclosure and displacement from their homes.

The court’s decision, which was based on technical grounds (“lack of standing”), amounts to a tactical victory for HUD. Instead of celebrating, HUD should see the decision as an opportunity to solve the predicament of the non-borrowing spouse in reverse mortgage transactions.

What is this predicament? It is displacement from the marital home of the non-borrowing spouse when the borrowing spouse dies. In the HECM program’s governing laws, Congress foresaw the problem and specifically asked HUD, the program’s designer, insurer, administrator and police, to protect the non-borrowing spouse. However, according to the lawsuit, HUD has never implemented this provision of the governing federal law. Why? Your guess is as good as mine.

Among others, one lesson we can take from this AARP-led litigation is that some issues cannot be swept under the rug, as HUD has done for more than 22 years. The core issue — the displacement of the non-borrowing spouse in HECM transactions — must be addressed now, not later. Otherwise, it will cast a pall on industry growth and negate reassuring marketing messages about product safety. It could further expose HUD and lenders to litigation and other risks. Who wants HECM, knowing it could result in the displacement of their spouse when they die?

The preventable disaster of now rescinded Mortgagee Letter 2008-38 (thanks to the lawsuit) and the resulting “AARP lawsuit” has brought this issue out. The consuming public now knows this ugly underbelly of the HECM program.

Getting this lawsuit dismissed on shaky technical grounds will turn out to be a pyrrhic victory unless HUD seizes the moment and moves fast to address the predicament of the non-borrowing spouse in reverse mortgage transactions. By any measure, 22 years of indecision on this issue is enough.

Failure to Protect: The Case against HUD, part 1

Administrator — Sun, 15 May 2011 08:24:22 +0000

The Non-borrowing Spouse and Reverse Mortgages

Harlan Moore must be turning in his grave. He died in 2008 believing that, upon his death, his wife and only heir, Delores, will be protected from displacement from their marital home in Covington, Indiana.

The assurance he got when he and his wife received counseling for a government-insured reverse mortgage in September 2005 seemed iron-clad: It came from the informed lips of a HUD-approved reverse mortgage counselor, who repeated a bed-rock program policy: Delores Moore could keep the home by paying off the loan balance but would never owe more than the fair market value of the property.

But 16 months after Harlan was buried, Delores Moore, 79, faced foreclosure and eviction from her marital home. Leila Joseph, 77, of Brooklyn, New York and Robert Bennett, 69, of Anapolis, Maryland (widow and widower of HECM borrowers Albert Joseph and Ophelia Bennett) met similar fates.

The widower and two widows are the plaintiffs in a seminal case for America’s seniors and the U.S. reverse mortgage industry now before the U. S. District Court for The District of Columbia. Filed March 8th, 2011 by AARP Foundation Litigation and the Washington, D C Law firm of Mehri & Skalet on behalf of the bereaved HECM spouses, the so-called “AARP Lawsuit” can be summed up in three words: Failure to protect.

What caused the ‘AARP lawsuit’? How did a federal government agency, authorized by Federal law to protect non-borrowing spouses in HECM transactions, end up accused of failing to provide that protection? How will the case’s outcome affect seniors, HUD, and the reverse mortgage industry? Why is the case important? Without statutory anti-displacement protection provision for non-borrowing spouse in a reverse mortgage contract, can the contract be legally valid? These are some of the questions we will look at in the series.*

For this series, I have three goals: to explain the lawsuit; to advance the idea that protection for non-borrowing spouses is good for the industry, and to suggest some ideas for protecting non-borrowing spouses.

*The series continue in July upon my return from Africa.

Beyond ML 2008-38: The 800-Pound Can of Worms

Administrator — Thu, 07 Apr 2011 04:47:46 +0000

After more than two years of single-handedly urging HUD to revoke Mortgagee Letter (“ML”) 2008-38, it finally listened, under legal and political pressure.

HUD issued Mortgagee Letter 2011-16 on Tuesday, April 5, 2011, rescinding the odious Mortgagee Letter 2008-38 (December 5, 2008), the cause of ongoing litigation brought by a widower and two widows (the “AARP case” March 8, 2011), among hundreds of seniors across the America who have been recklessly hurt by the application of ML 2008-38 as alleged in the federal lawsuit.

Besides being two years late, ML 2011-16 is a clumsy legal maneuver as well as an admission that ML 2008-38 was (and is ) a colossal mistake that has injured seniors and exposed lenders, servicers, and HUD (taxpayers) to potentially huge legal, financial, and reputational risks.

I say “clumsy legal maneuver” because while it may have been issued to blunt the AARP lawsuit, it actually buttresses the case against HUD. More troubling, in rescinding ML 2008-38, HUD leaves HECM non-recourse policy in doubt, putting seniors, counselors, and lenders in regulatory limbo on a crucial issue in the nation’s reverse mortgage industry.

The 800-pound can of worms in the “AARP case” – HUD’s almost 22-year scandalous failure to protect non-borrowing spouses in HECM transactions by willfully and arrogantly refusing to implement the anti-displacement provision of the HECM Statute – is not going away. It has the potential to become the grandmother of all legal and financial exposure for HUD
and lenders, thanks to the superior legal minds at HUD who substituted their bureaucratic judgment for a clear Federal law.

I believe the non-implementation of the anti-displacement law, Mortgagee Letters 2008-38, 2006-25, 2011-16, and other HECM policy letters call into question the judgment and competence of some of the legal counsel at HUD. The best risk-management decision Secretary Donovan and Acting FHA Commissioner Ryan can make today is to clean house at the highest level of HUD’s servicing and legal departments.

An Assault on Fairness: Quash Mortgagee Letter 2008-38, part 2

Administrator — Mon, 04 Apr 2011 02:01:33 +0000

On Tuesday, March 8, 2011, AARP sued The U S Department of Housing and Urban Development (HUD) over reverse mortgage foreclosures caused by Mortgagee Letter 2008-38. In a series of articles beginning in February 2009: “Grandma Rita’s Heirs and the 20-year ‘Mistake’”(The Reverse Review), “Revoke Mortgagee Letter 2008-38″ (Origination News), “An Assault on Fairness: Quash Mortgagee Letter 2008-38, parts 1 and 2 (My Blog and National Mortgage Professional Magazine), I challenged HUD’s revised HECM non-recourse policy in ML2008-38 and urged HUD to rescind it. HUD did not listen. The suit AARP filed on March 8th 2011 vindicates my position. I applaud AARP for taking on HUD on behalf America’s voiceless seniors who are using HECM to supplement their retirement income. Let justice be done for America’s seniors!

– Atare E. Agbamu

A version of this article was first published on this blog on June 1, 2009. Please read on:

Greetings…

In the dying days of the Bush administration (December 5, 2008), FHA issued Mortgagee Letter 2008-38 (ML-08-38). ML-08-38 is a raw deal for America’s seniors who have taken, who are taking, or who plan to take HECM reverse mortgages, the dominant program in the U.S. reverse mortgage market. “An Assault on Fairness …” shows why we believe ML-08-38 is a raw deal for seniors and their heirs/estate and why we are asking HUD to quash it.

In part one of “An Assault on Fairness …,” we looked at the assumptions behind ML-08-38 and concluded that they are severely flawed. Also, we affirmed that ML-08-38 represents a disturbing departure from historical HECM non-recourse policy. We now turn to why the arms-length rules in ML-08-38 turn off seniors’ relatives and cost taxpayers money.

As I recounted in a March 29th blog comment on ReverseMortgageDaily http://reversemortgagedaily.com/2009/03/25/should-hud-change-its-recourse-policy-for-reverse-mortgages/,
the unfairness in the arms-length rules in ML-08-38 have the potential to arouse anger and alienate seniors’ heirs and relatives — core centers of influence, essential to continued HECM and reverse mortgage acceptance by seniors.

Despite consistently high customer satisfaction with HECM and reverse mortgages, the 2007 AARP report revealed a vexing fact: a majority of seniors are still shying away from HECM and reverse mortgages. Why? There are several theories that are outside the scope of this article.

However, we believe that when fully understood by seniors, their heirs, and the public, policies such as ML-08-38 could reinforce this adverse trend. Twenty years after relentless consumer education by HUD, Fannie Mae, AARP, NRMLA, and lenders, HECM and reverse mortgage usage by eligible seniors is still less than one percent of known reverse capacity.

Given vital macro-economic needs to pay for baby-boomers entitlements, shrink the national debt, and lower taxes to maintain economic growth, an HUD policy that discourages seniors and their heirs from using HECM and reverse mortgages is unwise and counterproductive for all – seniors, federal treasury (taxpayers), and industry.

Take this incidence. Recently, I was explaining the new arms-length rule and the “clarified” HECM non-recourse policy in Mortgagee Letter 2008-38 to a senior and her daughter when the middle-aged daughter exploded:

“Atare!” she snapped. “This policy amounts to elder abuse [emphasis added] by our federal government! They collect hefty mortgage insurance premiums from seniors. Then, they arbitrarily deny them and their heirs one of the benefits of those expensive premiums?” “It is an outrage! It stinks!!”

Although it is understandable, the vehemence of her reaction stunned me. It is a reminder of the law of unintended consequences. The well-intentioned authors of the policy never imagined that their policy could be taken as elder abuse.

Full disclosure requires that HECM loan officers, counselors, and marketers explain the implications of ML-08-38. If my encounter is any guide, ML-08-38 will challenge seniors and their families. It may actually bring HUD/FHA some public scrutiny, multiplying opportunities for additional misinformation and misconceptions.

Taxpayers Lose

There is a wrong-headed assumption implicit in ML-08-38: It is good for taxpayers because it prevents seniors’ heirs and family members from buying the property at market value, waiting a couple of years, and selling it at a profit (the so-called “gaming the system” concerns). It sounds logical and prudent on the surface. ML-08-38 formulators deserve a “Congressional Medal of Prudence.” Well, let’s look deeper.

Granted, at loan termination, seniors’ heirs could refuse to the pay full loan balance demanded by HUD. They could walk away from the property without recourse. Then, the property becomes a HUD real estate owned or REO after a foreclosure process (at taxpayers’ expense). Mind you, HUD cannot sell property at loan balance amount. It may sell it at appraised market value if there is an arms-length buyer. As a HUD REO, taxpayers assume all carrying costs, legal costs, auction costs, etc.

Absent occupancy, six months after taking over property through the foreclosure process, collateral value can be expected to drop. HUD puts property up for sale through the auction process. At auction, winning bid is 25 percent less than termination market value (TMV). Add carrying costs, foreclosure costs, auction costs and we are looking at close to 40-to-50 percent depreciation from TMV.

Conversations with experienced REO market participants and managers suggest that the scenario we have sketched here is plausible. They say there is no way HUD can expect to get loan balance value (LBV) [what the authors of ML-08-38 want] or TMV [what heirs/estate want to pay by right] at loan termination. Now, if this is the reality of REO properties (and we assume that the makers of ML-08-38 know this), then it is foolhardy to erect regulatory barriers that prevent heirs from reclaiming family property and heritage by paying TMV. Bottom-line: The foreclosure and carrying costs of such REOs will cause HUD greater losses than if it had allowed the heirs to purchase the property at maturity for the TMV.

The federal treasury might actually benefit from allowing heirs/estate to buy the property at TMV. Let’s say the TMV is $100,000, and the LBV is $125,000. The heirs/estate acquire property for $100,000. The $25,000 difference is considered ‘forgiven debt,’ fully taxable under existing IRS rules, according to tax experts. If heirs/estate balk at paying LBV and property becomes an HUD REO, HUD would be lucky to get $75,000 or $60,000 at auction before selling and other costs. Since HUD cannot expect to get $125,000 at auction, isn’t it
prudent for HUD to take TMV of $100,000 (excluding forgiven-debt taxes to federal treasury) instead of $75,000 or $60,000 auction value? Ironically, with ML-08-38, taxpayers lose money while faithful adherence to pre-ML-08-38 HECM non-recourse rules saves taxpayers money.

But by far the most disturbing flaw in the arms-length rules in ML-08-38 is its impinging on a core American homeowner right: The right to redeem, the right to reclaim, and the right to take back the family homestead or the family farm from the lender even after foreclosure. For example, Brian Jones shows up to buy the Jones’s family homestead of six generations from HUD. HUD tells Brian to get lost because he is a relation of Judy Jones, Brian’s deceased mother. Meanwhile, Mrs. Jones stipulated in her will that Brian, as her executor, must
reclaim property in the interest of family and heritage. There can be a great deal of emotional undercurrents around seniors, HECM, home, heritage, heirs, and relatives. It is doubtful that HUD or any government entity should be interfering in these intimate family issues through misguided regulations.

The Under-age Spouse Dilemma

There are scores of outstanding HECM loans where one spouse is under-age (or under 62). Usually, the under-age spouse is a woman. But there may be some men.They have been taken off title to make the HECM loan possible. They were told at application and at closing that they cannot assume the loan when the borrowing spouse dies or leaves the home permanently. Presumably, they understand that they could be on the streets.

To ensure that their spouses do not end up on the streets and in the expectation that their full non-recourse benefit would kick in, borrowing spouses may have made provisions in a will for the living or community spouse to reclaim the property upon their death or permanent move from the mortgaged home. Under ML-08-38, the under-age spouse has two needless regulatory hurdles to scale: the arms-length rules would keep them from buying “their” home back directly; if they are unable to buy it back, the “clarified” non-recourse hits them unfairly with the full loan balance. If they don’t have the full loan balance, they end up on the streets when their titled spouse dies or moves out permanently. With millions of second, third, even fourth marriages out there in baby-boomer-land, how many potential HECM borrowers or their spouses are going to embrace ML-08-38-HECM reverse mortgages if they are fully informed as they must be? How many HECM counselors and originators are going to enjoy sharing the full implications of ML-08-38-HECMs with potential customers and their relatives?

Now, imagine this: ML-08-38 arms-length rules effectively nullifies the terms of a solemn private contract between the dead and the living, between one generation and another, between husband and wife, between mother and son, or between father and daughter for that matter. To honor his mother’s will and to be faithful to his contractual obligation as her executor, Brian may be compelled to use dishonest means (such as buying the property through unrelated third party or parties who may later sell the property to Brian). Why should HUD allow anybody but the senior’s family to buy the property? What public purpose does it serve to erect arms-length walls in HECM situations? Why should federal policy deliberately create ethical dilemmas for families in HECM transactions, especially at a time when families may be grieving? Arms-length rules may have a place in HUD’s regulatory schemes, but we doubt that HECM is an appropriate place for them because it is different.

From the foregoing, it is evident that ML-08-38 is a bad public policy: It costs taxpayers money; it violates a fundamental right of America’s senior homeowners who take HECM reverse mortgages; it turns off seniors and their relatives from a beneficial program that helps seniors and the federal treasury; and it uses a sledgehammer on an imaginary fly, smashing the heart of HECM in the process. Above all, it is a needless assault on old-fashion American fairness and justice. Quash it now and reaffirm full HECM non-recourse policy.

An Assault on Fairness: Quash Mortgagee Letter 2008-38, part 1

Administrator — Tue, 22 Mar 2011 03:43:45 +0000

– Atare E. Agbamu

A version of this article was first published on this blog on May 18, 2009. Please read on:

By shifting HECM non-recourse policy to deny seniors and their heirs a key benefit of their expensive mortgage insurance premiums, by imposing arms-length rules which turn off seniors’ heirs and cost taxpayers money, FHA Mortgagee Letter 2008-38 is an assault not only on fairness but also on a core homeowner right: The right to reclaim the family homestead or the family farm from a creditor without a snag. It should be repealed forthwith.

Since my March 18^th Op-Ed in Origination News http://brokeruniverse.com/originationnews/views/?story_id=130 feedback from senior policy-level people at HUD points unmistakably to misguided assumptions behind the flawed mortgagee letter.

Part one of this article examines the assumptions in the HUD feedback. Part two looks at why the new arms-length rules in ML-08-38, when fully understood and fully disclosed to consumers, will turn away seniors and their relatives from HECM. It concludes by showing that ML-08-38 is costly to taxpayers and unjust to seniors and their relatives.

Two days after my Origination News OP-Ed, this email, among others from senior policy-level people at HUD, came in:

“Yes, well, I would agree that it’s of concern that we’ve closed the one loophole that existed – that is, heirs could BUY the properties from the estate to keep the home, but not pay off the full loan balance. Other than that, you’re actually offering up some inaccurate statements about the program’s history. Although many people SAID, “Neither the borrower nor the heirs will ever owe more than the value of the home,” that’s an inaccurate statement on their part and our guidance has never said as much. Our policy position has always been: UPON SALE, the borrower or heirs will not owe more than the value . . . This distinction is VERY clear in our regulations. So the ML does not represent any change in policy position on this matter. Therefore, the ML [2008-38] that has been charged is appropriate and consistent with historical policy. AND, the definition of non-recourse IS just as we said it was – so that doesn’t represent a change.

So, the only change presented in this new ML is that that the heirs can’t buy the property from the estate to avoid paying off the full loan balance.”

Assumption number one: The 20-year-old language and industry-wide understanding in pre-ML08-38 paragraph 1-3C of the HECM Handbook contain a loophole. ML-08-38 is a regulatory loophole plug twenty years after the fact. Again, let’s review the language of chapter 1, paragraph 3C (1-3C) of the HUD HECM Handbook 4235.1 Rev.-1:

“The HECM is a “non-recourse” loan. This means that the HECM borrower (or his or her estate) will never [emphasis added] owe more than the loan balance or the value of the property, whichever is less [emphasis added]; and no assets other than the home must be used to repay the debt.”

Far from being a loophole, the above language expressly affirms and codifies a major benefit for which every HECM borrower is required to pay mortgage insurance premiums. Those premiums cover both crossover risk (protecting lender from property value decline at loan termination) and the recourse risk (protecting borrower from paying more than home’s market value at loan termination).

The above language was itself a 1994 explanation of non-recourse in the original HUD HECM Handbook 4235.1 of August 24, 1989. Here is the original non-recourse language (Read: historical policy):

“The lender’s recovery from the borrower will be limited to the value of the home. There will be no deficiency judgment taken against the borrower or the estate.” [Section 1-12-B, p. 1-6]

So where is the appropriateness of ML-08-38? Where is the consistency of ML-08-38 with historical policy? And where is the policy foundation for the formulators of ML-08-38? There is none.

And sadly, with ML-08-38, lender-investor (and successors) benefit/right is unimpaired, but borrower-heirs/estate benefit/right is arbitrarily taken away by administrative fiat without an Act of Congress. This is an imbalance. For the party paying the hefty mortgage insurance premiums, this is a grave injustice.

While I leave you, the reader, to judge the inaccuracies in my March 18^th Op-Ed, let’s look at the second premise in the HUD email: public and industry understanding and interpretation of paragraph 1-3C is wrong:

“Although many people SAID, “Neither the borrower nor the heirs will ever owe more than the value of the home,” that’s an inaccurate statement on their part and our guidance has never said as much. Our policy position has always been: UPON SALE, the borrower or heirs will not owe more than the value . . . This distinction is VERY clear in our regulations. So the ML does not represent any change in policy position on this matter.”

Really! “…that’s an inaccurate statement on their part and our guidance has never said as much.” Incredible! It is hard to understand these assertions, especially coming from high and responsible policy-level people at HUD. Please go back and re-read paragraph 1-3C of the HECM Handbook as well as the original non-recourse language I referenced above and ask yourself: Is that the language of “many people”? Wasn’t that HUD policy language (guidance) for 20 years until the travesty of ML-08-38?

Fannie Mae, HECM’s sole investor from program inception in 1989 until 2006 and its dominant buyer today, uses the pre-ML-08-38 language of paragraph 1-3C. Here is a Fannie Mae consumer education Q&A posted in August 2004:

“Q: Will my heirs owe anything to the mortgage lender if I die?

A: Upon your death, the loan balance, consisting of payments made to you or on your behalf plus accrued interest, becomes due and payable. Your heirs may repay the loan balance by selling the home or by paying off the HECM loan so that they may keep the home. If the loan balance exceeds the value of your property, your heirs will owe no more than the value of the property. FHA insurance will cover any balance due the lender. No additional financial claims may be made against your heirs or estate.” [Emphasis added] Click here.

NRMLA, the industry’s preeminent trade group, has a similar understanding of non-recourse as demonstrated by this consumer safeguard information on its Web site, dating back to May 2005:

“Asset Protection. The reverse mortgage is a “non-recourse” loan. This means that the amount due can never exceed what the home is worth. Title to the home always remains with the borrower. When the loan becomes due, the lender is repaid the sum of funds advanced plus the accrued interest, but never more than the value of the house. If there is remaining value, it belongs to the homeowner or the estate.” [Note: Since this post (May 18th), NRMLA has revised this wording on its Web site to reflect ML-08-38. However, NRMLA's revision does not change its historical accuracy, nor has it revised thousands of hard copies in circulation for years.] Click here.

Bank regulators at the Federal Deposit Insurance Corporation (FDIC) underscore the pre-ML-08-38 understanding of HECM non-recourse in the Winter 2008 edition of Supervisory Insights. Here is the wording:

“What happens if the value of the house becomes less than the amount of the loan?”

“FHA insures the difference. The borrower (or borrower’s heirs) will not be responsible for shortages if the value falls below the outstanding balance. The borrower pays FHA insurance premiums during the term of the loan; these premiums are added to the loan balance. (FDIC’s Supervisory Insights, Vol. 5, Issue 2, Winter 2008, p.16, Table 2).”

Aspects of a June 29, 2009 General Accountability Office (GAO) report to Congress on reverse mortgages underscore our position that ML-08-38 is a deviation from historical HECM non-recourse policy. Sadly, it also affirmed one of our concerns in my March 18th Origination New Op-Ed: HECM non-recourse marketing claims are now suspect, even “potentially misleading” as the GAO report stated:

“Never owe more than the value of your home”: The claim is potentially misleading because a borrower or heirs of a borrower would owe the full loan balance—even if it were greater than the value of the house—if the borrower or heirs chose to keep the house when the loan became due. This claim was made by HUD itself in its instructions to approved HECM lenders; however, in December 2008, HUD issued a mortgagee letter to HECM lenders explaining the inaccuracy of this claim [emphasis added]. This was the most common of the potentially misleading statements we found in the marketing materials we reviewed. Of the potentially misleading statements found among the top 12 HECM lenders, variations of this statement were the most prevalent.

In other words, the absolute HECM non-recourse claim was “made by HUD itself” before it became “inaccurate” almost 20 years later.

The Fannie Mae and the NRMLA consumer information postings on non-recourse tell us what Fannie Mae and NRMLA believed was the correct interpretation of paragraph 1-3C (of the HECM Handbook 4235.1 Rev.-1) well before HUD published ML-08-38 on December 5, 2008.

Moreover, we must keep in mind that HECM borrowers who have or are currently relying on Fannie Mae’s or NRMLA’s online descriptions of the non-recourse limit are paying their full MIPs [monthly insurance premiums] but are not getting the full non-recourse protection for their heirs that the program’s leading investor and trade organization are describing on their websites.[Note: Since this post, NRMLA has revised its Web site's non-recourse description to reflect ML-08-38]

They also are not getting the complete non-recourse protection that HUD assumed when calculating the HECM MIP. Below is the key section from the HUD document that describes the HECM model used by HUD to calculate payment amounts and MIP charges. It clearly never anticipated that HECM borrowers or their heirs would be liable for repayments exceeding home values. To the contrary, the MIP was calculated on the assumption that they would NOT be responsible for such repayments. In other words, the HECM MIP was calculated to fit HUD Handbook 4235.1 (and subsequent REV-1) definition. So HECM borrowers have been paying for this protection but not getting it. Here is the key section from the HECM model document:

“The debt is non-recourse, which means that if the borrower is unable to repay the loan when due, the lender looks only to the value of the mortgaged property for repayment and not to any other assets of the borrower or the borrower’s estate.” (“The FHA Home Equity Conversion Mortgage Insurance Demonstration: A Model to Calculate Borrower Payments and Insurance Risk,” HUD Office of Policy Development and Research, October 1990, Part II-A, page 3. HUD User # HUD-005802*s)

Furthermore, in deciding whether to pay loan balance or market value, the operative phrase in paragraph 1-3C of the HECM Handbook is “… whichever is less.” When there is a crossover event at loan termination, market value is always less. Therefore, it follows that if the borrower’s heirs/estate wants to reclaim the property, a legitimate need in some HECM loan termination cases, they will (and should) pay market value because it is an option for which the borrower has paid a very steep price.

The final assertions in the feedback that ML-08-38 “… is appropriate and consistent with historical policy” and “the definition of non-recourse IS just as we said it was – so that doesn’t represent a change” strain credulity again because we have every right to expect the best from our federal civil servants. In other words, if ML-08-38 is not a new rule, why issue it in the first place? Why the conditional recasting of non-recourse?

The fact is ML-08-38 is a clumsy policy response to a specific policy recommendation from AARP. For years HUD was violating its own non-recourse policy in practice. That is, it was forcing heirs who want to keep the family homestead to pay the full loan balance in breach of the “whichever is less” language of paragraph 1-3C of its program handbook. Enter senior advocate colossus, AARP.

In a major national report released on December 7, 2007 (“Reverse Mortgages: Niche Product or Mainstream Solution?” pp.111-112), AARP asked HUD to stop the above practice and harmonize its HECM non-recourse practice with its stated policy in paragraph 1-3C of the HECM Handbook. Here is what AARP said in the report (contrast it with assertions in the HUD feedback we are looking at):

“Some borrowers’ heirs may be in for a rude surprise when they learn that HUD is administering a key provision of the HECM program in a way that differs from what loan officers or counselors may have told them.”

[It quoted paragraph 1-3C verbatim and continued]

“As actually administered by HUD, however, the non-recourse provision only applies to the estate if it sells the home. If the estate does not do so, it must repay the full amount of the loan balance, even if it exceeds the value of the home. But HUD has never announced that its non-recourse practice differs from the policy in its HECM program handbook or that new regulations or policy letters have altered the handbook’s non-recourse policy.”

“As a result, many consumers may have been misinformed about this key defining characteristic of the HECM loan [emphasis added]. HUD should resolve the discrepancy between its stated non-recourse policy and its practice by conforming its practice to the definition in the HECM handbook.”

What is clear from the above is that AARP’s understanding of HECM non-recourse policy is in line with Fannie Mae’s, with NRMLA’s, with industry participants’, and with the public’s understanding of the policy. Equally clear is that AARP found the inconsistency in HUD’s stated HECM non-recourse policy and actual practice sufficiently troubling to recommend the harmonization of practice with policy. And it is abundantly clear that veracity is absent in HUD’s assertion in ML-08-38 that some program participants were “mistaken” about the policy.

There is another point we should consider about paragraph 1-3C. The paragraph clearly decrees that “…and no assets other than the home must be used to repay the debt.”

By forcing spouses, heirs, and estates, in violation of its own rules, to repay the loan balance, other assets other than the home’s value are being used to repay the loan. HUD cannot have it both ways for we are a nation of laws and rules. It needs to respect and follow its own rules, it needs to honor and abide by its own contractual obligations if it expects industry participants within its administrative supervision to do the same.

It is noteworthy that the authors of the 2007 AARP report include Ken Scholen, Donald L. Redfoot, and S. Kathi Brown, individuals with deep knowledge of HECM and policy issues around reverse mortgages and HECM in particular. Ken Scholen is the father of HECM and one of the leading authorities on reverse mortgages in America. For anyone at HUD to suggest that someone such as Ken Scholen is “mistaken” about HECM non-recourse policy when Ken Scholen was the guiding spirit behind HECM is questionable at best and disingenuous at worst.

From the foregoing, we conclude that the assumptions on which ML-08-38 is based are seriously flawed. For fairness and for justice for America’s seniors and their spouses, heirs, and estates, HUD should quash Mortgagee Letter 2008-38.