Archive for April, 2010

Spring Sale in Reverse Country

Monday, April 26th, 2010


Ginnie Mae saw it coming. The experts predicted it. And it has finally arrived, with a vengeance.

The entry-costs reduction food-fight among HECM reverse mortgage lenders is on. Among the major players, MetLife Bank lobbed the first salvo on March 26 by discarding origination and servicing fees on its fixed-rate HECMs.

Others have since jumped in with their version. Wells Fargo spread it to its adjustable-rate HECMs. Bank of America stretched it to front-end mortgage insurance premium (MIP), offering to pay 100 percent of the borrower’s MIP and erasing servicing fees. Other cost-reduction ideas are coming. One lender can easily match the other’s offering. None has costs-reduction competitive advantage. The HECM consumer is the winner. Call it spring sale in reverse country.

Jacking up volume is a driver of these lenders’ largesse. Volume is down 22 percent for the first half of fiscal 2010 from the same period a year ago. Volume projection for the remainder of the fiscal year is dismal. High secondary-market premium for fixed-rate HECMs is a second driver. A third is lenders’ guilt for making a bundle on the back-end.

What do these happenings mean for borrowers and the industry? For borrowers, it means more cash at a time of FHA’s cash-advance cutbacks and premium increases. If the trend continues, it could help change the perception of reverse mortgages as expensive loans. If it doesn’t, we are back where we started.

For the industry, it is a mixed blessing. It is a great PR opportunity. Government is taking away cash from seniors. Presumed predators are giving it back. Forget the $100,000 plus industry “repositioning” PR campaign. Scream about the cost reduction revolution in reverse mortgages. Speak of the difference it is making for seniors, saving their homes from foreclosure. Sing about the extra cash in seniors’ pockets in these tough times. So, what could go wrong?

Suitability: Lenders must ensure loan officers or brokers do not need the fixed-rate HECM more than seniors. With eye-popping premiums floating around for fully-funded fixed-rate HECMs, the risk exists that some may push fixed-rates on seniors who do not need them. If these seniors end up losing their lump sum in some post-reverse transaction situations, the industry gets the blame, canceling any PR gains.

Complexity: The flood of cost-reduction and pricing options is creating another layer of complexity in reverse mortgages. While professionals may find these ‘new’ options good and easy, consumers may find them bad and confusing. Industry should focus on simplifying these options: Tell consumers that zero-origination-and-servicing fees mean slightly higher rates. Tell them that high front-end costs equals slightly lower rates. Tell them what investors are paying for their loans on the secondary market and how it affects their long-term loan costs. And tell them that ultimately, they are paying for the zeros.

Disclosure: The conventionalization of reverse-mortgage entry costs have begun. As lenders wrap costs and yields into rates similar to forward lenders, they need to disclose everything, beyond the letter of the law.

Zero-Fee Conditioning: The industry has started training borrowers and the public to think origination and servicing fees are alien to reverse-mortgage lending. When premium pricing disappears and it finds its non-variable operating costs are still present, reinstating these necessary fees after conditioning seniors, regulators, and the public to forget them will do lasting damage to industry veracity. It will keep feeding the PR beasts and “repositioning” the industry. It is short-term thinking.

Copyright © 2010 ThinkReverse LLC/Atare E. Agbamu. All Rights Reserved.


Recognizing LOME Risks in Reverse Mortgage Origination

Friday, April 23rd, 2010


   Brenda McBride of Lake Hekmo, Minnesota got what she wanted: a government-insured reverse mortgage with a fixed interest rate at 6.125 percent.

    At closing, the 72-year-old grandmother of six and mother of three was ecstatic. She hugged her beaming loan officer, Sherry Mojah, three times. The experience reaffirmed Mojah’s decision to quit her CPA firm to serve seniors via reverse mortgages five years ago.

    So happy was McBride with her reverse-mortgage cash, her loan officer, the process, and her lender, Tru-Reverse Financial, Inc. (TRF), that she took the unusual step of  writing a fan letter to the Big Man in Washington, thanking the government for authorizing fixed-rate HECMs and praising the outstanding ethics, customer service, and professionalism of  the folks at TRF.

    The full text of her letter is posted on TRF’s Web site for maximum marketing impact. The hard copy is included in the company’s marketing kit.

The scrupulous former CPA, Mojah, was upfront with all disclosures. Nothing was held back. Nothing was glossed over. And nothing was misrepresented. McBride knew that the fixed-rate option is available to customers who want a lump-sum payout. Her oldest daughter, Carolyn Kumbata, a lawyer and forensic accountant, was a part of the process from start to finish. Even she was impressed by Mojah’s thoroughness.

    Because she wanted lots of tax-free cash to fix her kitchen and bathrooms and take her winsome grandchildren on a Caribbean cruise, McBride took her net principal limit of $100,000.

    Reverse mortgage lenders like fully-funded lump-sums because Wall Street investors pay more for them. Investors love them because they don’t carry future funding obligations and costs such as the term, tenure, modified term, and modified tenure options. The McBride deal was a win-win for all – borrower, lender, and investor, or so it seemed.

    After the repairs and the Caribbean vacation, McBride gifted $5,000 each to her grandchildren toward their college education. She deposited another $5,000 in her savings/checking account. And she prudently locked the remaining $20,000 in a bank CD at 6.75 percent for three years.

    Six months into her reverse mortgage loan and three months following the Caribbean boat trip, her grandchildren and her children began noticing the symptoms. At first they meant nothing, just the normal signs of aging.

    Normally a spirited woman with a ready smile, Brenda McBride became listless and withdrawn. She forgot things, places, and names. She would stare into space for hours, talking with invisible companions. She repeatedly mixed up her children’s and grandchildren’s names. 

    Then, the test results came in. They confirmed her children’s worst fears: McBride had Alzheimer’s and some dementia.

    Her children held a family meeting to decide how to manage their mother’s illness. It would be a long-drawn degenerative situation. It would mean home care attendants, assisted living, or nursing home.  It would come down to tests, more tests, lots of medication, doctors, nurses, and medical bills. The costs could be prohibitive and destructive to her and to her family’s finances. The children wisely concluded that their mother would have to go on Medicaid. 

 They applied for Medicaid, but her application was denied.  The reasons: countable assets of $24, 500 (the CD and cash in her savings/checking account) and “transfer of assets” issues (gifting $5,000 each to her grandchildren).  The children were stunned beyond words. They were furious. The other two, Glenn McBride and Susan Poko, blamed the reverse mortgage lender and her loan officer for not telling their mother about loss of Medicaid eligibility (LOME) risks inherent in reverse mortgage transactions. They threatened to sue the reverse mortgage lender for incomplete disclosure.

    But their oldest sibling, Carolyn Kumbata, who was part of the reverse mortgage process, told them to relax. She knew the Medicaid denial for their mother stemmed not from incomplete disclosure, incompetence, or fraud but from the limited understanding of the FHA-approved HECM counselors and the reverse mortgage professionals at Tru-Reverse Financial.  And she told her siblings so.

LOME Risks

The Brenda McBride vignette illustrates seven truths that every reverse mortgage origination professional should be mindful of:

  • Medicaid Eligibility is a very valuable benefit for most seniors (in the event of serious long-term illness, it could be worth millions of dollars in medical benefits);
  • Loss of Medicaid Eligibility (LOME) for public healthcare benefits is a risk for seniors taking reverse mortgages without broad consultation involving elder-law and financial-planning advice;
  • The types of payout option loan officers advise borrowers to take can increase LOME risks;
  • Reverse mortgage origination professionals need to understand how reverse mortgages and public healthcare benefits interact;
  • Failure to grasp and to plan for LOME risks could engulf reverse mortgage lenders in lender liability litigation;
  • Medicaid Eligibility and Medicaid estate recovery issues should be part of any curriculum for training reverse mortgage origination professionals;
  • The value of public health benefits is so important to most seniors’ well-being that reverse mortgage originators would be required to screen for LOME risks someday.

    A definition is in order here. So what are LOME risks in reverse mortgage origination? LOME risks are the risk of reverse-mortgage borrowers losing Medicaid Eligibility by accumulating assets over regulatory limits, and the risk of reverse-mortgage lenders attracting widespread customer displeasure and potential lawsuits.

This definition begs a critical question: What is wrong with reverse mortgage borrowers accumulating assets?  Answer: They may need Medicaid down the road and accumulated assets could make them ineligible for its valuable medical benefits.

Medicaid 101

    Medicaid is a federal-state healthcare program for the poor. To qualify an applicant must show monetary evidence of poverty. Although the program varies from state to state, federal “means-test” guidelines can help us understand it. For 2007, an individual with assets (cash in the bank and other liquid resources) of $2,000 (or $3,000 for a couple) a month is eligible. Above those numbers, the individual (or couple) is disqualified.

    Because of the jumble of conflicting federal and state rules, what is income, asset, or resource is anybody’s guess. Generally, a person’s home is not counted as a resource. For our purpose, reverse-mortgage cash is considered loan proceed; therefore, it is a non-countable asset. However, if it accumulates in a bank account above the $2,000/$3,000 guidelines, it becomes a countable asset, making the borrower ineligible for Medicaid benefits.

    This is the essence of LOME risks: Unsuspecting reverse-mortgage borrowers could pile up cash in an account and deny themselves significant health benefits. They would turn around and hold the clueless reverse-mortgage lender liable for ill-advising them. The life-planning ramifications of reverse mortgage funds are such that originators’ existing competencies are inadequate to the task of shielding seniors and themselves from LOME risks.

    Of course, in defense, originators may argue that they are not in the business of dispensing government-insured healthcare advice. It is like a doctor saying he is not a drug maker; therefore, he is not responsible for the negative side effects of the medication he prescribes. If the doctor discloses and explains the drug’s side effects to the patient before the patient starts taking the medicine, the doctor could be less exposed legally. Not disclosing and not explaining could land the doctor in trouble because it is his job to know the benefits and the dangers of the medicines he prescribes to patients. Similarly, the types of reverse mortgage payout options we recommend to our senior borrowers could have consequences, positive or negative as with Brenda McBride.
    Underwriting any loan is about managing risks. Reverse mortgages are no exception. LOME risks for seniors and reverse mortgage lenders are real. They must first be understood; then managed.

  Mitigating LOME Risks

Now that we have some understanding of LOME risks in reverse mortgage origination, let us look at some ways to limit or eliminate it. The following ideas could help:

  • Become aware of LOME risks through education*;
  • Keep the goal of enhancing seniors’ lives in mind at all times; it will help you think outside the box and recognize hazards like LOME risks;
  • Know that all reverse mortgage payout options except the line of credit option carry significant LOME risks because they could lead to risky accumulation of countable assets;
  • Build multi-disciplinary lending teams made up of reverse mortgage specialists, elder-law attorneys, and financial planners; alternatively, cultivate elder-law attorneys and financial planners within your markets that you can consult for the benefit of your borrowers;
  • Know Medicaid’s Eligibility and Estate Recovery rules;
  • Know the “transfer of assets” implications of gifting reverse mortgage cash;
  • Know your state-specific Medicaid rules as well as the federal rules;
  • Cultivate knowledgeable contacts within your state’s Medicaid bureaucracy, and pick their brains often on changes to the rules;
  • Develop Reverse Mortgages and Medicaid 101 Seminars to educate seniors in your market; healthcare is a critical value; they will pay attention to what you have to say; better still, coordinate it with an official of your city or state Medicaid office;
  • Bone up on the Deficit Reduction Act of 2005**;
  • Because a senior’s long-term healthcare needs are unpredictable, they should know the adverse consequences of accumulating resources;
  • Although it is outside the scope of this article, knowing something about SSI (Supplemental Security Income) program rules could enhance your understanding of Medicaid.

Gosselin’s caution

    One of the nation’s leading resources in understanding and mitigating LOME risks is Massachusetts’s elder-law attorney and reverse mortgage expert, John T. Gosselin. During a conversation for my column last year, he shared this caution, and I believe reverse-mortgage originators ignore it at their peril:
“To lose the benefit for people who are receiving the benefit [and for those who will receive it] would probably be catastrophic. They could put themselves in situations where their medical debt could consume the value of their house. If they have no other means of paying for their medical debt, they could be forced into bankruptcy for their medical debt.”

    Most of us were attracted to reverse mortgages because they offer the twin blessings of doing good while doing well in an emerging and growing segment of the mortgage-lending industry. As our industry evolves into a pillar of retirement finance for our seniors, we must be on guard to ensure that we do no harm, unintentionally or otherwise. We must avoid Brenda McBride situations.


*A two-part article I wrote for NRMLA’s Reverse Mortgage Advisor in 2007 (“Understanding the Linkage Between Reverse Mortgages, Medicaid, and SSI”) and a four-part piece for my column, Forward on Reverse, in The Mortgage Press (“Traps for the Wary: Reverse Mortgages and Healthcare Benefits …,” Sept.-Dec., 2007) are good places to begin your LOME education.

**My 2005 conversation (“DRA 2005: Medicaid Rule Change and Reverse Mortgages”) with Stephen Moses, one of the nation’s leading authorities on long-term care reform and a huge fan of reverse mortgages, in Appendix 1 of my book Think Reverse! (The Mortgage Press, 2008) is a good place to start.

***NRMLA’s Guide to Medicaid and National Aging Services Network is a valuable resource that members can download for $20 at

First published August 2008 in The Reverse Review.                                                                                                                                                                                                      (c) 2008 Atare E. Agbamu. All Rights Reserved.

An Assault on Fairness:Quash Mortgagee Letter 08-38, part 2

Monday, April 19th, 2010

    First posted June 1, 2009



  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.

 Please read part one (below) and share article’s URL with your network and with your state’s Congressional delegation.

Thank you,                        

Atare Agbamu



     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, 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.

And 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, senior’s 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.  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.

(Please read part one.)




An Assault on Fairness:Quash Mortgagee Letter 08-38, part 1

Sunday, April 18th, 2010

 First posted May 18, 2009

     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 18th Op-Ed in Origination News, 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 18th 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]

      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.]

     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 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 heirs/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 sphere of influence 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 heirs/estate, HUD should quash Mortgagee Letter 2008-38.