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

    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.)





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