Late last week, Indiana Sen. Mike Braun (R) submitted a letter to Ginnie Mae president Alanna McCargo asking about what he identified as recent bouts of instability in both the Home Equity Conversion Mortgage (HECM) and HECM-backed Securities (HMBS) programs, which stemmed from the collapse of a major lender and challenges that Ginnie Mae has described in maintaining a large portfolio of reverse mortgages.
To get a better idea of what prompted the letter and his interest in the reverse mortgage program, RMD reached out to Braun’s office with a series of questions about his perspectives.
‘Red flags’ and OIG inquiry
When asked about what first caused the senator to pay more attention to HECM and HMBS program issues, he explained that the late 2022 failure of Reverse Mortgage Funding (RMF) and the subsequent assumption of is reverse mortgage portfolio by Ginnie Mae were major influences toward his decision to inquire about the program’s challenges.
“RMF’s failure raised serious red flags,” Sen. Braun said in an email to RMD. “The scope of this failure is glaring, comprising 36 percent of all existing HECM loans at the time. I am seeking clarity about Ginnie Mae’s actions in dealing with this distressed issuer and their actions to fix underlying programmatic problems.”
In late 2023, the U.S. Department of Housing and Urban Development (HUD) Office of the Inspector General (OIG) announced that it was initiating an inquiry into how Ginnie Mae monitored RMF, as well as Ginnie Mae’s extinguishment of the failed lender from its HMBS program. OIG Rae Oliver Davis said at the time that the inquiry was being initiated “because extinguishing issuers and seizing their portfolios places significant stress on Ginnie Mae’s operations.”
When asked why he was not willing to wait for the OIG to finish its own inquiry before making his own overtures, Braun said that he feels like waiting may not be an option.
“The timing is important as Ginnie Mae explores improvements to the HMBS program,” he said. “The Senate Aging Committee strives to protect seniors and prioritizes oversight of aging-related issues, like reverse mortgages, and my letter highlights information that is vital to the longevity and stability of the program.”
Additional scrutiny, bipartisan potential
In his letter, Braun alluded to the potential for additional “congressional scrutiny” related to the oversight of the federally backed reverse mortgage program. When asked to expand on that thought, Braun explained that additional transparency into an important event like the RMF collapse is necessary.
“There needs to be more information on their dealings with RMF as it fell into distress,” Braun said. “It’s also important to know about the RMF assets that Ginnie Mae is now servicing, since they have never extinguished an HMBS portfolio previously. We need to have congressional oversight over their efforts to improve troubled issuers’ management practices and their proposals to improve liquidity in the HMBS program.”
With both the House of Representatives and the Senate having such narrow divides along party lines, the potential for added partisanship — especially headed into a hotly contested presidential election — remains high. RMD asked Braun if he feels this issue could descend into the same kind of pattern, but he seemed to be open to the idea of both parties coming together to address HECM and HMBS program challenges.
“It’s a nonpartisan issue,” he said. “While I sent the letter alone, there is a great opportunity to work with the other side of the aisle if further action occurs.”
He added that it’s important for the industry itself to be present during such discussions.
“Transparency is vital to the function of the HECM/HMBS program, and it’s important for Ginnie Mae to make sure Congress and industry professionals are at the table when it’s time to make decisions,” Braun stated.
March 29, 2024
Senator Mike Braun
404 Russell Senate Office Building
Washington, DC 20510
Dear Senator Braun,
I’m writing to you in response to two recent articles in Reverse Mortgage Daily. I very much appreciate your concern about the stability and viability of the FHA Reverse Mortgage program. I am a 78-year-old mortgage originator with a HECM loan we obtained in 2017. I have been in working in the industry full time for the last 28 years, but personally connected to the industry all my life. My grandfather and some friends started a Savings & Loan to serve a minority community in 1915. My father was a director and actively involved with it for many decades.
The FHA Reverse Mortgage product is an important product for many older adults. I find it is widely misunderstood by borrowers, their heirs, regulators, and congress. My book, “Why a Reverse Mortgage?” tells how the product has helped a few of my borrowers. Unlike many of my largest competitors who work from call centers, I meet all of my borrowers and know many of their stories long after the loans close. In 2023, I helped the son and grandson of my first HECM borrower deal with the borrower’s death and transfer of the property to the younger generation. Many borrowers and heirs come to us for help when these loans come due or when they need other help.
This article expresses your concern about the “collapse of RMF” and the attendant losses to FHA and Ginnie Mae. This approach, while important, misses the fact that the real problem was the uncontrolled federal spending that led to a spike in inflation and interest rates. These kinds of changes cause distress in the general mortgage market, but they are fatal to Reverse Mortgage lenders. The Reverse Mortgage industry is effectively the “canary in the coal mine” for the entire mortgage industry.
The difference is that with most other loans, all money is disbursed at closing so an increase in rates will cause the value of the note to drop, but it will rarely go negative. With a Reverse Mortgage, all money is not disbursed at closing, and rates on future disbursements are capped. This means that when rates increase as much and as fast as they did between October 2021 and October 2023, lenders are put in a position of having to lend at rates below their cost of money. This is exactly the same issue as what caused the Savings & Loan industry failures in the 1980s.
An easy example is my Reverse Mortgage. In 2023, I had the ability to borrower at 5.285% when the Fed Funds Rate was 5.33%. No lender can profitably fund loans at this rate, yet I can fax, email, or mail the paperwork to my lender and they are expected to have the cash in my bank account within a week. Unless FHA or Ginnie Mae is prepared to absorb the loss, it should be clear that it wouldn’t take many loans like mine to aggregate to large losses.
In November 2022, the month RMF filed for bankruptcy, the Fed Funds Rate went to 3.84% and I could borrow from my HECM at 3.28%. Some borrowers with loans closed in 2021 were able to borrow at rates under 3% at the same time. It shouldn’t take much analysis to understand why these numbers don’t work for the lender.
As I write this, my latest HECM data is February 2024. If I compare the top HECM lenders in February 2024 with the top HECM lenders in August 2022, just 18 months earlier, the contrast is interesting.
You already know why RMF, the number 5 HECM lender in August 2022, filed for bankruptcy in November 2022.
American Advisors Group, the number 1 HECM lender in August 2022, exited the industry and transferred its business to Finance of America Reverse.
Finance of America Reverse, the number 4 HECM lender in August 2022, is the number 1 HECM lender in February 2024 and has been subject to delisting letters from the New York Stock Exchange in recent months, an obvious sign of distress not profits.
Longbridge Financial, the number 3 HECM lender in August 2022, was acquired by Ellington Financial in October 2022. Recent statements from Ellington cast doubts on the current profitability of Longbridge.
Fairway Independent Mortgage, the number 6 HECM lender in August 2022 and number 4 lender in February 2024, closed about 1,434 HECM loans in 2023 and 2,747 in 2022. Fairway’s web site at https://www.fairwayindependentmc.com/about-fairway claims they closed more than 129,900 loans in 2022 with more than 2,000 loan officers and 650 branches. It should be clear that while Fairway is a major player in the Reverse Mortgage business, HECM loans are incidental to Fairway’s overall business.
When one looks at the industry as a whole, it is clear that while the product is positively life changing for borrowers, it has the potential to create losses for lenders, FHA, and Ginnie Mae that are completely outside of their control, and outside of the borrower’s control.
Above, I have described how rapid interest rate increases can kill this industry. Rate increases that are distressing for the general mortgage and bond markets are fatal for Reverse Mortgage lenders. These rate increases are caused by excessive spending by congress and the President, not by borrower actions or actions of FHA.
In the period after 2007, we saw a collapse of housing prices, particularly in California, that caused massive losses for the FHA reverse mortgage insurance fund. This drop in home values was outside of FHA’s and the borrower’s control. The HECM borrower does not have the ability to keep making payments during a down turn. The HECM often comes due because of borrower health issues forcing a move to assisted living or death, which are largely outside of the borrower’s control. In 2017, changes were made to the FHA underwriting and fee structures, penalizing borrowers for losses caused by others. Unfortunately, the interaction of Medicaid and a Reverse Mortgage can result in a home being over encumbered in ways that no underwriting changes can control.
The interaction between the FHA Reverse Mortgage program and the actions of other agencies has caused both distress for borrowers and losses for FHA. The most obvious case is the interaction between Medicaid and Reverse Mortgages. Medicaid refuses to provide statements or any other way to know the amount of their estate recovery claims. This can cause properties to be abandoned instead of sold. If a property is abandoned in Colorado or Indiana during the winter, it won’t be long before the water lines and drains freeze and break if the property is not properly preserved. Squatters can move in, drugs can be cooked, and the property destroyed very quickly. This creates losses that are outside both the borrower’s control, and FHA’s control, particularly if the borrower is dead. There are actions by the federal government that could mitigate these losses.
FHA creates servicing issues for these loans because FHA only asks for some contact information at application. They never ask “who will handle your affairs when you can’t?” This is effectively a denial of what happens to everyone as they age from 62 to 102. A good example is President Carter, a Naval Academy graduate selected for the Navy Nuclear Power program, Governor, President, Nobel Prize winner. If you saw the video of his wife’s funeral, his capability today is much less than it once was. Reverse Mortgage borrowers typically have less capability at their best than President Carter. When they are 100 years old, they can be like him or worse with no support. FHA expects elder orphans in his condition to properly handle the disposal of their house and payoff of the loan. I think FHA is in denial about what happens to Reverse Mortgage borrowers as they age. FHA’s solution is to foreclose if the borrower doesn’t handle everything perfectly, but foreclosures cause unnecessary losses. I suggest there is a better way involving a more collaborative approach to servicing, both during the loan and at the end of the transaction. FHA should recognize that defaults on these loans are very different from defaults on other mortgage products. These are responsible borrowers that could benefit from some help and support, not the deadbeats that create first payment defaults on other FHA products.
The FHA Reverse Mortgage program is life changing for borrowers and saves taxpayers large amounts of money compared to alternatives. It is much less expensive than subsidized housing. It has the potential to house many of the homeless. It can lower medical costs for Medicaid. There is much that could be done to the FHA Reverse Mortgage program both to improve the borrower experience and to improve the lender/investor experience. There is not one quick and easy fix. What is required is to know the borrower better, not only at application, but over the 40 or more years that these loans can be in place.
The best information I have shows 114,692 HECM loans closed in 2009 and 32,991 in 2023, with 2024 on track to close less than 30,000. During this time virtually all of the baby boom generation has become eligible for a Reverse Mortgage. I estimate the eligible population increased more than 50% during this time. Between the decline in usage and increase in eligible households, the program is serving a very small fraction of the people it could serve. My own federal representative, Brittany Pettersen, holds Senior Resource events, but will not allow information about Reverse Mortgages to be presented. Her predecessor, Ed Perlmutter also blocked access to the product. Senator Michael Bennett’s office is familiar with the product, but is not interested in promoting it, or even discussing it. In my area, FHA does nothing to promote the product. Many state and local government agencies are hostile to the product as evidenced by actions of Boulder County officials and the Colorado legislature in 2023.
FHA’s claims that they fully support the product and want to be part of the market, but not all of the market, rings hollow. The decline in the use of the product contradicts the claim of support. The idea that private investors are going to fully support a product where the largest risk factor is actions of congress and the President over a period of 40 or more years is unrealistic. We saw the line amounts on Home Equity Lines of Credit reduced without warning in 2008. We saw RMF file for bankruptcy in 2022. It doesn’t matter how strong a company is today. It can still be gone very quickly if congress is in session. Wall Street is littered with companies that were once well respected and strong, think Enron, Countrywide, Lehman Brothers, Washington Mutual, Silicon Valley Bank, Worldcom, General Motors, and many others. I think a federal guarantee is the only way to ensure a 100-year-old borrower will really have access to the money they were promised when they obtained the loan at age 62. I think the idea of suddenly leaving a 98-year-old lady that is depending on the Reverse Mortgage to pay for home care without access to funds is unacceptable, even if FHA thinks it acceptable to pass this risk on to the elderly. The 98-year-old lady in this example is a Reverse Mortgage borrower that I closed a loan for this year.
I think understanding this product requires more than talking to officials and managers that have never had the product and never talked to a real borrower or their heirs. Understanding this product and how it affects borrowers and lenders requires getting down in the weeds where originators, borrowers, heirs, servicers, and lenders meet.
I appreciate your interest in supporting the product. Don’t hesitate to call us if you have additional questions, or if we can be of service in any other way.
Very Respectfully,
Donald J. Opeka, President NMLS# 261505
Orion Mortgage, Inc. NMLS# 372081
Licensed Colorado Mortgage Loan Originator 100007878
http://www.OrionMortgage.com
[email protected]