Sticking Points Remain in Reverse Mortgage Reforms

Wide-ranging efforts to reform Home Equity Conversion Mortgage lending and servicing practices are designed to close loopholes and resolve policy inconsistencies, but some obstacles remain unresolved and more work needs to be done.

Investors of HECM mortgage-backed securities find the product's prepayment certainty attractive, and reforms recently enacted by the Federal Housing Administration address many key borrower and government finance concerns. But the continuation of uncertain and mutable foreclosure and accounting policies has created sticking points that, if left unchecked, could depress broader market participation by consumers and the secondary market alike.

For example, a recent rule change offers foreclosure protections to non-borrowing spouses on new reverse mortgage originations. But there have only been interim adjustments made to the policy for consumers whose loans predate the policy shift — meaning individuals who were not named on a property's title when their spouse obtained a reverse mortgage are still more likely to get foreclosed on if their significant other passes away.

The FHA, which insures HECM loans and sets policies for the product, declined to comment, citing pending litigation.

Separately, sellers of the HECM securities, which are insured by Ginnie Mae, continue to face challenges because of accounting changes that have been and remain in flux.

"There are very complex questions involved, and it is unclear if the situation will change," Ginnie Mae spokesperson Gina Screen wrote in an email response to questions about the accounting policies.

Originally, a key motivator for securitization was the ability to record the transaction as a sale so a bank would not have to keep the loans on balance sheet where they would have to hold capital against them and take on other responsibilities they might have for them.

"The accounting treatment of HMBS sales has evolved over the past three or four years as a reaction to broader developments in how securitizations are accounted for — specifically, securitizations involving disparate pieces of a debt," Screen said. "The prevailing consensus now in the accounting industry is that such HMBS securitization transactions are not sales."

This is considered one of the barriers to some institutions entry, or re-entry, into the reverse mortgage business.

"Ginnie Mae and FHA would, largely for that reason, like to see this prevailing consensus changed to one that accords sale treatment to such transactions, and have said that," Screen added.

But it's unclear whether this will happen.

On the surface, the legislation that establishes HECM loans seems clear on the issue of whether a non-borrower spouse can continue to occupy a home after the borrower spouse dies. And much of the litigation around this issue hinges on a subsection of that legislation entitled, "Safeguards to prevent displacement of a homeowner," which states, "For purposes of this subsection, the term 'homeowner' includes the spouse of a homeowner."

While the original HECM legislation appears to protect lenders' right to the home, over time the program changed because some lenders started making HECMs in which one spouse — generally the younger one — was either left off or removed from the title, according to Atare Agbamu, president and CEO of the advisory firm ThinkReverse LLC.

The maneuver allowed couples to qualify for a larger reverse mortgage because lenders base the amount of proceeds or equity they are willing to distribute in the transaction on actuarial tables that estimate how long borrowers will remain in their homes.

Borrowers must be 62 or older to get a reverse mortgage and in return for the proceeds in the transaction, borrowers agree to sell their home to the lender when they move or die.

Given the apparent homeowner displacement safeguards afforded to both spouses in the legislation, it's unclear whether reverse mortgage originators made it clear to couples who took advantage of the loophole that if the borrowing dies first, the surviving spouse would be left without title to the home and could potentially lose it.

The practice was particularly questionable during the housing and mortgage boom, when fierce competition for loans resulted in lax standards and misrepresentation at some lenders ran rife. After many of these poorly underwritten loans became distressed, many companies went belly-up in the wake of the downturn and accompanying home equity depreciation.

While HUD didn't establish the non-borrowing spouse practice, it recognized that it was happening and instituted additional counseling requirements for spouses in a 2006 mortgagee letter.

The one confirmed foreclosure action involving a non-borrowing spouse since the August rule change for new loans involves a loan made to a late pastor in 2007. He had been assured that his wife would be able to continue to live in the home after his death, according to Carlos Cato, a Community Reinvestment Act liaison officer at nonprofit neighborhood group Revitalizing American Properties, Inc. who has been working with the widow.

The mortgage company named in the documents, 1st Reverse Financial Services, went into runoff in 2010. GreenChoice Bank appears to have bought the original bank named in the documents, Family Federal Savings of Illinois, which sold 1st Reverse to another entity that wound it down. The OCC closed GreenChoice Bank in July.