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Forward on Reverse: An assault on fairness ... quash Mortgagee Letter 2008-38 (Part I)

Jul 31, 2009

Author’s note: In the dying days of the Bush Administration (Dec. 5, 2008), the Federal Housing Administration (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 Home Equity Conversion Mortgage (HECM) reverse mortgages, the dominant program in the U.S. reverse mortgage market. “An Assault on Fairness: Quash Mortgagee Letter 2008-38, Part I” shows why we believe ML-08-38 is a raw deal for seniors and their heirs/estate, and why we are asking the U.S. Department of Housing and Urban Development (HUD) to quash it. 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 It should be repealed forthwith.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, 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 piece, this e-mail, 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 Mortgagee Letter (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 cannot buy the property from the estate to avoid paying off the full loan balance.” A major insurance benefit or a loophole? Assumption number one: The 20-year-old language and industry-wide understanding in pre-ML-08-38 paragraph 1-3C of the HECM Handbook contain a loophole. ML-08-38 is a regulatory loophole plug 20 years after the fact. Again, let’s review the language of chapter one, 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 Aug. 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. Is ML-08-38 a change in HECM Non-Recourse Policy? While I leave you, the reader, to judge the inaccuracies in my March 18 op-ed, let’s look at the second premise in the HUD e-mail: 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 Mortgagee Letter (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’s 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: “Question: Will my heirs owe anything to the mortgage lender if I die? Answer: 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] ( The National Reverse Mortgage Lenders Association (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 that since this article was first posted on my blog, Atare’s Report, on May 18, NRMLA has revised this wording on its Web site to reflect ML-08-38. However, NRMLA's revision does not change its historical accuracy in the context of this article, nor has it revised thousands of hard copies in circulation for years ( 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 Dec. 5, 2008. Incomplete non-recourse protection for a full price? Moreover, we must keep in mind that HECM borrowers who are relying on ML-08-38 description of the non-recourse limit are paying their full mortgage insurance premiums (MIPs), but are not getting the full non-recourse protection for their heirs 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 during the program’s design. 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.” (Taken from “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. 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. Is ML-08-38 consistent with historical HECM non-recourse policy? 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 contractual obligation it assumed when it structured the program’s MIPs as we have established above. Enter senior advocate colossus, AARP. In a major national report released on Dec. 7, 2007 (“Reverse Mortgages: Niche Product or Mainstream Solution?” pages.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 statement 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 crucial point we should consider about paragraph 1-3C and HUD’s reinterpretation in ML-08-38. The paragraph clearly decrees that “…and no assets other than the home must be used to repay the debt.” By forcing heirs/estate, 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 HECMs in particular. Ken Scholen is the father of the 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 ML-08-38 was based on flawed assumptions. We affirm that ML-08-38 represents a major departure from historical HECM non-recourse policy. And we assert that ML-08-38 is unfair to America’s seniors and their heirs/estate. It should be quashed. Author and columnist, Atare E. Agbamu, CRMS is director of reverse mortgages at Minneapolis-based AdvisorNet Mortgage LLC. A member of the BusinessWeek Market Advisory Board, Agbamu is author of Think Reverse! and more than 100 articles on reverse mortgages. Through his advisory firm, ThinkReverse LLC, Agbamu advises financial professionals, institutions and regulators across the country. In a 2007 national report on reverse mortgages, the AARP cited Agbamu’s work. He can be reached by phone at (612) 436-3711 or (612) 203-9434. The views and opinions expressed in the following article do not necessarily reflect the views and opinions of National Mortgage Professional Magazine, the National Association of Mortgage Brokers, the National Association of Professional Mortgage Women and the National Credit Reporting Association Inc.
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