Origination Views

Revoke Mortgagee Letter 2008-38

By Atare E. Agbamu

Mr. Agbamu, director of reverse mortgages at Minneapolis -based AdvisorNet Mortgage LLC, owner of Oakdale, Minn.-based reverse mortgage advisory/training firm ThinkReverse LLC and the author of a book on reverse mortgages, has written an op-ed on why he believes Mortgagee Letter 2008-38 should be revoked.

Federal Housing Administration (FHA) Mortgagee Letter 2008-38 is twenty years late. It imposes new problematic disclosure requirements, casts doubt on HUD's reverse mortgage non-recourse policy, and complicates consumer education. It should be quashed.

For 20 years HECM non-recourse policy was clearly stated in chapter 1, paragraph 3C (1-3C) of the HUD Handbook 4235.1 Rev-1, thus:

The HECM is a "non-recourse" loan. This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.

Yet in ML08-38, HUD artfully tried to turn clarity into confusion by blaming "some program participants" for misreading paragraph 1-3C. What can be clearer than the language of paragraph 1-3C above? Please, read it again.

Among "some program participants" misguided by paragraph 1-3C's language over the last 20 years are legions of trained HECM counselors, originators, HUD reverse mortgage experts, bank and mortgage regulators, and others across industries and around the country. People like you and me.

So clear is the language of paragraph 1-3C that a recent regulatory manual on reverse mortgages for state bank supervisors and mortgage regulators, in explaining the 2-percent mortgage insurance premium (MIP) borrowers must pay to HUD to get HECM, declared:

"The MIP guarantees that if the company managing the account - commonly called the loan "servicer" - goes out of business, the government will step in and make sure the homeowner has continued access to the loan funds. Furthermore, the MIP guarantees that the homeowner will never owe more than the value of the home when the HECM must be repaid."*

So, it was not just "some program participants" who for 20 years relied on HUD's HECM non-recourse policy as stated in paragraph 1-3C. Even regulators did.

Let's assume that HUD's clarification in ML08-38 is the "pure" definition of non-recourse, and some experts say it is. Why did HUD wait 20 years before issuing a "clarification"? Why did HUD allow industry and non-industry participants to misinform seniors, their families, and the public for 20 years?

Besides the policy clarification, the Mortgagee Letter decreed new arms-length transaction requirements when selling HECM collateral at loan termination. Do we really need HUD's arms-length rules in intimate family inheritance and estate matters?

Unquestionably, the potential for abuses exist in the pre-ML08-38 definition in paragraph 1-3C. Actual abuses may have occurred. And ML08-38 may have been issued to check future abuses. HUD deserves praise for looking out for taxpayers. But how does the potential for some abuse outweigh damage to the credibility of the industry's signature program from ML-08-38?

As the state regulators' explanation suggests, hasn't the MIP covered that risk? In a sense, HECM borrowers have paid for the expanded definition of non-recourse in paragraph 1-3C. Some could see ML08-38 as a high-handed attempt to deny seniors and their heirs/estates one of the benefits of their expensive HECM MIP. Given the monopolistic hold HECM has on the industry, thanks to sovereign mortgage insurance, it is a logical conclusion to come to.

Non-recourse remains a cardinal feature of the HECM program. Without it, it may be difficult to suggest reverse mortgages to seniors, their advisers, and their families. Without it, seniors and their families may shy away from a revolutionary mortgage-financing program that has brought (and will continue to bring) much hope, dignity, and security to seniors across America in the recreative years of their lives. Without it, HECM consumer education has become even more taxing.

Mortgagee Letter 2008-38 poses at least four new challenges for HECM counselors and originators:

• New Non-recourse Disclosure - Counselors and originators must now tell seniors and the public that HECM's non-recourse is conditional: if they or their heirs/estates decide to keep the property, they must pay the full loan balance even if it is above the property value. If they or their heirs/estates choose to sell the property, they will owe nothing more.
• Arms-Length Disclosure/Warning - Conceivably, another new disclosure along these lines is now called for: "Mrs. Obamka, if you take an HECM reverse mortgage, I am required, by federal regulation, to tell you that, upon your death, your children or heirs may not be allowed (by federal arms-length rules) to sell or buy your home because the federal government, in its sole wisdom, believes they are too close to you, to your property, or to your estate. Therefore, before you die, you may consider disinheriting your heirs (check with your attorney) and make sure you select committees of non-relatives, non- friends, or non-acquaintances to sell or buy your home [The Arms-Length Committees for HECM Collateral Disposition]." Just imagine these consumer-soothing phrases rolling off the tongues of HECM counselors and originators across the country.
• Doubt - Telling seniors and the public that industry understanding of non-recourse was "mistaken" for 20 years raises serious doubt about HUD's and industry participants' veracity. "Hey, what else are they mistaken about?"
• Consumer Education Complications - Strongly supported by 1-3C language, "your heirs/estate will never owe more than your home's market value" has become an industry marketing mantra for 20 years. For a complex (and still novel) financing idea with a host of conceptual and historical baggage, the consumer reassurance afforded by that mantra is gone. Left in its place is doubt. It complicates consumer education.

As the industry (and the reverse-mortgage consuming public) appreciates the disturbing implications of Mortgagee Letter 2008-38, other "clarification" challenges will come up. Meanwhile, for the sake of America's seniors and their heirs/estates, the credibility of HECM and the reverse mortgage industry, HUD should rescind Mortgagee Letter 2008-38.-Photo courtesy of The Mortgage Press Ltd./Eric C. Peck