How and Why Congress Changed the Reverse Mortgage in 2008

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Remember the Housing and Economic Recovery Act of 2008? People call it “HERA?” Does that ring any bells? No

Yeah, I know… I didn’t remember it either.

Actually, now that I’ve had a chance to think about it, I do recall President Bush FINALLY signing a bill allegedly having to do with the housing crisis, which as of the latter part of summer 2008, had already become a four-alarm fire.

Remember it now? We were all waiting for the Bush Administration to do something that might mitigate the damage to the housing markets being caused by the growing number of foreclosures. As I recall, Bush fought with Barney Frank, back and forth, for most of the year as nothing was done. Dubya finally signed the legislation in late July 2008… weren’t there some $600 checks mailed out to a few million people as well?

Among other claims to fame, this is the piece of legislation that created the stunning failure, “Hope-4-Homeowners.” A government program with absolutely no chance of success whatsoever, the program’s $320 billion budget, notwithstanding. (“If you feel like a laugh, you can read what I had to say about Hope-4-Homeowners’ stellar performance back in 2009.)

That’s quite an accomplishment, a $320 billion budget and no meaningful results. I’m not even sure I could come up with a program that would perform that way if I tried… and had help.

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HERA’s Stated Purpose…

The bill was primarily created to address the sub-mortgage lending crisis and was put in place to “strengthen and modernize the regulation of the housing government-sponsored enterprises and expand the housing mission of the GSE.”

In other words, it was an attempt to strengthen Fannie Mae and Freddie Mac by introducing new regulations and injecting capital into the two faltering mortgage giants. It also established the Federal Housing Finance Agency (FHFA) as the regulator of Fannie and Freddie, and led to the government conservatorship of the GSE or government sponsored enterprise that remains in place today.

In addition, HERA created the first-time homebuyer tax credit for purchases on or after April 9, 2009, and that came to an end in June of 2010, as I recall…. it increased FHA loan limits, increased mortgage disclosure requirements and introduced a new Mortgage Loan Originator license under the Secure and Fair Enforcement for Mortgage Licensing Act, commonly referred to as the SAFE Act.

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Oh, and one more thing…

HERA did something else too. Congress recognized that reverse mortgages play an important role for homeowners over 62 so they included provisions for HUD to regulate reverse mortgages in order to offer greater protections and increased utility to eligible homeowners.

For example, HERA introduced the reverse-for-purchase mortgage, making it possible for those over 62 to use a reverse mortgage to buy a home. The program allows the proceeds from the sale of one home to downsize into a less expensive one, while conserving their cash. (You can read my article on this program here: Why Doesn’t Every Realtor in the Country Know About This?)

In addition, HERA did the following specific to reverse mortgages…

Increased the amounts available from an FHA reverse mortgage by raising the national limits upon which reverse mortgages are based to $625,000.

Lowered the costs of a reverse mortgage in order to make them more affordable, by placing strict limits on the origination fees that may be charged.

And at the same time, HERA also created important protections for homeowners related to reverse mortgages, including…

Protected seniors from predatory lenders attempting to defraud borrowers, by prohibiting lenders from requiring borrowers to purchase insurance, annuities, or other similar financial products as a condition of getting a reverse mortgage, with specific restrictions related to cross-selling financial products.

Strengthened counseling protocols and increased funding for education in order to help eligible homeowners become more knowledgeable about the reverse mortgage process.

Just about the worst year ever…

In case you were incarcerated during 2008, or perhaps you were treating patients in Zimbabwe that year, you no doubt remember 2008. You might say it was a year to forget. Home values were falling fast all over the country. In many places, values were cut by close to 50 percent, and in some places by even more.

People were… what’s the right way to phrase this… wait, I’ve got it… freaking out. No one knew exactly what was happening… no one knew how bad it was going to get. And as home values fell and credit tightened, consumer spending pretty much came to a screeching halt.

As companies started seeing their sales fall, they started to cut back and unemployment began rising to uncomfortable levels. Most small business owners saw their incomes go down by 25% or more. It was becoming clear that this was not going to be some garden-variety recession.

On top of all that, we had an unknown African American male and a well-known very white female candidate running for president… the point being that in 2008, we were distracted to say the least. And with all those other things that HERA did making headlines, it’s easy to understand why the news about reverse mortgages changing might simply get lost under the barrage of information more directly related to the growing crisis.

So, it’s easy to see what happened here, right? In any other year, the new reverse mortgage programs and rules might have been a little more widely publicized, but in 2008 and in the years since then, let’s just say the industry has had more pressing issues with which to contend. (And those in the media wouldn’t have known what to write, even if they had wanted to write about it.)

There’s something else to be realized about this whole thing…

Think about what lending was like before the meltdown of 2007-08. Everyone qualified for just about any loan they wanted. You could practically get a HELOC or a second mortgage while on your lunch break. In that sort of environment, it’s even easier to see why the changes to reverse mortgages were largely overlooked.

It’s also easy to understand why the traditional mortgage industry has traditionally ignored reverse mortgages. I mean, if you were a traditional mortgage broker, would you want to concentrate on a specialized product for older people or would you want to offer ALL the other types of mortgages to EVERYONE ELSE?

In addition, the reverse mortgage industry has struggled to adapt to HUD’s program changes and the shifting demographics and psychographics of its customers. Baby boomers started entering their 60s over the last few years and they have very little in common with members of the Greatest Generation that came before them.

When you consider the amount of turmoil that has enveloped the mortgage industry as a whole since 2008, it becomes easier to understand why changes to reverse mortgages pretty much fell off the radar. I started researching them 18 months ago now, and it took me at least 8-10 months before I had the complete picture, and I’m generally pretty good at researching things and putting the pieces of a puzzle together.

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No surprises here…

It took me a while to put it all together, but now I hope you can see that your not fully understanding reverse mortgages isn’t surprising at all. It would be far more surprising if you did, all things considered. Most traditional mortgage people don’t get them either, and by most what I meant to say was… all of them… I’ve yet to talk to even one that has an in-depth understanding of reverse mortgages. Heck, most reverse mortgage brokers are only marginally better.

One attorney recently sent me eight reasons why she didn’t like reverse mortgages… and all eight of her reasons were based on incorrect facts. And that’s not any sort of exception… it’s the rule.

Now that lending has changed so dramatically, retirees will increasingly come to realize that the equity in their homes is locked up and in there to stay… as if buried deep in their backyards, until they sell their homes… take out hard money loans… or access it through reverse mortgages.

With the average balance in a 401(k) being $150,000 give or take, and with 10,000 people a day turning 65 for the next 18 years or so… people don’t realize it yet, but the situation is dire and getting worse by the day. The misinformation about reverse mortgages is costing them precious time and countless dollars. That’s why I’m writing about it all the time, and that’s why I’m preparing to make it my full-time job.

What you can do with a reverse mortgage won’t become widely understood overnight, and perhaps it will take years, but what the reverse mortgage offers is simply much too good to stay a secret, and unless you win the lottery or the equivalent, the sooner you realize it the better off you’ll be.

Congress understood the importance of the reverse mortgage as it was considering what needed to help our economy recover after the worst meltdown in 70 years.

So, they made the changes part of the Housing and Economic Recovery Act of 2008. They had HUD regulate it and FHA insure it. So, the next time you hear someone say something negative about a reverse mortgage, just know they’ve got their facts wrong… and now you understand how the whole thing happened.

And tell them to contact me, if you want… I’ll straighten them out. As always you’ll find me at mandelman@mac.com.

Mandelman out.