Government to tighten up on reverse mortgages

By Kenneth R. Harney 12/28/2012 5:08 AM WASHINGTON — You’ve probably seen the reverse mortgage pitchmen at work on your TV screen — former Sen. Fred Thompson and actors Robert Wagner and Henry “Fonzie” Winkler prominent among them — urging seniors to pull cash out of their homes through a loan program guaranteed by the federal government.

But it looks like the pitchmen will have fewer and smaller mortgages to sell in 2013. In a move aimed at controlling losses to its insurance funds, the Federal Housing Administration is clamping a moratorium on the most popular form of reverse mortgage — the so-called “standard” version, which allows large lump-sum drawdowns of cash at fixed interest rates.

The FHA also plans to institute other changes that could make obtaining a reverse mortgage tougher for some applicants, such as financial qualification standards and escrow set-asides for taxes and property insurance.

Reverse mortgages are marketed to seniors 62 and older, can play important roles in retirement planning and enable owners to “age in place” — stay in their homes for as long as they want. Unlike other mortgages, reverse loans do not require periodic repayments of principal and interest; borrowers generally need not repay the amounts drawn down until they move out or otherwise sell the property. The FHA supports the dominant program in the field, known as the “Home Equity Conversion Mortgage” or HECM, which insures private lenders against loss and accounts for more than 90 percent of all new and outstanding reverse loans in this country.

FHA’s program grew rapidly in volume from 2001 onward, producing 108,000 new loans in 2007, 112,000 in 2008 and 115,000 in the peak year of 2009. Since then, however, volumes have been sagging. Major lenders such as Bank of America, MetLife, Wells Fargo and Citibank have stopped originating new HECM loans altogether. Total originations sunk to 54,800 in the past fiscal year ending in September, according to federal data.

But shrinking volume hasn’t been the only problem. The HECM program has been racking up outsized losses for FHA, in part attributable to foreclosures on homes whose market values have fallen below the insured amounts provided to the borrowers. In FHA’s annual independent audit report to Congress, losses on reverse mortgages contributed $2.8 billion to the agency’s capital reserve deficiency and increased the chances that FHA might have to seek a bailout from the Treasury next year.

Congressional critics of the agency consider the reverse mortgage performance scandalous. During a Capitol Hill hearing earlier this month, Sen. Bob Corker, a Republican representing Tennessee, told Housing and Urban Development Secretary Shaun Donovan: “You are losing your shirt on reverse mortgages. Losing your shirt. … You have got mortgage brokers out there who are making an absolute fortune right now off reverse mortgages. … Some of them are good operators. A lot of them are schlocky operators. And I do not understand why you do not shut the program down.”

Within days, that’s pretty much what Donovan, whose department runs the FHA, decided to do. In a letter Dec. 18 to Corker, acting FHA commissioner Carol J. Galante announced plans for an “immediate cessation” of the standard fixed-rate version of the program. The moratorium will not shut down all forms of FHA-backed reverse mortgages. Borrowers will still be able to use a version known as the “Saver,” which entails smaller maximum drawdowns and lower upfront fees, plus there are adjustable-rate options as well. None of them comes close to producing the volumes generated by the standard program, and FHA officials confirm that they expect the number of new reverse mortgages insured next year to decline further.

The fixed-rate Saver is likely to be the alternative of choice in 2013 for many borrowers. In an interview, Charles Coulter, deputy assistant secretary at FHA, said the Saver program offers 10 percent to 15 percent less in maximum drawdowns, depending on the age of the borrower. A comparison of the standard plan and the Saver prepared by Compass Point Research and Trading LLC, an investment advisory firm, estimated that on a home valued at $200,000, a 68-year-old borrower paying a 5 percent fixed interest rate would be able to pull out $130,400 in equity using the standard program, but only $108,600 under the Saver plan.

Bottom line: FHA-insured reverse mortgages for seniors won’t be disappearing in 2013. But they won’t offer as much cash, and may be tougher to obtain if FHA imposes new rules designed to cut its losses.

Polls about tax deductions don’t clearly lean for or against changing federal law

By Kenneth R. Harney, Friday, December 21, 6:45 AM

In congressional and White House negotiations on tax reform – including the mortgage interest and property tax deductions – who has the crucial political advantage of counting documented public opinion on their side?

Is it the real estate and building lobbies, which argue that maintaining long-standing federal tax benefits are essential, given housing’s key role in job creation and household wealth and given the fact that real estate is still in a fragile state coming out of the recession and mortgage bust?

Or is the “cut the debt” proponents and economists who see mortgage write-offs as unnecessary, costly and heavily tilted to favor upper-income owners, especially along the East and West coasts?

In tough debates such as this one, advocates invariably point to public opinion surveys to show members of Congress where their constituents stand – and, implicitly, how they should vote. That process is already well underway on Capitol Hill as the tense debt, tax and budget negotiations head toward the Dec. 31 “fiscal cliff” deadline.

But the polls can be confusing. On the one hand, a new survey by National Journal, a publication widely read on Capitol Hill, found larger numbers of Americans willing to limit both the mortgage interest and property tax write-offs than housing proponents suggest.

The poll of 1,001 adults, jointly sponsored by United Technologies and released Dec. 11, found 41 percent of respondents favor reducing the deductions for all homeowners, no matter their income, and another 21 percent favor limits on deductions for taxpayers earning more than $250,000 a year. Just 31 percent favored retaining the current system, which allows write-offs on up to $1.1 million in mortgage and home-equity debt on primary and secondary homes.

The same survey found roughly similar opinions on the property tax deduction: 42 percent of respondents said they favor limiting it for all owners, 19 percent support reducing it for high-income households and 31 percent favor no change in the system.

How to interpret these results? One way is to conclude that despite the housing industry’s claims to the contrary, there appears to be noteworthy public support for reducing current mortgage interest and property tax benefits, especially for taxpayers with the highest incomes.

But hold on here. The National Journal doesn’t have the only poll on the subject.

Earlier this year, the National Association of Home Builders commissioned a survey of 1,500 likely voters by a bipartisan pair of pollsters – Republican-leaning Public Opinion Strategies and Democratic-leaning Lake Research Partners.

That survey found that 73 percent of respondents were either strongly or moderately opposed to eliminating the mortgage interest deduction and 62 percent opposed any reduction. The same poll found a much slimmer majority – 54 percent – opposed new mortgage deduction limits on households earning $250,000 or more.

Wait. There’s still another new poll to add to the mix. On Dec. 13, the Pew Research Center released a national sampling of 1,503 adults. It found that although a majority of Americans favor limits on tax write-offs in general and 69 percent favor raising tax rates for households earning $250,000 and up, only 41 percent support cutting back on mortgage interest deductions. Fifty-two percent said they are opposed. Among Democrats, 45 percent favored limitations. Among Republicans, just 35 percent were willing to support cutbacks.

So what to make of these conflicting results? Jerry Howard, chief executive of the National Association of Home Builders, argued in an interview that multiple public opinion polls – the National Journal’s new survey notwithstanding – consistently have shown that a majority of Americans are opposed to limiting mortgage interest and other deductions. “There’s no question,” he said, and the politicians on Capitol Hill should give heavy weight to the public’s views on the subject.

Which views – and which polls – they ultimately side with is still up in the air. But if you had to bet on the matter, you might consider this: President Obama’s position for years has been to limit housing and other deductions for wealthier taxpayers while leaving write-offs intact for everybody else. That tracks fairly well with polling results that suggest voters are more willing to cut tax breaks for upper-income folks but are reluctant to impose reductions on others. Doing so would trigger battles with housing proponents, who’d call in every political chit at their disposal on Capitol Hill.

But after those battles are done, something along the lines of the Obama plan may be the way it all ends up.

Google’s Search for a Mortgage Brand

By John Adams

DEC 18, 2012 2:50pm ET

It’s hard to imagine Google (GOOG) having a search engine optimization problem – its name is the verb for “Web search” for hundreds of millions of people around the world.

But when it comes to Web research that borrowers use to compare different mortgage options, there are brands that are better known – and that’s a problem for Google as it attempts to target that space, according to Greenlight, a digital marketing and research agency with offices in London and New York.

Greenlight says that as of mid-December, Google’s mortgage comparison service does not appear at the top of sponsored search results for all mortgage-related terms. Google recently launched a U.K. mortgage comparison service allowing consumers to compare 5,000 different mortgage deals in a single search. The comparisons list products that are available from lenders and via brokers. Google also offers car insurance and credit card comparison services.

“Google’s got a good service and it works very well. But regardless of that, it isn’t getting the click-throughs,” says Andreas Pouros, chief operating officer at Greenlight.

Greenlight says research shows that Google’s entry into credit cards and car insurance had less than a 1% impact on what people clicked on when they searched Google for those products, and initial evidence suggests that trend is also true for mortgages. Even though people are searching for mortgages via Google for comparison sites, they aren’t clicking on Google’s own comparison engine.

Pouros says it’s an issue of branding – people are obviously familiar with Google, but don’t see it as a financial services brand, at least for rate and product comparisons. “It doesn’t benefit from any specialized branding,” he says.

Greenlight’s research is primarily focused on the U.K., where Pouros says there’s a mix of well-established mortgage comparison sites that have good brand awareness among the public. Companies such as Compare the Market, Go Compare, Money Supermarket and Confused all flood the British airwaves with ads that rely on humor. Compare the Market’s ads, for example, feature Aleksandr Orlov the meerkat, who complains that people are typing the URL wrong, and are arriving at comparethemeerkat.com. Go Compare’s ads feature an opera singer. “It’s hard to watch television for a half hour here and not see an ad for one of these companies,” Pouros says.

Google’s had similar problems with its U.S. mortgage search site. First, the site limited its operations to certain markets, then it shut down entirely earlier this year. The shutdown in the U.S. was limited to mortgages. Google continued to operate comparison sites for credit cards, certificates of deposits and savings accounts. Brand recognition was not reportedly part of the U.S. struggles. But, similar to the U.K., there are a number of recognizable mortgage search brands in the U.S., such as LendingTree.com, Zillow, Bankrate and My Bank Tracker.

Google did not provide an executive for an interview, but issued a response to Bank Technology News that was more focused on the mortgage comparison service’s competitive positioning than on branding. It contends the site’s stable of 5,000 mortgage products compares favorably to its competitors, and that its site includes a “code of conduct” that is beyond what is required by the Financial Services Authority, the U.K.’s banking regulator. The broker’s commission doesn’t surpass 1% of the mortgage’s value; and the lender and broker only pay when a customer clicks through to their website or calls.

“Over the last few months we have launched new comparison services for credit cards, savings accounts and car insurance in the U.K. We are now adding mortgages to our comparison family, making it easier for customers to find the best deal for their individual circumstances,” said John Paleomylites, product director for Google, in a statement.

FHA extension is good news for home-flippers

December 14, 2012 01:30PM

By Kenneth R. Harney

Rehabbers and real estate investors rejoice: You’ll still be able to sell houses to first-time buyers using low-down payment FHA-insured mortgages next year, even if you’ve owned the fixed-up property for less than 90 days.

The Federal Housing Administration has decided to extend its rule permitting loans on quick “flips” of renovated houses beyond the scheduled Dec. 31 expiration deadline. The policy is widely considered one of the key federal government moves that has encouraged private investors in large numbers – often mom and pop, small-scale operations – to buy foreclosed and deteriorating houses from lenders, then repair them and resell within short periods of time.

Since the plan was first put into place by the Obama administration in February of 2010, more than 65,000 renovated homes have been financed using more than $11 billion in FHA-backed loans, according to federal officials. Roughly 23,000 of these properties were acquired and resold with FHA loans within the past year alone.

The idea, according to acting FHA Commissioner Carol J. Galante, is to help “stabilize real estate prices as well as neighborhoods and communities where foreclosure activity has been high” by making it easier for investors to buy, fix up and sell run-down homes that add to urban blight and depress values. The primary purchasers of the renovated properties are first-time, moderate-income families who might otherwise be frozen out of the market because they don’t have the down-payment cash required for a conventional loan. FHA down payments can be as low as 3.5 percent.

The Obama administration’s initiative in 2010 represented a reversal of earlier restrictions on flips first imposed in 2003. After scandals in Los Angeles, New York, Baltimore, the District of Columbia and other large cities over widespread fraudulent flips – where houses sometimes resold for double their previous price within days or even hours – FHA stopped insuring loans on houses whose sellers had owned them for less than 90 days.

Paul Wylie, a Los Angeles-area investor active in renovating distressed properties, welcomed the extension of the FHA policy because “it allows predominantly first-time buyers to compete with cash buyers, investors and others” for houses at affordable prices that have been professionally repaired. In some neighborhoods in and around Los Angeles, much of the inventory of homes that have been rehabilitated for resale within 90 days are what Wylie calls “foreclosure flips, short-sale flips or standard-sale flips.” FHA is pretty much the only financing available for moderate-income, owner-occupant buyers of these renovated properties.

Bruce A. Calabrese, CEO of Equitable Mortgage Corp. in Columbus, Ohio, says the essential ingredients in FHA’s revised approach are its strict controls on appraisals, inspections and chain of title – all designed to ensure “that there is no funny business going on.”

Indeed, FHA’s policy requires property sellers to comply with a detailed list of standards. Among the most prominent:

. You can’t play games on ownership. All transactions must be arm’s-length with “no identity of interest between the buyer and seller or other parties” involved in the sale. You can’t buy a house from your uncle at a bargain price, hire your brother to do a few quick repairs to it, then resell it for a huge profit to an unsophisticated buyer, supported by a hyped-up appraisal signed by a friend or partner.

. The seller of the rehabilitated house must have clear legal title to it. This may sound elementary, but some flippers during the late 1990s never bothered to acquire title and record it. They took over the property one day, slapped a little paint on the outside and sold it the following day.

. If the selling price is 20 percent higher than what the house cost the seller, a second appraisal, conducted by a member of FHA’s panel of approved appraisers, is mandatory to be certain the improvements made to the property justify the increased price.

. An independent inspection report, conducted by a professional with no connection to other participants in the transaction, is also mandatory when the price jump is more than 20 percent. If there are repairs that are still needed that could affect the “health and safety” of the purchasers, they must be completed and a re-inspection conducted before the closing.

Bottom line: Flipping under FHA’s rules should continue to be an important option for buyers of renovated, previously distressed houses and the investors who make it their business to find them and fix them up.

Underwater homeowners say “fiscal cliff” could cost them six figures in federal taxes

Expiration of mortgage debt provision could cause massive ripple effect December 07, 2012 03:45PM By Kenneth R. Harney

Patrick Boris, a banquet chef in Las Vegas, is inching closer to his own “fiscal cliff,” 2,100 miles away from the political brinksmanship under way on Capitol Hill. If Congress and the White House allow the country to go over the cliff later this month, Boris figures he could owe federal income taxes on more than $100,000 in forgiven mortgage debt following the short sale of his two-bedroom townhome next year — a personal financial “disaster,” in his words.

In Sacramento, Calif., Elizabeth Weintraub, a real estate broker who specializes in short sales, says “many” of her clients have potentially taxable exposures on $200,000 or more in negative equity balances on their short sales next year if Congress fails to act. In the Tampa Bay area, Pam Marron, a mortgage loan officer who works with underwater homeowners seeking to avoid foreclosure, says some clients are in panic mode, terrified that Congress could force them into massive federal tax bills after their short sales. “This is ludicrous,” she says. “These people already are on the losing end. Now it could get much worse.”

Across the country, fears such as these are mounting. With the outcome of negotiations over taxes, spending and the federal debt uncertain, huge numbers of underwater owners worry that a single legislative provision that has been sucked into the “fiscal cliff” vortex could devastate them personally.

The issue is the extension of the Mortgage Forgiveness Debt Relief Act, which is set to expire Dec. 31. Dating to 2007, the law temporarily amended the federal tax code to allow mortgage debt on a principal home that is canceled by a lender through a loan modification, short sale or foreclosure to escape taxation as ordinary income. Several bills have been introduced in the House to extend the law for at least another year, and the Senate Finance Committee passed a bipartisan bill this summer that would do the same. But mortgage debt forgiveness is now on hold in both chambers, effectively a hostage until Congress works out a grand bargain — if it ever does.

Though it’s a relatively small and noncontroversial item compared with the multitrillion-dollar debates over taxes and spending, what’s striking about the mortgage debt relief provision is that it potentially affects such a large group of owners and could be extremely painful.

Consider this:

• Nationwide, according to mortgage industry estimates, about 11 million owners are underwater. New data generated for this column by realty information company Zillow indicates that the average negative equity amounts of owners who are underwater — their loan balances exceed the property value — are higher than $90,000 in more than 64 local markets and more than $50,000 in 470. The average negative equity balance among such owners nationwide, according to Zillow, is $73,163.

The highest average negative equity among owners who are underwater is in Key West, Fla., where it exceeds $185,600. In San Francisco, it’s $153,194; Los Angeles, $134,400; New York, $126,500, the Northern Virginia suburbs of Washington, D.C., $114,000; Miami-Fort Lauderdale, $99,900; Las Vegas, $99,000; and Seattle, $91,000, to name just a few.

• Federally regulated Fannie Mae and Freddie Mac own approximately 4 million mortgages that are underwater, and as of Nov. 1 began encouraging owners who are current on their payments but facing a financial hardship to apply for short sales that forgive their outstanding loan balances. All participants in these short sales who close after Jan. 1 could be subject to federal taxation on the forgiven balances if Congress does not extend the law.

• Forty-one state attorneys general recently appealed to the House and Senate to pass an extension so as not to disrupt the $25 billion nationwide “robosigning” settlement they negotiated with five major lenders. Among other provisions, the settlement encourages lenders to forgive billions of dollars in mortgage debt next year and beyond. Failure to renew the law, said Nevada Attorney General Catherine Cortez Masto, would cause families who are already are facing financial distress to be “stuck with an unexpected tax bill” that could deter them from “participating in this historic settlement.”

What’s the outlook? There are no indications that either House Speaker John Boehner, R-Ohio, or Senate Majority Leader Harry Reid, D-Nev., plan a separate vote on mortgage debt forgiveness extension, essentially freeing it from the game of political chicken under way. Whether or not a grand bargain including an extension can be struck before the New Year witching hour is anyone’s guess — and underwater short sellers’ ongoing nightmare.