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After last week’s National Reverse Mortgage Lenders Association (NRMLA) Western Regional Meeting in Irvine, California, attendees were generally in high spirits from spending time with their industry colleagues.
But a common topic of discussion among attendees who spoke on-site with HousingWire’s Reverse Mortgage Daily (RMD) was about the session that started the day.
NRMLA co-chairs Mike Kent of Liberty Reverse Mortgage and Jim Cory of Guild Mortgage led an advocacy update, giving attendees a look at the work that goes on behind the scenes to lobby for the reverse mortgage industry in Washington, D.C.
After the update, Cory went deeper into a plan designed to get more eyeballs on the reverse mortgage product from those in the forward mortgage world and adjacent industries — which amounts to an effort to expand the industry’s distribution efforts.
Cory detailed how he and Kent began devising a plan late last year. This consists of “a multiyear, long-term, permanent program where we want to raise awareness of reverse mortgages among related industries, associations and groups,” Cory said at the event.
This will be focused on trying to drive awareness in areas that NRMLA believes can make the biggest difference, with reverse mortgages for purchase cited as a key example. When asked about it on-site, industry participants in attendance were encouraged by the action plan.
“There’s hesitation [around reverse mortgages], because it seems outside the mainstream and that gives people discomfort,” said Ashley Smith, senior vice president of brand and communications at Finance of America (FOA).
“The more we can normalize it and make it mainstream, the better it is going to be for this industry, this category and Finance of America,” she added. “Part of our growth strategy is to make home equity for retirement mainstream, so this is something that we truly believe in and think is important for the industry right now.”
Mark Klein of Citywide Home Mortgage in Westlake Village, California, said that increasing distribution — which would also add competition into the industry — is a necessary step for growth.
“Expanding competition is important,” Klein said. “It helps push growth and product development, and clearly we need a few more products, so I think that would help.”
Reverse mortgages remain a source of much misconception, he added, which demonstrates the need for expanded education.
“What amazes me is how misunderstood this product really is,” Klein said. “I think, as a group, we need to educate the financial and senior communities about what it can really do.”
His colleague, Pattye Zeto, agreed.
“[Expanded distribution] only benefits the client and us,” Zeto said. “That’s because you come up with more competitive products and prices — for us and for them. I think competition is very good and really needed.”
Christina Harmes Hika of Reverse Loan Solutions in San Diego described her own positive reactions to Cory’s statements.
“Hearing Jim Cory talk about some of the changes that they’re bringing, and some of the things that I personally feel, is really important,” she said. “We’ve got to get visibility and to know that the association is really taking that to heart — and taking steps to make that a thing is really encouraging.”
Harmes Hika said she has always been an advocate for bringing more people into the industry’s fold. She has witnessed what it’s like for forward loan officers to understand that reverse mortgages are unique tools in the broader mortgage ecosystem.
“I think just bigger awareness across the board helps all of us,” she said. “I’ve always seen that, so getting some of the bigger players back in the space, I think, would probably be good for everybody — at the end of the day be good for American seniors.”
One of the worst and totally unnecessary examples of how HECMs are not mainstream is the waterfall application on prepayments. While the IRS permits lenders and borrowers to agree as to an application order for payments, normally one is mandated by the lender IF the borrower does not request how the payment be applied at the time of payment.
To a tax advisor, knowing that prepayments will be applied first to category 1 (accrued but unpaid MIP) which even when a deduction is possible by law, few HECM borrowers qualify for this deduction in prior years; this requirement is ridiculous. Then to the extent it must be applied to category 2 (accrued but unpaid servicing fees) again makes little sense to an income tax advisor especially when such fees are only deductible by a taxpayer if HECM proceeds are used in a trade or business related activity and then only by way of amortization over the TALC life expectancy of the youngest borrower.
If the prepayment is greater than categories 1 and 2, it must be applied against category 3 (accrued but unpaid interest) which in many cases is also undesireable due to the impact of the high Standard Deductions under the 2017 Trump tax law changes. Under the Trump changes, the income tax bunching strategy will generally work best for HECM borrowers who have sufficient taxable adjustable gross income to utilize such large deductions, limited to interest on acquisition indebtedness as specifically defined at 26 USC 163(h)(3)(B) and as adjusted by the maximum amout of debt that can be considered acquisition indebtedness at 26 USC (h)(3)(F)(i)(II) and then only through the end of this calendar year, unless changed through legislation.
In cases where the borrower simply wants to lower the impact of compounding MIP and interest but defer the deduction of interest until the future when either there will be more taxable adjusted gross income or there is more paid interest to deduct under the bunching strategy, applying the prepayment to category 4 (principal) may be the best financial strategy in such cases.
No, instead, we are told that FHA wants MIP to be paid off first which is an outright lie since upfront MIP is paid as part of the closing process on a HECM and ongoing MIP is paid off monthly by servicers. The myths promoted by this industry are one of the biggest reasons why reverse mortgages are NOT mainstream.
It is more than three decades since the prepayment application waterfall should have ended and replaced by a more borrower friendly policy but the industry still ignores some of the most prevalent reasons reverse mortgages are considered backwards and far too difficult to utilize by income tax advisers. This can be clearly seen in just how well the industry is doing when it comes to HECM endorsement volume. After all fiscal year 2025 may end up as the second year in a row that the industry will see fewer than 30,000 HECMs endorsed in a fiscal year since fiscal year 2003. As HECMs are now structured, it may be several years before interest rates fall enough to see the kind of HECM to HECM refinance endorsement volume we saw in fiscal years 2021 and 2022. Some believe it could take even longer.
And HECMs for Purchase let us say that we have NEVER seen a single fiscal year H4P endorsements have reached 2,660. Last fiscal year, H4P endorsement volume was less than 1,700. Yet the industry lacks the energy, financial backing, and expressed reason to get some of the basic changes it needs to make reverse mortgages mainstream, except when preaching to the choir at NRMLA conventions.