Don't Expect Much From Unregulated Regulators
The seeds of
this article were planted in my brain some 30 odd years ago,
when I did a consulting project for HUD, for which they
contracted to pay me $2500. Three months after delivery and
acceptance of my report by HUD, I realized I had not yet
been paid and I contacted the person who had retained me.
This elicited what I came to realize was a stock reply of an
unregulated regulator: The payment was “in process”.
The same Q and
A were repeated multiple times, and a year went by. At that
point, in a fit of pique, I wrote a letter to the Secretary
of HUD asking why it was not possible for his agency to
discharge an uncontested debt within a year. Three days
later I received a check for $2500. Two days after that I
received another check for $2500.
occurred to me to seek help from someone or some entity
outside the agency, because then as now, HUD was an
unregulated regulator. Neither did I stop to consider
bureaucratic lethargy that delayed my payment might have
other negative consequences of far greater importance. I
didn’t pursue that line of thought until last week, when my
colleagues and I were suddenly faced with one.
upgrading our reverse mortgage calculator to handle house
purchases by seniors. In 2008, Congress extended the HECM
reverse mortgage program, administered by HUD, to cover
house purchases. Thenceforth, seniors could buy a house and
finance the purchase in part with a HECM reverse mortgage.
The costly intervening step of buying the house with a
forward mortgage and paying it off with a reverse mortgage,
was no longer necessary.
that lenders extending reverse mortgages to seniors buying
houses would offer multiple combinations of interest rate
and upfront fees. This has long been the practice on forward
mortgages, and has become increasingly common on HECM
reverse mortgages issued on homes already owned. Higher-rate
loans carry rebates from the lender that are used to pay
upfront settlement charges, including title insurance and
on August 14, one lender on our site offered a senior of 83
with a house worth $500,000 and a $313,000 existing mortgage
balance an adjustable rate HECM at 2.529% and a rebate of
$12,057. The rebate reduced the settlement costs on the HECM
to $1868. If the borrower expected to be out of the HECM
within 5 years, this would cost the senior less in total
than the lower-rate ARMs available that day on which the
lender charged fees instead of paying rebates.
astounded, therefore, when lenders told us that HUD did not
allow rebates on HECM purchase transactions! We checked all
the relevant HUD documents, and nowhere did we find a
statement that rebates paid by lenders were not allowed. On
the other hand, we did not find any statement explicitly
authorizing rebates, either.
What we did
find were strict prohibitions against any participants in
the transaction, including lenders, contributing to the down
payment required of the senior. We have no problems with
these rules, which
are designed to prevent seniors from being charged
more for houses than they are worth. We know that when home
sellers pay some of the settlement costs of home buyers,
sale prices end up higher. That happens because negotiations
on who pays settlement costs and negotiations on the sale
price occur together – they are part of the same negotiation
the offering of multiple combinations of interest rate and
upfront fees by lenders, and the selection of a preferred
combination by the borrower, are not part of the negotiation
on sale price. Offering borrowers multiple price
combinations cannot affect the sale price of the house.
happened was that HUD was not sure that rebates from lenders
wouldn’t affect prices, so they left the issue ambiguous.
They did not explicitly prohibit rebates, but neither did
they explicitly exclude rebates from the prohibitions on
other kinds of payments.
I was told
that when they were asked about it by lenders several years
ago, they said “we will look into it.” This is another stock
reply of a regulator that knows it need not do any follow-up
because it is not being monitored.
regulation is left ambiguous, the interpretation by the
industry involved will depend on the culture of the
industry. In many industries, the prevailing assumption is
that what is not explicitly prohibited is permissible. The
mortgage industry, however, is so rule-driven and mortgage
lenders so risk-averse that they often assume that what is
not expressly authorized is prohibited.
That seems to
be the case here. We have not found any lenders willing to
offer rebates on purchase HECMs. HUD has effectively shut
down a potentially valuable service to seniors without
explicitly prohibiting it, thus avoiding any need to justify
its actions. Unregulated regulators can get away with that.
article above was sent to HUD with an invitation to comment.
No response was received but HUD had it only for 3 days
prior to publication. The following week, however, I was
pleasantly surprised to be contacted by two HUD officials,
who told me that a working group had been formed to examine
the issue. Several email exchanges followed on substantive
issues, and at this writing I am cautiously optimistic that
the question will be resolved, one way or another, by an
official policy directive. Stay tuned.