PERSON OF THE WEEK: Atare E. Agbamu And FHA Mortgagee Letter 2008-38

hin the reverse mortgage sector, the Federal Housing Administration (FHA) Mortgagee Letter 2008-38 (ML-08-38) has created a lot of talk -[/b] and a great deal of that palaver is not supportive. This week, MortgageOrb speaks with Atare E. Agbamu, director of reverse mortgages at Minneapolis-based AdvisorNet Mortgage LLC and author of the book ‘Think Reverse!’ (The Mortgage Press, 2008), to discuss the controversy created by this document. [b]Q:[/b] What exactly is FHA ML-08-38, and what does it mean for reverse mortgage customers? [b]Agbamu:[/b] It is a policy statement that redefined the home equity conversion mortgage (HECM) reverse mortgage's nonrecourse feature – the heart of the product. Originally, HECM nonrecourse meant the borrower (or his or her heirs/estate) will never owe more than the home's value at loan termination (when borrower moves, sells or dies). For this unconditional guarantee, the Department of Housing and Urban Development (HUD) charges every HECM borrower insurance premiums. Almost 20 years later, without reducing borrower premiums, FHA ML-08-38 replaces original, structural, unconditional guarantee with a conditional promise. In capsule, it says if a borrower (or heirs/estate) sells a home at loan termination, it owes nothing more than home's market value. But if a borrower's heirs/estate keeps property, he or she must pay full loan balance, even if it is more than the market value – a breach of the original obligation between HUD (as insurer) and HECM customer (as insured). It was a fundamental shift. ML-08-38 also decreed arms-length transaction rules in HECM collateral disposition. For HECM reverse mortgage customers, ML-08-38 takes away the unconditional nonrecourse guarantee, financially exposing customers and their heirs/estate to significant deficiency (or recourse) risks. The new arms-length rules bar borrowers' relatives from buying the home in a property sale. It is a raw deal for seniors who have taken, who are taking or who plan to take HECM reverse mortgages, the dominant product in the U.S. market. [b]Q:[/b] To date, what problems has ML-08-38 brought upon the reverse mortgage market? [b]Agbamu:[/b] In addition to the financial exposure to customers and their heirs/estate, ML-08-38 has caused other challenges. It has called industry participants' integrity into question, because for 20 years, as an article of faith, they assured seniors, their relatives, and the public that HECM reverse mortgages would not expose them to recourse or deficiency risks – a key concern for seniors and their relatives. It has also imposed substantial new disclosure burdens on the industry, upon the mountain of disclosures already in place, driving up operating costs and reducing profitability. By sowing doubts about the industry's veracity, it hurts honest marketing and consumer education efforts, especially at a time like this. Above all, there is a fundamental issue of fairness: The party who is paying comprehensive-type premiums is getting liability-type coverage. [b]Q:[/b] How has the reverse mortgage sector responded to ML-08-38? [b]Agbamu:[/b] In my opinion, it has ranged from utter disbelief to muted displeasure to tepid accommodation. Although among industry and among the program's true believers who appreciate the challenges ML-08-38 poses, we have been seeing some pushback through articles and comments in the mortgage media since December 2008, when ML-08-38 was issued. [b]Q:[/b] Is HUD aware of the problems raised by this situation? And is there any movement to amend or repeal ML-08-38? [b]Agbamu:[/b] HUD is fully aware of the problems raised by the redefined nonrecourse. In fact, credible sources acknowledged that ML-08-38 was a controversial issue within the department. Some senior policy people recognized the problems inherent in the revised policy and made their views known. There is speculation that HUD is beginning to listen. [b]Q:[/b] Reverse mortgages are often cited as one of the bright spots in today's industry. Do you see their value growing in the post-recession period? [b]Agbamu:[/b] Every research or data I have seen says yes. We have 76 million Baby Boomers who are maturing every hour and who are going to live longer than previous generations of American elders. Traditional actuarial assumptions underlying our retirement models no longer hold. By most measures, private funds will be needed to supplement traditional sources of retirement cashflow. Home equity via reverse mortgages will play a significant role. Reverse mortgage is a growth indu