HUD Counseling Rules Confound Reverse Mortgage Counseling

Housing counselors are upset with new administrative rules within the Department of Housing and Urban Development that make it hard to advise their clients.

For years, people seeking reverse mortgages have been obligated to get counseling. Many of the lenders involved in reverse mortgages are the same as the lenders that participated in subprime lending.  What’s worse, marketing for these mortgages often uses affinity spokespersons that play on the trust of borrowers.  In Kansas City, for example, one lender hired a now deceased Negro League baseball star.  Some even call reverse mortgages a form of subprime lending.

The requirement for counseling is linked to the concern over the populations that utilize these instruments.  Reverse mortgages appeal to retired people who have more home equity than cash.  Reverse mortgages allow seniors to stay in their homes, but to tap the built-up equity in their homes.  In such a mortgage, the lender gives the resident a monthly cash payment in exchange for the right to residents title.  The lender assumes the title upon the death of the resident.  It is a risk, because consumers may end up trading their equity for just one or two years of payments.  It is also a risk for the lender, because longevity can mean that they make a substantial sum of cash payments.  The loans also come with high origination fees.

New Rules, New Problems

Rules governing housing counseling in HECM change often, but procedures to qualify as a certified counselor have become particularly onerous.  Under the new HECM rule, counselors are required to update their training.  The trainings are not free, and they take up to a week.

I spoke with a housing counselor in North Carolina yesterday about this issue.

It is asking a lot to take our counselors out for a week to get the test.  In order to take the test, it costs at least $100.  Some places charge $500.  They have to score an 80.  There is only a 17 percent pass rate.  If that is the case, then HUD needs to understand that there is a problem with the test.

The impact is that only a few counselors are now qualified to counsel on these mortgages.  In North Carolina, there are no qualified counselors east of Raleigh.

Policy makers could changes this.  One option would be to give states control over their own jurisdictions.  North Carolina has its own certification program.  Counselors have to take that one, too.  However, HUD will not allow North Carolina’s test to substitute for the federal exam.  North Carolina petititioned for an exemption.  They were turned down by HUD’s general counsel.

Another option would be for HUD to reverse the policy, or to re-evaluate the test.

Could lead to foreclosures

Another upshot of this is that it leads to more foreclosures.  For seniors with some debt remaining on their home mortgages, a reverse mortgage on their existing equity can generate enough cash flow to service debt.  Those seniors often can’t get that counseling, though, so they are prevented from utilizing this product.  Naturally, the impact is the most severe in places where there are not counselors.  While telephone counseling is an option, it is generally less effective.  Some would say that it is not effective at all.