Reuters issued an article by Karey Wutkowski and Rachelle Younglai last night, July 9, 2008, about the woes of banking giant IndyMac Bank and how its’ future probably was now resting in the fate of Banking Regulators. Reuters Article Titled Indymac’s Fate
The article does an excellent job of explaining what can happen to IndyMac depositors, what will happen with FDIC Insurance and what a failure (if indeed a full failure is what the ultimate result becomes) can do to the FDIC and its fund to pay insured depositors. There is another side to this story that affects senior borrowers very deeply that must be considered and needs to be brought out. IndyMac Bank owns Financial Freedom and holds one of the largest portfolios of both government insured Home Equity Conversion Mortgages (HECM or “Heck-um”) and also the proprietary jumbo reverse mortgages they funded under their Cash Account product.
If we start by reviewing the IndyMac Bank Issues Stakeholder Letter dated July 7, 2008 IndyMac Bank Stakeholder’s Report IndyMac Chairman and CEO, Michael W. Perry states that IndyMac is in a “crisis period” and that they are working closely with their federal banking regulators with respect to the actions that they must take to meet their mutual goal of keeping IndyMac safe and sound. He later explains that IndyMac is ceasing all forward mortgage lending and working on building, “within regulatory constraints”, Financial Freedom for FHA reverse mortgage production only. Now it’s really interesting that if you go down to the comments issued by Grove Nichols, the IndyMac Bank Communications Director back on May 22, 2008, there is a whole article on how IndyMac Bank reduced Home Equity Lines of Credit (HELOC) for existing loan holders. But how does all this come together now?
In the case of the government-insured HECM, this all means little. The loans are insured by the FHA and if IndyMac were to fail these loans are an asset which could be sold to a number of other lenders who currently service HECM loans. These borrowers would probably never miss receipt of a monthly payment and would only know that their loan had been sold because they would receive a notice in the mail and they would start receiving their checks and statements from another address. But what happens to all the proprietary loans, or Cash Account loans, currently in Financial Freedom’s servicing portfolio? Based on conversations I have had with Wall Street traders over the last few years, Financial Freedom did not have as much luck in the sales of their proprietary product as they enjoyed in their early offering.
If you take the statement made by Michael Perry about building reverse mortgages within regulatory constraints, and you couple that with HELOC cut-backs already made, one cannot help but wonder how long it will be before seniors who took out a reverse mortgage expecting an income for life receive a notice that they can no longer draw on that reverse mortgage! The Cash Account allowed borrowers to take any amount up to the total for which the borrower qualified as a lump sum payment, but anything not taken as that initial funding was left available to the borrower as a Line of Credit which grows as the borrower ages. If IndyMac cannot sell these loans and “regulatory constraints” dictate that they can no longer offer money to borrowers on these lines of credit, then all these senior borrowers who are depending on these funds for living expenses, property needs, medical expenses, emergencies, etc. are in for a very rude awakening if they make that request that never gets honored.
Mr. Perry states: “We plan to honor all of our existing rate-locked loans and will continue to fund these loans in the coming weeks”. I am sorry to say that this is not an entirely accurate statement in that IndyMac sent a notice out to all mortgage brokers with loans locked with them just yesterday, one day after Mr. Perry filed his statement, stating that the only locked loans that would be honored would be those that the brokers paid a 1%, non refundable fee to change the terms of the lock agreement and if the broker was not willing to pay the 1% fee on every loan in his pipeline, ALL loans would be nullified. Those fees would only be refundable if IndyMac declined the loan (no word if they cut the value and the borrower could not take their “revised value”). No broker in their right mind will pay out thousands and thousands of dollars with no guarantees to a lender who may be defunct literally any day and Mr. Perry knows that so that assurance is hollow. What assurance do our senior borrowers have that they won’t also be cut off with little or no notice – perhaps just at the time when they need the funds the most?
I would encourage all individuals who currently hold a Financial Freedom Cash Account Reverse Mortgage to take a moment to review your mortgage statement. If you have already taken all the funds available to you, you have nothing to worry about. If you or your loved one still have a large amount of money left coming and you think it may be needed, I would encourage you to contact a reverse mortgage specialist and have them run a current scenario for you. I am not advocating hysteria or trying to incite senior borrowers to run out and needlessly pay fees for another reverse mortgage, but the writing is on the wall and if you have this mortgage now and think it will always be there when you need it, you may be in for the worst surprise of your life.
Michael G. Branson (CEO All Reverse Mortgage Company) is a Mortgage Broker who has over 31 years of mortgage banking experience.
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