As the scrutiny of home equity investment (HEI) products has accelerated, credit ratings agency Fitch Ratings this week released a report explaining its approach to such products, reiterating that it does not rate them.
While some other ratings agencies have opted to provide assessments for such products, Fitch continues to avoid “provid[ing] rating criteria for securitizations backed by HEI/HEA assets,” the report stated. It also cites some of the movements taking place in terms of the regulatory posture on these products at the state level.
“HEI/HEA providers maintain that these instruments are not loans,” the report explained. “However, some states have recently passed legislation to regulate these instruments, and require HEI/HEA originators to hold mortgage lender licenses.”
Product criteria
Fitch acknowledged the potential consumer benefits of these products. These include lower borrowing costs, no principal and interest payments, and no interest accrual over the life of the product. But the firm also said there are unique risks associated with them, including “limited performance history driven by the limited number of securitizations and issuers.”
There is also regulatory risk, Fitch said, particularly if HEI products are reclassified as a “standard mortgage loan.” This could result in compliance violations, particularly if providers of these products do not maintain required licenses under legal and regulatory guidance that the mortgage industry must follow.
Additional risks include “credit risk layering” stemming from weak client credit profiles that may not have been accounted for in the underwriting process, the report explained.
The arrival of the report comes on the heels of accelerating scrutiny of the home equity investment landscape. Some of this is tied to legal definitions and regulations that govern reverse mortgages.
Recent reverse mortgage comparisons
In Washington state, a legal case is playing out in the U.S. Court of Appeals for the Ninth Circuit. It features plaintiffs who argue that these products are actually reverse mortgages, at least under state law.
The company defending itself in that suit, Unison, maintains that there are several distinctions between its offerings and reverse mortgages. It pointed out in a hearing that the state Legislature does not include HEI products under its definitions for what constitutes a reverse mortgage.
In January, the Consumer Financial Protection Bureau (CFPB) — at that point still under the leadership of Rohit Chopra — published an “issue spotlight” to highlight the potential risks of HEIs for consumers. One of these risks is that the products operate outside of the regulatory purview of other home-equity tapping products, including the Federal Housing Administration (FHA)-sponsored Home Equity Conversion Mortgage (HECM) program.
The bureau also filed an amicus brief in a case involving a home equity contract company. It took the position that a home equity contract counts as a residential mortgage and corroborated that perspective with comparisons to reverse mortgages.
“Many homeowners expect that when they put their house on the line in exchange for getting money, they will also get certain protections. But right now, some home equity contract companies say that they don’t have to follow those laws,” the bureau said when detailing its HEI activity. “The CFPB filed a brief in a court case where one home equity contract company said exactly that.”
Additionally, the Oregon legislature debated a bill that specifically targeted reverse mortgages by name. But it was later determined in a hearing that the intended regulatory target was the home equity investment industry, not the reverse mortgage business.
“It is important to be able to parse the difference between a reverse mortgage loan that is [backed by] FHA, a loan that is governed by HUD regulations [and which is] very tightly regulated. Equity sharing agreements [are totally different],” said David Ellison, a Portland-area reverse mortgage originator with Longbridge Financial who provided testimony about the measure in a committee hearing last month.
Time-tested HECM
More recently, Massachusetts Attorney General Andrea Joy Campbell filed a lawsuit against HEI provider Hometap. In part, Campbell alleges that Hometap’s product offerings constitute “illegal reverse mortgages that fail to comply with state consumer protection laws.”
Hometap denied the allegations in a statement to HousingWire‘s Reverse Mortgage Daily (RMD) and is pursuing its legal defense in the matter.
“We have pursued every possible avenue to engage in constructive dialogue with the Massachusetts attorney general’s office,” the company said. “Unfortunately, those efforts have not been reciprocated, and we believe they are pursuing an unfounded lawsuit predicated on meritless claims.”
But some members of the reverse mortgage industry have long held that such products are simply not time-tested enough in comparison to something like the HECM loan product. They have raised similar concerns to this week’s Fitch report about overall product longevity.
“We now have 30 years of product testing and market revision to get to what is, today, an exceptional and unique financial product when used in the right application,” Scott Harmes of C2 Reverse told RMD in 2019.
“We’ve seen equity conversion methods come and go, because they’re not market-proven or market refined long-term. That long history of HECM refinement is why we have such a viable product today.”
