When I first came into the industry I believed exactly as you do now. Time and the current home value upheaval in various parts of the country have changed my views drastically.

On the surface the age issue seems right; however, one needs to go beneath the surface. Few 62 year olds take the HECM they closed at age 62 to their grave. So then one must look at the expected HECM life for borrowers at various ages at the time of closing before one can reach any reasonable conclusions about simple age weighted MIP. Other factors could enter into it as well, such as the state in which the home is located. In some areas of the country seniors have a greater propensity to move more frequently than in other locations. This data would have to be analyzed based on many acceptable criteria; however, several important factors such as marital status and sex might not be acceptable to HUD.

Unfortunately the same must be said about your appraised value concept. Due to the drastic drop in home values in some areas of the country, there are substantial losses which are expected to be incurred on homes with appraised values much higher than the lending limit at the time of closing; however, those losses will be much less than if those same homes had appraised at the lending limit or lower. The stability of home values over time in various sectors of the country might be a critical factor in analyzing what insurance premiums should actually be assessed based on what HUD deems as risk based criteria.

Let us say you are correct. The trouble would be that those in their early sixties might have to bear upfront MIP rates of over 8% (that is not the right number but it demonstrates the essence of the concept) of the Maximum Claim Amount at the time of funding while those in their late nineties of just ½%; if the 62 year olds had home values less than the lending limit, the rates could be even higher. This is one reason why HUD is adverse to risk based premiums.

Risk based MIP assessments could lead to a much smaller program; however, without sufficient information the opposite might be the result. Ultimately, however, for the HECM program the issue might not be the number of seniors who will be helped by the suggested changes as much as it is the financial and economic status of those seniors who will be helped.

There are many positive aspects to what you present. One area that needs immediate attention is some of the confusing terms used in computing the principal limit. First and foremost is the “lending limit.” What this term means has nothing to do with a true lending limit. Then we come to the clumsy term, “maximum claim amount.” This is not the maximum claim amount and is nothing more than the lower or lowest of several factors.

One very intelligent naturalized citizen became infuriated when I began defining the term “lending limit.” He had read that the current lending limit is $625,500 and he had a home he believed worth just over than limit. In his broken English he all but proclaimed the principal limit I presented was a “bait and switch” tactic. He refused to hear my explanation all of the way through and pushing his wife out the door stomped out of my office very disappointed and angry.

You presented the easy issue — making the principal limit based solely on age and home value. The hard part is what should the permanent expected interest rate be? Many have suggested 5.56%. From a HUD point of view, how could they support such a low interest rate unless MIP rose substantially? It seems the Principal Limits would have to be very low to have one universal expected interest rate without significantly raising the MIP — which would mean using a much higher expected interest rate than 5.56%. Imagine how many fewer seniors would be helped if the principal limits went appreciably lower.

As to other issues, I agree with the remarks of Mr. Agbamu.