Senate and House Appropriation Bills Have Different Reverse Mortgage Solutions

The Senate and House appropriators have two different approaches on how to cover the the Federal Housing Administrations $798 subsidy request for the reverse mortgage program but both involve adjusting the amount seniors receive from he product.   

Last week, the House passed its appropriation bill for FY 2010 and requires that HUD operate the HECM program at a net zero subsidy rate which eliminates the need for the $798 million.  However, the changes to the program will lover the available benefits for reverse mortgage borrowers.  

National Mortgage News is reporting that the Senate Appropriations Committee is willing to provide $288 million to cover part of the shortfall.  The Senate bill also requires HUD to reduce the loan proceeds seniors receive by 5%, which gives us a better idea of how much the program would be adjusted under the House version of the bill.

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As an alternative, the National Reverse Mortgage Lenders Association is proposing that HUD reduce the upfront mortgage premium on HECMs and increase the annual premium to deal with shortfall.  NRMLA’s president Peter Bell told NMN that, "We are willing to work with HUD to re-engineer the mortgage insurance premium."

Appropriators Move to Cut HECM Proceeds (Subscription Required)

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  • The upfront mortgage insurance premium should be reduced or eliminated, and the periodic premium should be increased to a level that provides for a zero-subsidy program without reducing benefits to the HECM borrower. By increasing the periodic MIP, which is based on the outstanding principal balance, the bulk of MIP premiums collected will come from those loans with the greatest risk — those with the largest outstanding balances. This also would have the effect of reducing overall costs for those borrowers who desire the safety net of a reverse mortgage with a line of credit but access it minimally or not at all.

    The principal limit calculation also should be re-engineered so as to provide for a constant factor based on age alone, rather than one based, in part, on an expected rate that changes weekly and only serves to penalize borrowers for choosing the wrong timing for their application or closing.

  • I just agree with lowering or eliminating the up-front MIP. In some cases, the up-front MIP is half of the closing costs. For a lot of seniors who need a reverse mortgage, the closing costs are just to astronomical to consider. They can't see beyond the typical 5% of their home's total value that it takes to get into a revese mortgage. We need to make these loans more attractive to seniors who need them by eliminating as much of the closing costs as we can. Since HUD saw fit to cut our origination, it would be nice to see them step up in a way that would REALLY benefit seniors.

    • yourreverselender1,

      Please do not take the following personally. The arguments in your comment are much too typical to simply ignore.

      First HUD did not cut our origination fees. Congress did that at the insistence of AARP in Section 2122(c) of HERA of 2008 (P.L. 110-289). Why originators insist on spreading and promoting this ridiculous industry myth is hard to say? What is achieved by its promotion is: 1) it displays our ignorance and 2) it harms an otherwise good relationship with HUD. I for one am grateful that HUD held off on implementing the reduction for over three months.

      Do not expect financial advisors to be impressed by percentage cost arguments that are based on home values. Who knows what the value of a home really is? The best we can do is talk about a range of value.

      Actually in comparing loan costs, one of the items that most competent financial advisors are interested in is the percentage cost of each dollar of proceeds. In fact all percentage costs of loans for disclosure purposes are computed using proceeds as the denominator including the percentages displayed in the TALC Schedule. Of course that only explodes the percentage of the upfront costs of a HECM but that is one of the primary measures that is used in evaluating what loans to recommend and here the phrase “compared to what” should be applied. If there will be a line of credit or the tenure option will be selected, what should the denominator be? Available HECM proceeds will generally be increasing over time in these cases, while forward loans will normally be shrinking — so how are proceeds a meaningful determinate in that scenario since the available proceeds are usually going in opposite directions? Of course on closed-end HECMs, using proceeds as the denominator is generally appropriate although again forward mortgage proceeds should be shrinking over time but not by much in the early years.

      In 2004 when looking into a HECM (my first time) for the widow of a deceased friend, a highly recommended manager at a very well respected bank made exactly the home value argument to me. I listened politely but never called that person back. He had no idea how to present a HECM to a financial advisor and it showed. If he had, he would have argued that HECM proceeds can grow while proceeds from the typical forward mortgage generally decrease over time.

      The widow got a reverse mortgage from someone I recommended who was far less knowledgeable about the product but provided the information I needed without trying to make arguments made on ill advised ratios. By the way the minimum value of the home in question exceeded twice the Maximum Claim Amount (“MCA”); its appraised value was almost three times the MCA. In this case the percentage of upfront costs based on its appraised value was about 1.6% while the ratio based on available proceeds was a little over 7%.

      A word to the wise….

  • HECM_Dude,

    While I like the idea of a free flow and exchange of ideas and thinking outside of the box, why does it make any sense to base the principal limit solely on the age of the borrower? The recent proprietary reverse mortgages did exactly what you are proposing. Where are they today?

    The number of original HECMs that terminate after the youngest borrower reaches the HECM life expectancy indicated at time of origination is extremely low. Most HECMs terminate within seven years of endorsement. So is age really that critical? Maybe the interest rate is far more critical? Since the average age of borrowers is in the 70's, maybe a fixed age should be used instead?

    What interest rate should be used in establishing an age weighted principal limit? Should it be 5.56% or 12%? Proceeds would be substantially different based on that underlying interest rate.

    Risk can be managed far easier if all of the significant risk factors are used in determining the level of available proceeds. However, my opionion is skewed by a prejudice against the platform used by the proprietary product market. You would have thought 1st Reverse would have made a fortune based on their pricing structure while they were the only significant proprietary product available to correspondents….

  • We are strongly in favor of reducing the upfront MIP and increasing the yearly MIP.

    This solution seems consistent with the core mission of the Reverse Mortgage.

    It would also allow for slightly reduced loan amounts, as proposed by the Senate committee, if the reduced MIP could be allocated into remaining equity instead of higher net proceeds.

  • We are strongly in favor of reducing the upfront MIP and increasing the yearly MIP. rnrnThis solution seems consistent with the core mission of the Reverse Mortgage. rnrnIt would also allow for slightly reduced loan amounts, as proposed by the Senate committee, if the reduced MIP could be allocated into remaining equity instead of higher net proceeds.

  • Mr. DeRenzo,

    How is that solution consistent with the core mission of the Reverse Mortgage? Please explain. Total MIP costs will rise for most borrowers who have a high balance due to original maximum claim amount which will make an even greater balance due when the HECM ends.

    How can “reduced MIP” “be allocated into remaining equity instead of higher net proceeds”? I am not so sure how that could work.

    Thanks.

  • Mr. DeRenzo,rnrnHow is that solution consistent with the core mission of the Reverse Mortgage? Please explain. Total MIP costs will rise for most borrowers who have a high balance due to original maximum claim amount which will make an even greater balance due when the HECM ends.rnrnHow can u201creduced MIPu201d u201cbe allocated into remaining equity instead of higher net proceedsu201d? I am not so sure how that could work. rnrnThanks.

  • yourreverselender1,rnrnPlease do not take the following personally. The arguments in your comment are much too typical to simply ignore. rnrnFirst HUD did not cut our origination fees. Congress did that at the insistence of AARP in Section 2122(c) of HERA of 2008 (P.L. 110-289). Why originators insist on spreading and promoting this ridiculous industry myth is hard to say? What is achieved by its promotion is: 1) it displays our ignorance and 2) it harms an otherwise good relationship with HUD. I for one am grateful that HUD held off on implementing the reduction for over three months.rnrnDo not expect financial advisors to be impressed by percentage cost arguments that are based on home values. Who knows what the value of a home really is? The best we can do is talk about a range of value. rnrnActually in comparing loan costs, one of the items that most competent financial advisors are interested in is the percentage cost of each dollar of proceeds. In fact all percentage costs of loans for disclosure purposes are computed using proceeds as the denominator including the percentages displayed in the TALC Schedule. Of course that only explodes the percentage of the upfront costs of a HECM but that is one of the primary measures that is used in evaluating what loans to recommend and here the phrase u201ccompared to whatu201d should be applied. If there will be a line of credit or the tenure option will be selected, what should the denominator be? Available HECM proceeds will generally be increasing over time in these cases, while forward loans will normally be shrinking — so how are proceeds a meaningful determinate in that scenario since the available proceeds are usually going in opposite directions? Of course on closed-end HECMs, using proceeds as the denominator is generally appropriate although again forward mortgage proceeds should be shrinking over time but not by much in the early years.rnrnIn 2004 when looking into a HECM (my first time) for the widow of a deceased friend, a highly recommended manager at a very well respected bank made exactly the home value argument to me. I listened politely but never called that person back. He had no idea how to present a HECM to a financial advisor and it showed. If he had, he would have argued that HECM proceeds can grow while proceeds from the typical forward mortgage generally decrease over time.rnrnThe widow got a reverse mortgage from someone I recommended who was far less knowledgeable about the product but provided the information I needed without trying to make arguments made on ill advised ratios. By the way the minimum value of the home in question exceeded twice the Maximum Claim Amount (u201cMCAu201d); its appraised value was almost three times the MCA. In this case the percentage of upfront costs based on its appraised value was about 1.6% while the ratio based on available proceeds was a little over 7%. rnrnA word to the wiseu2026.rnrn

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