$798 Million Subsidy: Time to Change the FHA Insured Reverse Mortgage Program?

As the reverse mortgage industry faces a $798 million subsidy request, there is plenty of discussion from industry leaders and politicians about how to change the program to ensure its success and viability.   

The knee jerk reaction from most is to cut the principal limit to ensure that no subsidy is needed for the government insured reverse mortgage product.  The House has already passed its version of the Appropriations Bill which requires that HUD adjust the program to operate at a net zero subsidy rate.  The Senate’s current version also includes provisions which would lower the principal limits. 

At a time when many seniors find their home values down drastically, it will clearly limit the amount of people who could benefit from the program.  According to an analysis of three major lenders’ portfolios by the National Reverse Mortgage Lenders Association, nearly 21% of current borrowers would have come up with too little cash from the reverse mortgage to pay off their existing indebtedness if principal limits are reduced by 10%.

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Most would agree that the HECM is far from perfect and many feel now might be the right time to make some needed adjustments to the program.

One of those is Joe Kelly from New View Advisors, a Capital Markets and Investment Banking consultant based out of New York, NY.  As part of a three part series on the HECM program, Kelly starts off with The Trouble with HECMs: FHA’s Bumpy Road to Grandma’s House, where he says that:

The Trouble with HECM is that the program encourages senior homeowners to borrow a very high percentage of their home value, which not only increases FHA’s losses, but also unnecessarily drives up costs to borrowers, lenders and investors. The lack of a more efficient, low-cost alternative has also discouraged many senior borrowers who might otherwise benefit from a HECM loan, but are discouraged by the size of the upfront fees.

In his final installment, Kelly writes that “a new approach is needed, one that lowers the senior borrower’s cost, lowers FHA’s risk, while still providing sufficient proceeds to the senior.”  The article describes the “HECM II”, low cost alternative reverse mortgage product with no upfront MIP, no servicing fee set aside, a 75 basis point (0.75%) annual premium, and sensibly lower LTV ratios.

Kelly’s argument for eliminating the upfront MIP is that the same fee is charged to both 62 year old and 99 year old borrowers alike and is the main driver for calling these loans “high cost”.  Sounds great, but is that really possible? 

Kelly feels that the ongoing MIP should be increased from 50 basis points to 75 basis points per annum.  The fee of 75 basis points would be charged to the loan balance, not property value, and would keep borrowers LTVs greater than 40% and provide sufficient revenue to FHA to insulate it from further losses.

By keeping the monthly MIP, Kelly writes that “FHA’s risk is aligned with the borrower fees it collects, and the borrower pays for the risk she creates and the duration of the benefit she receives.”  He provides a principal limit table for the HECM II which provides LTV’s in the 50-60% range. 

Raising the MIP is something that has been discussed at length but Kelly proposes something that I’ve yet to hear about, which is replacing the SFSA with a taxes and insurance escrow set aside.

The Servicing Set-Aside (”SFSA”), a concept unique to HECM, is the subject of some controversy. It basically quantifies the present value of the servicing fee, a flat monthly dollar amount that is added to the HECM loan balance each month. The SFSA is disclosed to the borrower as a reduction in the Principal Limit, which gives it the appearance of yet another initial cost. Suffice to say that many reverse mortgage lenders and borrowers find it to be a confusing and unnecessary concept. On the other hand, no set-aside or escrow provision is required for payments of property taxes and insurance (“T&I”). Servicing fees, which total less than $400 per year per loan, can easily be paid by the investor to the servicer, but T&I payments can run into thousands of dollars. If not paid, T&I delinquencies can ruin the value of a HECM loan by causing it to lose its first lien status and therefore its FHA insurance. The reverse mortgage industry is currently grappling with the issue of rising T&I delinquencies and losses.

In other words, FHA created the wrong set-aside. The HECM program was first introduced in the late 1980s, and most features have never been updated. FHA should use the clean slate of a new product design to replace the SFSA with a T&I set-aside. The T&I set-aside could take the form of a fixed dollar amount equal to six months of taxes and insurance payments. This amount would be deducted, or “set-aside” from the Principal Limit at origination. The servicer would then have the ability to cure T&I defaults by paying those expenses directly and adding the payment to the loan balance.

While many might say this is un-necessary, it can also be seen as another level of protection that is provided to seniors who decide to take out a reverse mortgage.

Another idea of of how to cure the rising number of T&I defaults came from Meg Burns, director of the FHA’s Single Family Development Program, at the National Reverse Mortgage Lenders Association’s policy conference in Washington, DC.  Burns said that FHA was running a pilot program in Michigan which allows HECM borrowers to receive a subordinate lien through a government program to help keep borrowers up to date on T&I.

Burns also said that HUD was discussing a HECM "mini", which would offer borrowers a way to withdraw only what they want and the max claim would be adjusted accordingly.

As the $798 million subsidy request hangs over our industry, everyone needs to be ready for the HECM program to change.  If the principal limits are lowered, changing the MIP structure to resemble something like Kelly’s “HECM II” or even offering it as an alternative to the HECM currently available could help change the publics perception of reverse mortgages being high cost loans.

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  • Ms. Lewis,rnrnWhen 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.rnrnOn 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. rnrnUnfortunately 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.rnrnLet 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 u00bd%; 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.rnrnRisk 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.rn

  • HECM_Dude,rnrnThere 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 u201clending limit.u201d What this term means has nothing to do with a true lending limit. Then we come to the clumsy term, u201cmaximum claim amount.u201d This is not the maximum claim amount and is nothing more than the lower or lowest of several factors.rnrnOne very intelligent naturalized citizen became infuriated when I began defining the term u201clending limit.u201d 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 u201cbait and switchu201d 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.rnrnYou 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.rnrnAs to other issues, I agree with the remarks of Mr. Agbamu. rn

  • Mr. LaFay,rnrnReverse Guy makes the point when he discusses rolling it into the interest rate. In principle a higher interest rate would pay for that cost. rnrnFor example, if the interest rate is higher, the lender would be paid more money for the same loan when it is sold to the investor and out of that higher payment, the servicing fees would be taken or paid to a third party servicer.

  • Mr. Sprinkle,rnrnAlthough certain information is based on historical information, the $798 million subsidy is strictly based on the projected results of HECMs expected to be endorsed during the fiscal year ending September 30, 2010 and those HECMs alone. It has nothing to do with actual losses that might arise in that fiscal year except for losses that might arise from HECMs endorsed during that year which should be nothing or next to nothing.

  • Mr. Kelly,rnrnThe things you address in your blogs are fundamentally important both now and for the future of our industry; I applaud you for taking them on. I also believe the product you propose could have its place. Unfortunately some seek to stifle free discourse and reasoned opinions on such matters. rnrnI apologize if some of my remarks about your first blog (related to the RMD article by Mr. Morse on August 24, 2009) appeared to be overly strong; they in fact were. I am passionate about seniors and this program as I know you are also.rnrnTo make things clear about one of the prior remarks, not long ago there was an u201cirrational exuberanceu201d in the industry regarding the importance of proprietary products and their alleged imminent dominance in origination over HECMs. However, there is no glee or delight in the loss of those products. But the unfounded euphoria that developed in 2007 and early 2008 distracted from the attention that should have been paid to the HECM program and HERA, especially as to the shift of the HECM program from the General Insurance to the Mutual Mortgage Insurance category and its potential impact on the HUD budget. We are now living with some of the results of that distraction.rnrnAlmost everyone in the industry is well aware of the risk to the HECM insurance fund from declining home values. A much smaller percentage are aware of the negative impact the dynamic shift in originating higher and higher percentages of fixed rate HECMs also has had on that risk. A significant portion of the huge overall subsidy for fiscal year 2010 comes from the higher percentages of balances due to MCAs at funding due to the increasing numbers of fixed rate HECMs.rnrnVery early in 2007 when our company was looking at designing a unique proprietary reverse mortgage, I suggested that a product be designed that has two distinct components. Upon funding, the initial balance due would be captured into the fixed rate component structured in principle just as most fixed rate HECMs (but obviously without MIP or servicing fees) are structured today. Any available proceeds which are not taken at funding would be available to the borrower through an adjustable rate line of credit component. It is my understanding that recently MetLife looked into such a product and now HUD is looking at this idea. Since many seniors would prefer not taking all available proceeds at closing on a fixed rate HECM, this would not only answer the concerns of those seniors but should also lower estimated subsidies for future fiscal years. rn

  • HECM_Dude –rnrnThanks for some good ideas. “Hardcoding” the expected rate into a principal limit calculation formula brings simplicity, but it creates opacity; so is the idea of building SFSA into the rate. rnrnWe are in a regulatory environment that may not tolerate such opacity, especially in products designed for our customers.rnrnrnrn

  • The original intent of the legislation that created the HECM demonstration program was to encourage the private sector to follow FHA’s lead and develop its own, non-FHA reverse mortgage programs. If Congress ends up passing a budget that includes a subsidy for the HECM mortgage insurance program, there no longer will be an incentive for the private sector to create competing reverse mortgage programs. That result will be okay if Congress and the American people want for the government to stay permanently in the reverse mortgage business.rnrnAssuming the government is in the reverse mortgage business to stay, Congress should direct HUD develop a completely new model for calculating the reverse mortgage. Changes should include: 1) a principal limit calculation that is easy for the consumer to understand, based solely on property value and the age of the borrowe — a constant “expected rate” may be hardcoded into the formula; 2) elimination of the servicing fee set-aside — the servicing fee can be included in the rate or paid by the investor; 3) reduction or total elimination of the up-front MIP — periodic MIP may be increased to offset the loss of up-front MIP, and those with larger balances will pay more MIP in keeping with the greater risk such loans present.rnrnPayment of taxes and insurance is a serious issue, and failure of the homeowner to pay these has become the chief reason for HECM defaults. Property tax rates vary considerably from one jurisdiction to another, so a cookie-cutter approach is not feasible. rnrnSome states, such as California, have property tax deferral programs that enable the homeowner to postpone the payment of property taxes until the home is sold, not unlike a reverse mortgage. On the other hand, other homeowners may have burdensome property taxes and do not qualify for help from their state. rnrnOne change to HECM counseling that should be made immediately is a requirement that homeowners be apprised of the ongoing obligation to pay property taxes and insurance premiums after they obtain their reverse.mortgage. The originator also should discuss the issue with the homeowner, and if their documented income is not sufficient to pay their taxes and insurance as well as living expenses, a set-aside for their payment should be mandatory. This also should be part of the underwriting process.

  • QuanAdora,rnrnFrom what I have seen, HECM guidelines provide the originator with an option to either have a fixed monthly servicing fee ($25, $30, etc.) applied to the loan balance each month (which requires the creation of a servicing fee set aside) OR to roll the servicing costs in to the interest rate margin – just like the do on the “forward” side.rnrnAs far as I know, no lenders are currently doing this because it could possibly be viewed as a “hidden cost” and that can be problematic with this loan product.

  • If the Servicing Set Aside is abolished,how are Lenders going to collectrnthe monthly fee.? The T&I 6 month Reserve sounds like a most workablernplan to address this problem. Bob LaFay Reverse Mortgage Consultant

  • I agree that it doesn’t make sense for the upfront MIP to be the same for 62 and 99 year old borrowers. I’d add that this scenario: If someone’s home is worth well over the lending limit (say $1M and the HECM is their best option for a cash infusion), they’re paying $12,500 for no reason. [If the lending limit drops back to $417K, we’re SOL in SoCal].

  • The $798 Million subsidy, is this based on actual number of loans that have balances > value that must be subsidized or is it the Govt’s fuzzy math based on potential loans to be subsidized because they are currently underwater? Example: If the average loan is 100,000, the 798 Million would represent 7,980 loans. Are there actually, right now, 7,980 loans that must be subsidized due to Senior deaths &/or homes sold? Or are there potential of 7,980 homes that are underwater, but may not need to be subsidized due to Seniors living longer and values returning.

  • I would like to see the HECM balance sheet adveraged out over the years the product has existed to see where on the bottom line it has been profitable or not, whether it has brought in more than the subsidy.

  • In terms of proprietary products…be careful what you wish for. There are some very good reasons they are not around today and some very good reasons we should not wish them to reappear.

  • To clarify an important point, New View Advisors is advocating for 75 bps ongoing MIP which would be calculated on current UPB, and accrued to the loan balance. rnWith the HECM II product, there would be no upfront MIP, which is currently calculated based upon MCA.

  • Additionally,rnI believe that without proprietary products…you cannot expect to make the HECM perfect for everyone…there was a low cost alternative to the HECM 2 yrs ago with lower ltv’s and even allowed 60 yr old clients , it was called Simple 60…guess what happened to it? Poof. Gone as quick as it came even though it was a good product, part of the problem…there was little money to make on the loan and only one lender offered it…

  • I think we all agree that there need to be changes to the HECM program, however, we also must be mindful that due to the lowered YSP’s on these loans, lack of major buyers in secondary markets, and a non existent proprietary product pipeline, we run the risk of making the HECM program an unattractive product to be offered by lending institutions due to the lack of profitability. Those of you who want to say that it is about helping seniors, I 100% agree, but if a company cannot make money writing the product, what is the incentive to continue writing it? There is a danger than the HECM will become much like a HELOC in that it will be a secondary product offered by larger institutions and those of us who specialize in selling this product ethically, exclusively, and properly will be left out in the cold with nowhere to go.

    • Mr. Kelly,

      The things you address in your blogs are fundamentally important both now and for the future of our industry; I applaud you for taking them on. I also believe the product you propose could have its place. Unfortunately some seek to stifle free discourse and reasoned opinions on such matters.

      I apologize if some of my remarks about your first blog (related to the RMD article by Mr. Morse on August 24, 2009) appeared to be overly strong; they in fact were. I am passionate about seniors and this program as I know you are also.

      To make things clear about one of the prior remarks, not long ago there was an “irrational exuberance” in the industry regarding the importance of proprietary products and their alleged imminent dominance in origination over HECMs. However, there is no glee or delight in the loss of those products. But the unfounded euphoria that developed in 2007 and early 2008 distracted from the attention that should have been paid to the HECM program and HERA, especially as to the shift of the HECM program from the General Insurance to the Mutual Mortgage Insurance category and its potential impact on the HUD budget. We are now living with some of the results of that distraction.

      Almost everyone in the industry is well aware of the risk to the HECM insurance fund from declining home values. A much smaller percentage are aware of the negative impact the dynamic shift in originating higher and higher percentages of fixed rate HECMs also has had on that risk. A significant portion of the huge overall subsidy for fiscal year 2010 comes from the higher percentages of balances due to MCAs at funding due to the increasing numbers of fixed rate HECMs.

      Very early in 2007 when our company was looking at designing a unique proprietary reverse mortgage, I suggested that a product be designed that has two distinct components. Upon funding, the initial balance due would be captured into the fixed rate component structured in principle just as most fixed rate HECMs (but obviously without MIP or servicing fees) are structured today. Any available proceeds which are not taken at funding would be available to the borrower through an adjustable rate line of credit component. It is my understanding that recently MetLife looked into such a product and now HUD is looking at this idea. Since many seniors would prefer not taking all available proceeds at closing on a fixed rate HECM, this would not only answer the concerns of those seniors but should also lower estimated subsidies for future fiscal years.

  • I think we all agree that there need to be changes to the HECM program, however, we also must be mindful that due to the lowered YSP's on these loans, lack of major buyers in secondary markets, and a non existent proprietary product pipeline, we run the risk of making the HECM program an unattractive product to be offered by lending institutions due to the lack of profitability. Those of you who want to say that it is about helping seniors, I 100% agree, but if a company cannot make money writing the product, what is the incentive to continue writing it? There is a danger than the HECM will become much like a HELOC in that it will be a secondary product offered by larger institutions and those of us who specialize in selling this product ethically, exclusively, and properly will be left out in the cold with nowhere to go.

  • Additionally,
    I believe that without proprietary products…you cannot expect to make the HECM perfect for everyone…there was a low cost alternative to the HECM 2 yrs ago with lower ltv's and even allowed 60 yr old clients , it was called Simple 60…guess what happened to it? Poof. Gone as quick as it came even though it was a good product, part of the problem…there was little money to make on the loan and only one lender offered it…

  • To clarify an important point, New View Advisors is advocating for 75 bps ongoing MIP which would be calculated on current UPB, and accrued to the loan balance.
    With the HECM II product, there would be no upfront MIP, which is currently calculated based upon MCA.

  • In terms of proprietary products…be careful what you wish for. There are some very good reasons they are not around today and some very good reasons we should not wish them to reappear.

  • I would like to see the HECM balance sheet adveraged out over the years the product has existed to see where on the bottom line it has been profitable or not, whether it has brought in more than the subsidy.

    • matmel,

      How does the average of the HUD HECM balance sheet for prior years relate to the HUD HECM subsidy request for the fiscal year 2010? Please explain.

  • The $798 Million subsidy, is this based on actual number of loans that have balances > value that must be subsidized or is it the Govt's fuzzy math based on potential loans to be subsidized because they are currently underwater? Example: If the average loan is 100,000, the 798 Million would represent 7,980 loans. Are there actually, right now, 7,980 loans that must be subsidized due to Senior deaths &/or homes sold? Or are there potential of 7,980 homes that are underwater, but may not need to be subsidized due to Seniors living longer and values returning.

    • Mr. Sprinkle,

      Although certain information is based on historical information, the $798 million subsidy is strictly based on the projected results of HECMs expected to be endorsed during the fiscal year ending September 30, 2010 and those HECMs alone. It has nothing to do with actual losses that might arise in that fiscal year except for losses that might arise from HECMs endorsed during that year which should be nothing or next to nothing.

  • I agree that it doesn't make sense for the upfront MIP to be the same for 62 and 99 year old borrowers. I'd add that this scenario: If someone's home is worth well over the lending limit (say $1M and the HECM is their best option for a cash infusion), they're paying $12,500 for no reason. [If the lending limit drops back to $417K, we're SOL in SoCal].

    • Ms. Lewis,

      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.

  • If the Servicing Set Aside is abolished,how are Lenders going to collect
    the monthly fee.? The T&I 6 month Reserve sounds like a most workable
    plan to address this problem. Bob LaFay Reverse Mortgage Consultant

    • Mr. LaFay,

      Reverse Guy makes the point when he discusses rolling it into the interest rate. In principle a higher interest rate would pay for that cost.

      For example, if the interest rate is higher, the lender would be paid more money for the same loan when it is sold to the investor and out of that higher payment, the servicing fees would be taken or paid to a third party servicer.

  • QuanAdora,

    From what I have seen, HECM guidelines provide the originator with an option to either have a fixed monthly servicing fee ($25, $30, etc.) applied to the loan balance each month (which requires the creation of a servicing fee set aside) OR to roll the servicing costs in to the interest rate margin – just like the do on the “forward” side.

    As far as I know, no lenders are currently doing this because it could possibly be viewed as a “hidden cost” and that can be problematic with this loan product.

  • The original intent of the legislation that created the HECM demonstration program was to encourage the private sector to follow FHA's lead and develop its own, non-FHA reverse mortgage programs. If Congress ends up passing a budget that includes a subsidy for the HECM mortgage insurance program, there no longer will be an incentive for the private sector to create competing reverse mortgage programs. That result will be okay if Congress and the American people want for the government to stay permanently in the reverse mortgage business.

    Assuming the government is in the reverse mortgage business to stay, Congress should direct HUD develop a completely new model for calculating the reverse mortgage. Changes should include: 1) a principal limit calculation that is easy for the consumer to understand, based solely on property value and the age of the borrowe — a constant “expected rate” may be hardcoded into the formula; 2) elimination of the servicing fee set-aside — the servicing fee can be included in the rate or paid by the investor; 3) reduction or total elimination of the up-front MIP — periodic MIP may be increased to offset the loss of up-front MIP, and those with larger balances will pay more MIP in keeping with the greater risk such loans present.

    Payment of taxes and insurance is a serious issue, and failure of the homeowner to pay these has become the chief reason for HECM defaults. Property tax rates vary considerably from one jurisdiction to another, so a cookie-cutter approach is not feasible.

    Some states, such as California, have property tax deferral programs that enable the homeowner to postpone the payment of property taxes until the home is sold, not unlike a reverse mortgage. On the other hand, other homeowners may have burdensome property taxes and do not qualify for help from their state.

    One change to HECM counseling that should be made immediately is a requirement that homeowners be apprised of the ongoing obligation to pay property taxes and insurance premiums after they obtain their reverse.mortgage. The originator also should discuss the issue with the homeowner, and if their documented income is not sufficient to pay their taxes and insurance as well as living expenses, a set-aside for their payment should be mandatory. This also should be part of the underwriting process.

    • HECM_Dude,

      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.

  • HECM_Dude —

    Thanks for some good ideas. “Hardcoding” the expected rate into a principal limit calculation formula brings simplicity, but it creates opacity; so is the idea of building SFSA into the rate.

    We are in a regulatory environment that may not tolerate such opacity, especially in products designed for our customers.

  • Mr. Kelly,rnrnThe things you address in your blogs are fundamentally important both now and for the future of our industry; I applaud you for taking them on. I also believe the product you propose could have its place. Unfortunately some seek to stifle free discourse and reasoned opinions on such matters. rnrnI apologize if some of my remarks about your first blog (related to the RMD article by Mr. Morse on August 24, 2009) appeared to be overly strong; they in fact were. I am passionate about seniors and this program as I know you are also.rnrnTo make things clear about one of the prior remarks, not long ago there was an u201cirrational exuberanceu201d in the industry regarding the importance of proprietary products and their alleged imminent dominance in origination over HECMs. However, there is no glee or delight in the loss of those products. But the unfounded euphoria that developed in 2007 and early 2008 distracted from the attention that should have been paid to the HECM program and HERA, especially as to the shift of the HECM program from the General Insurance to the Mutual Mortgage Insurance category and its potential impact on the HUD budget. We are now living with some of the results of that distraction.rnrnAlmost everyone in the industry is well aware of the risk to the HECM insurance fund from declining home values. A much smaller percentage are aware of the negative impact the dynamic shift in originating higher and higher percentages of fixed rate HECMs also has had on that risk. A significant portion of the huge overall subsidy for fiscal year 2010 comes from the higher percentages of balances due to MCAs at funding due to the increasing numbers of fixed rate HECMs.rnrnVery early in 2007 when our company was looking at designing a unique proprietary reverse mortgage, I suggested that a product be designed that has two distinct components. Upon funding, the initial balance due would be captured into the fixed rate component structured in principle just as most fixed rate HECMs (but obviously without MIP or servicing fees) are structured today. Any available proceeds which are not taken at funding would be available to the borrower through an adjustable rate line of credit component. It is my understanding that recently MetLife looked into such a product and now HUD is looking at this idea. Since many seniors would prefer not taking all available proceeds at closing on a fixed rate HECM, this would not only answer the concerns of those seniors but should also lower estimated subsidies for future fiscal years. rn

  • matmel,rnrnHow does the average of the HUD HECM balance sheet for prior years relate to the HUD HECM subsidy request for the fiscal year 2010? Please explain.

  • Mr. Sprinkle,rnrnAlthough certain information is based on historical information, the $798 million subsidy is strictly based on the projected results of HECMs expected to be endorsed during the fiscal year ending September 30, 2010 and those HECMs alone. It has nothing to do with actual losses that might arise in that fiscal year except for losses that might arise from HECMs endorsed during that year which should be nothing or next to nothing.

  • Mr. LaFay,rnrnReverse Guy makes the point when he discusses rolling it into the interest rate. In principle a higher interest rate would pay for that cost. rnrnFor example, if the interest rate is higher, the lender would be paid more money for the same loan when it is sold to the investor and out of that higher payment, the servicing fees would be taken or paid to a third party servicer.

  • HECM_Dude,rnrnThere 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 u201clending limit.u201d What this term means has nothing to do with a true lending limit. Then we come to the clumsy term, u201cmaximum claim amount.u201d This is not the maximum claim amount and is nothing more than the lower or lowest of several factors.rnrnOne very intelligent naturalized citizen became infuriated when I began defining the term u201clending limit.u201d 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 u201cbait and switchu201d 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.rnrnYou 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.rnrnAs to other issues, I agree with the remarks of Mr. Agbamu. rn

  • Ms. Lewis,rnrnWhen 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.rnrnOn 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. rnrnUnfortunately 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.rnrnLet 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 u00bd%; 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.rnrnRisk 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.rn

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