Reducing the Impact of Decision to Cut Reverse Mortgage Principal Limits

The US Department of Housing and Urban Developments decision to reduce the principal limits for the Home Equity Conversion Mortgage (HECM) has received a decent amount press over the past couple of weeks.

The Washington Post covered how the Federal Housing Administration’s reverse mortgage program faces changes due to an estimated budget shortfall of $798 million in the program for the coming fiscal year.

Peter Bell, president of the National Reverse Mortgage Lenders Association told the WaPo the change could prevent more than one out of five applicants from paying off their existing home mortgage debt with a new reverse loan.

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During Bell’s testimony to the Subcommittee on Housing and Community Opportunity, he proposed restructuring the mortgage insurance premium instead of the 10 percent reduction in principal limit factors.

“HUD could generate the income the program needs to operate, while reducing upfront costs, by restructuring the MIP with a lower front-end amount and a higher ongoing MIP. By reducing the up-front premium to 1% or less, while raising the ongoing premium an appropriate amount, the program can be operated on an easily-adjusted self-sustaining basis, senior homeowners would not have to experience any reduction in proceeds from a HECM, and up-front costs could be lowered—a winning combination for all.”

The WaPo story also mentions an option which allows seniors current lender to accept less than a full payoff, given the diminished reverse mortgage proceeds available.  Any unpaid balance could be recasted as junior liens secured by the property, repayable over an agreed-upon term of years, or in a lump sum with interest at the time of sale of the house.

Some lenders have already done this said Ralph Rosynek, President of 1st Reverse Financial Services.  “Many times – a subordination is much easier and less risk for all of the parties, as the original lender has the option to modify and recast by working with the borrower’s “new cashflow” position,” said Rosynek.

Given the current economic situation and government’s approach to housing, Rosynek said he doesn’t believe a subordination truly violates the current HUD guidelines of “no new debt” incurred as the result of securing a HECM mortgage versus recasting and placing a new lien on the property.

He added that, “Ultimately, it is the present lender who must consider the risk of being in a limited position behind a combo 1st/2nd HECM versus another REO property.”

Reverse Mortgages Feel the Squeeze (Washington Post)

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  • I'm probably missing somehing here, but is it really possible to have the lender of a current mortgage take a second (third after the HUD/FHA deed) for the difference between the existing loan and what the borrower can get from a reverse mortgage?

  • I am very surprised by the opinion Mr. Rosenyk renders.

    If as part of the subordination, there are changes to other terms in the loan, the subordinated debt will generally be considered new debt by HUD. If there is a simple subordination and then some time after the HECM is closed, the terms of the subordinated note are substantially changed, there will generally be no impact to the HECM; however, they cannot be connected to the subordination and should only come after some period of time has passed since HECM closing.

    It is rare that HECM investors have problems with subordinations since they have the first lien. Usually if problems arise, they are a HECM lender issue or a HUD issue.

    Before incurring any costs on a HECM, it is my opinion you should check with the DE underwriting group where the loan will be placed to see what their position is on subordination and on any changes to the note that will occur upon subordination. If you are connected to the underwriters at your HUD HOC, it may be a good idea to get their opinion also.

    Our bank normally permits simple subordinations if the borrower will lose the home without it.

  • Sometimes what Mr. Bell says goes right over my head. I guess I am lost.

    How do any of the other 80% of the borrowers win by the restructuring? If they must absorb any part of the $798 million positive credit subsidy (whatever that means), it seems they lose. It also seems they will incur higher interest costs as a result.

    Can anyone please explain how restructuring is a benefit to the majority HECM borrowers who would have borrowed despite the 2% upfront HECM fees, etc. especially if they will pay more MIP as a result of the $798 million?

    • Hey Cynic. I'll take a stab at part of your question. The 80% that can still take advantage of the HECM are paying a 2% upfront premium whether they keep the loan for 1 year or 20 years. Wouldn't it be more beneficial to those keeping the loan for < 5 years (just throwing a number out there) to have little to no upfront premium and higher ongoing charges? Those that benefit currently from the 2%, .5% ongoing are the homeowners that keep the HECM long term or those that take the lump sum disbursement.

      I'm a big fan of the MIP impacting those that are the highest risk category.

      • Mr. Neumeyer,

        I am sorry but I am lost. Are you advocating that the 80% pick up the vast majority of the $798 million?

        I do not know very many people in the industry who oppose MIP restructuring but why should the 80% be charged any part of the $798 million? If the 20% total 24,000 loans and they are the ones to pay the additional MIP, they will pay over $33,000 on average in additional MIP; of course, “average” means some will be paying more and some less. Imagine what that would do to accrued and compounded interest.

        These numbers are hard to swallow.

  • I am sure many of us would like to able to include a subordination as part of a short payoff. I haven't come across any lenders that will subordinate or HECM lenders that will accept the subordination of an existing lien an longer. Have you? If either of these are really happening perhaps Mr. Rosynek and Mr. Peale would like to elaborate. Theoreticals don't help in the real world.

  • Mr. McNichol,

    As stated, Security One Lending, Inc. will in specific and very limited situations allow simple subordinations. I am not aware of lenders which do subordinations with any changes of terms, etc. It seems Mr. Rosynek is; you should contact him for a list of those lenders.

  • Mr. McNichol,rnrnAs stated, Security One Lending, Inc. will in specific and very limited situations allow simple subordinations. I am not aware of lenders which do subordinations with any changes of terms, etc. It seems Mr. Rosynek is; you should contact him for a list of those lenders.

  • Mr. Neumeyer,rnrnI am sorry but I am lost. Are you advocating that the 80% pick up the vast majority of the $798 million?rnrnI do not know very many people in the industry who oppose MIP restructuring but why should the 80% be charged any part of the $798 million? If the 20% total 24,000 loans and they are the ones to pay the additional MIP, they will pay over $33,000 on average in additional MIP; of course, “average” means some will be paying more and some less. Imagine what that would do to accrued and compounded interest.rnrnThese numbers are hard to swallow.

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