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)