FHA to Increase MIP and Cut Principal Limit for Reverse Mortgage Product

The Obama Administration announced earlier this week that it was requesting a $250 million credit subsidy for the Federal Housing Administration’s reverse mortgage program along with a contingency appropriation to meet all program demand.

In addition to the subsidy request, Secretary Donovan told a group of attendees at the Brooke-Mondale Auditorium at HUD’s headquarters in southwest Washington that it would increase the ongoing annual Mortgage Insurance Premium (MIP) from .5% to 1.25% and a low-to-mid single digit cut in the principal loan limit said the National Reverse Mortgage Lenders Association.

Donovan added that there would be long term reforms in the reverse mortgage program down the line, but that the $250 million subsidy “is a reaction to last year’s adjustments to make sure the program does not limit its availability to seniors.”

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After the need to reduce the principal loan limits for the second year in a row, many feel the Office of Budget and Management’s assumptions regarding the HECM program are off.

“I think their assumptions about housing prices are far too pessimistic,” said Jeff Lewis, Chairman of Generation Mortgage in an email to RMD.  “Again we have a process that is highly flawed as no constituents will have the opportunity to examine OMB’s assumptions, which must be extremely pessimistic.”

He adds that, “the FHA is an insurance company, why does it act like there are no cycles? They should try to break even through a complete cycle, not at the bottom of the cycle.”

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  • I'd posted this on a related story, but my comments are more appropriate to this one specifically…

    A Principal Limit cut was expected as Meg Burns mentioned at NRMLA last November, but a 150% increase the monthly MIP? Really? Is this how we “value” our seniors?

    This is odd since conforming FHA loans usually only charge .55% MIP. If, this budget and PLF cuts & MIP increase are passed in their present form here's what to expect…

    1. Further damage to the reputation of the HECM as a loan that is “too expensive”. We've been working hard to improve the public's perception of the program. Jacking up the monthly MIP will not help matters.

    2. Fewer referrals from professionals. Those financial professionals who saw the value of a RM may now think twice with the extreme expense of monthly MIP compounding over time.

    3. Fewer loans. The amortization schedule is a hard sell already. Add in the monthly MIP and it gets real ugly.

    4. Fewer qualified/interested seniors. PLF cuts, increased MIP will hurt those who really want and need the program. Add this to coming interest rate increases and home values that have yet to reach bottom….

    I'm disgusted that seniors who per capita did not create this mortgage mess are being saddled with some of the harshest insurance increases and benefit reductions in recent history.

    • If they have ignored the damage that the existing process is doing to seniors, let alone the brokers and all other participants in a reverse and now plan to cut the Principal Limit, there can be only one real reason: they plan to make the program go away altogether because that is exactly where it is headed.

    • There were salvos at the NRMLA convention on this. Issues were raised about fears that more seniors would be foreclosed on when they had used up all the proceeds from the RM and had no money to pay for insurance and property taxes.

      The officer from the Office of the Inspector General for HUD said that the loans they were currently investigating were those which took out all the proceeds up front.

      By penalizing seniors for large withdrawals of proceeds, HUD may think they are controlling the unwarranted use of funds for inappropriate disbursements. In other words, Big Brother knows best. But, by the same token, this program was begun by Congress to help seniors use their homes to stay in their homes for as long as they could. Now, a lot of those seniors who need the program most don't qualify for it.

      Well I hate to say it but Critic is right. This is strictly an OMB/Obama administration issue. How do we plead our case that seniors deserve better treatment when, as Marty Bell, our program is barely a whisper in the shouting of the needs within the HUD Budget.

      How do we make ourselves heard?

    • Lead time of 12-24 months for what to find another job? The government does not like our volume and is doing everything possible to greatly reduce it. I felt and sold that it was great that the HECM was backed by the government…now its going to be the downfall. This is terrible for the future of our seniors and our career. Each change has been slowly destroying the HECM this one is going to push it over the edge! I believe its time to find another JOB. The only seniors that will soon use the HECM are those who have no other choice. I guess all those critics of our program who always said “its a loan of last resort will soon be correct”. Good luck everyone…it has been fun.

  • This is the budget for the fiscal year ending 9/30/2011. The budget is a proposal by the President through OMB. It must now be broken down into various appropriations bills and then passed by Congress. Because of its radical nature, the President got an early start so that it will get enacted in full unlike much of last year's budget.

    It has been four months since the beginning of the current fiscal year and yet there is no HUD appropriations bill for this year. HUD is still working from Continuing Resolutions.

    The President wants this budget passed so he got an early start. Based on last year it is extremely doubtful if Congress will provide any subsidy for the HECM program. Here is hoping my prediction is wong.

  • I have to say – “Bravo!” to the comments from both Jeff Lewis and “Save The HECM”. I could not agree more.

    I am simply astounded that the current administration is looking at HECM borrowers as a way to help rebound the FHA insurance fund – especially considering the obscene amount of money that has been delegated for other government programs over the past year. There are few programs out there that have the direct positive impact on the senior citizen community than the HECM.

      • You guys have got to be kidding. Think about when all of the changes to the program itself occurred. It was not until this President. HUD does not run the President. It is not the HUD budget. President Truman used to say: “The buck stops here.”

        This is not a HUD issue; it is a issue with OMB and our President.

  • With these proposed changes in the reduction in the principal limit, and the dramatic increase in the MIP, many of our Senior homeowner population, who need the HECM, will be left “out in the cold.” Shameful.

  • This will be another nail in the coffin for the HECM. Now that we are at the bottom of the housing market, FHA's insurance losses should significantly lessen as values rise in the next several years. I will be writing to my congressman, about this terrible injustice.
    <Ahref=”http://www.fhareversemortgagesofsouthflorida.com>reversemortgagessouthfloridaFHAhud

  • Does Mr. Lewis have any idea what is going on?

    HUD is not predicting this subsidy. This is the proposed budget of Barack Huessin Obama, the President of the United States. Our President is just a few pay grades above Secretary Stevens. In fact, Mr. Stevens serves at the pleasure of our President.

    In May of last year, Mr. Lewis was complaining in RMD about cash flow for the fiscal years ended 9/30/2009 and ending 9/30/2010 when he commented on the HECM budget subsidy proposed for the fiscal year ending 9/30/2010. He is doing considerably better this time but he seems to think this is a HUD issue. It is not.

    HUD may be suggesting these changes but it is due to the projections forced on HUD by OMB. OMB does not report to HUD; it reports to POTUS.

  • Would be interesting to see how the OMB formulated their numbers for this increase. As stated by others, this will have a continued profound and devastating affect on senior homeowners, who will find themselves ineligible for a HECM.

    Echoing a previous call to industry senior advocates, we need to let our congressmen and senators know the devastating affect this change will have on senior homeowners.

  • What do you all think of this idea?

    We all draft letters to our existing clients asking them to write their US Congress or Senate representatives expressing their concern that this move would effectively eliminate the HECM for seniors.

    Any thoughts? Ideas? I’m fighting this tooth and nail!

  • Is it just me or does anyone else see the potential? There are a trillion dollars of wealth tied up in senior homes that could be released to stimulate the economy, putting many people to work. That alone could bring the economy out of this recession. It would not increase the national debt, and jobs would strengthen local communities.

    Congress should promote reverse mortgages. It will take pressure off the deficit and off of seniors who can not make ends meet. When anyone cannot pay their bills it creates tremendous stress, especially for seniors. This is the year of change, so let’s move forward not backwards.

  • The Federal government has a huge budget deficit. The HECM is not an entitlement or welfare program; the taxpayers refuse to subsidize it (or most other programs that don't benefit a broad majority of them directly); therefore, it must be self-supporting. The arguments about business cycles and appreciation are well-taken, but difficult decisions must be made based on what's happening now. And right now, all FHA mortgage insurance programs must have adjustments made so that they will be self-sustaining. The taxpayers demand it.

    I agree that we've seen a peak in HECM production volume for the current business cycle. If the proposed changes are implemented, future growth will be limited.

    Some of my colleagues who only recently entered the reverse mortgage business might forget that when the HECM was created as a demonstration program some 20 years ago, it was hoped that the private sector would be inspired to create its own, non-FHA insured products that actually would supplement and eventually replace the FHA HECM. Part of the reason this has not happened successfully is because the private sector recognized the risk involved and wasn't willing to offer benefits comparable to the HECM without some sort of shared appreciation or shared equity to mitigate that risk. Horror stories of seniors being taken advantage of in connection with sharing equity or appreciation with the lender, along with the negative press and lawsuits that resulted, put those programs, including one offered by Fannie Mae, to an end.

    In order to properly manage risk, an entity taking that risk must occasionally be on the winning side of its bets, in order to offset its losses when it ends up on the other side. In the case of the HECM program, the homeowner always wins (if they exhaust all their equity and then some, they REALLY win, despite uninformed pronouncements to the contrary), and FHA always loses.

  • Unbelievable. Wonderful points made so far, and I can only add that this constant manipulation of core components makes the reverse product look the very opposite of what a senior homeowner is looking for…stability. This succession of changes makes it apparent that various government agencies have no real handle on what is going on nor do they have the foresight to intiate changes that provide long term solutions.

  • Now I truly regret the disappearance of privately issued reverse mortgages. The problem is even if they do return, what volume of loans would they be able to securitize in the secondary markets.

    If home values stabilize, private reverse mortgages would have a competitive advantage against the new ugly and expensive HECM if this budget is enacted. Wishful thinking on my part.

  • Since they are looking for an equalizer, why not return all of the MIP
    premiums originated by HECM over the eight year period 2002 to 2008
    to the HECM fund. Nearly all of the premiums collected were siphoned off
    and used as general tax revenues, which of course, has been spent long ago.
    With Cost of Living Adjustments frozen in place at 0 % for the next two years and now this ,it appears the veneration of Senior Americans has
    been turned into a war of vengeance on Senior Americans.
    It is estimated that 10 million Seniors own their homes free and clear.
    It is the greatest source of solid assets in the country.
    Why not extend an invitation to President Obama to attend a one hour private session overview to portrait the stimulus multiplier of the HECM program.
    It pumps money into the economy that likely, would be frozen in place without it.
    The unemployment rate will take a quantum jump upward if this ill conceived plan is implemented.
    Bob LaFay, Reverse Mortgage Consultant

    • Bob,

      I normally find what you write thoughtful, reasonable, and rational. These are the very qualities that are starkly missing from this comment. Sir, those funds that were “siphoned off” as you call it will be returned to pay for the losses that the current outstanding HECMs are expected to produce.

      Even though I find a whole lot wrong with their findings, New View Advisors, LLC address this issue on their lengthy and overly wordy blogs on their website. Much of their blogs are propaganda for their assertions but there is much value in getting familiar the blogs on their website.

      • Hi,
        I am delighted to hear the funds will find their way into the MIP reserves. That makes the current considerations more rational. It is great news.
        As an alternative to what is being discussed, why could we not reduce the up front MIP by 1%: charging 1% of appraised value and adjust the monthly MIP to 1%,just as a trail to see if it would alleviate the shortage of reserves. Funding decrease will impact younger seniors, bringing total up front
        availability to just a fraction over 40 % of FMV. Seniors more advanced in age will still have substantial funding, especially those in their late 70' s on up.
        I sincerely appreciate your response. Bob LaFay,Reverse Mortgage Counsultant

      • Mr. LaFay,

        From reading the financial reports of HUD, it seems The Cynic is correct. Apparently Treasury reports the cash received as an increase to its cash and an increase to the amount it owes HUD. HUD seems to report it as an increase in the amount due from Treasury identified by program with an increase to the MIP account to which it is related. That is the way that double entry accounting normally works on such transactions. It seems as if there is also interest charged on the amounts due to and due from.

        Since I have NOT looked at, reviewed, or verified their accounting system, internal controls, or recordkeeping practices, my inferences could be wrong but the financial reports seemed to be based on double entry accounting principles. There is little doubt on my end, again wthout verification, that the record keeping is tracking HECM MIP revenues appropriately.

      • Hi James,
        Thank you kindly for the explanation. It would be greatly appreciated to get a national news release explaining the procedure. It would help to
        quell the resentment from those of us who did not see it that way. I am a strong advocate of FHA and the HECM program.Theirs is the only
        viable survivor of the 20 year experiment with Reverse Mortgages. I feel it is significant that several other countries around the World are
        doing all they can to emulate FHA 's HECM. Again, thanks for the input. It is kind of you. Bob LaFay Reverse Mortgage Consultant

  • What I write does not come easy. While I greatly respect Mr. Lewis as an industry spokesman and an ardent defender and supporter of the HECM program, I do not agree with his strident remarks against FHA in this article.

    As I could not agree with the remarks of Mr. Lewis in RMD on May 27, 2009, I cannot agree with his remarks now. His remarks in May showed very little knowledge about the positive credit subsidy for the fiscal year ending September 30, 2009. His remarks now show his lack of understanding of the budget process.

    To blame FHA for either of the HECM budget fiascos for the fiscal years ending September 30, 2010 or September 30, 2011 is irresponsible for an industry leader of the stature of Mr. Lewis. I strongly urge him and anyone else who blames FHA or HUD for the current HECM mess to read Page 31 of the July 2009 GAO report (GAO 09-836) on the HECM budget. The GAO is the Government Accountability Office and calls itself the “investigative arm” of the United States Congress which is dominated by the Democratic Party. It is hard to believe that the GAO report would be biased against this White House.

    Whoever in the Obama Administration is foisting these ridiculous appreciation rates on HUD should be flushed out and questioned as to why this individual (or individuals) believes that the HECM program and SENIORS should be the casualty of infighting and squabbles. To say I lack respect for such political maneuvering is a gross understatement.

    As an appointee FHA Commissioner Stevens works for and at the pleasure of President Obama, not vice versa. This is a budget matter. OMB (the Office of Management and Budget, part of the White House) is responsible for the budget, not FHA Commissioner Stevens or even his boss, HUD Secretary Donovan. Secretary Donovan also serves at the pleasure of the President. President Obama is a few pay grades above either Commission Stevens or Secretary Donovan. Since the budget is the responsibility of the President of the United States of America and his OMB, as deceased and former President Harry S. Truman might say today: “The buck stops THERE – WITH PRESIDENT OBAMA.”

  • I count four major proposed and potential changes to the program.

    1. A reduction to the principal limits through a direct percentage deduction of less than 10%

    2. A potential reduction to the principal limits by perhaps an additional 5% (or more) if Congress does not grant the suggested subsidy

    3. Next is an increase to the ongoing MIP of a startling 0.75% from 0.5% to 1.25%

    4. Finally the proposed increase in ongoing MIP will probably result in an effective reduction of principal limits of the magnitude of an increase in the expected rate of 0.75%,

    If all four items occur, the number of seniors who can be helped by HECMs will drop dramatically. How HUD can project that the volume of HECMs will be above 90,000 is absolutely astounding.

    What is most startling of the four is the sharp increase in ongoing MIP. A consulting firm to NMRLA had projected that an increase of the MIP from 0.5% to just under 1% would allow HUD to replace if not all, most of the upfront MIP. This means that if the current suggestion adjustment in the HECM program that is reflected in Item 3. above had been to increase the upfront MIP instead, the proposed upfront MIP would be around 5% rather than 2%.

  • I have read everyone's comments up to this point. I must say that the Critic and James Veale have read into this release and presented their case very well.

    I am appalled at what I am seeing happening. Does the Obama administration (President) really have this little faith in our economy. Do they have so little faith that we are never going to see the housing market come to life again?

    To me, this is what I see our President saying in the signals he is putting out. Increasing the MIP to 1.25% is ridicules, decreasing the principle limit again at this time in the economic mess we are in is ludicrous.

    Does Obama want and end to the reverse mortgage industry, if so, he is doing a good job in achieving his goal.

    HUD is not the cause or the creator of this proposal, it is Obama, our president. He is doing all he can to make it more difficult for a senior to live a long life. From the Health Care Reform Bill to attacking the reverse mortgage industry through HUD/FHA and the other agencies every chance he gets. Lets not forget Barney Franks behind the scenes as well.

    I am saddened over what I have seen over the past year perpetrated on the reverse mortgage industry. I fear what I feel I am going to see perpetrated on the reverse mortgage industry over the next year.

    John A. Smaldone

    • Mr. Smaldone,

      What is odd to me is Representative Frank and many of his fellow Democratic Representatives are strong supporters of the HECM program. In this regard I admire and appreciate the enduring fight of Representative Frank on behalf of so many seniors. Even though I believe President Obama is the boss and the ultimate blame, it seems there is someone within the Administration who is bent on harming HUD or the HECM program itself; I have a difficult time believing it is the President himself doing this.

      Last budget fight, the negative effect on the HECM program may have been innocent. The individual or individuals may have believed that Congress would bail the HECM program out. This time there is no excuse and a heavy hand is evident in the proposal.

      Someone caught the inappropriate remark Mr. Emanuel made last August and now he is paying the price. The question is, can the culprit who is tearing down the HECM program be rooted out? I have a very difficult time believing President Obama wants his Administration being perceived as anti-senior. Yet until this element within his Administration is weeded out, President Obama looks like he is against seniors.

      • James,

        I agree with you. Something is very odd. Either Frank is putting on a good show for the public and then doing his devious work behind closed doors, which is a possibility.

        I also agree with you on Obama not being the only one behind this movement against the RM industry. It makes no sense for Obama and his administration to openly being perceived to be anti-senior.

        Their is no doubt in my mine a culprit or culprits are lurking in the present administration to go after the senior in a negative way.

        I really have to wonder if Obama is the boss? You take care my friend, have a good evening and we will talk soon.

        Best personal regards,

        John A. Smaldone

  • As a financial advisor who has utilized the HECM program for a number of clients over last 15 years, I am greatly disturbed that there are proposed changes that would make reverse motgages even more expensive to those who really need them. With the principal reduction last fall, and the proposed changes in the works, I doubt that I could have avoided the imminent foreclosure that several of my clients faced prior to obtaining their reverse mortgages.

    The proposed changes will eliminate this program from consideration in many cases in my city (over 20% of population are seniors), and directly refutes the “do no harm” mantra of this administration. Hopefully this proposal can be forestalled till a better analysis is done of the harm it will do to the program, and the seniors who really need this option available.

    One question I have….does anyone have a clear idea of the expected timetable for implementation of these rules changes and the proposed effective dates should it be approved? Thanks for any input!

    • jpolony,

      This proposal comes from the budget report for the fiscal year beginning October 1, 2010. That is the expected date it would begin.

      That is why the 10% prinicpal limit started on October 1 last year; it resulted from the $798 million positive credit subsidy projection that OMB gave for the HECM program back in May 2009 for the budget for the fiscal year that started October 1, 2009.

    • As a financial advisor who has utilized the HECM program for a number of clients over last 15 years,'

      Would you mind describing how you “utilize” RMs in your practice?
      What is your professional background.?
      Thank you in advance.

      • dduck12,

        Great questions!! I wonder what his credentials and licenses (such as securities licenses) might be?

      • I really am curious, because I think properly used the RM can really enhance some seniors lives. But, I'd like to hear about real life examples that I could relate to my fellow financial adviser associates.

      • dduck12,

        Late last year, NRMLA released their magazine which included great testimonials from around the country. Sam Collins also created a great book with 52 stories about the experiences of seniors. You should contact both. Of course there are hundreds of thousands of other stories that have yet to be printed.

      • It will be very interesting to see 1) if you get a response and 2) what the response will be. If it is tied to financial products, things could become very sticky, very fast.

  • It will be very interesting to see 1) if you get a response and 2) what the response will be. If it is tied to financial products, things could become very sticky, very fast.

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