Without $250 Million HECM Subsidy, Big Principal Limit Reduction Needed says FHA

[Update from HUD spokesperson added.]

During his testimony in front of the House Financial Services Subcommittee on Housing and Community Opportunity, David H. Stevens, Assistant Secretary of Housing for the Federal Housing Administration voiced his strong support of the administration’s reverse mortgage program on Thursday.

“The need for this type of program is greater now than it’s ever been, due to increasing medical costs, declining employment/incomes, and less “savings” in various types of pension funds/retirement accounts,” said Stevens.

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This comes as the OMB requested an appropriation of $250 million to support the Home Equity Conversion Mortgage (HECM) in its FY 2011 budget.

Referencing a survey conducted by AARP in 2006, Stevens told the committee the product has provided seniors with much-needed financial relief and was primarily used to pay for long term health care, enable home repairs, and provide piece of mind that housing expenses could be met.

In addition, Stevens said the program plays an important role in allowing seniors to age in place. “Keeping seniors in their homes and communities, close to familiar support networks, puts less pressure on our nation’s overextended nursing home infrastructure and the public resources that support it.”

According to his testimony, FHA’s analysis showed that to maintain the viability of the program for FY 2011, an increase in the annual mortgage insurance premium from 0.50% to 1.25% and a further reduction in the principal limit factors (PLFs) of approximately one to five percent depending on the age of the borrower is necessary, on top of the 10% reduction in PLFs that was implemented at the beginning of FY2010.

If the $250 million appropriation is not provided, the PLFs will be cut even more.  “Without the budget request, we would be forced to reduce the PLFs by an additional 21% in FY2011. This would significantly reduce the amount of funds that would be available to seniors (more than 30%), which is on average a $23,000 to $27,000 impact,” said Stevens.

He added, “Any additional steep cut to the PLFs will result in serious decline in program level as HECMs would no longer be viable to many seniors who need to access their home equity while staying in their homes. ”

Update: HUD confirmed with RMD that without the $250 million appropriation, the PLFs would be lowered an additional 11% from the prior 10% in FY 2010.

Update 2: HUD contacted RMD to say its previous statement was incorrect, its spokesperson told RMD that:

The additional 21% PLF reduction would be on top of the 10% reduction on October 1, 2009.  In other words, HUD would have to reduce the PLFs by an additional 21% from where they are today.

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  • I don’t know whether to get angry or laugh when I read the comments from Mr. Stevens. If HUD is required to cut the PLF’s by 21% in 2011, there won’t be a reverse mortgage lender left standing. Does the responsible party in this not understand that? Or do they have an ulterior motive?

    Two things bother me greatly. The first is the appreciation rate that is being used. Does anyone know what that figure is or if it’s public information? It’s obviously been drastically reduced from years’ past. I’d like to read the logic behind the low projected appreciation rate for all HECMs originated in 2011.

    The final item that bothers me is the way the HECM insurance fund has been handled. How it got lumped into a general fund with all other FHA insured loans is beyond me. By my estimation the positive years from 1989 to 2006 should be helping to pay for the down years in 2007 to 2011. My background is not in insurance accounting, so I don’t know what’s common, but the current methodology is absurd. I’d be curious to see what percentage of insurance funds collected from HECMs have been used to pay for HECM losses and what percentage have been used to pay for other FHA losses. Is this too simplistic of a viewpoint?

  • The comments mark a sad turn of events for the HECM program. Rather than standing by the HECM program as designed, the Commissioner is promoting the home appreciation rates mandated by OMB. I am truly disappointed.

    What the Commissioner is stating is that under the budget proposal for next year, the principal limit factors starting on October 1, 2010 will go still lower. The total reductions will be between 11% and 15% based on the age of the borrower. The further increase to the current reduction seems to be based solely on the increase in the annual rate for the monthly MIP.

    Now we come to the most important issues of all. Will Congress provide any subsidy for the next fiscal year? If not, we will face more reductions to the principal limit factors. If Congress fails to approve the increase to the annual rate of 0.75% (or a 150% increase in the current 0.5% rate to 1.25%), will we experience an additional 21% reduction to the current principal limit factors? This is not beyond the realm of probability (forget possibility).

    The tone of our commissioner was surprising. It was almost as if he were saying “Rather than eliminating this program….” I never thought I would see this day. What a change from the prior administration to this. As to this program, my appreciation of the last four administrations grows daily. I hate to see what is happening to the fine dedicated HECM staff at HUD. I am sure many of them are more baffled than we. As to HECMs, these comments mark “the world turned upside down.”

  • It's a difficult time for our industry – as we are being hit from both sides (low home values and principal limit decreases). It will be interesting to see how our industry looks 12 months from now…

  • It was encouraging to see Mr. Stevens' articulate argument for the subsidy, but at the same time, it was horrifying to read what would happen without it.

    If the subsidy is not provided, the HECM program will be “done like dinner”.

    • reversemaniac,

      Maybe I am wrong but I see the situation much worse. For the first time we have a FHA Commissioner who is not speaking to the long-term nature of the design of the HECM program in coming to its “defense.” Second, there is no option listed in the explanation to the budget to the increase in the annual rate on the monthly HECM. Finally, how do we go from a 10% reduction when there was a $798 million positive credit subsidy to a 31% (or maybe only 28.9% {i.e., 100%-[90% X 31%]}) when there is only a $250 million shortfall.

      Is the budget report hiding an over $1 billion positive credit subsidy and Commissioner Stevens has just accepted the fact that Congress will NOT fund $800 million of that amount? Or how big is the positive credit subsidy if we must also accept an increase in the annual rate on the monthly MIP of 0.75%?

      I, for one, would appreciate some straight talk from the Commissioner. Even HUD seems confused by it as evidenced by the two RMD updates.

  • If the $250 million appropriation is not provided it would be the death knell for our industry.

    If the PLF’s are cut by another 21% the decrease in volume would be so dramatic it would make this product unprofitable for the banks. What bank in their right mind would continue to support this product?

    If they did it would be done through call centers because loan originators would not be able to make living.

    The 1 to 5% reduction with the 1.25% annual MIP looks like a foregone conclusion. This in and of itself is a slow death. Just keep chopping off body parts until the patient succumbs.

    Do the math. Look at a 75 y.o borrower with a $500K home (fixed rate) 10K MIP upfront with 1.25% compounding annually on a principal limit of approx $329K. It is not a pretty picture! Approximately an additional $23,000 in MIP in just 5 years!

  • Reverse mortgage sales are already down significantly. I believe this is due in large part to the drop in home values and the previous cut in the principal limit factors. Seniors are now having problems being able to pay off existing mortgages due to these two factors. The other issue that has been a barrier for may seniors has been the cost of doing the loan. With a drop in the PLF the cost of doing this loan becomes that much higher. In reality they are going to be paying more and getting less. Are these proposed changes an over reaction to a bad housing market? Does the government believe that housing prices are not going to recover in the future? This program was meant to help seniors during rough times not penalize them.

  • This is unbelievable to me. It looks like the best-case scenario is that limits get reduced a little and MIP percentages go up, so borrowers get less on both accounts. This is all based on conjecture and projections that are all based on very limited data. The truth is that no one knows when these loans will terminate and certainly not where the real estate market will be when they do. The HECM program has never had a losing year and for all anyone knows, it never will. I can't believe senior homeowners will be getting hurt again.

  • So to summarize my understanding of this article:

    If we get the subsidy the MIP goes up to 1.25 and reduction of PL by 1% – 5%.

    If we do not get the subsidy the MIP goes up to 1.25 and reduction of PL by 21%.

    Am I understanding this correctly?

  • Kudos to to Mr. Stevens for going to bat for both seniors and the HECM industry. That being said I’m optimistic we will receive the $250M subsidy request. The potential political fallout of denying such a request in light of massive bailouts is sizable.

    That being said if we do see PLF cuts and/or MIP increases this may speed the reappearance of Proprietary Reverse Mortgages which could fill the needs of seniors who are cost-conscious or would receive more benefit than the HECM would provide.

  • Just a heads up for everyone,

    Update: HUD confirmed with RMD that without the $250 million appropriation, the PLFs would be lowered an additional 11% from the prior 10% in FY 2010.

    So its not an additional 21% on top of the 10% we already experienced.

  • It would be nice to hear from someone at NRMLA tell us what they are doing about this. It is my understanding that NRMLA has contractual relationships with lobbyists (it may only be one) and are they engaged in this debate both on the Hill as well as at HUD? Are they explaining how potentially damaging this could be to seniors all over the country?

    I will ask the same question I have on other occasions: Why is the Obama adminsitration spending billions on trying to help financially-challenged borrowers stay in their homes on the “forward side”, yet they are (maybe unknowingly) inflicting so much pain on seniors?

  • Update 2: HUD contacted RMD to say its previous statement was incorrect, its spokesperson told RMD that:

    The additional 21% PLF reduction would be on top of the 10% reduction on October 1, 2009. In other words, HUD would have to reduce the PLFs by an additional 21% from where they are today.

    Article updated.

  • The MIP is going up regardless of the 250 million. Anyone know how much of an effect the MIP increase is going to have on the PL? Once the MIP is increased it effects the funds available…right?

  • Traverse has the numbers right and it ISN'T a pretty picture. The MIP increase alone will certainly erode even further the inroads made among financial professionals to see reverses in a more positive light.

  • Traverse has the numbers right and it ISN’T a pretty picture. The MIP increase alone will certainly erode even further the inroads made among financial professionals to see reverses in a more positive light.

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