Principal Limit Reductions Force Reverse Mortgage Lenders to Innovate

As reverse mortgage volume continues to slide and the possibility of another principal limit reduction in October, reverse mortgage lenders have been forced to innovate and bring down costs to ensure seniors have access to the HECM program.

The drop in home values across the country has played a big role in the decline in volume, but the principal limit reduction from last year hurt even more. “I don’t think many people understood exactly what the impact of the 10% principal limit factor cut was going to be, but it certainly has been much worse than most of us thought,” said Craig Corn, Vice President of MetLife Home Loans.

For the first quarter of 2010, overall volume fell 32% versus Q1-09 and if the industry experiences another principal limit reduction there is little doubt we will see an uptick in volume anytime soon. During March volume slid even further to 5,822 units, down 17% from February and the lowest month since December 2006 according to Reverse Market Insight.

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Luckily for the industry, interest from investors in Ginnie Mae’s HMBS has drastically improved the secondary market execution for lenders. Issuance of HMBS was up over 600% in 2009 and a new report from Barlcays Capital said it expects to see even greater investor interest as the demographics from the demand side remain very favorable considering how quickly the US population is aging.

This increased interest has allowed lenders to offset some of the pain from the principal limit reductions by eliminating the servicing and sometimes origination fee for the first time in the 20 year history of the program. “By increasing how much older Americans can receive in proceeds, at a lower cost, we have likely increased the number of older Americans who can now qualify for a HECM, and also improved the value proposition of the HECM product,” said Corn. “Hopefully, these changes will result in more older Americans considering the product.”

The increased competition among lenders has helped to drive down the costs of the loans and while it doesn’t cancel out the principal limit reduction, it certainly helps. The changes have also generated some positive coverage from the media, specifically the New York Times and Wall Street Journal, who both reported on how lenders are lowering costs for borrowers.

The changes have been well received by the US Department of Housing and Urban Development as well. “You as an industry have taken it upon yourselves, to help drive the costs of the program down,” said Erica Jessup, HECM Program Specialist at HUD during her speech at the National Reverse Mortgage Lenders Association Road Show in Philadelphia. She told attendees that lenders lowering margins and Bank of America’s decision to pay half of the MIP for the borrowers are, “all positive signs and is the direction we want to go in.”

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