With High FHA Loan Limits, Hard for Private Reverse Mortgages to Compete

During the Mortgage Bankers Association Secondary Marketing conference in New York last week, David Stevens, Federal Housing Administration (FHA) commissioner stressed to attendees the need to bring private markets back into the mortgage business.  “This is a market purely on life support, sustained by the federal government,” he said. “Having FHA do this much volume is a sign of a very sick system.”

While the statement was directed at the mortgage business in general, it especially rings true in the reverse mortgage business.

The reverse mortgage industry has always relied heavily on FHA’s HECM program, but proprietary products served a need the HECM program could not.  Catering to borrowers with higher home values, analysts estimate private reverse mortgage products made of 6% of the total units and 16% of the total dollar volume originated.

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When the financial markets started falling apart in 2008, investors for jumbo reverse mortgage products disappeared.  In response to the lack of private capital in the marketplace, the federal government stepped in to fill the need and raised the national HECM loan limit to $417,000 and then $625,500 months later.  With a higher loan limit, the HECM program provided borrowers with more proceeds and no one saw a need for proprietary products anymore.

All that changed in October of last year when the principal limits were lowered by 10% due to the Office of Management and Budget saying the program needed a $798 million subsidy to break even.  Since the cuts were made origination volume continues to trend lower and has yet to recover.

Facing the possibility of another principal limit reduction for FY 2011, many believe the need for proprietary reverse mortgages is back.  However, the impact the private markets is limited because the HECM provides so much money to borrowers.

“At the end of the day its about the cost of money and we’re so far away from what the private market will ever be able to provide,” said Jeff Lewis, Chairman of Generation Mortgage during a NRMLA conference in Philadelphia earlier this year. His company released the first private product in two years earlier this week, catering to borrowers with higher home values.  “If a home isn’t in excess of 1mm, I can’t see our program working for the borrower,” Lewis said in an email to RMD.

Others believe that if the government would lower the loan limit back to $417,000, the private market would come back in a bigger way.  “As long as the loan limits stay so high, it will be hard for the jumbo to compete,” said Joe Kelly, Partner at New View Advisors during the MBA’s secondary market session.

With the current loan limits set to “sunset” back at the end of the year, Congress would need to vote to extend loan limits at $625,000.  There has been talk about keeping them the same, bringing it back to $417K, and even some rumors of $550,000.  Where they will end up is anyone’s guess, but is now the right time to lower the loan limit?

“We would recommend waiting for the private, secondary markets to recover before lowering the loan limit,” said Kelly.  “The loan limit increase was always intended to be temporary, but there’s time.”

He added, “Right now it’s a chicken-or-egg situation: do we need newly originated quality mortgage loans to restart the private secondary market, or do we need the private secondary market to restart in order to finance quality mortgage loans? The proprietary reverse mortgage is a good candidate to lead the restoration of that market, given its relative performance and value, but someone is going to have to step up and take some risk to make that happen.”

Generation is the first to step up and take that risk, but Kelly said the market needs both the HECM and proprietary products.  “Otherwise, the lack of product development exposes the industry to political risk from changing principal limits.”  His company has long felt the industry needed a new product, proposing that HUD create a HECM II.  However, the real challenge remains in how, “we carve out a healthy niche for the proprietary loans,” said Kelly. 

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  • Mr. Kelly has hit the nail squarely on its head.

    Any talk of lowering the lending limit (its correct HECM name) should be delayed until there is a thriving secondary market of some magnitude. Last year some industry leaders were promoting the idea of creating proprietary products insured through Private Mortgage Insurance (“PMI”) and thereby lowering the lending limits needed through the HECM program. That would have been a big mistake then and perhaps an even bigger mistake now.

    The HECM program should continue substantially as is until the market can create competitive proprietary reverse mortgage products for a sustained period of time – more than 2 years. No doubt that would mean no substantial changes to the HECM lending limit until at least 2013.

  • I agree that lowering the limits now (after the 10% reduction) would be a disaster. The fact that Generation is dipping their toes into the propietary market is a good sign of things to come.

    • Martha,

      If you are saying that we need these products at any cost, that is literally amazing. As to reliability as an originator, proprietary products have a spotty record.

      For example, in the closing days of one proprietary product of one lender, applications were being arbitrarily rejected for any number of reasons. The underwriting for one of mine was delayed for weeks and then was rejected. I responded within hours of notification of the rejection but was told the response was too late. As it turned out the rejection was over an alleged overvaluation based on a desk review. What occurred was the person doing the desk review had used the wrong property address and was valuing a home on a single lot rather than the property under consideration which was a much larger home on a double lot. Several other originators had similar stories about not only this lender but others.

      Between mid 2008 and mid February 2009, the number of seniors who applied for reverse mortgages in Southern California nose dived due to the $362,790 HECM lending limit and later the $417,000 lending limit. When the $625,500 lending limit went into effect, things picked up. I would hate to see the lending limit lowered to $417,000 just on the whim that perhaps — just maybe — some lenders might once again be enticed to offer proprietary products. Not long ago there was one lender who was still offering a property product but its principal limit factors, interest rates, and upfront costs were so obnoxious there were few takers.

      While I want to see proprietary products return, I hope that will occur despite the current HECM lending limits (as in the case of Generation Mortgage) rather than seeing HECM lending limits lowered just to induce lenders to bring back proprietary reverse mortgages. Seniors with higher valued homes generally have more financial options available to them than those with lower valued homes.

  • I agree that lowering the limits now (after the 10% reduction) would be a disaster. The fact that Generation is dipping their toes into the propietary market is a good sign of things to come.

  • Martha,rnrnIf you are saying that we need these products at any cost, that is literally amazing. As to reliability as an originator, proprietary products have a spotty record. rnrnFor example, in the closing days of one proprietary product of one lender, applications were being arbitrarily rejected for any number of reasons. The underwriting for one of mine was delayed for weeks and then was rejected. I responded within hours of notification of the rejection but was told the response was too late. As it turned out the rejection was over an alleged overvaluation based on a desk review. What occurred was the person doing the desk review had used the wrong property address and was valuing a home on a single lot rather than the property under consideration which was a much larger home on a double lot. Several other originators had similar stories about not only this lender but others.rnrnBetween mid 2008 and mid February 2009, the number of seniors who applied for reverse mortgages in Southern California nose dived due to the $362,790 HECM lending limit and later the $417,000 lending limit. When the $625,500 lending limit went into effect, things picked up. I would hate to see the lending limit lowered to $417,000 just on the whim that perhaps — just maybe — some lenders might once again be enticed to offer proprietary products. Not long ago there was one lender who was still offering a property product but its principal limit factors, interest rates, and upfront costs were so obnoxious there were few takers.rnrnWhile I want to see proprietary products return, I hope that will occur despite the current HECM lending limits (as in the case of Generation Mortgage) rather than seeing HECM lending limits lowered just to induce lenders to bring back proprietary reverse mortgages. Seniors with higher valued homes generally have more financial options available to them than those with lower valued homes. rn

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