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.