Reviving the HECM Lite Idea for Reverse Mortgages

Applause greeted a recent FHA public mention of possible flexibility in the HECM program that would permit borrowers to pay fees only for the reverse mortgage amounts they desired.

Described as the “HECM Lite”, the proposal laid out by Colin Cushman, director of portfolio analysis at HUD, would feature no mortgage insurance premium upfront and only 1.25 percent annually with lower principal loan factors (a.k.a. “pay as you go”).

Cushman said the shift is being considered because “HECM is in a budget box due to differences between long-run house price growth-rate assumptions – used in the original PLF table calculation (4 percent) – and assumptions now being used for the federal budget.”

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One industry veteran who likes the proposal is David Peskin, chairman of Guardian First Funding in Melville, N.Y., who tried a similar approach in a proprietary product called “Simple60,” with a former firm. “It was a good idea because it was not as expensive for someone who wanted to get access to less money,” Peskin explains. “Today, you pay fees on the full [mortgage] amount, regardless of whether you use it.”

He says, “anytime you have multiple options for the borrower it’s an advantage to everybody. Right now, the reverse mortgage is a needs-based product and most people want as much money as possible.” The Simple60 product “never got full momentum,” Peskin tells RMD, because “by the time we launched it, the secondary [funding] market had dried up.”

Shannon Hicks, vice-president, product development for Reverse Fortunes, sees the “HECM Lite” as a step in the right direction. “What remains to be seen is the effect of a 1.25 percent annual MIP in conjunction with the real possibility of increasing interest rates in the future,” Hicks says. “The real advantage of such a new product,” in his view, “is its ability to provide future liquidity while managing the loan balance and preserving future equity from an otherwise larger rising loan balance.”

Michael Gruley of 1st Financial Reverse Mortgages sees the prospective product as being aimed at “those folks who have little or no mortgage balance on their home.” Given today’s smaller PLFs, the lower MIP costs might be “just the trade off consumers are looking for in those instances.” Gruley suggests, however, that “since the funded amounts would be so low, origination fees likely would be necessary in some form, which could counter-balance the lower MIP.”

Written by Neil Morse

Note:  A previous version of this article described the “HECM Lite” and HECM mini as the same thing.  It’s not the same product, we apologize for any confusion.

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  • David Peskin’s Simple 60 was a nice product. I sold the product and it did fill a gap but unlike the HECM Lite it had no MIP and there was a flat origination fee. The product did not gain traction, as he said but I believe it was also a low demand product and do not have high hopes for the HECM Lite. We advertised the Simple 60 along side of every other product and tried to work it into every presentation. The biggest competition was the HELOC, as another writer commented but in those days, they were giving them out like candy at Halloween. The few customers that did the loan were perfectly suited and definitely thrilled to have it but they were a smaller slice of our already small audience, I’m afraid.

  • This is going to be a very suitable product for our older borrowers, especially those over 85 years old. Not having to pay the up front MIP makes alot of sense.

  • I understand that the intangible taxes are a state law. I just happen to be in a state that charges well above the “fair” amount. I listed it because I think it’ll be an obstacle unless states begin to calculate intangibles on HECM principal limits. nnI was referring to what was previously the origination floor on HECMs – $2,500 before the price war began. If there is no floor set on the HECM Lite, will you be comfortable originating them for < $1,000?

  • Matt,rnrnHere is what you are missing…rnrnStop thinking that reverse mortgages are just a needs based product and are more of a financial planning product.rnrnHow about reverse mortgages to purchase long term care insurance?rnrnHow about a reverse mortgage to remodel an entire home and bring in outside medical services so seniors can choose to live home rather than go to a facility?rnrnHow about using a reverse mortgage to start reducing the size of your estate, possibly gifting funds to children & grandchildren before you die?rnrnHow about the purchase of life insurance to a client in their low-mid 60’s and increasing their estate value?rnrnI can go on and on…the reason the world looks at a reverse mortgage as a needs based last resort product is because the industry itself looks at itself that way! (No disrespect is meant to you Matt)rnrnApproach an estate attorney, a certified financial planner, a long term care provider and tell them you have a product that can offer their senior clients hundreds of thousands of dollars with no qualifications and no monthly debt serviceu2026And watch their eyes light upu2026rn

  • You don’t think the HECM Lite will remain a product of last resort in the eyes of attorneys and financial advisors? I see a standard HELOC as the primary competition for the HECM Lite, assuming we’re mainly talking about small sized loans and a free and clear home. Let’s assume we’re talking about a customer that needs $30K on a $200K home.nnClosing costs – HELOCs can be had for little to no closing costs. Will a HECM Lite be had for less than several thousand?nnInterest rate – HELOCs are prime plus or prime minus points depending on the strength of the borrower. What will be the effective interest rate of the HECM Lite, taking into consideration the 1.25% ongoing MIP?nnInterest – HELOC is simple interest paid monthly, HECM Lite has deferred compounding interest. I see this as the biggest obstacle in the eyes of professionals. nnTax deduction – Not really in play since the interest paid on a $30K HELOC won’t help the borrower exceed the standard deduction.nnQualification – This is really the only selling point since a HECM Lite won’t require have income or FICO requirements. nnWhat am I missing?

  • Who is expected to sell the HECM Lite, commissioned loan officers? If the process of establishing the “lite” reverse mortgage is the same, is the minimum fee going to be $2,500? $2,500 origination on a $30,000 HECM Lite request? What about intangible taxes being calculated based on 150% of the max claim amount? Will we finally see intangible taxes based on the principal limit?n

  • This is exactly what our industry needs. The “HECM Lite” product in addition to the present HECM program will meet the needs of so many more seniorsu2026rnrnThe present HECM program will largely remain as a needs based program for those who are having problems maintaining their quality of life and the HECM Lite program, with greatly reduced closing costs, will be used for more specific reasons such as home improvement, debt consolidation, purchase of LTCi, the list will be endless once the massive cost of the upfront MIP is removed.rnrnThe introduction of the HECM Lite option will get the attention of the millions of financial advisors, attorneys, registered reps and health care professionals who still to this day consider the standard reverse mortgage a product of last resort.rnrnAs rough as these last 18 months have been we are now seeing the evolution of the reverse mortgage as a true financial product that can be used in many forms for many good purposes.rn

  • One problem with the current HECM products is they are costly when the senior only needs a short-term loan. You see this most effectively demonstrated on the TALC (Total Annual Loan Costs) schedule when looking at holding a HECM for 2 years. rnrnThe 2-year TALC percentage particularly on the current monthly adjusting rate HECM is normally much greater than the sum of the note interest rate used in the TALC computation and the ongoing MIP annual rate. It is actually much worse if the intended draw down of proceeds will be less than the assumptions underlying the TALC calculation. This difference should drop dramatically if there is no upfront MIP, meaning the costs of having this loan for a short period of time is not as objectionable as it has been. The same general principles should apply to fixed rate HECM Lite products when compared to the traditional fixed rate HECM as well.rnrnNo doubt this will also mean we will have product which will be more beneficial to seniors who only need a small percentage of proceeds to meet their current financial need. Originating a traditional fixed rate HECM for this purpose is a fiscally irresponsible decision unless there is absolutely no other way to provide the necessary funds. The current upfront costs of a monthly adjustable rate HECM usually also makes it a poor choice at best. A monthly adjusting rate HECM Lite should provide a much more fiscally responsible and cost effective way to address this need.rnrnWhen the HECM Lite products are introduced, the industry needs to change its outlook on the effectiveness of HECMs in meeting the need for short-term financing and smaller size loans. While these products may not revolutionize our industry they certainly will be much more responsive to the financial needs of seniors. rn

  • One problem with the current HECM products is they are costly when the senior only needs a short-term loan. You see this most effectively demonstrated on the TALC (Total Annual Loan Costs) schedule when looking at holding a HECM for 2 years.

    The 2-year TALC percentage particularly on the current monthly adjusting rate HECM is normally much greater than the sum of the note interest rate used in the TALC computation and the ongoing MIP annual rate. It is actually much worse if the intended draw down of proceeds will be less than the assumptions underlying the TALC calculation. This difference should drop dramatically if there is no upfront MIP, meaning the costs of having this loan for a short period of time is not as objectionable as it has been. The same general principles should apply to fixed rate HECM Lite products when compared to the traditional fixed rate HECM as well.

    No doubt this will also mean we will have product which will be more beneficial to seniors who only need a small percentage of proceeds to meet their current financial need. Originating a traditional fixed rate HECM for this purpose is a fiscally irresponsible decision unless there is absolutely no other way to provide the necessary funds. The current upfront costs of a monthly adjustable rate HECM usually also makes it a poor choice at best. A monthly adjusting rate HECM Lite should provide a much more fiscally responsible and cost effective way to address this need.

    When the HECM Lite products are introduced, the industry needs to change its outlook on the effectiveness of HECMs in meeting the need for short-term financing and smaller size loans. While these products may not revolutionize our industry they certainly will be much more responsive to the financial needs of seniors.

  • This is exactly what our industry needs. The “HECM Lite” product in addition to the present HECM program will meet the needs of so many more seniors…

    The present HECM program will largely remain as a needs based program for those who are having problems maintaining their quality of life and the HECM Lite program, with greatly reduced closing costs, will be used for more specific reasons such as home improvement, debt consolidation, purchase of LTCi, the list will be endless once the massive cost of the upfront MIP is removed.

    The introduction of the HECM Lite option will get the attention of the millions of financial advisors, attorneys, registered reps and health care professionals who still to this day consider the standard reverse mortgage a product of last resort.

    As rough as these last 18 months have been we are now seeing the evolution of the reverse mortgage as a true financial product that can be used in many forms for many good purposes.

    • You don't think the HECM Lite will remain a product of last resort in the eyes of attorneys and financial advisors? I see a standard HELOC as the primary competition for the HECM Lite, assuming we're mainly talking about small sized loans and a free and clear home. Let's assume we're talking about a customer that needs $30K on a $200K home.

      Closing costs – HELOCs can be had for little to no closing costs. Will a HECM Lite be had for less than several thousand?

      Interest rate – HELOCs are prime plus or prime minus points depending on the strength of the borrower. What will be the effective interest rate of the HECM Lite, taking into consideration the 1.25% ongoing MIP?

      Interest – HELOC is simple interest paid monthly, HECM Lite has deferred compounding interest. I see this as the biggest obstacle in the eyes of professionals.

      Tax deduction – Not really in play since the interest paid on a $30K HELOC won't help the borrower exceed the standard deduction.

      Qualification – This is really the only selling point since a HECM Lite won't require have income or FICO requirements.

      What am I missing?

      • Matt,

        Here is what you are missing…

        Stop thinking that reverse mortgages are just a needs based product and are more of a financial planning product.

        How about reverse mortgages to purchase long term care insurance?

        How about a reverse mortgage to remodel an entire home and bring in outside medical services so seniors can choose to live home rather than go to a facility?

        How about using a reverse mortgage to start reducing the size of your estate, possibly gifting funds to children & grandchildren before you die?

        How about the purchase of life insurance to a client in their low-mid 60's and increasing their estate value?

        I can go on and on…the reason the world looks at a reverse mortgage as a needs based last resort product is because the industry itself looks at itself that way! (No disrespect is meant to you Matt)

        Approach an estate attorney, a certified financial planner, a long term care provider and tell them you have a product that can offer their senior clients hundreds of thousands of dollars with no qualifications and no monthly debt service…And watch their eyes light up…

  • Who is expected to sell the HECM Lite, commissioned loan officers? If the process of establishing the “lite” reverse mortgage is the same, is the minimum fee going to be $2,500? $2,500 origination on a $30,000 HECM Lite request? What about intangible taxes being calculated based on 150% of the max claim amount? Will we finally see intangible taxes based on the principal limit?

  • Matt,

    Intangible taxes are a state phenomenon. HECM Lite is not the same as HECM (state) Lite.

    Why would the origination fee be limited to $2,500?

    • I understand that the intangible taxes are a state law. I just happen to be in a state that charges well above the “fair” amount. I listed it because I think it'll be an obstacle unless states begin to calculate intangibles on HECM principal limits.

      I was referring to what was previously the origination floor on HECMs – $2,500 before the price war began. If there is no floor set on the HECM Lite, will you be comfortable originating them for < $1,000?

      • Matt,

        Trying to find out how the origination fee will work, not having much luck but trying.

    • This is going to be a very suitable product for our older borrowers, especially those over 85 years old. Not having to pay the up front MIP makes alot of sense.

  • David Peskin's Simple 60 was a nice product. I sold the product and it did fill a gap but unlike the HECM Lite it had no MIP and there was a flat origination fee. The product did not gain traction, as he said but I believe it was also a low demand product and do not have high hopes for the HECM Lite. We advertised the Simple 60 along side of every other product and tried to work it into every presentation. The biggest competition was the HELOC, as another writer commented but in those days, they were giving them out like candy at Halloween. The few customers that did the loan were perfectly suited and definitely thrilled to have it but they were a smaller slice of our already small audience, I'm afraid.

  • David Peskin’s Simple 60 was a nice product. I sold the product and it did fill a gap but unlike the HECM Lite it had no MIP and there was a flat origination fee. The product did not gain traction, as he said but I believe it was also a low demand product and do not have high hopes for the HECM Lite. We advertised the Simple 60 along side of every other product and tried to work it into every presentation. The biggest competition was the HELOC, as another writer commented but in those days, they were giving them out like candy at Halloween. The few customers that did the loan were perfectly suited and definitely thrilled to have it but they were a smaller slice of our already small audience, I’m afraid.

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