Senate Passes FHA Bill, Could Allow Two Product Reverse Mortgage Solution

The Senate approved legislation giving the Secretary of the US Department of Housing and Urban Development the ability to increase annual premiums for single family loans insured by the Federal Housing Administration late Wednesday night.

HR 5981permits FHA to increase its annual premiums for “forward” loans from from 0.55 percent to 1.55 percent.  The agency also said it plans to raise annual premiums for HECM loans from 0.50% to 1.25%.

“While premium increases are never ideal, this bill was necessary to help improve the strength and stability of FHA’s single family programs,” said Robert E. Story, Jr., CMB, Chairman of the Mortgage Bankers Association.  “We are encouraged that FHA Commissioner Stevens has indicated he may not need to raise premiums to the maximum, and we believe that that a small increase in the annual premium, coupled with a decrease in FHA’s upfront premium, will help stabilize FHA while lowering closing costs for many borrowers.”

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The could also give HUD the ability to adjust premiums for a two reverse mortgage product approach outlined by Colin Cushman, Director of Portfolio Analysis at HUD earlier this year during a conference in Washington, DC.

The proposal includes the current HECM product with higher annual premiums and the “HECM Saver” would provide borrowers with less in proceeds but without an upfront premium. Designed to be a pay as you go product, Cushman said it would help lower the risk to the FHA insurance fund and offer borrowers an additional option not currently available.

According to the National Reverse Mortgage Lenders Association, it’s awaiting confirmation from HUD’s Office of General Counsel that the language in the bill does in fact provide the flexibility needed to implement the HECM Saver. “Early indications are that it does, but we await official confirmation,” said the association.

The bill passed the House last week and now heads to President Barack Obama who is expected to sign the bill into law.

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  • Enactment of this bill means Principal Limit Factors (u201cPLFsu201d) will not have to be reduced by 31% of what they were on September 30, 2009 (or 23% from what they are today). However, that does not mean PLFs will not have to be lowered a very significant amount if the other piece of this puzzle is not enacted, i.e., the appropriations bill passed by the House.

    It is believed that the total positive credit subsidy for the fiscal year ending September 30, 2011 (u201cFYE 9/30/2011u201d) needed to put the HECM program where it was on September 30, 2009 was around $1.7 billion:

    u2022tApproximately $800 million of that number will not have to be addressed because the Obama Administration (through its OMB budget FYE 9/30/2011) plans to keep the 10% reduction of October 1, 2009 in place for the next fiscal year.

    u2022tWe know the President (through OMB and HUD) asked for $250 million in a direct subsidy for the HECM program but since then the House has stated that because of an overestimate of HECM endorsements FYE 9/30/2011, the amount can safely be lowered to $150 million; however, the House only approved $140 million.

    u2022tSo the other $650 million is estimated to be made up by increasing the monthly FHA Mortgage Insurance Premium (u201congoing MIPu201d) charge of 0.5% per annum on the outstanding balance due to 1.25% per annum on all HECMs originated during the fiscal year ending September 30, 2011 (u201cDYE 9/30/2011u201d).

    Of course the increase in ongoing MIP, will lower PLFs to some degree beyond what they are today. That reduction will no doubt be reflected in the HECM calculators at the appropriate time. So the impact of this bill on current HECM products means higher ongoing MIP and slightly lower PLFs for that cohort of current HECM products endorsed DYE 9/30/2011.

    So preparing your prospects for higher ongoing MIP and slightly lower PLFs now can avoid the finger pointing and name calling that this industry so regrettably endured last year.

    While passage of this bill could mean good things for the HECM Saver or Lite, there seems to be much concern about its acceptance in the secondary market and even its impact on current pricing for fixed rate HECMs. Hopefully the secondary market issue can be ironed out before HUD approves the HECM Saver/Lite. Some have predicted that final HUD approval could come before December.

  • Enactment of this bill means Principal Limit Factors (“PLFs”) will not have to be reduced by 31% of what they were on September 30, 2009 (or 23% from what they are today). However, that does not mean PLFs will not have to be lowered a very significant amount if the other piece of this puzzle is not enacted, i.e., the appropriations bill passed by the House.

    It is believed that the total positive credit subsidy for the fiscal year ending September 30, 2011 needed to put the HECM program where it was on September 30, 2009 (“FYE 9/30/2011”) was around $1.7 billion:

    • Approximately $800 million of that number will not have to be addressed because the Obama Administration (through its OMB budget FYE 9/30/2011) plans to keep the 10% reduction of October 1, 2009 in place for the next fiscal year.

    • We know the President (through OMB and HUD) asked for $250 million in a direct subsidy for the HECM program but since then the House has stated that because of an overestimate of HECM endorsements FYE 9/30/2011, the amount can safely be lowered to $150 million; however, the House only approved $140 million.

    • So the other $650 million is estimated to be made up by increasing the monthly FHA Mortgage Insurance Premium (“ongoing MIP”) charge of 0.5% per annum on the outstanding balance due to 1.25% per annum on all HECMs originated during the fiscal year ending September 30, 2011 (“DYE 9/30/2011”).

    Of course the increase in ongoing MIP, will lower PLFs to some degree beyond what they are today. That reduction will no doubt be reflected in the HECM calculators at the appropriate time. So the impact of this bill on current HECM products means higher ongoing MIP and slightly lower PLFs for that cohort of current HECM products endorsed DYE 9/30/2011.

    So preparing your prospects for higher ongoing MIP and slightly lower PLFs now can avoid the finger pointing and name calling that this industry so regrettably endured last year.

    While passage of this bill could mean good things for the HECM Saver or Lite, there seems to be much concern about its acceptance in the secondary market and even its impact on current pricing for fixed rate HECMs. Hopefully the secondary market issue can be ironed out before HUD approves the HECM Saver/Lite. Some have predicted that final HUD approval could come before December.

    • Mr. Veale –

      I received your response to my post, tho I am unable to access it on RMD.

      My question was not about handling of the increase in MIP on 10/1 in the PL growth calculation, but rather the language in the HECM disclosure document which reads as though credit line growth is, in fact, calculated identically to PL growth without reference to adjustment for outstanding loan balance, remaining service fee set aside, etc. I think it is this language which leads most originators to characterize the unused balance in a credit line as 'growing at the note rate plus .5%.'

      • REVGUYJIM,

        I take it you are also Jwarns. Please read my response to Jwarns below. If the monthly servicing fee is zero and there are no other set asides, the language can read exactly that way. In the article I reference, you can see through the line of credit formula why that is true.

        If there is a monthly servicing fee or other set asides, the wording will generally be wrong if it is an adjustable rate HECM. I need to find out a lot of information about the loan as mentioned below before I can reconcile the two statements.

      • I will confirm whether the specific HECM loan does/does not have a SFSA. I agree that if it does not, the language is in the disclosure is fine.

  • Jim provides a very lucid rationale from an administrative standpoint, as usual, but we are left with an increasing number of clients who's drop in home values has put them on the bubble. Many are just out of reach in securing an reverse and as of Oct. 1st that number will increase. I'd be curious to hear statistics on the number of applicants for whom 80%+ of their proceeds are going towards paying off existing mortgages. Even if it is only 10-15% of current business that would be a significant drop in volume.

    • J Brodey,

      The harsh reality is more seniors will be cut off for at least one fiscal year. This is one of the rippling effects of the impact of the OMB projected home appreciation rates for the fiscal year ending September 30, 2011. This is why it is so important to let borderline cases know they need to act before October 1.

  • If the ongoing MIP goes up to 1.25%, does that mean that the creditline growth rate will be changed accordingly? Anyone know if HUD has addressed this?

    • counselor,

      Since technically the creditline has no growth rate, the answer is no. The growth rate is applied to the principal limit and in most cases that means growth in the unused credit line (although the credit line can even shrink). If you are not already familiar with the rules related to the growth in the credit line, please see the RMD article titled “Are Reverse Mortgage Credit Lines Really Shrinking?” and posted August 3rd, 2009.

      If you want to look at some of the changes you can do so by using the HUD HECM calculator and making some adjustments. Once HUD announces the actual changes, you can go on line and update the calculator for the new Principal Limit Factor tables.

      The temporary changes needed now to the HUD HECM calculator to look at what how Principal Limit Factors and Principal Limits are estimated to look like are: 1) add 0.75% to expected interest rates and 2) the floor on the expected interest rate must be 6.25% instead of 5.5%. It is OK to make these adjustments for now but remember once the calculator is modified, the adjustment will no longer be required and will only give wrong answers.

      • “Since technically the creditline has no growth rate, the answer is no.”

        The issue of the credit line “growth rate” has been discussed elsewhere, as indicated. I am still left wondering how these technicial discussions square with the language in Section 2.6 of the Home Equity Conversion Mortgage Loan Agreement, which reads, in part: “The line of credit amount increases at the same rate as the total Principal Limit under Section 1.7.”

        Section 1.7 reads, in part: “Principal Limit means the amount indicated on the attached payment plan (Exhibit 1) when this Loan Agreement is executed, and increases each month for the life of the loan at a rate equal to one-twelfth of the sum of the Mortgage Interest Rate and one-half of one percent.”

        Can you reconcile the two?

      • Jwarns,

        There are considerable differences between HECM fixed rate loan docs and adjustable rate loan docs. Please identify which you are providing and what is the monthly servicing fee on that loan?

        Please see the RMD article titled “Are Reverse Mortgage Credit Lines Really Shrinking?” and posted August 3rd, 2009. Whenever a HECM has no monthly servicing fee (and thus no monthly servicing fee set aside), except for rounding computing the increase in the line of credit through the formal computation will produce little difference than the increase in the line of credit derived by multiplying “the growth rate” times the unused line of credit unless other set asides are involved which do not increase by the “growth rate.”

        As to the Section 1.7 you cite, the monthly (annual, backside, or ongoing) MIP will remain 0.5% on all HECMs closed before October 1, 2010. The increase to 1.25% will only impact HECMs closed after September 30, 2010 (except for those which are eligible for the lower 0.5% which were in process before October 1, 2010.) No doubt Section 1.7 will be changed on HECM loan documents to which the higher 1.25% ongoing MIP will apply.

        It is unlikely all HECMs in process before October 1, 2010 will be eligible. In recent years the date which the FHA Case Number was issued has been the standard used to determine whether a HECM would be treated under prior rules or those being implemented. If the issue date was before the implementation date, the HECM was eligible for treatment under the prior rules. No one has yet stated what the standard will be under the changes contemplated for October 1, 2010.

  • Jim,

    A couple of important issues with regards to your post:

    1) If FHA increases the back-end MIP from 0.50% annually to 1.25% annually, then it it has NO EFFECT on the expected interest rate. Said differently, an increase to the back-end MIP does NOT affect the PLF's.

    2) The proposed increase to the back-end MIP will not, in and of itself, change the 5.50% PLF look-up floor. FHA would need to take separate action to change the PLF floor IN ADDITION TO increasing the back-end MIP…..and they have not said anything publicly about doing that.

    • Mr. DeMarkey,

      Thank you for your comment. Please note the correction to my prior reply to the reader who uses the name “counselor.”

    • Jdemarkey,
      I hope you are right but I think you are wrong. I believe and have been told that the the increase in MIP from .5 to 1.25 will also reduce the amount of funds available Please tell me I am wrong.

  • 2545,

    FHA has proposed BOTH an increase in the “back-end” MIP along with a modest reduction in the PLF's. However, the increase in the back-end MIP is not causing the decrease in the PLF's.

    An increase in the back-end MIP does not (by itself) reduce PLF's.

    • Mr. DeMarkey and 2545,rnrnI am very interested in seeing a demonstration of how the modified model works. I am very pleased to hear about the general refinements. Some of us have been calling for these changes for several years. It was good to hear that it has taken three years to incorporate all of the new variables and factors, showing there was thought put into the changes.rnrnWhile it may not provide more available proceeds, it reflects more dynamically actual experience which can only help preserve the integrity of the HECM program. Now I hope we see the appropriations bill passed and reconciled before 10/1.

  • 2545,rnrnFHA has proposed BOTH an increase in the “back-end” MIP along with a modest reduction in the PLF’s. However, the increase in the back-end MIP is not causing the decrease in the PLF’s.rnrnAn increase in the back-end MIP does not (by itself) reduce PLF’s.

  • REVGUYJIM,rnrnI take it you are also Jwarns. Please read my response to Jwarns below. If the monthly servicing fee is zero and there are no other set asides, the language can read exactly that way. In the article I reference, you can see through the line of credit formula why that is true. rnrnIf there is a monthly servicing fee or other set asides, the wording will generally be wrong if it is an adjustable rate HECM. I need to find out a lot of information about the loan as mentioned below before I can reconcile the two statements.

    • jan,rnrnLaws of inheritance are not impacted by whether a reverse mortgage is on a property or not. So if a property does not pass to a spouse that failure has absolutely nothing to do with the type of debt for which the home is security. However, if the spouse is not a borrower on the reverse mortgage and the decedent spouse was the last surviving borrower, the loan will become due and payable due to the passing of the decedent spouse.rnrnIf you still have any questions, you will need to provide more information.rnrn

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