Reverse Mortgage Industry Reacts to Changes and HECM Saver Opportunity

The Department of Housing and Urban Development announced two big changes and the reverse mortgage industry is still trying to figure out what it all means. As expected, HUD reduced the principal limits but surprised the industry by lowering the floor from 5.50 percent to 5.00 percent.

“We made the suggestion for them to lower the floor months ago but they never indicated they were seriously considering it,” said John Lunde, President of Reverse Market Insight.  “I like that they did it and how they did it to surprise the industry on the upside for once.”

By lowering the floor, younger borrowers will have access to more in proceeds than before as long as rates remain low.  ”The lower interest rate was a sensible adjustment given market reality,” said Michael McCully, Partner at New View Advisors.  “Lowering the floor of the look-up tables delivers more benefit to borrowers, and lowers the price at which newly-created HBMS will trade.”

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While unable to predict the future, McCully said it’s likely that a reduction in execution for HMBS will be met with price reduction for lenders as well.

Even though the benefit could be short lived if rates rise, lenders welcome the surprise from HUD.  “Any program that gets more money to the borrower is good,” said Dave Bancroft, Executive VP of Security One Lending. “The changes provide the potential for younger borrowers to refinance, but because rates are so low, it’s a short term run.”

HUD and investors are concerned about the potential for “churning” – where lenders refinance borrowers even if the benefit is minimal – but several lenders told RMD they don’t expect any sort of “refi-boom”.  Because rates will have to rise eventually, the HECM Saver is where lenders see the most opportunity.

From a long term perspective, the HECM Saver provides the industry with a low cost reverse mortgage and the opportunity to reach new breed of customer.  “The industry has been catering to a diminishing customer base since home values have depreciated,” said Jean Noble, EVP of Guardian First. “We can’t control home values, so lost production can be made up targeting a higher end client with the HECM Saver.”

This higher end client – someone with no mortgage balance – has been been out of reach in the past because upfront costs of the HECM couldn’t compete with a home equity line of credit.  This segment of seniors is much larger than the current audience the industry has been targeting in the past according to Lunde.

His company estimates that the Saver could become 20 percent of all reverse mortgages originated in the next 12 months.  “We’re very bullish on the potential volume for the product,” he said.

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  • Can refis be justified on HECMs originated this fiscal year — during the next fiscal year (i.e., after 10/3/2010)?
    I am not a senior advocate. I am just looking at the true costs of the additional dollars where the appraised value has not changed from this fiscal year to next. If the interest rate drops by at least 0.75% on a refi, perhaps it can be justified — unless there are some REAL tax benefits to the interest which might not be apply to the MIP based on the situation of the borrower.
    If the interest rate does not drop enough to at least neutralize the increase on the MIP, one can make the argument that the increased costs should all be attributed to the additional borrowings. If a 62 year old is only getting 10.2% more in cash with no relief in interest rates, then the increased costs are correctly all allocated to the increase in the principal limit and the MIP true cost for those additional few dollars rises to over 9%. Adding that to an interest rate of 4.99% means that annual costs for those additional dollars is over 14% annually without considering any upfront costs. Such disclosure would throw ice water on all refis.
    The smaller the increase in the principal limit, the greater the percentage annual cost for getting those additional dollars. 14% is just the starting point as age goes up combined with no real change in the interest rate and assuming no significant change in appraised values.
    Lenders should be required to offset the increase in MIP by lower interest rates (or lower margins) solely on refis taking place during the next fiscal year on those HECMs originated during the current fiscal year. These specific refis need to be put under the microscope. The HUD OIG should be on top of this and laying down strong guidelines before the “super refi sales folks” ruin the image of this industry any further.
    I hope NRMLA takes a strong position on this issue immediately.

    • Didn’t the professional panel on the Reverse Fortunes webinar on Monday comment on the issue of churning and how HUD would looking very closely at any HECM refis that came in? And if HUD is looking very closely, doesn’t that mean that HUD doesn’t think refi-ing will be such a good idea for most senior borrowers? Doesn’t that tell us as loan originators that we should be very careful how we approach our recent borrowers?

      Am I the only one who heard Dan Mooney say that?

  • Louise321
    Not only did Dan Mooney state that but the folks at Cantor Fitzgerald stated how churning negatively impacts the secondary market.
    I hope we are all looking at the big picture when it comes to refi’s. The secondary market is finally coming back so I hope originators are not looking at short term gains at the risk of a scaring off investors.

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