HUD Wants HECM Saver to Represent 30% of All Reverse Mortgages

After the initial roll out of the HECM Saver, Vick Bott, Deputy Assistant Secretary for the Department of Housing and Urban Development said the agency would like to see it represent a minimum of 30 percent of all reverse mortgages it insures.

Released earlier this month, the product provides consumers with less in proceeds but at a much lower cost compared to the traditional Standard HECM.

During an interview with Reverse Fortunes, Bott said the decision to develop the HECM Saver was two fold.  First, even before she joined HUD, the market had been asking for a low cost product that didn’t require borrowers to leverage all the equity in their home. Second, when the Obama Administration released its FY 2011 budget, the program was reported to need a $150 million subsidy to break even for the year.

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The creation of the Saver product will address the needs of the marketplace and have a positive net effect on the ongoing risk association with the traditional product. “It’s important that the industry provides seniors the Saver product because it subsidizes the standard product,” she said.

In recent years, data from the Department of Housing and Urban Development shows the average reverse mortgage borrower is getting younger and Bott said the HECM Saver is likely to appeal to this group of seniors.  “It absolutely trends towards the younger senior, someone looking to supplement money that they lost in the stock market,” she said.

Even with all this potential, Bott admits it could take some time for the industry to fully adopt the new product, but the agency hopes to get a better idea about where volume will end up by January or February.  “We certainly know the demand is there,” she said.

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  • One of the interesting things about her statement was Ms. Bott did not give a target date for when the endorsement volume would reach 30% Savers. I expect that the 20% John Lunde projects is a little more reasonable. But it is uncertain how soon it will take before we see endorsement volume at 20%, if ever. Not even John gave a target date.

    If the market proportionately values Savers to be worth far less than the Standard, that could result in lenders providing more upfront costs savings to borrowers on a Standard than it could or would provide on Savers. For example if the market pays par for a Saver but gives 900 basis points for a Standard, as to fixed rate HECMs it is safe to say that lenders would make the upfront costs of Standards cheaper than those of Savers. For adjustable rate HECMs with substantial beginning balances, one would expect the same to be true. Thus if such disproportionate value exists, one would expect Savers to be used for lower beginning balance HECM adjustables and little else.

    This will be one of the most interesting issues we face near term. Since Saver valuation has a lot to do with the perception of how long after endorsement, Savers terminate, it is not certain how quickly the market will decide on the value of Savers. Until we reach that point, many questions lack firm answers; therefore, Saver volume projections seem premature, especially those which are not associated with target dates.

  • I’m having a hard time trying to understand why any senior would elect to take less equity out of their home and choose the Saver Plan. I was under the understanding that a Reverse Mortgage was created for seniors to pull as much equity as possible out of their homes, so why leave some of it still untouched?

    • KatyDog,

      No that is not the purpose of reverse mortgages. As to the fixed rate product, that is exactly what it does but it is a recent arrival in the market place.

      The reverse mortgage was created to allow seniors to take as much out of their home as they believe appropriate. The model was based on the idea of making the amount available to be as great as possible without injuring the lender or in the case of HECMs, FHA net of the insurance premiums and the related earnings it receives.

      If a senior does not need anything close to the gross principal limit AND the actual overall costs of Saver can be reasonably projected to be less than a Standard, then why not take the Saver?

      Its purpose is to reach those seniors who only need an amount much less than the gross principal limit and for them the upfront costs have been a primary barrier. The original idea was to provide the same proceeds, lower the upfront MIP, but increase the ongoing MIP; the idea was to transform all HECMs into that mold. Because of the need to increase the ongoing MIP across the board, proceeds differentials were believed a better solution and have two products rather than one.

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