FHA Wants to Reduce Market Share: The Impact on Reverse Mortgages

During testimony before the House subcommittee last week, David Stevens, FHA Commissioner, said bringing private capital back into the mortgage markets is a critical component to further recovery of the broader economy.

“This administration believes that the current level of government support for housing finance is unsustainable and unacceptable for the permanent state of this market because it exposes taxpayers to far too much risk,” said Stevens during the testimony.

The reliance on government-assisted financing couldn’t be greater. Fannie Mae, Freddie Mac, FHA and Ginnie Mae collectively insure or guarantee more than nine out of every 10 new mortgages. “We do not want FHA to have such a substantial share of the market—and we are very aware of the risks this elevated role poses,” said Stevens.

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Rather than support the entire mortgage marketplace, Stevens said FHA aims to bring back its traditional role as a targeted provider of mortgage credit for underserved low and moderate-income Americans and first-time homeowners. “We will shrink the government’s oversized footprint in housing finance and help bring back private capital to the mortgage market. Central to this effort is winding down Fannie Mae and Freddie Mac at a deliberate pace that doesn’t pose further risk to taxpayers, jeopardize recovery in the housing market, or constrain families’ access to mortgage credit,” said Stevens.

Fannie Mae’s role in the reverse mortgage business has already been greatly reduced. The GSE’s market share of purchasing HECM loans fell below 1% in the third quarter of 2010, down from 90% during the first quarter of 2009. The initial pullback caused some pricing problems, but in the long run, the growth of Ginnie Mae’s HMBS program has brought lower costs to consumers and has been a boost for the industry. The last connection to Fannie Mae is its reverse mortgage portfolio, which totaled $50.8 billion as of September 30, 2010.

If FHA decided to shrink its share of the reverse mortgage market, it would be significant. Today, analysts estimate the agency insures 99% all reverse mortgages closed. When RMD asked whether FHA’s decision play a smaller role in the overall mortgage market would impact the HECM program, a spokesperson for the agency declined to comment. If Congress follows the request of FHA to let the higher loan limits expire on October 1, 2011, it could help bring proprietary products back and slowly start to lower FHA’s reverse mortgage market share.

Proprietary products or jumbo reverse mortgages previously met the needs of borrowers with higher home values, but disappeared when the housing market collapsed. Temporarily, FHA stepped in and raised the loan limits to $625,500 for the HECM program. Since then, FHA’s share of HECM endorsements with loan amounts over $417,000 has grown to 18.5% of volume in 2010 according to data form Reverse Market Insight.

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By letting the loan limits fall from $625,500 back to $417,000, FHA could tempt lenders to re-introduce jumbo products. But the reality is that even with higher loan limits, Generation Mortgage released the first jumbo product last year. The product caters to borrowers with homes worth more than $1 million and signals that lower loan limits might not be necessary.

Most would agree that lowering the loan limits is a step in the right direction, but Michael McCully, partner at New View Advisors, told RMD it will take more than lower limits to get the private market moving again.

“There’s sufficient regulatory uncertainty in the markets, both prospectively and with current modification/foreclosure changes to prevent a robust market returning anytime soon,” said McCully.  Tough underwriting standards and investor requirements are also being challenged by the low interest rate environment and pose a threat to private products returning, he said.

In addition, uncertainty over home prices are keeping lenders on the sidelines. “Strong empirical data supporting widespread and consistent nationwide home price appreciation will go a long way to restart the mortgage markets,” said McCully.

According our sources in Washington, D.C., seeing lower loan limits come back to $417,000 is a possibility and reverse mortgage lenders are looking at the opportunity to re-introduce jumbo products.

“Our clients have been actively assessing how a reduction in lending limits to $417,000 would impact HECM volumes and their ability to offer proprietary products,” said John Lunde, president of Reverse Market Insight. “Releasing a jumbo is the obvious first reaction to a HECM loan limit reduction, but the 417-625 crowd wouldn’t likely see any benefit because of the lower LTVs associated with private products.”

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  • This is absolutely true: “the 417-625 crowd wouldn’t likely see any benefit because of the lower LTVs associated with private products.”

    When we did have jumbo’s I would always apologize to those clients who had home values between 450K and 900K. There was not a product available for them…wishful thinking would be maybe some lender out there realizes this was the case. Although, I am sure there is greater risk than those with million dollar homes.

  • 2545 does not quite have all of his facts right.

    For years the industry did have the Home Keeper, a “proprietary” product created by Fannie Mae which did help a number of homeowners who had home values up to $417,000 (its comparable lending limit) when HECM lending limits in all counties were lower and in many areas much lower. However, the principal limit to value ratio was much lower than for HECMs and the Home Keeper margin component on their adjustable interest rate was significantly higher. It had no mortgage insurance premiums but the program terminated for all new originations on December 31, 2008.

    It was only after the home market had gone through almost of its value increases that the first major competitor to the Financial Freedom proprietary product entered the scene. Shortly thereafter several companies came into the market and there seemed to be no end in sight of new proprietary products. That was late 2006 and most of 2007.

    In the current market who has the nerve to introduce a new proprietary product. It is silly to talk about proprietary products magically reappearing if HUD simply resets the lending limit at $417,000. Unless home value increases support the risk, no proprietary lender in their right mind wants to enter into this market unless they follow the pattern of Generation and since there is not much of a market for the Generation product, why would they?

    Some have talked about private insurance, etc. Right now it is highly unlikely any insurer would want to back proprietary reverse mortgages. Insurers are somewhat risk tolerant but the premiums on proprietary reverse mortgages right now could only be astronomical. More proprietary products right now does not seem feasible.

    • The Critic,
      Which facts do you believe I do not have? That the fannie Mae “homekeeper” was a proprietary product?
      You are crazy if you thought this was a great product for homes valued between 417K – 900K! I would love to see the numbers of Homekeepers funded during that time period. I believe the Homekeeper went away because their was NO volume. Which would further validate my point that the homekeeper was useless. Although, I do remember doing a few I believe because they had much easier condo requirements.
      I would venture to guess the Homekeeper was a better product outside of California because we often had the higher lending limits. But again I believe you are in California and can’t believe you were blowing the “homekeeper” out to all this forgotten home value population (417K – 900K). If you did do a lot…you were the only one.

      • 2545,

        Your reply is odd. Here is what you wrote: “When we did have jumbo’s I would always apologize to those clients who had home values between 450K and 900K. There was not a product available for them…wishful thinking would be maybe some lender out there realizes this was the case.”

        Financial Freedom had a “jumbo” proprietary reverse mortgage long before the HECM lending limit ever approached $417,000 (except in high cost areas outside of the contiguous US states). Many times, HomeKeepers provided more proceeds than HECMs when lending limits were County based and had ridiculously low lending limits. I guess your history in the industry is post 2005 or most likely post 2006.

        HECMs with a national lending limit of $417K were only in competition with HomeKeepers for two months in 2008. That is it. Carry on from there.

      • Sure FF had a jumbo propriety product but it did not benefit the clients with mid-range home values. Just like the above article says “the 417-625 crowd wouldn’t likely see any benefit because of the lower LTVs associated with private products.” Yes, it got them some $$ but not anything significant. No product served this client…not even the Homekeeper. Although you are trying to pretend like it was a great often used product. The Homekeeper was a joke really. The margins were through the roof and the funds available were very, very low.
        Yes, I would feel sorry for these clients in the past and will feel the same unless something unforeseen happens.

  • The information above is very helpful. However, it does not answer the basic question of how many of those who were able to take advantage of the lending limit while it has been above $417,000 would have obtained a HECM so if the lending limit had been in fact $417,000 at the time their loans closed. It is doubtful if endorsement volume would have dropped by 18% in the last twenty-four months.

    For example, one senior we originated a HECM for in 2009 had a home valued at over $900K. Yet all he needed was half of the available principal limit. Despite our concerns and those of the counselor, he selected a fixed rate HECM because he was afraid of what might happen to the adjustable rate. Even though he was a moderately successful fiction writer, he had a relatively poor record as an investor. He told us not to worry that he could invest the cash effectively and get a return greater than the interest cost accruing on the cash he was investing. Would this man have gotten a HECM at the $417K lending limit? There is little doubt he would have.

    Of course others have needed every dime which was available to them plus some. So again what percentage would the endorsement volume have dropped over the last 24 months if the lending limit had been $417K?

    While percentages have their place, in terms of volume, HECMs have decreased over the last two years, not increased. HUD believes volume will all but be flat over the next 20 months, if not longer. Is there any real need to lower lending limits? Yes, risk would go down but so would needed help for many seniors. This is not the forward market where there is a proven history of lenders creating mortgages in the FHA space. As to HECMs, that is very, very doubtful.

  • What IF a lender came back out with a proprietary RM that offered a higher principle limit but ALSO came with no MIP BUT had an equity share feature along with no recourse. Is that on the horizon and I can’t say myself if that would be damaging to the integrity of the product.

    • Just the term “equity share” has the ring of a scam or rip off in most people’s eyes. I’m not saying that they are the scourge of the earth, but they carry with them a stigma of impropriety.

    • wealthone,

      Huh?

      How in this home appreciation market could that work?

      Until home appreciation can support the accrual of interest on the reverse mortgage, there is little way for the principal limit factors on any product to be higher than HECMs, unless they have insurance equivalent to that of FHA and that would cost more than MIP.

  • Reducing the limit back to $417,000 would greatly heard states like Califorina where even with the decline in home properties there is still major percentage of homes with a value of over $500,000. Is there any chance that Ca would stay at $625,500?

      • 2545,

        Your beliefs are just that. It is the interpretation of HUD which matters.

        There were long disagreements on RMD over the interpretation of HUD between July 31, 2008 and November 6, 2008. Even HUD was somewhat divided on the issue.

        Mortgagee Letter 2008-35 answers your questions. I guess you never read HERA or had much involvement in the industry until after late 2008.

        HUD made it clear before ARRA that the only high cost areas as the HERA national lending limit were those outside of the continguous US states. Many disagreed with their interpretation of the law to no avail.

  • I sincerely hope FHA does not go the rout it alluding to go in. We have enough hurdles to overcome, the timing is wrong. It sounds like the main concern with this administration is to put the emphasis on the young and shy away from helping our seniors,

    The critic is right, the industry had the Home Keeper, a “proprietary” product created by Fannie Mae which did help a number of homeowners who had home values up to $417,000 (its comparable lending limit).

    However, as the critic had stated, the principal limit to value ratio was much lower than HECM’s and the Home Keeper margin component on their adjustable interest rate was significantly higher. It had no mortgage insurance premiums tied to it but the program terminated for all new originations on December 31, 2008.

    A proprietary program makes no sense at this time. We need the HECM and we need to retain the $625,500 max limit.

    All of us in the reverse mortgage industry are trying to cope with all that has hit us square in the face. We have to contend with the SAFE act, the new comp program, the new GFE requirements, states implementing new regulations against us, new products on the market, lower actuary calculations for the principle limit amount and I could go on and on!

    This is the last burden we need perpetrated on this industry. It has come to be darn right exhausting and discouraging. Look at what our seniors are going through. I for one is very unhappy with what is being proposed.

    John A. Smaldone

  • Although I have not done a detailed analysis, my estimation is that the reduction to $417,000, along with some income/credit underwriting component (good idea from a risk management perspective), will reduce overal RM volumes by over 20%, and have the greatest impact in states like CA where home values are high. Jumbo programs will not make a significant impact on the lost volume any time soon due to their lower advance rates and likely higher interest rates (although their volume may be high enough to warrant their existence).

    • I agree Lance that volumes will be down when the changes take place(as if we don’t all think volume is already down!). We are going to continue to see lenders/brokers and originators leave the market.

    • Lance,

      The percentage John Lunde presents is no doubt correct. Since less than 20% of HECMs have MCAs exceeding $417,000, I do not understand why the reduction in volume nationally would exceed 20%. In fact, it is my belief, the volume would shrink by perhaps less than 10% although the volume in MSAs like San Francisco, San Jose, Los Angeles, parts of Orange County, CA and San Diego could see reductions of over 25%.

      Until sustainable home appreciation returns to higher valued homes, it is doubtful if there will be any significant activity in proprietary reverse mortgages.

      Sincerely,

      The_Critic (who you refer to as Zorro)

  • The decision of where to set HECM loan limits will be made by Congress, not HUD. They are set by statute. Of course, HUD has a voice in the process and will indeed make its position known, but in the end it will be decided by the House and Senate that ultimately make this decision.

    • Peter,

      As I understand the issue, the $625,500 is scheduled to terminate on 9/30/2011. Is that correct?

      What interest is there in Congress to see the HECM lending limit extended? Surely those in Congress from states with higher property values would support the extension?

  • >>and since there is not much of a market for the Generation product, why would they?

    I disagree. Nearly everyday I talk to homeowners across the country who are very interested in a Jumbo solution. From my perspective, there’s a large market for Jumbo programs.

    • Raymond,

      Many more 62 year olds would get HECMs if PLFs were 175% as well. BUT that ain’t goin’ to happen.

      People like to talk.

      Generation is there and waiting for all of this business you have in hand. How many of these people who have expressed an interest in “Jumbos” are getting the Generation product? Remember the only “Jumbo solution” there is, is the one we have today. Who knows when and if it will change for the better? Or worse once in place simply disappear again.

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