In areas where home values are historically high, some lenders are deeply concerned that if loan limits for reverse mortgages expire as scheduled on September 30, the negative impact on their business will be tremendous.
Raised to $625,500 in 2009 in an effort toward economic stimulus, the FHA-insured loan limit will return to its pre-recession level of $417,000, barring Congressional intervention. In areas where loan limits typically do not exceed the $417,000 level, the change could be negligible.
However, for areas where home values are higher and for lenders who may have a majority of loans above that limit the outcome could be significant.
Looking back to 2009 when the limit was raised, the impact was quick, says John Lunde, president of Reverse Market Insight.
“We saw the average loan amount go up as the loan limit was raised, and in some states, we saw the volume go up,” Lunde says.
For states like California, New York and Washington, D.C., the increase was huge, RMI says.
This year, data shows nearly half of all reverse mortgages endorsed in California and Washington, D.C. are above $417,000, while New York is a close third with more than 42% of its reverse mortgage loans above the former limit. Last year, the loan amounts were comparable for those areas.
If the loan limits fall, Lunde says, California may wind up in similar shape to Florida in terms of volume, and states with the highest proportion of loans above $417,000 will suffer.
Source: Reverse Market Insight
Some reverse mortgage companies in those states are concerned about how a lower limit may affect their business.
“It’s going to have a tremendously negative effect on high value states,” says Michael Fullam, president of California-based Trinity Reverse Mortgage. The economic stimulus initiative behind the limit increase has yet to be achieved, he says. “[HUD is] pulling the plug too early; they’re wanting to pull the plug before things are fixed,” he says.
Greg Shearer, a loan officer for The Senior Equity Group in California, also says a lower loan limit would have a “tremendous effect” on his business, especially as he primarily refinances reverse mortgages for homes valued above $500,000.
“There’s a real urgency right now with my clients,” says Shearer. “These are people with homes valued at $700,000 to $800,000—these are people whose equity plummeted, but by getting a reverse mortgage, they can preserve their stocks and mutual funds.” Shearer says those who are equity rich and cash poor will be hurt the most—people who have invested everything into their properties, but may end up with nothing in return.
Not all states would be negatively affected by a lowered loan limit, however. Even though Florida is the state with the third-highest reverse mortgage endorsement volume, it didn’t experience much of a change when the limit increased, as the average reverse loan amount in the state is $204,800. Similarly, Texas, ranked No. 2 in mortgage endorsement volume, has an average reverse mortgage loan amount of $162,700.
Lenders with generally lower loan amounts don’t see the pending change as being an issue. Jeffrey Bangerter, president of California-based WSB Mortgage Services, says he doesn’t expect his company to be hugely affected by lower loan limits.
“It depends on where you are,” he says. “If you’re in an area where you have high value homes, then you’ll be affected. But there are a lot of homes in California that are under $200,000, so it won’t really make a big difference.”
As for what will happen when and if the loan limit returns to $417,000, or some level beneath $625,500, Fullam says the private sector may be the answer, but it might not be quick enough.
“The only solution would be that other lenders out there would look at this and say, ‘Probably HUD is going to fall on their face again, and they are going to lower it to $417,000,’ and look at that as an opportunity, because they’ve been looking for the opportunity to bring out a jumbo [product],” says Fullam, adding that this still might leave high value states in trouble. “I’m concerned that the proprietary jumbos won’t come back right when they’re needed, so there will be that gap between when they’re offered for states that need them.”
The current ceiling for FHA-insured forward mortgages loans is also expiring, and a recent study from the National Association of Home Builders (NAHB) says this will not bode well for the housing market. The national limit will drop to $625,500; NAHB says that under present law, 8.32 million owner-occupied homes are priced above the existing FHA loan limits, and once the limit drops, 3.87 million more owner-occupied homes will surpass the limit, bringing the total number of homes ineligible for FHA-insured mortgages to 12.2 million.
“The lower limits will place a constraint on home buying in high-cost housing markets, such as those along the coasts and in California. It is the last thing we need in a housing market that is still struggling to get back on its feet,” said NAHB Chairman Bob Nielsen in an NAHB summary of the study.
Written by Alyssa Gerace