Lower HECM Loan Limit May Have “Tremendous” Effect on Some Lenders

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.

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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.

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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

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  • There is much in this article that is very difficult to swallow.
     
    John Lunde is right on point and the tone of the overall concept in the article is right on point but the rest of the article is odd at best.
     
    First, what can HUD do to keep the $625,500 lending limit?  That is a matter of law.  Too many times we hear HUD blamed for what is not their fault.  Oh, HUD has faults but crediting HUD with supporting a single national $625,500 HECM lending limit or blaming them for losing it is not among them.
     
    Then there is the ridiculous statement that seniors with homes worth $700K to $800K have watched their equities plummet and somehow a mortgage is going to preserve of all things – equity.  How in the world does that work?  Both lower home values and debt reduce equity.  This only underscores how confused even the most experienced in the industry are when it comes to the subject of equity.  They really do not get it.  Worse they believe they are right.
     
    In late 2008 the market was clear of any proprietary product when the lending limit had just been implemented at $417K.  The plummet in the availability of the proprietary products occurred long before the $417K lending limit was passed in HERA.  With home values much lower than in mid 2008 and home values not rising, what lender is crazy enough to enter the market with a proprietary product and if they do how long will they remain unless home values start moving up?  There are no white knights when home values are not rising.

  • A lower Lending Limit and a (much needed) financial qualifier for T&I will both have a downward effect on HECM volumes.  Many people with home values over a lower Lending Limit will still obtain HECMs, so the net effect that these changes will have on volumes is difficult to gauge.

    It will be interesting to see if the financial markets are ready for a proprietary product given the continued uncertainty about the direction and rate of change of home values.   The financial markets are surely watching the HECM T&I default issue closely as well.

  • A lower Lending Limit and a (much needed) financial qualifier for T&I will both have a downward effect on HECM volumes.  Many people with home values over a lower Lending Limit will still obtain HECMs, so the net effect that these changes will have on volumes is difficult to gauge.

    It will be interesting to see if the financial markets are ready for a proprietary product given the continued uncertainty about the direction and rate of change of home values.   The financial markets are surely watching the HECM T&I default issue closely as well.

    • Please read ML 2008-35 and 2008-36 for HUD’s interpretation of the lending limit under HERA.  Guam, the Virgin Islands, Alaska, and Hawaii are subject to a graduated lending limit of up to $625,500.  As of November 2008, only 4 areas in Hawaii had lending limits exceeding $417,000. 

  •  They need to raise max to 729k and lower Total Principal Limit that would be best Risk Management because if Total Principal Limit is too high any value 417k 317k 217k would be bad risk……….its the Total Principal Limit not home value

    • Tom,

      But FHA is not in the risk management business.  Their purpose is to insure loans so that lenders can provide a meaningful reverse mortgage to seniors with lower valued homes on an overall no gain or loss basis to FHA.  FHA uses risk management to ascertain how to structure the program accordingly.

      While your concept is correct it is not the mission of HUD either from a legal standpoint or as a practical matter.  HUD is not permitted to do as you suggest.  Only enactment of a new law allowing a lending limit of that magnitude will permit FHA to do as your suggesting.

  • Ok…At least I got the concept correct..and I never said HUD or FHA…
    They need to raise max to 729k and lower Total Principal Limit and I lived in Hawaii 14 years so if one of the areas is HONOLULU ,thats all we need to know

  • Ok…At least I got the concept correct..and I never said HUD or FHA…
    They need to raise max to 729k and lower Total Principal Limit and I lived in Hawaii 14 years so if one of the areas is HONOLULU ,thats all we need to know

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