Reverse Mortgage Loan Limit Extension Has Regional Impact

Federal Housing Administration (FHA) loans will retain their lending limits through 2013, the Department of Housing and Urban Development (HUD) announced last week. However, the decision to remain at the elevated loan level will mostly effect only those few regions experiencing upticks in home values.

In 2009, the lending limit was raised from $417,000 to $625,500. Representing 150% of the national conforming limit, FHA’s extension has helped many borrowers in high cost areas claim larger amounts from their homes’ equity. 

Benefitting from the extension are those in urban or coastal areas where home prices are high, notes Brian Cook, an advisor from Alpine Mortgage Planning, a division of Pinnacle Capital Mortgage. 

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More impact would be felt by homeowners and lenders alike had FHA decided to lower its lending limit, notes Cook.

“If FHA lowered the lending limit, it would have a huge effect on homeowners that could qualify,” said Cook. “it would have taken a sector of borrowers, senior homeowners that might not be able to qualify for a percentage of their equity that they would have before.”

The effects would greatly impact somewhere like California, says Cook, who is based in the Seattle area, where a large portion of the state has high home values relative to the rest of the United States. 

The same goes for the coast, believes Mike Gruley, director of reverse mortgagee operations at 1st Financial Reverse Mortgages. 

Citing a higher maximum claim amount (MCA), particularly in California, Gruley is certain that FHA’s decision is more likely to affect people there as opposed to Michigan, where the the average MCA is around $170,000-$200,000.

“I could probably count on one hand how many loans we do that are over $625,000,” said Gruley. “It is not often.”

Also doing business in South Carolina and Florida, Gruley believes that FHA’s loan limit extension will have some effect, though probably not immense, but more so than Michigan. 

Hypothetically speaking, if FHA were to lower lending limits for next year, it would make waves for several coastal states, such as Hawaii, Washington D.C.. California, New York and Massachusetts, all of which  would see volume percentage impacts ranging from 20%-70%, according John Lunde, president of Reverse Market insight.

Written by Jason Oliva

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  • It was very surprising HUD kept the higher lending limit as is.  Over the years cushion has been disappearing.  Cushion is the difference between the average appraised value and the average maximum claim amount. 

    Of course, a higher percentage of higher valued homes have also maintained their values or recovered their values faster than lower valued homes.   

    • Based on historical performance, higher home value HECMs have generally performed better from a risk and default perspective, particularly T&I defaults.  So while it might seem riskier to maintain higher loan limits, it’s likely that reducing the limits might have hurt FHA’s insurance book rather than helped it.

  • John,

    Foreclosing now versus foreclosing when losses could be substantially larger in the future could save FHA as well!!! There is an old saying that goes:  “Your first loss is your best loss!”

    Not all T & I related foreclosures will end in loss to anyone other than the homeowner even if the balance due is greater than the value of the home.  Reimbursement will generally be required in such cases but loss is a function of MIP revenues related to the HECM being lower than the reimbursement.  Foreclosure loss and T & I defaults are separate issues although they may intersect and share a high percentage of HECMs in T & I default.

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