FHA to Halt Fixed Rate Standard Reverse Mortgage Starting April 1

The Federal Housing Administration today announced changes to is Home Equity Conversion Mortgage reverse mortgage program in an effort to limit risk to the agency’s finances. Among the changes comes the consolidation of its Standard Fixed-Rate Home Equity Conversion Mortgage (HECM) and Saver Fixed Rate HECM pricing options.

The change will be effective for case numbers assigned on or after April 1, 2013.

The new program requirements will be made in an effort shift the large majority of fixed rate reverse mortgage loans taken under the Standard program, which has caused stress to the FHA’s mortgage insurance fund, the agency said.

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“These are essential and appropriate measures to manage and protect FHA’s single-family insurance programs” said FHA Commissioner Carol Galante. “In addition to protecting the MMI Fund, these changes will encourage the return of private capital to the housing market, and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American homebuyers.”

Outlined in Mortgagee Letter 2013-01, the change will apply to case numbers assigned prior to April 1 for loans closed on or before July 1, 2013.

“To help sustain the program as a viable financial resource for aging homeowners, the HECM Fixed Rate Saver will be the only pricing option available to borrowers who seek a fixed interest rate mortgage,” FHA stated. “Using the HECM Fixed Rate Saver for fixed rate mortgages will significantly lower the borrower’s upfront closing costs while permitting a smaller pay out than the HECM Fixed Rate Standard product, thereby reducing risks to the Mutual Mortgage Insurance Fund.”

Galante first announced the intent behind the program shift in December through a letter to Senator Bob Corker (R-Tenn.). The Senator raised criticism over the FHA’s financial status in a congressional hearing following an audit of the FHA’s financial position in late 2012.

In the announcement, FHA also stated it will be making additional changes to its insurance programs in the coming days and weeks to further protect its MMI fund. Those changes are expected to include raising mortgage insurance premiums for forward loans, requiring additional underwriting standards for certain forward borrower profiles and raising downpayments for certain loans, among other changes.

View Mortgagee Letter 2013-01.

Written by Elizabeth Ecker

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  • We will probably be seeing fixed rate standards being endorsed as late as September 30, 2013 as a result.

    What a shame!! Unless HUD can obtain additional funding before October 1, 2013 for the HECM program, the cumulative net loss position of the HECM portion of MMI Fund could be worse than $2.8 billion.as of the end of this fiscal year.

    Let us hope that the price increases on the appreciation home front will be able to more than offset any additional loss projections and result in a trimming of the $2.8 billion net loss position.

  • On the qualification & set-aside/escrow requirements, are they just kicking the can down the road? I was hoping they would address all of this at one time.

    • Mr. Neumeyer,

      FHA has stated at several times believes that any significant financial assessment change must be addressed through the regulatory channel, not as Mortgagee Letters. My understanding is they take the same position on set asides for taxes and insurance.

      Most knowledgeable observers talk about a one year period to implement once the final proposals have been published requesting public response. Some do not expect to see implementation until mid to late 2014.

  • Bob Corker received other alternatives that would have solved the problems but none of those suggestions or alternatives were used.

    The saver has been an unsuccessful program up till now, why should it be so attractive down the road? The problem is the amount of money available for the senior through the saver. It will not help the borrower who is needing a maximum amount to accomplish goals of paying off their existing loan, debts, buy a new car ETC.

    If we look at what the saver was originally designed for and sell the program based on that, volume can pick up on the product. On the other hand from a loan originators stand point and the company they work for is the revenue that can be generated from the saver. Historically the product produced very little revenue in comparison.

    Time will tell what the secondary markets will do and where the gain on sale premiums will wind up?

    John A. Smaldone

    • Hi John,

      Since Senator Corker was not the party making the decision, all he had was the influence of one Senator. This was the decision of the new FHA Commissioner.

      The concern should never have been about the senior but rather having a viable program. It would have been far better if the fixed rate Standard had been replaced by a hybrid back in 2007. It is very doubtful if the net loss position would have been anything near $2.8 billion or the overall problem estimated at about $6 billion.

      Avoiding the difficulties of generating a hybrid and allowing the fixed rate Standards to continue substantially unchanged for so long has resulted in the termination of the latter.

      Based on all available options, this still seems the best. Of course, it was also the only one taken by the Commissioner.

      • Jim,

        I don’t disagree with you but Bob Corker could have had more of an influence on the new FHA commissioner to go in a different direction.

        I know Bob Corker and sent him alternative plans to look at but to no avail. Don’t get me wrong, I have a lot of respect for the senator, I worked on his behalf as a 3 county coordinator during his reelection bid.

        However, I am not pleased with certain positions he has taken lately, especially on this issue.

        Thanks Jim,

        John A. Smaldone

  • Bob Corker received other alternatives that would have solved the problems but none of those suggestions or alternatives were used.

    The saver has not been an unsuccessful program up till now, why should it be so attractive down the road? The problem is the amount available through the saver. It will not help the borrower who is needing a maximum amount to accomplish goals of paying off their existing loan, debts, buy a new car ETC.

    If we look at what the saver was originally designed for and sell the program based on that, volume can pick up on the product. On the other hand from a loan originators stand point and the company they work for is the revenue that can be generated from the saver. Historically the product produced very little revenue in comparison.

    Time will tell what the secondary markets will do and where the gain on sale premiums will wind up?

    John A. Smaldone

  • I’m not so sure that removing the reverse mortgage most likely to trigger HUD MMI claims from the marketplace will necessesarily encourage private capital to automatically return and buy closed loans. This step would lower the risk to the MMI, but also lower the return for the investors if adjustable rates stay low and require longer to get more Fixed Savers to fill the securitized pools.
    If these circumstances hold, does it really change the risk:return ratio for anybody but HUD?

    • Mr. Peters,

      That is exactly the expected result.

      What actually was predicted to happen is that if on 9/30/2012 FHA had shut down the HECM program, the current net cost of that shut down to the US taxpayer for just the HECM portion of the MMI Fund would have been $2.8 billion (on a discounted cash flow basis) beyond the over $2.2 billion already reallocated from the capital reserve portion of the MMI Fund.

      The economic result is that $5 billion would be transferred from the US Treasury to pay for losses, a good deal of which resulted due in part to origination revenues.

      Then there is the argument that the risk for lenders will be reduced due to a much higher percentage of available lines of credit which can be used to pay for property charge payment defaults.

      • Hi Jim,
        I agree, I was just wondering out loud about the probability that the Secretary’s remarks about this step stimulating private investment would actually have any effect on the secondary market.

      • Mr. Peters,

        You are very kind to the Secretary. His words did inspire the thought of will this “have any effect.”

      • Mr. Mastromatto,

        Perhaps you can point out one single instance where the LIBOR rate was substantially above market. You are right; the LIBOR rate system could have been abusive but it has been very close to other rates since its inception.

        Most knowledgeable financial professionals have known about how LIBOR rates are computed for years. That is not to say some of us were not surprised when we heard about it the first time but the flawed system worked reasonably well for years. As the old saying goes, it was one of the worst kept secrets about LIBOR.

      • Give me a break …a scam is a scam …a market is a market and a 5 to 10 year scam in
        Libor Market is a form of Organized Crime..
        White Collar Crime.An estimated $1.5 trillion was stolen from customers…$800 trillion worth of securities

      • Mr. Mastromatto,

        (This is reply to your 2/3/2013 response)

        LIBOR is an index and nothing more. It is regulated by the participating banks and was known for years to allow various rates including average, offered, bid, and other basis used by participating banks to report. That was why it was so shocking to see it treated as if it was a reliable index for use in mortgages, directives, and other financial products.

        This is hardly a 5 to 10 year issue. How you view this issue and how international financiers view it are quite different. Full disclosure and transparency would have been nice but that was not the case. Market manipulation outside the US is not uncommon; that is what makes CMT so attractive.

  • This decision was not only made by people that are incredibly shortsighted but even worse also by people who don’t seem to understand how the program works, specifically as it relates to the Principal Limit/Credit Line Growth rate.

    If interest rates stay where they are now, this might work out. But if they return to 2007 levels, this is a nightmare. And with the credit line growth rate, it doesn’t matter whether they take a full draw now, or eventually exhaust it over time, they will still owe the same amount in the future. And if that’s at an adjustable rate of 8% where rates were 5 years ago, when it could have been fixed at 4% or 5%, the damage this “solution” causes to the MMI fund could be insurmountable

    It’s a shame that something like further lowering the the PLF floor, that actually could have made a difference, wasn’t implemented. Instead we just got a ticking time bomb.

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