HUD Slashes Reverse Mortgage Principal Limit Factors

Following the announcement of changes to the Federal Housing Administration’s Home Equity Conversion Mortgage program, the Department of Housing and Urban Development today announced new reverse mortgage principal limit factors to go into effect October 1, 2013.

The new tables have been posted by HUD to reflect a roughly 8% cut in PLFs, according to industry estimates. Compared with 2011 Standard factors, according to estimates from Ibis Software, the reduction is around 15%.

HUD issued two mortgagee letters this week specifying program changes including a shift to one new set of principal limit factors that consolidates the HECM Standard and HECM Saver programs also effective October 1. Borrowers will also be limited in the amount of loan proceeds that can be disbursed at closing or during the initial one-year period after loan closing.

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Additional changes will include a financial assessment of borrowers and set-asides for taxes and insurance payments. Those changes will go into effect January 2014.

“The changes being announced [this week] will realign the HECM program with its original intent which will aid in the restoration of the MMI fund and help ensure the continued availability of this important program,” Federal Housing Commissioner Carol Galante said in announcing the changes. “Our goal here is to make certain our reverse mortgage program is a financially sustainable option for seniors that will allow them to age in place in their own homes.”

View the new PLF table.

Written by Elizabeth Ecker

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  • Elizabeth,

    I believe the effective date for the changes is October 1, 2013, not September 30th as indicated above. The reason for the September 28th date discussion is that for all practical purposes, no case number can be assigned on either September 29th or 30th.

  • I don’t believe the figures are accurate. I ran a side by side comparison of the differences between every single PLF for each age and rate combination. If you average all of the PLF differences from the standard to the new table the resulting number is about 8.80% lower than the current standard table. However, depending on the exact age/rate combination, some differences are higher, some are lower, of course. But I did not see any difference in the PLF tables that reached as high as 15%.

    • Do the math….526/.619 = .8479 or 85 % so 15% reduction. You are looking at absolute percentage point reduction, with is 15% at every level. the base is not 100. It is the percentage point at each level. No wonder we have an issue with people understanding the numbers in this industry. They can’t do basic math. And we think they can do the Financial assessment for the senior population when they can’t do basic arithmetic. Geez.

    • David,

      You are subtracting Standard PLFs from those of the new product. What you need to do to see the actual reduction of principal limits is to divide the difference you calculated by the same Standard PLF you used as your minuend. Then test the result by determining principal limits for a few PLFs, Standard and new, and see if the theory is correct.

      • I hear you and now understand why “15% lower” is being touted. The actual NEW LOAN AMOUNT (principle limit 2013) is 15% lower than the OLD LOAN AMOUNT (principle limit current standard).

        Stating it as above, then, will make for a more dramatic headline. And I suppose it is simpler to use the 15% reduction since the number is consistent across the table.

        However, the reality is we see the new 2013 PLFs are reduced an average of 8.80% (and ranging from 3.3% to 11.6% reductions depending on age/rate combination) from the current standard PLFs.

        I only ‘piped up’ about it because it sounds incorrect, at first blush, when you say 2013 PLFs suffer a 15% reduction from current standard PLFs. My impression is take the current PLF % and then subtract 15% from that to result in the new PLF % – and that, of course is inaccurate.

        So if this is as clear as mud – can we agree on the following:

        The actual difference between 2013 PLFs and current Standard PLFs represented as a percentage of the current Standard PLFs = 15% reduction across the board.

        However the actual difference between 2013 PLFs and current Standard PLFs averages about an 8.80% reduction with a range of reductions between 3.3% to 11.6% depending on the exact age/rate combination.

        (Of course – to my clients I will say, “the new loan amounts are about 15% lower than the old loan amounts.)

      • David,

        Multiply the Standard PLFs by 85% and see if that is not approximately the new product PLFs. That means that if one takes the Standard PLFs and reduces them by 15%, you will end up at the new product PLFs. So are the PLFs of the new product just the Standard PLFs reduced by 15%, you bet.

        You are looking at the difference between the two PLFs, not how they were computed. Try it and see if the new product PLFs are not approximately the Standard PLFs reduced by 15%.

        I do not get where you are coming from.

      • Cynic,

        Where I’m coming from is pretty simple and pretty well explained. Take old PLF and subtract from new PLF. the ACTUAL percent reduction (point for point) averages 8.80 across all PLFs with a range between 3.3 to 11.6. I needed to clarify this because I am not the only person who, at first blush, thought when 15% reduction was touted, that in fact it was a number to be subtracted from the PLF directly (also a percentage number). I understand now what everyone means by a 15% reduction (or better to say new PLFs are 85% of the old PLFs). But like I said, many other intelligent, high producing people understood, at the very first blush before that new PLF table was released, that 15% reduction was taken as PLF% – 15%…not PLF% – PLF%*15%.

      • David,

        Very interesting initial reaction to a 15% reduction. The result you took it for would have far more drastic than it is. I apologize for not getting your point before.

        Perhaps it is best said that the new PLFs are 85% of the existing Standard PLFs so as not to confuse the PLFs being reduced with the PLFs for Savers.

        I have never disagreed with your math, just your logic. Even though I was not one of those who announced the changes, I will remember your concern as I discuss these changes with others.

        I am glad you explained your initial reaction further.

  • Thanks Cynic, you are right and that does make a difference. One day, how important!

    The changes are mind boggling, it will take us all a while to assimilate it all. The good old days, they are gone, we have to adapt or leave the industry to seek our dreams else where.

    I feel as rough as the changes will be to swallow initially, those who hang in there will adjust and go forward as usual.

    True, we will need to start focusing on new markets, go after seniors with more equity in there properties but they are out there.

    I wish after all these changes are implemented that HUD, our Federal Government and the CFPB takes a sabbatical and retreats from change after change, we all need a rest from it, especially our seniors!!!

    John A. Smaldone

      • Haven’t seen it on the ratesheets in a while & from what I gather it was rarely utilized. Rates nearly 9% and LTV in the 25-30% range looks more like hard money (in my opinion). We need more provide products to create competition. True though 🙂

      • allreverse,

        I cannot account for what may or may not be on your rate sheet. You and Raymond need to realize that few, if any lender, will revert to the rates which were effective in late 2006 through early 2008. In those days many lenders were lured into our industry because home appreciation rates were so great in some parts of the country that there seemed to be little likelihood that even with a recession, any lender would lose any money with proprietary reverse mortgages. That concept has now been fully exposed as significantly flawed.

        The Generation interest rates reflect one thing — risk. Without adequate mortgage insurance for lenders, reverse mortgages are a very risky mortgage for lenders and note holders. Looking at home appreciation and risk, the Generation product seems fairly priced even though it may not acceptable to many homeowners.

      • I understand the risks of proprietary quite well. The concept follows the same loses we’re having
        on
        the HECM and many other products that survived the recession. I’m sure
        we can all agree that without competition there’s likely a higher cost
        to the consumer. If values continue to appreciate as we’re seeing in CA
        I’m sure we’ll
        see some proprietary resurface. If not only for values
        stabilizing but for those that don’t fit within the HECM FA…or how
        about when expected rates bring down these PLF’s another 10% you don’t
        see this door opening? I’d make a friendly
        wager

      • allreverse,

        Just remember as the expected rates rise for HECMs, they will rise for proprietary products as well. The result will be lower proceeds for seniors for any reverse mortgage product.

        If PLFs drop “another 10%,” the gross proceeds for proprietary reverse mortgage mortgages will drop proportionately more. It is not what appreciation rates are doing here in California but rather how those rates are perceived in light of risk concerns. There will always be risk “cowboys” out there but will they be the “mushrooms” we saw in 2007 and 2008? Most likely yes!! For all intents and purposes the proprietary products left the market over five years ago. Those who have been burned in the past will not be quick to return as is very clear so far.

        For the last five years we have heard how proprietary products will be here soon. Guess what? Where are they?

        Your friendly wager is so indefinite it reminds me of the following two lines from Somewhere in West Side Story: “Somehow, Some day.” Your offered wager is not worth a response.

  • I love this business, I really do and my initial reaction is of shock. Then I went back and looked at my last 10 transactions and realize 2 of them would not fit into this new version and the other 8 would have cost less for the client. Of the ones in my future pipeline that haven’t made a commitment yet of course this could quickly get them off the fence but over half of them will benefit from lower upfront costs. I’m more concerned about the purchase opportunities I have- its going to cost these folks quite a bit more.

    • wealthone,

      And there is a real question if HECM for Purchase borrowers can take more than 60% of the principal limit unless federal liens are enormous. It simply does not seem like it.

  • Elizabeth Ecker (or what is your new last name),

    I was wrong. You had it right with September 30 the first time. I have never seen HUD do this at the end of a month before. I want to thank Matt Neumeyer for correcting me.

  • I think I’m getting used to change. From the old CMT based HECM 100 to this newest mortgagee letter. We’ve seen many changes to our industry. Change happens… I will have to adapt and make the best of it. Just like I’ve always done.

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