[Poll] How Much Will New Reverse Mortgage Changes Impact Your Volume?

Recently announced changes to the Home Equity Conversion Mortgage (HECM) program will be impactful on the reverse mortgage industry, according to Charles Coulter, assistant secretary for single family housing at the Department for Housing and Urban Development (HUD).

During a teleconference Friday, HUD officials gave an overview of new changes to its HECM program, which include a consolidation of the HECM Saver and Standard products, lower disbursements for borrowers, reductions in principal limit factors of up to 15%, among other substantial program changes. 

As these changes from HUD are the most recent modifications to the federal reverse mortgage program since the suspension of the HECM Standard fixed-rate product in April, RMD is reaching out to the industry to gain insight as to how these newly announced program changes look to impact volumes moving forward.

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  • In 16 years as a RM specialist I have closed around 1000 HECMs. I suspect around 50% of those would not qualify under the new rules. The reverse mortgage will appeal to a new group of potential borrowers because it’s possible to negotiate a loan at a much lower cost (assuming less than 60% is needed). That’s good, but we have effectively turned our backs on a segment of seniors who need the loan (not just want it). Does anyone see the irony here? The government has excluded those who may not be able to pay the back breaking property tax bill on the fixed income they were expecting to take care of them in their golden years (which they paid for all throughout their working years…while building this country) Certainly something to reflect on, don’t you think?

    • Mr. Gilmour,

      HUD, itself, has now projected that HECMs endorsed over the last five years will not have met its capital reserve requirements by almost $10 billion. The HECM program is not only expected to result in no losses but it is also expected to contribute at least to the minimum capital reserve requirements.

      So should that group of seniors who will be cut off from HECMs be helped in some way? That must be looked at in the larger scope of things. Few of us object to a government program which is self-sustaining even if the general, administrative, operating, and “marketing” costs of providing the insurance is covered by US taxpayers as it is with the HECM program. But why should taxpayers pay for HECM losses? The HECM program is not a social welfare program.

      The cutoff group of seniors all own homes. So what we have are a group of needy seniors who would like to retain their homes but simply have no way of doing it without a significant government handout. Is their need greater than seniors without homes or those who were not born in the so called “greatest generation” or those whom you imply did not build this nation? Be careful how you answer this question.

      The HECM program should never have accommodated the segment of seniors you mention; that was a huge mistake. But I am not so sure if your anecdotal 50% is the objective percentage for the industry as a whole. In fact that 50% is most likely 25%, if not lower, for the overall industry.

      (The opinions expressed are not necessarily those of RMS or its affiliates.)

      • HUD already is the purveyor of a massive social welfare system…it’s called section 8. In that program, HUD pays the rent for, in many cases, able adults in their working years. I’m not a big fan of social welfare any more than you but, seniors by virtue of the fact that the human body cannot labor forever have a unique need for a helping hand. Their need is not met by simply turning off the tap and leaving them to fend for themselves.

      • Mr. Gilmour,

        Surely you are not saying Section 8 agreements are insured mortgages. How is it that FHA is involved in Section 8? Are you saying that FHA insurance covers it as well? Can a Section 8 contract be “sold” through GNMA (another specific branch of HUD) like a HECM?

        While Section 8 is connected to HUD it is not connected to either FHA or GNMA. HECMs and Section 8 agreements have no commonality other than they are both under one department of the federal government, HUD.

        In plain English, Section 8 is a social welfare at its roots; HECMs are not. Both are overseen by HUD but neither FHA nor GNMA have any involvement in the administration of Section 8.

        It seems you are only a fan of social welfare when you agree with it. If you want HECMs to include a social welfare aspect, then get the law changed; however, until you do, a social welfare aspect neither adds to the program stability or fiscal soundness. Until that change comes HUD and FHA need to get back to basics and run the HECM program as it was legislated to be run.

    • This is not a loan with a lower cost. The new HECM is essentially a saver loan with higher cost (0.5 MIP) if someone borrows less than 60% or a loan with much higher costs (2.5 MIP) if greater than 60% is borrowed.

      A new poll should be done asking the projected effect of the financial assessment. MetLife would probably vote 100% loss of business.

      • True, but given that this is the hand we’re dealt, some will see it as slightly better than a saver because it yields more dollars than the saver at a lower cost than the standard. The glass is half full idea.

  • Sorry I didn’t get to add my vote – but after looking at my production from 6/2011 until 7/2012 – Between 50-55% of my clients would have been faced with a “cut” initial draw. And 20-23% of my clients would be “dead in the water” due to cash shortfall from the loan amount vs. required debt payoffs. (This doesn’t even consider the new 60% cap rule yet).

    Now that’s based on Expected Rates being AT or BELOW the floor. Take our current expected rate environment (as of today) those same clients would see between 53-56% “cut” initial draw and 23-27% would be “dead in the water” due to cash shortfall from loan amount vs. required debt payoffs. (Again – not even considering 60% cap rule yet.)

    And the expected rates will continue to get worse considering no more “Quantitative Easing.” Now, perhaps, is a good time to wrap up what you can and then move back to forward? (Perhaps with HECM as an added offering?) I’m just not so sure how survival on strictly HECM will work with these types of numbers.

    From the originator standpoint (and the poll agrees) there will be about 25% less production just purely on required loan amounts. (Pay cut one) Then there will be lower average loan amounts (initial draws – not yet considering the new withdrawal cap) by about 10-13%. (Pay cut two) Then there will be additional lower initial draws allowed due to new 60% cap rule. (Pay cut three) Then there will be a portion of prospects eliminated by Financial Assessment. (Pay cut four) The Expected Rates are increasing at breakneck speed, significantly reducing Principle Limit loan amounts. (Pay cut five) And finally (this yet to be seen) most likely a cut in the investor’s payout of UPB. (Pay cut six).

    And the cuts from EACH of those six categories above is not insignificant. You know, like a few dollars here, a few dollars there, but LARGE cuts in each category that all add up to….unsustainable to be solely dedicated to this one product?

    How about your thoughts?

      • Raymond,

        Just the opposite would be for the secondary market to increase premiums, not keep them the same. If one takes average premiums in 2013, it is very unlikely we will see premiums of that size. There were a substantial number of fixed rate Standards closed in 2013 with much higher premiums than we will see in 2014. What most of us expect are premiums closer to Savers.

      • Raymond – looks like I was right. As expected – pay cut #6. I am seeing between 25% and 55% cut in premium payout depending on the margin you’re selling. (And if you’re trying to get client a max loan amount – offering the lower margins – you are taking that 55% cut in premium!)

        Happy to say that paycut #5 above (expected rates) have seen a DRAMATIC turn around with helicopter Ben firing up the chopper fresh with a new bag load of Benjamins to drop on all the good little boys and girls of the world.)

        But to replace paycut #5 I failed to mention the skyrocketing costs of marketing because now marketers will have to weed through THAT many more prospects to find those who have enough equity and/or think the new lower payouts are with the costs/hassle.

    • David,

      So what is so unexpected about your idea of pay cuts? There is nothing new in the information just a list of rehashed information. While it is good idea to present them, there is little profit dwelling on the items themselves rather than how to overcome them.

      What you do not discuss is the transitional cost of reaching out to a different segment of seniors. As we all know financial planners are not just waiting by their calls for us to call them. It will take a lot of work to open up the segment of seniors who have asset managers, financial advisors, and financial planners. So first there is the challenge of reaching financial planners and then there is the hurdle of getting the seniors they recommend to see the need as well.

  • More than half of the loans I’ve done in 2013 couldn’t be done under the new program rules. Taking the need driven borrowers out of the market will significantly hurt the business, making for Slim Pickens next year. I expect a bigger drop in volume than what we recently experienced with the elimination of the standard fixed rate product. Combining the 15% drop in principal limit with interest rates rising above the 5.06% floor will probably translate to about a 20% overall reduction for most borrowers (unless we can get lenders to offer lower margin products to keep us below the floor). I also expect lower profitability per loan, so my volume has to increase next year in a declining market. For those who expect to be saved by getting increased referrals from financial planners, I personally haven’t had much success in that area and and I certainly don’t expect it to improve with the new rules.
    On the positive side, HUD didn’t just cancel the entire program, so I’m still in business. I also look forward to the combination of lower volume and lower profitability per loan resulting in a reduction in the number of lenders and originators next year.

    • mrreverse,

      2014 will be a hard transition. But revenues per loan were much lower in 2008 and most of 2009.

      Lower revenues per funded loan will force the industry to do what its originators have been reluctant to do, reach out to the broader senior market.

      Your general outlook does not seem that far off.

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