In its announcement of long-anticipated changes to the Home Equity Conversion Mortgage program, the Department of Housing and Urban Development has stated its initiative to shore up its insurance fund and make reverse mortgages safer for borrowers.
Short term, estimates that reduce the amount borrowers can access by around 15% as well as a financial assessment overlay that will restrict access to some senior homeowners have raised serious concerns among lenders with respect to the future of the program and the “new” future borrower.
Anecdotally, originators say two in 10 past borrowers won’t qualify under the new restrictions.
But others are opting to look for the bright side of the changes, namely strengthening the program, eliminating headline risk and accomplishing what the Federal Housing Administration set out to achieve—making the program safer for borrowers as well as the FHA’s insurance fund.
The good news
With FHA having long talked about the program changes, the potential for paving a new path for the loans both within the industry and among members of the press is seen as one upside to the changes.
“These changes mitigate a lot of potential headline risk issues market participants have been concerned about,” says Darren Stumberger, managing director of mortgage trading for Stifel & Co. “These changes lay the groundwork for a healthier, more sustainable program.”
The industry has struggled long with negative headlines having to do with non-borrowing spouse issues as well as more recently, headlines surrounding a near billion-dollar shortfall to FHA’s insurance fund that would require a first-ever bailout of the agency to cover the projected losses.
“Particularly as they relate to non-borrowing spouses and originator steering, the changes will help to combat misunderstandings,” Stumberger says.
In addition, newer market participants are seeing the time of change as an opportunity. Recent entrant Reverse Mortgage Funding, led by a team of former MetLife executives and former Senior Lending Network President David Peskin, says it is seeking growth through the program change.
“We believe this is a great time to be entering the reverse mortgage space,” Peskin told RMD. “It is evident that FHA is taking a long term view on this product and these changes should help investors be aware that this product is here to stay.”
While the reduction in principal limit factors announced by HUD this week stands to lower the amount that borrowers can receive by approximately 15% according to estimates by Ibis Software, the industry faces a mitigating factor in that home prices are on the rise.
According to the most recent reading from Clear Capital’s home price index, home prices were up across the nation by 10% year-over-year in August.
The data compares to a sharp downturn in home prices that took place in 2011—the last time reverse mortgage principal limit factors were reduced.
“Home prices are going up,” says John Lunde, president and founder of Reverse Market Insight. “The last time we saw a PLF cut, home prices were going down. One of the major factors that mitigates or exacerbates PLF cuts is home price appreciation.”
On the rise for more than 12 consecutive months, home price appreciation is likely to balance the impact to volume.
“We believe there will be an impact on overall industry volume, but that should turn as home values increase,” Peskin says. “The number of seniors with a first lien continues to grow and more lenders will enter the space based on the program now having stability and safeguards.”
The uncertainty factor
An industry in the throes of change continues to take a realistic view, in spite of some potential upsides. Most agree there will be an adjustment period that is likely to put a drag on the lender landscape before FHA’s intended outcomes are realized.
Investors are likely to take time to adjust to the new product landscape as lenders develop new strategies to sell the redesigned reverse mortgage to potential borrowers.
“It will take investors a little bit of time to digest the changes,” Stumberger says. “They’ll want to see new pools of collateral and how cash flows look versus the existing universe of HMBS.”
Further, the cap on borrower proceeds allowed at closing may or may not address the problems FHA intended to solve and a question remains as to how far is “too far” when it comes to restricting access to borrowers.
“The biggest question is whether putting in those utilization caps carves off the riskiest segment of the borrowers are still just as risky,” Lunde says. “I tend to think it will be a pretty good thing and FHA is going to carve off the riskiest borrower with this move.”
Consumer preferences and a shift away from the needs-based borrower that was more typical in the past could also signal a move toward more volume in the long term with a “new” borrower still yet to be defined.
“The borrower of the future is going to better-heeled, married, younger, and healthier,” said reverse mortgage originator Laurie MacNaughton of Middleburg Mortgage. “Once someone is old, sick, widowed and has run through other resources, s/he is not going to pass the financial assessment, creating the perennial dynamic of the rich getting “richer” and the poor getting poorer…or displaced.”
How the new borrower becomes better defined could eliminate an important borrower segment, or could shed light on a new, unrealized market.
“We also have consumer behavior wildcard,” Lunde says. “And another longer range question is: How much does the industry’s target customer shift? Maybe this gets to be a product that appeals to the financial planning audience. That could easily dwarf any decline questions.”
This edition of the RMD Report is sponsored by national appraisal management company Landmark Network.
Written by Elizabeth Ecker