Reverse Lenders Market to New Borrower in Wake of Product Changes

New Federal Housing Administration (FHA) regulations have changed the amount of proceeds seniors can receive from FHA-insured reverse mortgages and are pushing for lenders to market different, National Mortgage News reports, adding that regulation changes are making the product more attractive to borrowers.

“[Seniors] are generally limited to just 60% of the funds during the first 12 months,” National Mortgage News reports. “The rationing of proceeds is to make sure borrowers have some equity left when they leave the closing table, reducing the likelihood of default.”

Other regulation changes include requiring “reverse mortgage lenders to conduct financial assessments to ensure borrowers have the necessary residual income to pay taxes and insurance and maintain the property,” National Mortgage News reports.

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The new regulations are changing the way reverse mortgages are pitched to seniors, and more retirement planners are viewing HECMs as a valuable retirement tool, industry experts tell National Mortgage News.

“It is forcing the industry to market differently and to look for a new borrower,” Jeffrey Taylor, a reverse mortgage consultant who helped launched the first FHA reverse mortgage product in 1991, tells National Mortgage News.

In the past, many borrowers defaulted when they couldn’t afford to pay taxes and insurance, prompting FHA to change its rules, the article notes.

Ginnie Mae, the agency that sets standards for securitization of FHA loans, has also changed the way reverse mortgages are structured.

Ginnie Mae has banned from its pools fixed-rate reverse mortgages that disburse funds as a line of credit, National Mortgage News reports, adding that the changes influenced warehouse lenders who have since then began to pull back on funding HECMs with fixed-rate lines of credit.

“The net result of the FHA and Ginnie reforms is that the adjustable-rate line of credit now dominates the reverse mortgage scene instead of fixed-rate products,” National Mortgage News reports.

About 75% to 80% of HECMs being originated today are adjustable-rate, Joe Demarkey, the director of product development at Reverse Mortgage Funding, tells National Mortgage News.

The most popular reverse mortgage now is an adjustable-rate HECM with a 10% lifetime cap.

“This means that with a starting interest rate of 3%, the rate cannot go higher than 13% during the life of the reverse mortgage,” says National Mortgage News. “The FHA reported last week that HECM originations totaled $4 billion in the first quarter, up from $3.4 billion in the prior quarter.”

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Written by Cassandra Dowell

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  • It is fascinating to look at full months of case number assignment information. The percentage applications for fixed rate new HECMs to total new HECMs has been growing each month since October 2013 to March 2014 (the last month FHA has reported case number assignments).

    In October 2013, the percentage of fixed rate to total was 21.3% and in March 2014, it was 37.9%. The average was 28.9% for the first six plus months of reporting (includes 57 case number assignments processed on September 30, 2013). The month-to-month change in the growth of the percentage of fixed to total goes from a low of 1.7% (November at 24.1% to December at 25.8%) to a high of 4.6% (December at 25.8% to 30.4%).

    So far in six plus months, only 31,571 new HECM applications have received case number assignments. Since only about 60% of these applications will ever get endorsed, the most endorsements we should see by July 2014 from this six month cohort of applications is just 20,000; however, adding that to HECM applications receiving case number assignments in the four month period ended July 31, 2014 which will turn into endorsements in that four month period, we should see a total of about 24,000 endorsements on new HECMs by July 31, 2014.

    If it was not for over 20,400 in Standards and Savers being endorsed during the six month period ended March 31, 2014, not only would endorsements be miserable but lender revenues would be disastrous. In that same six month period only 7,506 new HECMs were endorsed.

    While none of this is great news, it will be a much better fiscal year in the way of endorsements than many thought it might be. Since few endorsements for the fiscal year ended September 30, 2014 will come from applications received after May 31, 2014, it does not look like the yet to be FHA mandated financial assessment will have any impact on endorsement numbers until fiscal year 2015.

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

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