Refi Madness: Reverse Mortgage Refinances Gain Greater Volume Share

Endorsements for Home Equity Conversion Mortgages (HECMs) hit a minor snag in the last few months of 2015 as the industry felt the fallout of the Financial Assessment. But as volume compressed in the months following August, the share of reverse mortgage refinances have grown to near-high levels, according to recent industry data.

In November, 11% of all HECM endorsements were refinances, according to the latest Reverse Market Insight (RMI) data released Tuesday. During the month, while endorsements fell 7.1% from October to 4,023 loans, the share of refinances rose one percentage point, up from October’s from 10% refi share.

The jump to 11% marks the highest refi share of volume since August 2015, which reported 5,750 loans, and is second only to February 2009, when HECM refinances represented 12% of volume.

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“Refinances have been a hot topic in the reverse mortgage industry lately, with NRMLA issuing updated guidelines and HMBS investors asking more questions about the higher prepays than they might have expected when paying significant premiums for new pools,” writes RMI in its HECM Trends – November 2015 newsletter.Screen Shot 2016-01-26 at 1.02.55 PM

Late October, the National Reverse Mortgage Lenders Association (NRMLA) issued an ethics advisory aimed at preventing instances where HECM refinances do not provide a bona fide advantage to the borrower.

In efforts to prevent such “loan churning,” the NRMLA guidelines institute an 18-month seasoning requirement, where the new FHA case number shall not be sooner than 18 months from the date of the prior loan closing.

The updated policies also subject prospective refinance borrowers to a closing cost and loan proceeds test; where the increase in principal limit must be at least five times the cost of the transaction, and under the loan proceeds test, the available benefit amount from the HECM refinance must be at least 5% of the borrower’s principal limit.

Given the ethics advisory arrived in late October/early November, and considering the delay between loan applications and endorsements, it is possible that refis have already experienced their largest shares of volume in the months following November.

“We’ve already seen refinance activity reduce significantly on the application side since the NRMLA ethics advisory, so given the timeline of applications to funding and then endorsement, we’d expect to see endorsement figures start to show a lower share attributable to refinance transactions by February or March,” Lunde said.

In 2014, HECM refis represented 5% of total reverse mortgage endorsements, an increase of 15% from the prior year.

View the RMI data.

Written by Jason Oliva

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  • As a counselor, I often have trouble with refinancing HECMs. I have seen too often, over the years, a salesmen that has originally sold someone an adjustable rate, now come back and try to sell them a fixed rate because it is somehow, “better.” Now, I am seeing the opposite, selling them a fixed rate and then, because now you can access more money, an adjustable rate. Unfortunately, this rarely works out to the consumer’s advantage. Sure, they might get access to a few thousand more dollars, or even as much as twenty thousand, but it generally means that they were not placed in the proper product in the beginning.

    Now, do not get me wrong, there are instances that I have seen where refinances made a lot of sense. Particularly for people who have had a HECM for many years, some of which going back when the property values limits were much lower. Someone whose original HECM limit was at 325,500 or 417,000, whose house was worth in the $700k range, might very well have use for a refinance. The difference in the money it produces is significant, particularly as their age has gone up as well.

    I just worry when someone gets a cold call to refinance an existing HECM when it does not make a lot of sense.

    Frank J. Kautz, II
    Staff Attorney

    Community Service Network, Inc.
    52 Broadway
    Stoneham, MA 02180
    (781) 438-1977
    (781) 438-6037 fax
    [email protected]

    • Mr. Kautz,

      I see the way H4P is sold today in the same light (almost all fixed rate). I was hoping inappropriate selling of refis was a thing of the past. So thank you for your insight.

      Fixed rate Standards ruined the MMI Fund and was rarely a friend to borrowers. HUD should have eliminated this product soon after implementation and who knows Savers and adjustable rate Standard upfront MIP and principal limit factors might have been preserved.

      I remember hearing how the fixed rate Standard was not eliminated, just suspended for a while. It was sad that so few originators saw the fixed rate Standard for the dangerous monster it was.

      Please keep us informed on your views of the HECM market.

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