Reverse Mortgage Industry Voices Concerns Over FHA’s HECM Proposals

Less than a week remains until the Federal Housing Administration (FHA) ends the comment period for its most recent round of proposed changes to the Home Equity Conversion Mortgage (HECM) program. As the comment period draws down, several reverse mortgage industry stakeholders are voicing their concerns over which proposed rules stand to adversely impact the future of the HECM marketplace.

FHA made headlines earlier this year when it proposed a set of new rules for the HECM program. While the proposal aims to reinforce and codify recent HECM reforms that FHA has implemented over the years, it also includes several new rules that have industry members crying out for FHA to reconsider some of its proposed changes.

The last day to submit comments on FHA’s proposed rule is Monday, July 18 at 11:59 PM (ET). To date, the proposal has generated 25 comments, according to those already posted on as of this writing.


Rate cap pressures

Collectively, industry commenters call into question several major proposals outlined by FHA, notably FHA’s proposal to cap lifetime interest rate increases on all HECM adjustable-rate mortgages (ARMs) to 5%; as well as the proposal to reduce the cap on annual interest rate increases on HECM ARMs from 2% to 1%.

The suggested changes to the rate caps have the potential to create unintended consequences that could adversely affect senior borrowers, the FHA and the reverse mortgage marketplace, according to the comments of several industry stakeholders.

“Adjustable interest rate caps appear to protect the consumer at first glance but ultimately will cost future HECM borrowers more,” comments Shannon Hicks, president of Reverse Focus. “I would ask HUD to reconsider their continued efforts to re-engineer the HECM by adjusting interest rate caps.”

Not only would these interest rate caps force lenders to increase the HECM ARM margins to compensate for increased costs, Hicks states, but may also negatively impact FHA’s Mutual Mortgage Insurance fund due to the immediate increase in loan margins, “thus immediately increasing loan balance negative amortization in a low interest rate environment.”

“If the lifetime caps are lowered to 5% above the starting rate lenders will necessarily increase margins (as mentioned in the proposed rules), thus immediately increasing the cost to the consumer as the mortgagee seeks to recoup their operational costs,” Hicks writes.

The reduction in annual cap from 2% to 1% is also “problematic” as this may reduce or eliminate the current secondary market for reverse mortgages and drive up the rates and costs for seniors, comments Glen Smart, senior loan officer and manager of the reverse mortgage division at Nova Home Loans in Tucson, Ariz.

“At the very least, don’t alter the structure on both the annual and lifecap without having an appreciation of the immediate impact on the markets; and therefore, seniors,” Smart states.

Community association concerns

Other commenters raised concerns over FHA’s proposals related to its rules on HECM eligibility for community association, such as condominium homeowner associations and housing cooperatives.

Section 206.136(a)(1) requires the entire amount of a community association’s lien for unpaid assessments to be subordinate to the HECM mortgage if such a mortgage is to be considered acceptable to the Secretary, according to the Community Associations Institute (CAI), an international membership organization with more than 35,500 members.

“This requirement will have a substantially negative impact on otherwise eligible senior citizens living in association lien priority jurisdictions,” writes Thomas M. Skiba, CEO of the Institute, in his submitted comment to FHA.

In direct conflict with the statutes of 21 states and the District of Columbia, which provide a limited priority for community association liens, the CAI states that FHA proposes to exclude senior citizens living in these community associations from the agency’s HECM program.

“The proposed requirement that community association liens in these jurisdictions be in a fully subordinate position to a first lien is in direct contradiction of these state statutory frameworks,” comments N. Karpel, a CAI member. “Not only is this bad public policy, it is dangerous.”

The CAI urges FHA to withdraw its proposed HECM rule and submit a revised proposal that does not endanger the financial security of community associations and the senior citizens who call these residences their homes.

“Rather than attack senior citizens in association lien priority jurisdictions, FHA should ensure compliance from the lending community with program rules and guidelines concerning foreclosure, property preservation, and title conveyance,” Karpel comments. “The FHA should respect state statutes that provide limited priority for community association liens and require FHA-approved mortgagees to follow state law and program guidelines.”

To electronically submit a comment to FHA’s proposed rule, click here.

Written by Jason Oliva

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  • Jason,

    first and foremost, thank you for bring the ability to respond to this potential change into the limelight and making all aware that they have a voice. I am sorry to see so few comments and hope that everyone will take 15 min out of their day to respond.

    HECM for Purchase
    HECM for purchase requirement for counseling before the contract: Whilst the intent is thoughtful, this is not necessary as a typical contract is written with a financing contingency, the borrower will have at a minimum of 15 days to obtain counseling after contract. If it is discovered not to be a suitable option and the best solution for the buyer, they are protected by the mortgage contingency. The purchase market is very strong. Counseling prior to the contract is inadvertently putting the borrower at a competitive disadvantage.

    Not allowing seller paid closing costs is biased as we allow this on the forward side and causing the buyer to most likely share in more of the cost than necessary. Please consider change that will allow the seller to pay 3-6% of closing costs similar to the forward side. This is a very costly and unnecessary for the homebuyer.
    The 2.5% upfront MIP for a purchase is also putting them at a disadvantage and in my opinion and a penalty for using the HECM for purchase product.

    Capping the ARM interest rate – again, overkill. We already have an annual adjustable with conservative caps. This will surely have some unintended (I would assume) negative consequences on the secondary market. Purchasing of trailing GNMAs would be much less attractive for the market and worst case could be catastrophic in a high interest rate environment. Low rate + small cap= untradeable in an unavoidable higher interest environment

    I am in favor of a borrower to be able to borrower more than 60% of the principle limit under demonstrable extenuating circumstances. Extenuating circumstance should be spelled out clearly and not vague as many of the rules are. They should include housing issues that require a LESA , be sensitive to that requirement or medical in nature.

    Regarding regular property inspections: First and foremost, this does not appear to be sustainable to scalable. Who will provide these inspections and what will be their area of expertise? This is intrusive and only be allowed if this is conducted on all government insured products. We have already said that we don’t trust you to pay for your own taxes and insurance in spite of this clearly being the minority, now we are sending a message that we don’t trust them to keep house.

    The FHA maximum value limit of 625,000 is antiquated and should reflect the housing values in the market in which they reside. Due to the strong housing recovery many markets have average appraised values well above 625,000.

    The condo approval process is a nightmare and should be overhauled and streamlined. We need spot approval process to be reinstated for expired approvals. I could write a book on this topic alone, we have much work to do. We need resources to restructure this process and I would suggest a task committee. I humbly throw my hat in to lead the transition.

    • If I am a senior citizen mulling a reverse mortgage and I see comments from industry professionals that the program will worsen it would make me think twice about engaging in a HECM. Stay positive.

  • I know that I put my 2 cents worth in, well before the FHA comment period comes to a close on its most recent round of proposed changes to the HECM program!

    Nancy is right on target, we all need to speak our piece. This proposal needs to be put on the Shelve to gather dust! Many comments need to be put forth before the comment period ends, I believe that what Nancy meant?

    All of us, our industry leaders and our industry organizations must make our voices heard, loud and clear! Not much time left to do that my friends!

    Nancy brought up many great points as to what the problems are with this proposal in her comment, she is right on target with what she has pointed out!

    I said this before, The reduction in annual cap from 2% to 1% can have a serious impact on the secondary markets and the future for the reverse mortgage itself! Also, the impact it would have in the trading of trailing GNMA’s (Tails), especially in rising market conditions. These caps, as they may be attractive to the borrower and the origination market could put a stop in trading many pools that started out with low UPB’s. These pools could consist of low margin product and low initial rates, which may be fine for the initial trade!

    The problem lies in trading future pools, consisting of those same loans. Remember, pools that start out with low UPB’s, low margins and low initial rates trade again at some point in time as additional draws are taken against the line of credit or when tenure payments build up.

    With the proposed caps, based on those low initial rates (Especially ARM’s) in a high interest rate environment, could make that pool, untradeable! What do you think that would do for the marketability of the HECM, today and tomorrow!

    In closing, I am going to repeat myself, this proposal could be very dangerous for all of us if it is not reformed drastically or done away with completely. As I said, my major concern is with the secondary markets, we remove that from the equation and we have no more reverse mortgage, no more HECM period!

    Also, again I say that the points Nancy Pedone brought up are extremely critical to the survival of our industry, nice job Nancy!

    John A. Smaldone

    • John,

      I don’t get the topic of end all here and Armageddon. I think these HAVE to be bright people behind these possible rule changes. Surely good to have a forum to voice concerns and I’m certain modifications will be made to this proposal. I am also scratching my head due to the fact that the majority of loans I see originated are 5/2 cap loans. So they are proposing a 5/1 cap loan and it’s dangerous? A fixed rate is virtually non existent in this market unless a lien is paid off almost or equaling the principal limit. These borrowers don’t want to leave $$ on the table. For many it’s there last go around. A monthly offers a lower interest rate, lower credit line growth and a 10 cap. An annual provides the same principal limit as a monthly, higher growth and higher initial rate with a 5 cap. Side by side no brainer for most…

      We have been through many changes like ALL sides of the mortgage business and there will continue to be change bc nothing remains constant.

      I say bring it on. Bring it all on. I don’t see secondary being affected enough to rid of the program.

      • reverseguru1,

        I can understand your questioning of my comment.

        However, the impact of this proposal will spell higher margins for adjustable rate HECMs as the product will then become less inviting to investors.

        As a previous article spelled out, Ginnie Mae has been the primary vehicle for funding HECM loans since it created the HECM mortgage-backed securities (HMBS) program in 2007. The agency can also serve as collateral for Real Estate Mortgage Investment Conduits (REMICs) backed by HMBS, known as H-REMICs, which further broadens the potential capital investor markets.

        However, the 1% periodic cap proposed by FHA for adjustable rate HECMs is a “non-starter” for the HMBS and H-REMIC investor base,

        The theoretical cost to uncap the HECM loan back to where it is today is several points, and the unrealistic best-case scenario would be that Investors pursue derivatives to do just that and this change causes origination coupons to skyrocket, saddling the consumer with much higher interests costs,making the loan more costly.

        The realistic base case expectation is that this change eliminates the buyer base and the sector becomes extinct.

        This is the main concerns in the secondary market today reverseguru1

        Once again I point to Nancy Pedone’s comment, she pointed out many other concerns, which I feel are very valid!

        I hope I answered your question of me to your satisfaction, if not, don’t hesitate to contact me, I would love to talk to you. I can be reached at 865-980-3583 or my e-mail,

        reverseguru1, I appreciate your reply to me, Make it a great Wednesday.


      • Thanks John. Appreciate the information. I doubt they would impose changes that would destroy or sabotage the industry with purpose as it would be less costly to pull it all together? Why make changes like these if the end result is non existence? What do you believe would save our market in the event they make the proposed changes final? Raising rates? Thanks

      • I think you hit in on the head. The only problem with that is, how high is high?

        Higher rates today may not be higher rates tomorrow. It is the spread that is the problem, believe it or not the cap between 1% and 2% makes a major difference in the secondary market.

        When it is all said and done, it will still boil down to what FHA/HUD comes out with in the end. Everyone’s comments are either going to be taken seriously or do they have their minds already made up and the outreach for comments may just be a show?

        Who really knows at this point my friend. I do appreciate you responding back to me. Make it a great day and hopefully we will have the opportunity to talk to one another.


  • As a Reverse Mortgage recipient with a line of credit, my main concern is how the proposed caps would affect the growth of the line of credit.

    It seems the optimal use of a Reverse mortgage (no heirs) is one where the loan-interest-rate is irrelevant, in that there’s no intention of selling the property. But, a high interest rate means higher growth of the line of credit; and that’s “what it’s all about” when you’re on the retail receiving end of the industry. That growth is a financial “edge.”

    I suspect that it’s this “edge” that, basically, “the government” is attacking: there’s nothing the government dislikes more than seeing ordinary people getting a “good deal” without “fooling with it.” I don’t believe my view is merely a cynical opinion, as in my observation, it’s actually the way the government thinks: if it’s too good, it must not be regulated enough.

    • Travel,

      Once a HECM is closed and the three day period for rescission has passed, no changes can be made. It is a contract between a lender and a borrower. So changes to interest caps cannot be enforced on an existing HECM; however, HUD can require lenders to change these caps on all new HECMs prospectively IF the lenders want the reverse mortgages to be covered by FHA insurance.

      HECMs are based on math modeling. If some consumers learn to use the loan more proficiently than others, HUD is generally pleased. The goal of the program is to provide a mortgage to seniors that they can rely on as a source of cash throughout retirement without any required monthly (or other period) cash drain from payments of interest and principal. However, since it is a HECM, the entire balance due must be paid at termination.

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