What HUD’s New Rules Mean for the Reverse Mortgage Industry

The Department of Housing and Urban Development on Tuesday shook the reverse mortgage world with new rules regarding mortgage insurance premiums and principal limits. While the industry continues to sort out the exact effects — many of which may not be known until after the first months of endorsement data come in after implementation on October 2 — here’s what we do know so far.

Goodbye, floor

The expected rate “floor” at 5.06% has collapsed, with every one-eighth of a percent difference in expected rate influencing the principal limit all the way down to 3%. This will likely require lenders to lower their margins in order to achieve higher principal limits, according to Dan Hultquist, director of learning and development at ReverseVision.

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“It still creates the potential to give a loan to this client, but the lenders must be flexible in the margins they offer,” Hultquist told RMD. “They’re going to have to reach down deeper to provide lower lender margins, and, of course, lower lender margins may protect borrowers with higher loan amounts.”

At current rates, principal limits will run about 20% lower for borrowers between the ages of 62 and 80, according to an analysis by Jerry Wagner of Ibis Software Corporation. While factors flattened out for borrowers at age 90, this plateau does not occur until age 97, Wagner said.

For instance, at age 62 and a 5% rate, a 62-year-old borrower would have a principal limit factor of 52.4% under the old system, and 41.0% under the new system. That’s a drop of 11.4 percentage points, but a 21.8% reduction in actual principal availability, Hultquist observed.

Ruthlessness reaps lower rewards

The so-called “ruthless” option had been floated in recent years as a way for higher-income individuals to use Home Equity Conversion Mortgages to their advantage: Take out a reverse mortgage line of credit on a high-value house, let it grow over time, then cash out once the line is worth more than the property itself. But these rule changes have reduced the incentive for this strategy, Hultquist said.

“Lower lender margins and the lower MIP have has made this strategy less attractive,” Hultquist sad. “The ruthless strategy has been addressed.”

HUD officials indicated that these rule changes were, in part, designed to make it more difficult for borrowers to cultivate credit lines worth more than their homes by prolonging the balance growth. Though HUD cited concerns about the MMI Fund — which has bled almost $12 billion since 2009 because of reverse mortgages, according to HUD — the officials also framed the slower growth as beneficial for the borrower, helping them to preserve more equity.

Even with these restrictions, HUD doesn’t expect to actually reverse the damage already done to the MMI Fund; these changes will only stanch the bleeding, officials said, and were merely intended to reach a more stable financial base for loans moving forward.

Brace yourself for the rush

These new rules will not affect any borrower that already has a reverse mortgage, HUD officials stressed, adding that they did not want to cause any additional anxiety or confusion for existing HECM borrowers.

But on the flip side, with a little more than a month until the new rules take effect, originators are already bracing for a rush of borrowers who want to complete their applications in time to lock in the higher limits and potentially lower insurance premiums.

“First and foremost, it means that if your client, friend, or family member is looking into a reverse mortgage, now is the time to consider moving forward,” Laurie MacNaughton, a reverse mortgage consultant with Atlantic Coast Mortgage, wrote in an e-mailed blog post.

“Future applicants with little or no mortgage debt will see notably smaller lines of credit than they would have under current guidelines,” she continued. “It also means thousands of homeowners will be scrambling to get a place in line for their mandatory FHA reverse mortgage counseling.”

Written by Alex Spanko

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  • The following view is off center and does not look at the HECM program as a whole: “Future applicants with little or no mortgage debt will see notably smaller lines of credit than they would have under current guidelines….” This implies that there is no impact on fixed rate HECMs since they have no line of credit. That view is far too narrow.

    Our view should be on the principal limit, net principal limit, balance due, and for adjustable rate HECMs ONLY, the line of credit. First and foremost the principal limit factors have been adjusted and the HECM floor adjusted more than at any time in the past. It is this floor adjustment that will cause the greatest concern for lenders, originators, and future borrowers.

    As to fixed rate HECMs, although possible it is doubtful if we will ever see a 3% expected interest rate. The problem with the adjustable rate is if the 3% floor currently applied the index for the expected interest rate is 2.13% which would only permit a margin of 0.93% without exceeding the floor. It is very doubtful if lenders will offer many monthly adjustable rate HECMs with margins of less than 1%. Further it is extremely doubtful if the expected rate for the annually adjustable rate HECM will be much less than 4%.

    Even for a few fixed rate HECMs, there may be a drop in the net principal limit from the flat 2% Initial MIP (IMIP) rate of 2%. Where this may cause an increase in the net principal limit is with fixed rate H4P transactions where the borrower uses all proceeds to acquire a home. It may also do the same for adjustable rate HECMs with mandatory obligations of 60% or more.

    Where there is a significant balance due, the balance due should grow more slowly as to both ongoing MIP at 0.5% as well as to the related interest. Also with anticipated lower margins, we should see a significant decrease in how quickly the balance due on a HECM grows.

    Finally, as to the line of credit, generally its size and growth are both negatively impacted by the new Mortgagee Letter. This should help slow down the growth in some of the riskiest strategies we have seen in years. Most of the sounder strategies should see little impact from the changes which will be implemented on 10/2/2017.

  • It would seem that to potential borrowers currently interested in the HECM program, this statement “At current rates, principal limits will run about 20% lower for borrowers between the ages of 62 and 80,” combined with the “shocking” one month’s notice of this dramatic change, any confidence they had in the program is pretty much over.

    One of the main attractions of the HECM is that it’s government regulated. Presumably those associated regulations are designed to protect the “little guy” in the retail financial world. However, the recent regulations-changes in the program are sending the opposite message: “We’ve mismanaged the program and now, watch-out, you’re going to pay for it.

    Ya, anyone thinking of getting into the program mainly for reasons of financial-hedging and social security delaying tactics, etc. will be scared-away. That leaves the people for whom the program was mostly intended: “the last resorters.” Only now they’re “stuck” worse than ever.

    Was all this considered in this latest decision by the “”HUDs?” Of course it was.

    Personally, I don’t totally buy the stated, underlying reasons for this decision. I think it has more to do with politics than “saving” the insurance fund.

    Save what?

    1.) The fund is beyond saving.

    2.) This decision does little to help in that direction, so why the highly unsettling change in the program?

    3.) The insurance fund is billions of dollars in the hole. So what’s new? So is Medicare, Medicaid, S.S., S,S. Disability, SSI, the budget deficit, the national debt, etc.

    They (HUD/Congress) knows the fund is in the hole, will stay that way, and they fully understand that that condition will always remain and as life itself, bureaucracy will still go on. They’ll just shift-around more three-card-monte funds to supply the HECM insurance fund in the future, as needed.

    So why this latest decision, this pretence of fiscal responsibility?

    I believe that it greatly bothers them (congress/bureaucracy) that the middle class may have found a loophole to their (the semi-affluent that’s been getting into the HECM ) financial benefit. And it’s being shut down quick (note the astonishing one month notice – when is the last time you saw the government do anything this fast in the fiscal-realm?)

    Also, Democrat allies as AARP and general-academe have long been irritated by the HECM line of credit, especially (in most cases) the tax exempt nature of this HECM feature. Well, with this latest change, they’ve poked a hole in that, too.

    And if you immediately think that the government is incapable of such petty and mean spirited behavior, you may want to think that one over a little.

  • Has anyone seen/heard a definitive statement on whether the 60% IDL will continue to be applied? The IDL will be a difficult explanation for lenders to give to those borrowers with lower MOs who find themselves being charged the same IMIP as those borrowers who may be tapping as much as 40% more cash at settlement.

    • REVGUYJIM,

      I have run the issue down with Shannon. It turns out the writer of the comment meant to say that the first year disbursement limitation rule remains unchanged. Somehow what was written was misunderstood by the moderator. For any further clarification, please read what wrote in reply to Ms. Hipp.

    • Ms. Hipp,

      Perhaps my answer to REVGUYJIM confused you.

      Absolutely nothing is changing to HECMs on October 2, 2017 other than HECMs with case numbers assigned after October 1, 2017 must comply with the three changes stated in Mortgagee Letter 2017-12.

      1. The first change is the affected new HECMs will have an upfront (or initial) MIP rate of 2% and only 2% of the Maximum Claim Amount.

      2. The second change is that the affected new HECMs will have an ongoing MIP annual rate of just 0.5%.

      3. Finally the third and final change is that on October 2, 2017, we have a new principal limit factor table going into effect solely for these new HECMs (i.e., those with case numbers receiving case number assignments after October 1, 2017).

      I do not know how to be clearer. As to why other changes are not being made, I have no idea. So I cannot explain it, perhaps, Shannon Hicks or the folks at NRMLA can.

      Please reread my comment. I distinctly said that someone in writing in to the webinar allegedly made that claim; I never claimed that. Shannon has since run down the source of that claim and that person said that he meant that the first year disbursements limitation rule still remains in effect. Somehow what the writer stated was misunderstood by the moderator.

  • To be clear it is not expected that the changes found in Mortgagee Letter 2017-12 will impact losses from years prior to fiscal 2017. There is little doubt that even the changes of 9/30/2013 and thereafter were sufficient to stop estimated losses in the new books of endorsement business which followed those changes. The changes found in Mortgagee Letter 2017-12 are intended to mitigate the expected losses from the expected book of business during fiscal 2017 and beyond.

    With the separate insurance operating losses in the HECM portion of the MMI Fund exceeding $15 billion as of 9/30/2016 and also understanding that the actuaries were expecting an estimated $800 million in losses for fiscal 2017 and another almost $400 million in losses from the fiscal year 2018 book of endorsement business, HUD was right to make changes. Worse, with the actuaries no doubt finishing their interim field work for their fiscal 2017 actuarial review in July or August of this year, HUD may have received a warning about the losses for this fiscal year, perhaps being even greater than the actuaries had estimated in their fiscal 2016 actuarial review (let’s hope not).

    We have a difficult story to tell because of the actions of HUD’s executive officers during the Obama Administration in transferring funds out of forward programs and allocating all of the $1.7 billion intended for all of the MMI Fund only to the HECM portion of that fund. If we remove the funds from forward mortgage programs and the $1.7 billion from the HECM portion of the MMI Fund, the negative net asset position of the HECM program goes from $7.7 billion all the way down to $15.2 billion. So even though the MMI Fund showed a positive net asset position of $27.6 billion, if one removes the HECM portion of that fund from the total, that total rises to a positive $42.8 billion for the forward mortgage programs accounted for in the MMI Fund as of 9/30/2016.

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