By the time you’re reading this, it’ll be too late for reverse mortgage borrowers to complete the process — from counseling to application to case number — ahead of the October 2 roll-out of lower principal limits and higher mortgage insurance premiums for certain applicants.
So RMD figured it was time to start looking into the future — specifically regarding the financial-planning uses of the reverse mortgage, which had contributed to the rehabilitation of the product’s image among the general public.
We looked to two of the most prominent voices in the world of academic inquiry into the Home Equity Conversion Mortgage, American College of Financial Services professors Wade Pfau and Jamie Hopkins, to find out where they see the reverse mortgage in the post-October 2 world.
Change comes fast
Hopkins expressed surprise at the speed of the Department of Housing and Urban Development’s rule change, which was first announced at the end of August — giving the industry about five weeks to prepare.
“That’s a very close deadline,” Hopkins told RMD. “A lot of times, you’re thinking six months to a year out ahead, and not basically less than two months.”
But he pointed out that even more so than other regulated industries, the HECM space must maintain a close, cordial relationship with Washington, and thus couldn’t do what other industries might have considered in the situation: filing a lawsuit to obtain an injunction.
“That’s never really been a thing in the reverse space,” Hopkins said. “If you start suing the government … it gets weird very quickly.”
Worry may be overblown
In separate interviews, both Hopkins and Pfau sought to downplay the potential for a major sea change in the reverse mortgage industry: The program still has great value, both told RMD, and it may simply be up to lenders and brokers to tweak their strategies slightly.
For instance, many had pointed out the potential death of the so-called “ruthless strategy,” in which borrowers take out a standby HECM line of credit and wait to cash out until it significantly increases in value. While there was speculation that the promotion of this technique among academics and the industry led HUD to clamp down on principal limit factors, Pfau said that the niche strategy was never popular enough to put the Mutual Mortgage Insurance Fund in peril on its own.
“I do not get the impression that this option has become popular enough to become a problem for the insurance fund; however, it is hard to say exactly how much current HECM holders are thinking to use the line of credit in this way,” Pfau told RMD via e-mail. “But overall, I think this is more of an effort by the government to slow down these strategies before they did become more of a problem.”
If anything, Hopkins said, more limited credit line growth under the new structure may make the products more attractive to consumers by eliminating the “too-good-to-be-true” factor.
“That very robust line of credit growth, I actually think that might have been hard for people to really believe,” Hopkins said. “I think a more reasonable-looking line of credit growth, with some limitations, actually feels more powerful from a marketing and consumer standpoint, where I’m more likely to believe it when I hear it.”
Still too early to tell
Both Hopkins and Pfau admitted that it may still be too early to tell the exact effects, with the real verdict handed down once HUD begins endorsing loans after October 2.
“It remains to be seen what effect this will have on upfront costs for opening a line of credit,” said Pfau. “If costs rise, then planners will need to take this into consideration.”
Hopkins also emphasized that while the changes may seem earth-shattering to people who work in the industry every day, consumers may not necessarily see it that way.
“It’s significant to the people who get the details, and it’ll be significant in the short term,” Hopkins said. “But I’m not sure that these changes, to the consumer, really matter. Dropping down the amount of money people can get from the house — most people weren’t taking the previous [maximum] amount up front.”
He did admit that endorsements will likely decline after a September and October burst. But in the end, according to Hopkins, the principal limit factor shift of 2017 will likely go down as a blip, not a time when the industry changed forever.
“I would expect a pretty big bounceback early next year, to the levels we were seeing,” Hopkins said. “From a consumer standpoint, it will be minor, especially in the long run. I think in a year, we’re not going to be looking back and cursing the October 2 deadline.”
Written by Alex Spanko