Expert Calls for Lower Costs on Reverse Mortgages Used in Retirement Plans

A leading expert on reverse mortgages called on the Department of Housing and Urban Development to consider offering lower ongoing costs for borrowers who use the loans as part of an overarching retirement plan.

Writing on his Mortgage Professor blog, Jack Guttentag asserts that Home Equity Conversion Mortgages used to boost a homeowner’s overall portfolio — which could also include existing savings accounts and deferred annuities — represent less of a financial risk to HUD, as these borrowers are more likely to be able to maintain their properties and avoid tax-and-insurance defaults.

“HECMs that are part of a well-designed retirement plan should carry little risk to HUD because borrowers will not face impoverishment that leads to neglect of the home,” Guttentag wrote. “HUD might be justified in imposing lower insurance premiums on such HECMs.”

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He also framed the development of such a program as a public good aimed at creating new potential funding streams for seniors in retirement, particularly given changing benefits at many American workplaces.

“Given the rapid phase-out of defined benefit pension plans, furthermore, it should be public policy to encourage replacement plans to fill the gap,” Guttentag wrote.

Recent reports about the state of the HECM portfolio — including the report last fall that placed reverse mortgages’ overall drag on the Mutual Mortgage Insurance Fund at $14.5 billion — have prompted many players in the space to weigh in on how to strengthen the program and fight back against sagging origination totals.

Last week, for instance, multiple professionals told RMD about their wish list for back-end reform at the Federal Housing Administration, including ways to expedite the foreclosure process and reduce inefficiencies around seasoned loans currently serviced by HUD and FHA.

Guttentag’s theories, meanwhile, focus on how HUD can potentially bring its mortgage insurance premiums more in line with the risk associated with each loan. Under the most recent set of program rule changes, all HECM borrowers play a flat 2% upfront insurance premium based on the maximum claim amount, followed by 0.5% of the loan balance per year thereafter. Guttentag argues that not all HECMs are created equal in terms of risk for HUD losses, so not all loans should be subject to the same premium.

“The logical way to determine whether insurance premiums should vary with the draw option selected by the borrower is to compare loss rates on transactions grouped by draw option,” he wrote, though he noted that more detailed analysis from HUD would be necessary to develop a truly progressive premium structure.

The adjustable premium idea comes in the same month that Guttentag suggested attracting more “solid seniors” — borrowers who care less about maxing out their claims amounts, and more about supplementing their retirement income — to help right the MMIF shop.

Finally, Guttentag posits that regulations against using HECM proceeds to fund annuities are a too-strict relic from a bygone era of unscrupulous lenders and financial advisors, arguing that these borrowers may actually present a net positive to HUD.

“A borrower who uses a HECM to finance the purchase of an annuity may be a better credit risk than a borrower drawing a tenure payment,” he wrote. “Borrowers who have moved to a nursing home have an incentive to conceal the move if they are receiving payments that cease when they become non-occupants, but they have no such incentive if they are drawing annuity payments that continue until death.”

Check out the full analysis at the Mortgage Professor.

Written by Alex Spanko

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  • >>“HUD might be justified in imposing lower insurance premiums on such HECMs.”

    Been there, done that … Homeowners used to be able to get a standby credit line with a .05% upfront insurance premium.

    It’s ashame that same homeowner has to pay 2% now … standby credit lines don’t make sense anymore.

  • How could what Jack suggests ever be validated? What kind of planning would qualify for this reduction? Yet Jack’s idea should not be thrown away as totally out of hand.

    Perhaps a better answer is a new Saver.

    Like yesteryear the new Saver would have a lower upfront MIP but this time of say 0.5%. The new Saver would have to lower PLFs to be proportionately lower to the current Standard’s PLFs in the same way that the PLFs of yesterday’s Saver were to the PLFs of the Standards of that same era. The new Saver would compare favorably to the Saver of yesteryear with a current 0.5% annual MIP rather than yesteryear’s 1.25%.

    Could and would originators sell this new Saver? Yesteryear’s Saver received a lot of resistance from originators. Yet one suggestion would be for HUD to only insure adjustable rate new Savers.

  • We should embrace any FORWARD thinking ideas that take us out of the dark ages and compose creative guidelines that open up a market that HUD has carelessly closed in their collective myopic decision making process. A broad stroke of higher fees and lower plfs was incredibly short sighted and lazy considering the positive affects of FA will take several years to play out. Crippling our industry and shutting out otherwise deserved seniors the assistance this program was designed for is shameful. And now conversation continues at another round of reduced plfs as we try to somehow manage beyond the abyss of declining endorsements just released in HECM 100 report. We are in trouble here and unless Peter Bell and our industry come together in a greater effort to REVERSE the direction we are going, HUD will continue its knee jerk reactions and we will lose more ground. Proprietary products are definitely a good sign, but the HECM and the inherent benefits must be protected rather than diminished. Thank you Jack for your Magellan path of ideas! I would endorse you and others like you for HUD’s advisory committee.

    • 2bmagoo4u,

      Somehow the HECM MMIF losses from new endorsements must come down. Few disagree with the idea that there are problems in the projection suppositions HUD and its actuaries use in making their MMIF projections but until NRMLA has the ability to refute some of the worst of those suppositions, PLF reductions must be implemented. Imagine (or maybe not) what would have to be done to being reversing the HECM losses from earlier years.

  • I proposed something similar to this at an annual NRMLA conference some years ago…why not use a tiered approach, same idea as conventional mortgages use, but based on factors specific to reverse mortgages – possibly percentage available in first year (50% = .5% upfront; 75% = 1.0%, etc.); or, how many times the applicable RI amount the borrowers have (1x = 2.0; 3x = 1.0; 4x = .5% upfront ). You get the idea – not all HECMs are created equal. OF course, the factors and amounts would have to be revenue-neutral to the fund.

  • Hmmmmmm, Jack says that HECMs that are part of a well-designed retirement plan should carry
    little risk to HUD?

    How are we to determine this? Just because Jack says these type of borrowers will not face impoverishment that leads to neglect of the home? How do we know that and if we really don’t have the the precise answers to these questions, why should HUD be justified in imposing lower insurance premiums on these HECMs?

    I agree with what Carmine DeSoto stated in his or her comment that was made. I also agree with Carmine on the statement that, “Jack’s idea should not be thrown away as totally out of hand”!

    I don’t fully agree with everything Jack Guttentag stated and it surly would not cure or help in reducing the loses in the MMIF.

    I also agree with what Carmine DeSota says about the Saver, good analogy come back to Jack’s suggestions!

    John Smaldone
    http://www.hanover-financial.com

  • Just wondering; do we understand that the overall insurance fee at 2% is less than it was at .5% after 3 years to a client? The yearly outshines the up-front by then.

    • Jay,

      This is incorrect under any HECM scenario involving the comparisons you provide above.

      It seems you are adding 2% to 0.5% plus 0.5% and 0.5% to come to 3.5% and comparing that to the sum of 0.5%, 1.25%, 1.25% and 1.25% for a sum of 4.25%. That would be correct as long as the percentages were all being multiplied by the same thing but they are not. IMIP rate is being multiplied by the MCA and the ongoing MIP rate by the balance due.

      In the first case the 2% is being multiplied by the MCA (generally the appraised value of the home) but each of the following three 0.5% are being multiplied by the balance due. In the second case the 0.5% is being multiplied by the MCA and the following three 1.25% by the balance due.

      Say the senior had a home worth $400,000. He takes out $100,000 at closing (including all upfront costs) and takes no more until the third year after it closes. His average interest rate over the three year period is 5%.

      If he closed his loan on 9/1/2017, his upfront costs would have included IMIP of $2,000. His total ongoing MIP costs over the three years would be $4,113. That is a total of only $6,113 in MIP charges in the first three years.

      If he closed his loan on 4/1/2018, his upfront costs would have included $ 8,000 in IMIP. His total ongoing MIP over 3 years would be $1,627 for total MIP incurred in the three year period of $9,627.

      It will take much longer than 3 years for the MIP charges to be equal. Lower IMIP wins out in a three year period based on the two scenarios you present.

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