Despite Long-Term Benefits, Upfront Premium Causes HECM Hesitation

Last year’s principal limit factor reductions have been blamed for the dip in reverse mortgage volume this year, but some industry professionals say the higher initial insurance costs are equally — if not more — at fault.

Before the Home Equity Conversion Mortgage rules changes last October, initial mortgage insurance premiums were set at 2.5% for borrowers taking 60% of the loan’s proceeds upfront, and at 0.5% for borrowers making smaller draws. Now, the initial MIP is set at 2% of the maximum claim amount for all borrowers regardless of upfront loan draw, while the annual MIP was reduced from 1.25% to .5%.

Only available on federally backed reverse mortgages, this insurance provides protections to both the borrower and lender.

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Melinda Hipp, branch manager with Open Mortgage LLC in San Antonio, Texas, said that the lower PLFs definitely make it more difficult for a borrower to qualify, but it’s the sticker shock of the initial MIP that can turn off some potential borrowers.

“Even though our property values are lower in Texas, $8,000 can look like a big number to anyone,” she said. “I believe the lower PLFs are what keep folks from qualifying and the higher MIP is what makes them think twice. So, in reality it’s a double whammy.”

New View Advisors partner Michael McCully said that the increase of the initial MIP offers certainty to the Department of Housing and Urban Development and helps offset any current losses “from older books of business.”

“It’s difficult to convince a borrower to pay a lot of upfront expenses, and increasing the initial MIP from .5% to 2% of [maximum claim amount] increases overall upfront costs significantly,” he said.

In speaking with originators, McCully said most agree that a lower initial MIP and a higher ongoing MIP, similar to the former HECM Saver offering, could boost volume.

Under the current regulations, borrowers end up paying less over time in combined insurance premiums when compared to a pre-October 2017 borrower who had an initial MIP of .5% and an ongoing rate of 1.25%, McCully said.

“Even though the combined MIP is lower after about four years, 2% upfront is a real stumbling block,” he said.

Factors behind lower volume seem to be market-specific. In the Washington, D.C. area, Laurie MacNaughton, a reverse mortgage consultant with Atlantic Coast Mortgage, said the initial MIP is an eye-opener, but the PLFs continue to be the main deterrent. She said many of the local 62-and-over homeowners have recently relocated to the area to accept jobs as federal contractors.

“Consequently, they are still carrying large forward mortgages that cannot be extinguished without bringing a substantial check to closing,” MacNaughton said. “The higher MIP undeniably presents initial sticker shock, but that is not an objection that typically sticks once the homeowners are educated as to its function.”

Hipp agreed that it is originator’s job to educate the borrower about the amount saved over time.

“What originators have to do is show how the .5% will benefit them in the long run,” she said. “With less MIP rolled in over time, they are truly saving equity in the long run.”

Beth Paterson, executive vice president of Reverse Mortgages SIDAC in St. Paul, Minn., said it’s the combination of the low PLFs and high initial MIP that create the hesitation. When she entered the reverse mortgage business in 1999, she said initial MIPs were high but the PLFs were much greater.

“I just quoted an over $600,000-valued home, and the MIP is $12,000, and the amount available is so much less,” she said. “I think if the PLFs were adjusted and the amount available to the borrowers was higher, it would be easier to digest the higher initial MIP.”

Written by Maggie Callahan

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  • I did a triple take on reading the following statement from Mike McCully: “Even though the combined MIP is lower after about four years, 2% upfront is a real stumbling block….”

    Yet that is not always true. McCully is assuming that the average month end balance due will be sufficient so that the ongoing MIP rate of 1.25% will create a high accrued but unpaid MIP balance due.

    However, if the senior only wants a cash reserve and will not have a large balance due for any substantial period of time, having the 2% IMIP rate with a 0.5% ongoing MIP rate could produce higher accrued MIP costs than a 0.5% IMIP with a 1.25% ongoing rate HECM, depending on facts and circumstances. Thus the answer as to what MIP structure produces the overall lowest MIP cost is very dependent on actual use of the line of credit on an adjustable rate HECM.

    On the other hand, with a fixed rate HECM where no pay downs will be made and the maximum draw will be made with mandatory obligations of 85% or more, the answer seems very straight forward as McCully stated.

  • It’s a wonder why HUD does not recognize the value in a lower upfront MIP, especially for those in the “planning stage”. It would generate volume, which would increase the fund balance and they still collect on the back end. As much thought went in to this as did the H2H refi calculation in place now – some very specific people know exactly what I am referring to here.

    • Ed,

      I am very lost.

      The 10/2 changes were not made to harm seniors but to stop the flowing HECM losses in the MMIF. You make it like intended changes to injure seniors. You need much education on the MMIF and what will happen if Congress decides to temporarily or permanently stop insuring HECMs. If you thing PLFs are low now….

      This is not a borrower capacity or willingness repayment issue. This is a collateral loan only. Collateral appreciation in Camden, NJ is not the same as Huntington Beach, CA.

      H2H needs to be slowed down. It hurts investor willingness to pay higher premiums.

      • Bram, my comment on the H2H refi is a reference to the thought process involved with HUD in the changes that they made. The H2H refi, now, results in a significantly lower MIP collected – bad move. I don’t believe that anyone makes changes to actually “harm” anyone; I did not say that. What I stated was a lower MIP in certain circumstance would spur an increase in volume and therefore add to the fund overall, especially if the line is ultimately used. Having 20 years in this industry and worked in all facets of such, I have a tremendous understanding of the fund and the working of the fund.

      • Ed,

        The problem is the greater the endorsement volume in a fiscal year (every fiscal year since fiscal 2009 to fiscal 2017) has only added losses to that year’s book of business.

        As to 20 years, I have no idea what that has to do with HECMs in the MMIF. HECMs have only entered the MMIF since fiscal 2009.

        Until 10/1/2008, all HECMs endorsed in a fiscal year were added to the G&SRI Fund. What happened with HECMs in that fund is not open to the public. Certainly there never was an actuarial report provided to Congress on HECMs until late 2010 which was also posted on the HUD website for public consumption.

      • I’m a little late to the discussion, but in economics we call this elasticity of demand – the response of a consumer when faced with a price change. The initial cost of a HECM went up… and volume naturally decreased. But with such a radical change, it is hard to tell where the optimal IMIP structure resides. Nevertheless, I am optimistic our current leadership will figure it out in time.
        Regarding the separate issue of H2H refinances, I know exactly the point Ed is making. The new IMIP threshold in the final rule is a clear mistake that I hope will be remedied with future rulemaking. No borrower should be able to increase risk to the fund (with a refinance) without paying an initial premium.

      • Dan,

        This is not a general economic issue but rather an MMIF projected loss issue and a factual one. This is an insurance issue and thus a cost of the lender who has the right to pass it along to the borrower or absorb it directly. Absorbing such cost is NOT new to the industry.

        The 10/2/2017 increase in IMIP was done by current HUD leadership. As to any other leadership, their relevance in the process was to be ignored as they absolutely should have been.

        H2H IMIP is a matter of fairness, but in this case, fairness to the forward MMIF borrowers.

      • Dan,

        I have no interest in H2H refinancing.

        I believe that the high percentage of H2H was a huge problem for Ginnie Mae investors in prior fiscal years, due to truncating the period in which they have to recover the premiums they pay to lenders. The refi abuses of the past (more frequent commissions for originators) have made GNMA investors leery of the honesty of the projected life of HECMs provided in the period of investor due diligence.

      • Then we are in 100% agreement. The point Ed was making is that many new H2H refinances now “under-pay” IMIP, or pay no IMIP, because of one sentence in the Final Rule.

  • Having focused my “practice” on CPAs and CFPs and their middle income+ clients, educating them on how a HECM LOC could be “the fourth leg of the retirement stool”; a hedge against future unknowns – exactly what the industry has been working to accomplish; the 2% initial MIP decimated my business. It is one thing to tell a CFP their client is going to pay $3,000 on a $600,000 home; but, ramp that up to $12,000 and add in a $6,000 origination fee, and the economics just don’t work out anymore.
    It is sad to me, that this administration choose to take away a very viable safety net from millions of struggling middle class families, when we all know there is a retirement savings crisis on the horizon. How short-sighted of them.

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