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