Late last week, the United States Department of the Treasury under the direction of President Donald J. Trump unveiled a new series of proposals aimed at improving the nation’s housing finance system, including a number of proposed changes to the Home Equity Conversion Mortgage (HECM) program. While the housing industry largely applauded the proposed changes, the reverse mortgage industry is expressing generally cautious optimism over the potential effects they could bring to the business.
Among the key HECM-related proposals are the elimination of HECM-to-HECM refinancing, the creation of geographically-based HECM lending limits as opposed to operating a single national standard limit, the development of new HECM servicing standards and the removal of the HECM program from the Mutual Mortgage Insurance Fund (MMIF).
Eliminating HECM-to-HECM refinancing
The elimination of HECM-to-HECM refinancing, if pursued and implemented, would be an interesting development for the reverse mortgage industry, but it largely depends on the manner with which it would be implemented, says John Lunde, president of Reverse Market Insight (RMI).
“Ultimately, [this proposal] would reduce the refi volume directly but might also reduce non-refi volume, as it could introduce more cautious approach by borrowers if they can’t refinance if/when better rates/terms come along,” Lunde tells RMD in an email. “[That can happen] particularly if it was very strict in saying a borrower could only ever do one HECM on a specific property. It seems like a very strong reaction, and I’m curious what the motivating factor for it is.”
If this is a change that’s pursued, then one originator hopes that it can have a positive impact on the situations that non-borrowing spouses of reverse mortgage loans may face.
“If this change is made, then I sincerely hope [FHA] will allow a carve out for adding non-borrowing spouses to title,” says Laurie MacNaughton, reverse mortgage consultant with Atlantic Coast Mortgage. “If a non-borrowing spouse can’t afford legal representation, it can be very difficult for them to remain in the home. I’ve waded into many of these situations, and they’re tough.”
In the past two years, MacNaughton’s instances of facilitating HECM-to-HECM refinances have been “almost exclusively” dealing with adding non-borrowing spouses to title, she says.
Geographic lending limits
The proposal aimed at aligning HECM lending limits based on location as opposed to a single, national standard would align the reverse mortgage program more closely with the forward mortgage program, as specified in the proposal. This would actually be a return to a previous standard that the HECM program has previously observed, Lunde says, though it hasn’t been the case since 2006 when a national lending limit was first established by FHA.
“[Regional lending limits] create more of a nationwide opportunity for ‘jumbo’ reverse mortgage offerings, whereas before those were heavily concentrated in a few states,” Lunde says. “It could easily lead to short-term gaps in product coverage where HECM has pulled back on lending limits where proprietary products have not yet been licensed/offered. That’s unfortunate for the potential borrowers affected but not an enormous effect from industry perspective.”
While there is an argument to be made for this change, it may have a negative impact on those with higher-valued homes, adds MacNaughton.
“Of the [proposed changes], this would have, potentially, the least impact,” she says. “It could penalize people in higher-valued homes, and I think there would be a loud cry if it does happen, but I understand why FHA would want to go that way.”
Among the recommendations is a proposal to administratively implement a tiered pricing system as a measure of protection for the MMIF, and to ensure it is pricing appropriately for higher-risk loans. This proposal could be a positive development for the reverse mortgage industry, particularly as it looks beyond its primarily typical borrower profile and ahead at more strategically-driven borrowers.
“Tiered pricing could be a very positive development for HECM, particularly if it enables something like the old ‘Saver’ product that offered significantly lower upfront mortgage insurance premiums (MIP) for lower risk borrowers,” Lunde says. “That could significantly enhance the development of financial planning borrowers as the industry continues shifting away from a traditional, ‘needs-based’ borrower focus.”
Trade association response
The plan as put forth by representatives of the White House and the Department of Housing and Urban Development (HUD) demonstrates that the HECM program is still something that the government is committed to. This is according to National Reverse Mortgage Lenders Association (NRMLA) EVP Steve Irwin.
“HUD’s Housing Finance Reform Plan, which was delivered in response to the Presidential Memorandum of March 2019, demonstrates HUD’s serious commitment to the HECM program and the Department’s desire to ensure the HECM program operates on a sound financial footing,” Irwin said in an email to RMD. “There are a few administrative proposals, and a couple of legislative proposals, put forth, all of which will be taken up by the NRMLA Board of Directors when they convene in Washington, DC this coming September 18.”
The board is “closely examining” each set of proposals, and is working to determine an association position on each individual recommendation, Irwin adds.