Reverse Mortgage Industry Cautious About Trump HECM Proposals

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).

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“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.”

Tiered pricing

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.

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  • My gut reaction to this is that HUD is looking to get volume down to a specific level, and all of these actions that it continues to take are with that purpose in mind. Whether that be 10-15K loans per year or whatever target this administration has set.

    I’m extremely disappointed in the second term Commissioner Montgomery. His hands may be tied, but I see nothing favorable from his actions so far (that would benefit the industry or the borrower). Nothing further should have been done to the program until the back end was fixed, and that just doesn’t appear to be the priority.

  • IMHO, the geographic lending limits would severely upset the entire HECM marketplace, as (basically) dropping the amount of money which can be accessed from $363,000 to $158,000 creates a product with an extremely limited audience. And, frankly, that audience can generally be described as a higher risk pool.
    Further, as noted above, it also would create a big void between the $360,000 valued home versus the $725,000 home. Disallowing this entire swath of borrowers means the financial planning community’s use (tenuous as it is) would lose the very benefit many of these borrowers are using the HECM LOC for… that is a hedge against market downturns by better managing their sequence of returns risk.
    The real problem isn’t the loans being made today, as their drain on the MMIF is minimal and will likely remain so from the changes instituted by HUD since 2013. The issue is the old reverse loans prior to. Frankly, those may continue to be a drain, but time will solve those problems generally. Continuing to force current HECM borrowers to bail out the past sins is unfortunate, but it does seem to be working positively overall.

    • Richard,

      Your comment is full of anecdote but its weakest point is no citations to establish that its reasoning is well grounded in fact.

      So let us look at a few key points. First, the drop in the lending will NOT produce a drop in the principal limit (I guess) of just $363,000 to $158,000. At all expected interest rates, the principal limit still varies by age. You are jumping to an unfounded conclusion without describing the age of the borrower and the expected interest rate you are using.

      Second, we do not know what HUD is proposing. Is HUD proposing that San Francisco, CA will retain the $726,525 lending limit based on the average price of a home there and that Arlington Texas will see a lending limit much closer to $417,000? This would all have to be negotiated in the legislation if it gets that far. So where are definite figures you are using, coming from? To me it is worthless conjecture until legislation is formulated.

      Yes, the financial advising community may be concerned about this proposal but why are we fueling that fire with unfounded hype. When it comes to proposing proposed legislation, nothing is all that sure. Yes, I meant to use two words with their root in propose. It shows how really speculative your comment is. Until we get some information about what will be proposed, we are blindly discussing more myth than fact.

      One of the most unfounded beliefs in our industry is that any financial adviser is using HECMs to hedge the sequence of returns risk. With NO reliable study demonstrating that the current HECM will perform as well as the HECM Saver in the examples produced over 5 years ago, what evidence can we provide that the concept works on a HECM closed after 2013? Beyond that there is no historical/empirical evidence showing this strategy works. All we have are forecasts with questionable assumptions. Forecasts are not empirical evidence. What the industry has produced is a bunch of true believers who either do not or cannot question what they are told.

      You say: “The real problem isn’t the loans being made today, as their drain on the MMIF is minimal and will likely remain so from the changes instituted by HUD since 2013. The issue is the old reverse loans prior to. Frankly, those may continue to be a drain, but time will solve those problems generally.” Where do you get this nonsense. Based solely on data provided by HUD, the actuarially determined loss for fiscal 2018 had the largest per HECM endorsed loss than ANY other fiscal year accounted for in the MMIF. That was based on the losses on all active HECMs endorsed in prior years that are accounted for in the MMIF being updated for fiscal 2018 presumptions and assumptions.

      So that you can see the issue yourself, look at Table 6 displaying the total projected losses for each fiscal year cohort under the heading, “FHA,” on Page 15 of the Actuarial Annual Review of the HECMs in the MMIF for fiscal 2018 dated 11/15/2018, located on the HUD website at

      https://www.hud.gov/sites/dfiles/Housing/documents/ActuarialMMIFHECM2018.pdf

      Then go to total HECM endorsements for each fiscal year provided by NRMLA located just below the graph at

      https://www.nrmlaonline.org/2019/08/05/annual-hecm-endorsement-chart

      Then divide by loss in a fiscal year by the endorsements produced in that same fiscal year. The loss per HECM endorsed for each fiscal year is an amazing picture.

  • Since the HECM Final Rule was implemented (9/19/17), HECM-to-HECM (H2H) refinances have added unnecessary risk to the MMIF without proper compensation to FHA for that risk. That’s a problem.

    But let’s be honest – the formula for calculating the Initial MIP for refinances [found in 24 CFR § 206.53 (c)(1)] was a mistake. And that was not the current Commissioners mistake. If H2H loans are a drain on the fund, then maybe H2H borrowers should actually contribute initial premiums commensurate with the added risk they create. This was something we had before the final rule.

  • I agree with Dan, (if I’m understanding correctly), Instead of completely denying a senior the ability to re fianance a HECM, why dont they allow it witht a more fair upfront MIP and maybe remove the credit altorgether? Seems like they are losing possible premiums in the future?

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