Last week, the Federal Housing Administration released a Mortgagee Letter (ML) detailing that the lending limit for government-backed Home Equity Conversion Mortgage (HECM) loans would be increasing for the fourth consecutive year in a row, to $765,600 beginning with case numbers assigned on January 1, 2020.
This represents a welcome development for many reverse mortgage lending companies and originators who have contended with changes to the HECM program over the last few years, including the collateral risk assessment (CRA) and reductions to principal limit factors (PLFs).
Lending companies’ perspectives
“The rise in the lending limit is welcomed news as it will allow more borrowers to benefit from the HECM product, especially those who may not have previously qualified under the previous lending limit,” says Paul Fiore, chief of retail sales and operations at American Advisors Group (AAG). “With the continued expansion of private products in the market, the impact of increasing the lending limit on HECM may not be as great as it once was, but it does help fill a gap that exists between where the HECM provides a greater overall benefit to the borrower compared to a private product.”
The numbers work out favorably for borrowers and lenders alike, according to Dan Hultquist, VP of organizational development at Finance of America Reverse (FAR). While the timing of the new lending limit’s announcement could present a drawback in terms of lowering case number assignments in the final month of the year, the numbers are generally positive, he says.
“Clearly this is a good thing for HECM lenders and borrowers,” says Hultquist. “The good news is that the Maximum Claim Amount (MCA) will increase $39,075 for homes that exceed the HECM limit, principal limits for these homes will increase approximately $19,500, January case number assignments should improve (as well as February closings), and loan originators now have the opportunity to reconnect with leads in their databases regarding the changes. There are bound to be high-value properties where the new limits may be advantageous.”
The higher lending limit could also have a positive impact from the perspective of the federal government, particularly as it relates to the HECM program’s solvency within the Mutual Mortgage Insurance (MMI) fund, he adds.
“I believe this is a smart move from a regulatory standpoint as well – these homes now contribute as much as $15,312 (IMIP) into the MMI fund,” Hultquist says. “In addition, these loans tend to be lower risk to the fund on the back-end as homes that exceed the HECM limit often perform better in appreciation, maintenance, and equity position over time.”
The rise in the limit also helps to create additional options, according to Open Mortgage CEO Scott Gordon.
“It’s great to see the increase as it allows that many more borrowers a choice between the HECM and the new proprietaries,” Gordon tells RMD. “Choice is good!”
The rise in the lending limit also serves to further close a gap between traditional HECM loans and proprietary/portfolio reverse mortgages, which ultimately serves to expand the kinds of borrowers that reverse mortgage products can serve. This is according to Scott Harmes, manager of the C2 Reverse division of C2 Financial Corp in San Diego, Calif.
“Now that we’re at $765,600, that’s pushing further into what has traditionally been the portfolio value range,” Harmes tells RMD. “And now, the portfolio value range has dropped clear down into the $400,000 range. So, if you think of the number of properties, especially in our market area in California, the number of properties that fall within that range of $400-800,000, you’re getting a possible majority of the potential reverse mortgage prospects that are going to be in that range. So, that means we’re able to serve a much higher number of people with options, opportunities and flexibility.”
For C2, which lays out portfolio options alongside HECM options for potential borrowers, they may choose a private option that does not require mortgage insurance. Now that the lending limit is higher, though, borrowers could see value in paying the MI due to some of the assurances that come with an FHA-sponsored product, he says.
“So, the fact that we’re going up now to $765,600 pushes further into that traditional portfolio range,” Harmes says. “And again, it gives us opportunities to lay out additional options so we can get more borrowers to take advantage of the benefits that a reverse mortgage can bring them.”
Markets seeing a steady rise in home values also have a greater opportunity to benefit from the increase, according to Brandi Braley with Neighborhood Mortgage in Bellingham, Wash.
“Here in Western Washington, we have seen home values increase year-over-year at a steady pace, so our borrowers are nearing the loan limits [already],” Braley tells RMD. “Once they hit the loan limit, they either have to go to a proprietary loan to access the additional equity in the home, or they lose out on anything over the limit. This increase will help a lot of people in this area to access the maximum equity in their homes. This is great news for everyone.”