The lending limit for federally-backed reverse mortgages is increasing for the sixth consecutive year in a row, set to hit $970,800 in 2022.
In an unexpected move late Tuesday night, the Federal Housing Administration (FHA) has raised the lending limit for the Home Equity Conversion Mortgage (HECM) program on the same day that the Federal Housing Finance Agency (FHFA) announced it would be increasing the conforming loan limits on mortgages to be acquired by the Federal National Mortgage Association (FNMA, or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (FHLMC, or “Freddie Mac”).
According to the publication of Mortgagee Letter (ML) 2021-29, the new maximum claim amount (MCA) for FHA-insured HECMs is a pronounced rise of nearly $150,000 when compared to the 2021 lending limit of $822,375. The figure is in line with the higher maximum conforming loan limit announced by FHFA earlier on Tuesday, and is calculated as 150% of Freddie Mac’s national conforming limit of $647,200.
FHFA conforming loan limits
In most of the United States, the maximum conforming loan limit for one-unit properties in 2022 will be $647,200, an increase from $548,250 in 2021. For areas that generally feature higher-than-average home values, defined as places where median home values exceed 115% of the baseline, FHFA has set a higher maximum figure of $970,800 for 2022, up from 2021’s figure of $822,375.
“Median home values generally increased in high-cost areas in 2021, which increased their conforming loan limits (CLL). The new ceiling loan limit for one-unit properties will be $970,800, which is 150% of $647,200,” FHFA said in its announcement of the new loan limits.
Accelerated home price appreciation (HPA) is attributed as the primary cause of the rise being observed in 2022’s FHFA limits. According to FHFA’s third quarter 2021 Housing Price Index (HPI) report also published on Tuesday, home prices increased by an average of 18.5% between the third quarters of 2020 and 2021, more than twice the growth rate observed at the same period last year.
Because of this, the baseline maximum conforming loan limit in 2022 will increase by the same percentage, FHFA said.
Potential impact of a $970,800 HECM lending limit
FHFA does not have authority over the lending limits tied to reverse mortgages; however, the Federal Housing Administration (FHA) has typically aligned them with the new Fannie and Freddie limits in previous years. This year’s new limit marks the sixth consecutive time that has been the case.
The Housing and Economic Recovery Act (HERA) of 2008 dictates that the baseline conforming loan limit must be adjusted annually for Fannie and Freddie in order to reflect changes in the average U.S. home price.
Now that the HECM lending limit is very quickly approaching $1 million nationally, the possibility exists that such lending limits may arrest the potential for borrowers of higher-value homes to be served by proprietary reverse mortgages, which are typically designed to provide a reverse mortgage option for homeowners with appraised values of up to $4 million.
However, as noted in FHA’s Annual Report to Congress released earlier this month, the reverse mortgage portion of the Mutual Mortgage Insurance (MMI) Fund reached positive territory for the first time since 2015, with much of the improvement in the HECM portfolio’s capital ratio being attributed to strong HPA over the past year, according to FHA.
“The financial performance of the HECM portfolio has improved in each of the last three years and is now positive for the first time since FY 2015,” FHA’s Annual Report reads. “The projections of the HECM portfolio’s financial performance are more sensitive to changes in Home Price Appreciation (HPA), and as a result, the strong HPA experienced in recent years explains the increase in the ratio in FY 2021.”
There is also the potential for this much higher loan limit to further fuel HECM-to-HECM refinances according to an industry participant, which has already seen inflated activity in 2021 due to the combination of accelerating HPA and historically low interest rates. According to recent data, HECM-to-HECM refinances made up 46.68% of reverse mortgage volume measured in fiscal year 2021, up from 25.66% in FY 2020, based on data included in FHA’s Annual Report.
Reverse mortgage posture headed into 2022
While disruptive changes made to the HECM program in 2017 and 2018 under the administration of President Donald Trump likely had an impact on the improved performance of the HECM book, former Deputy HUD Secretary Brian Montgomery also expressed that the general strength of HPA was a major contributing factor to the improved performance of the portfolio.
“While recognizing that the HECM stand-alone capital ratio is highly sensitive to HPA, even more so than the forward book, the changes made to the reverse program in 2017 and 2018, and changes made by previous Administrations, nevertheless have helped move a program that had been struggling to demonstrate sustainability in a positive direction and into the black,” Montgomery wrote in a commentary published by RMD this week. “That said, [strong HPA] explains the welcome and dramatic increase in the ratio from FY 2020 to FY 2021. It does not, however, provide a reason for complacency or assurance of future (positive) results.”
One year ago when FHA released lending limits for 2021 while under the leadership of the Trump administration, then-FHA Commissioner Dana Wade openly questioned whether or not FHA was achieving its mission with lending limits approaching $1 million.
“FHA has seen consistent increases in loan limits during the past few years, putting it in a position to serve a segment of borrowers that may be better served by the conventional [non-agency] market,” Wade said at the time. “FHA’s mission is to support low-to-moderate income borrowers, so why does the law permit FHA to insure mortgages up to $822,375? This is a question for Congress and the taxpayers who stand behind FHA to answer.”
Keeping up with higher home values
However, HPA one year ago did not accelerate as quickly as it appears to be moving this year, according to FHFA data. Significantly higher home prices across the country naturally affect the proverbial “height” of the barrier to entry for low-to-moderate-income borrowers and first-time homebuyers alike, and the forward market could be negatively affected if the federal government does not keep pace with higher home values.
Additionally, officials with the Biden administration made clear to RMD earlier this year that while current FHA leadership is aware of the perspectives of officials from the preceding administration, those concerns do not necessarily represent “‘ongoing dialogue’ about the HECM program under the Biden Administration,” a spokesperson told RMD in February.
Editor’s note: the original version of this story focused solely on the FHFA conforming loan limits announced on Tuesday, and has been updated to include information related to the rise in the HECM lending limit. RMD will update this story as more information becomes available.