The Department of Housing and Urban Development on Tuesday formally announced plans to increase premiums and tighten lending limits on reverse mortgages, citing concerns about the strength of the program and taxpayer losses.
Mortgage insurance premiums on Home Equity Conversion Mortgages will rise from 0.5% to 2.0% of the maximum claim amount at the time of origination. Those figures will be the same for all loans regardless of the initial draw amount, according to a presentation released by HUD; the premium for loans with draws greater than 60% during the first 12 months will drop from 2.5% to the 2.0%. The annual premium will decline from 1.25% of the loan balance to 0.5%.
The Wall Street Journal first reported the news Tuesday morning.
In addition, the average amount of cash that seniors can access will decline from about 64% of the home’s value to 58% based on current rates, the WSJ said.
These changes are set to go in effect for all loans with case numbers assigned on or after October 2, one day after the start of the new fiscal year.
“Given the losses we’re seeing in the program, we have a responsibility to make changes that balance our mission with our responsibility to protect taxpayers,” HUD secretary Ben Carson said in a statement e-mailed to RMD. “Fairness dictates that future HECM loans do not adversely impact the overall health of FHA’s insurance fund, which supports the financing needs of younger, mostly first-time homeowners with traditional FHA mortgages.”
The HECM program’s value within the Mutual Mortgage Insurance Fund was pegged at negative $7.72 billion in fiscal 2016, and HUD noted that the HECM program has generated nearly $12 billion in payouts from the fund since 2009. The value of the HECM program fluctuates over time, however: In 2015, the reverse mortgage portion of the fund generated an estimated $6.78 billion in value; in 2014, the deficit was negative $1.17 billion.
Without this change, the Federal Housing Administration would need an appropriation from Congress in the next few years to sustain the HECM fund, the agency said in a fact sheet released Tuesday. Officials also told the WSJ that the drag created by reverse mortgages has prevented them from lowering insurance premiums on forward mortgages for homeowners.
“We can no longer tolerate putting American taxpayers and future generations of seniors at risk,” the agency said in the fact sheet. “Quite simply, the HECM program is losing money and can no longer remain viable in its present form.”
“The new upfront premiums recognize that all borrowers taking out a HECM, regardless of how much they draw upfront, represent potential risk and should contribute to the fiscal health of new business,” the fact sheet continues.
Carson echoed this sentiment in his statement.
“We’re taking needed and prudent steps to put the HECM program on a more sustainable footing so it can remain a resource for senior borrowers,” Carson said.
The announcement came with an accompanying mortgagee letter, 2017-12, that lays out the changes to mortgage insurance premiums and draw limits. HUD also released a chart showing the effects of the changes in select scenarios, as well as more exhaustive tables of principal limit factors that will become effective October 2.
The latest mortgagee letter is the second released in the last week; letter 2017-11, issued on August 24, detailed new servicing guidance as HUD prepares to implement the HECM final rule on September 19.
The move took the industry by surprise, with the WSJ reporting that leaders were not briefed on the changes beforehand.
David Stevens, president of the Mortgage Bankers Association, expressed support for the moves in a statement released Tuesday afternoon, calling them “moves designed to strengthen the FHA fund and lessen risk to taxpayers.”
“Reverse mortgages are an important financial product for our nation’s seniors, but the program needs to remain financially viable if it is to continue to offer its benefits into the future,” Stevens said.
National Reverse Mortgage Lenders Association president and CEO Peter Bell also released a statement in the afternoon, offering a mixed response that similarly lauded HUD’s decision to shore up the MMI Fund and described the move as a sign of support for the HECM program from the department. But Bell also expressed concerns over the effects on borrowers.
“On one hand, it reaffirms the secretary and department’s commitment to sustaining FHA’s reverse mortgage program for older homeowners while protecting the MMI Fund and taxpayers from future draws on the Treasury,” Bell said in the statement, which RMD received by e-mail.
“On the other hand, these changes diminish the benefit (amount of loan proceeds) available and increase the costs (increased upfront mortgage insurance premium) to most borrowers,” Bell continued.
NRMLA remains in the process of reviewing the new principal limit factor tables.
“We believe that there are alternative options for better managing the HECM program to reduce its overall costs and will continue to advocate for such beneficial changes to the program,” he said.
Written by Alex Spanko