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How the $1M HECM limit could cut into private-label business in 2023

A higher limit combined with proprietary product changes could solidify HECM dominance in the new year

The Home Equity Conversion Mortgage (HECM) limit of $1,089,300 is officially in effect for case numbers assigned on or after January 1. HECM loans are typically the main product offered by the reverse mortgage industry, and the new limit, coupled with recent private-label product challenges, may help to solidify HECM’s dominance throughout 2023, according to Understanding Reverse author Dan Hultquist.

While higher-value areas historically found value in proprietary products, these areas could now find increased utility with a HECM, he said.

Greater HECM utility

While there are certain misconceptions about the new HECM limit, these misconceptions do not diminish the newfound value a HECM could have for owners of higher-value homes, Hultquist said.

“A lot of people refer to [the HECM limit] as the maximum claim amount, but it’s not,” he said. “The maximum claim amount for HECM loan is the home’s value up to that HECM limit. What that does for us, though, is it opens the door to work with borrowers who own much more valuable homes.”

Most proprietary reverse mortgage products have limits of up to $4 million, which could make sense for certain homeowners who want to unlock a home’s value.

For more average homeowners, a HECM may now make more sense, even in higher-value areas. Take, for example, the average home price in California, which is $762,245, according to recent data from Zillow.

“There are areas and pockets of the country where if somebody has a very high-value home, they were looking at proprietary products,” Hultquist said. “And we’ve seen a lot of changes to the proprietary products in 2022.”

A place for proprietary products

Some private-label products have experienced recent turbulence. In mid-October 2022, industry-leading lender American Advisors Group (AAG) announced that it would cease offering the Finance of America Reverse (FAR) proprietary product through a correspondent partnership. Reverse Mortgage Funding (RMF) also ceased originations in late November prior to filing for bankruptcy, which took its Equity Elite product off the board.

However, there is still room for these types of proprietary products — even with the higher HECM limit.

While Hultquist acknowledged that a $1 million HECM limit could eat into proprietary business, he did not think the need for proprietary products would dwindle anytime soon.

“I know some of those who own those proprietary products would love to see more utilization of those,” he said. “There’s still going to be a market for them; it’s just we’ve seen a lot of volatility on the proprietary side that maybe we haven’t seen on the HECM side.”

Generally speaking, Hultquist describes himself as a “HECM purist” who would prefer to see the origination of a HECM. However, borrower need should overrule any other concern, he said.

“If it turns out the proprietary is a better option, then by all means let’s explore those options,” he said. “In some cases, the costs are a little bit less because there’s no upfront mortgage insurance premium (MIP). Sure, the interest is higher, but there’s no MIP. So there are some advantages, and there are some niche proprietary products that are probably going to emerge over the next year to satisfy the needs of higher-priced homeowners.”

The proprietary product landscape has also been shaped by many of the product changes worked into the HECM program by HUD and the Federal Housing Administration (FHA) over the years.

“Right now, I think the HECM program is as strong as it’s been,” FHA Commissioner Julia Gordon told RMD last year. “We have, over the years, gained a lot of experience with this product, and I think we have learned how to better manage it. Relationships with stakeholders, both on the industry side and on the consumer advocacy side, are good. And, it is a market where this product right now is useful for many people who see a lot of equity in their home that they can’t otherwise access.”

The rate environment

Much of the reverse mortgage value proposition may come from the rate environment, however. And with the way rates are expected to play out, the additional value gained from the 2023 HECM limit may dwindle, Hultquist said.

“HECMs with FHA case numbers assigned last week fell under the 2022 HECM limit of $970,800,” Hultquist said. “The good news is that HECMs with FHA case numbers assigned this week fall under the 2023 HECM limit of $1,089,300. That is an increase of $118,500.” 

What this means for a 73-year-old with a 2.50% lender margin is that the hypothetical borrower would see an increase in their principal limit of $49,652. This is good news, but comes with a caveat regarding rates, Hultquist told RMD on Tuesday.

“My warning to loan originators and clients is that the benefit of increased HECM limits can slip away from our clients rather quickly when rates change,” he said. “For example, with Wednesday’s expected rate increase (+19 basis points), that same borrower profile with an application date of Wednesday, 1/4/23, will lose $11,982 of that principal limit gain because of shifting rates.”

Listen to the full discussion with Hultquist, a 2022 RMD Changemaker, on the latest episode of The RMD Podcast.