The Department of Housing and Urban Development announced two big changes and the reverse mortgage industry is still trying to figure out what it all means. As expected, HUD reduced the principal limits but surprised the industry by lowering the floor from 5.50 percent to 5.00 percent.
“We made the suggestion for them to lower the floor months ago but they never indicated they were seriously considering it,” said John Lunde, President of Reverse Market Insight. “I like that they did it and how they did it to surprise the industry on the upside for once.”
By lowering the floor, younger borrowers will have access to more in proceeds than before as long as rates remain low. ”The lower interest rate was a sensible adjustment given market reality,” said Michael McCully, Partner at New View Advisors. “Lowering the floor of the look-up tables delivers more benefit to borrowers, and lowers the price at which newly-created HBMS will trade.”
While unable to predict the future, McCully said it’s likely that a reduction in execution for HMBS will be met with price reduction for lenders as well.
Even though the benefit could be short lived if rates rise, lenders welcome the surprise from HUD. “Any program that gets more money to the borrower is good,” said Dave Bancroft, Executive VP of Security One Lending. “The changes provide the potential for younger borrowers to refinance, but because rates are so low, it’s a short term run.”
HUD and investors are concerned about the potential for “churning” – where lenders refinance borrowers even if the benefit is minimal – but several lenders told RMD they don’t expect any sort of “refi-boom”. Because rates will have to rise eventually, the HECM Saver is where lenders see the most opportunity.
From a long term perspective, the HECM Saver provides the industry with a low cost reverse mortgage and the opportunity to reach new breed of customer. “The industry has been catering to a diminishing customer base since home values have depreciated,” said Jean Noble, EVP of Guardian First. “We can’t control home values, so lost production can be made up targeting a higher end client with the HECM Saver.”
This higher end client – someone with no mortgage balance – has been been out of reach in the past because upfront costs of the HECM couldn’t compete with a home equity line of credit. This segment of seniors is much larger than the current audience the industry has been targeting in the past according to Lunde.
His company estimates that the Saver could become 20 percent of all reverse mortgages originated in the next 12 months. “We’re very bullish on the potential volume for the product,” he said.