A new risk retention requirement proposal that would mandate a 5% capital reserve for non-government backed mortgages doesn’t immediately appear to have a direct impact on the reverse market, but some say it could influence one aspect of the industry’s future: the return of private-backed reverse mortgage products.
The risk retention proposal, made earlier this month and now open for comments, is part of a greater initiative to heighten credit requirements for residential borrowers. Because essentially all reverse mortgages are insured by the Federal Housing Administration under the HECM program, loans will meet the requirements of Qualified Residential Mortgages (QRMs) and will not be subject to the capital reserve stipulation.
“From a reverse perspective we have very little history of private secondary markets to begin with, so it’s more likely that whatever changes in FHA lending limits and principal limits over time end up defining the size [of the secondary market] for us,” said John Lunde, president of Reverse Market Insight. “Lower loan limits and principal limits mean larger secondary market and higher equal smaller. We as an industry are exposed from that standpoint, but the cure is painfully similar to the stress Fannie Mae caused a few years ago by taking a series of steps to lower their pricing for HECM loans to lower their market share.”
Earlier this year, the Obama administration recommended Congress allow the present increase in FHA loan limits to expire on October 1, 2011. If that happens, the reduction would likely bring the loan limt for FHA-insured reverse mortgages down from $625,500 to $417,000. By lowering loan limits, the private market could start to find a place in the market, but if risk retention requirements are too strong, it could inhibit such a comeback.
“Clearly, leaving even very low loan-to-value private products out of the QRM category will not help the market come back,” said Jeff Lewis, Generation Mortgage Company chairman.
With reverse mortgage market penetration lingering around the 2% mark, some say proprietary products are the key to growing the industry overall. In speaking about a new joint venture, National Senior Home Equity, of which he is president, industry veteran Bart Johnson told RMD the proprietary market must come back in order for market penetration to increase.
“Just having HECM in the industry puts us at the point where we’re always going to be at 2%, and it will take proprietary market coming back to get higher. We ought to have eight to 10% market penetration based on needs and longevity,” he said.
Written by Elizabeth Ecker