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When HUD released their expected changes to the Home Equity Conversion Mortgage Program (Mortgage Letter 2013-27), or the federally insured reverse mortgage many asked “Where are the new lending ratios?”. Well the new Principal Limit Factors are here (download PLF Factor Table here).
Important Points to Ponder:
- Many expected (myself included) that HUD would split the difference in lending ratios between the Standard and Saver. That is not the case. HUD has basically given us a Saver with a graduated upfront Mortgage Insurance Premium based on the percentage of available funds used in the first year. Basically the new Stand-Alone HECM gives 15% less than the standard across all ages and .6% – 8.2% than the Saver based on age.
- **High Interest Rates spell trouble above 10%. This has been the case since the October 2010 PLF table update but is a little known fact. HUD says that it is not financially feasible to offer HECMs if interest rates reached 10% or higher and reiterates this point in their latest PLF Factor Tables.
- The product is still viable for those working with financial professionals. While the Saver will cease, it’s introduction opened up the door of using the HECM as a legitimate planning tool. Despite higher upfront MIP charged for those only seeking a line of credit the costs are still negligible and the lending ratios still support a robust line of credit.
16 Comments
Excellent ‘quick analysis’, Shannon. While I find the new PLFs very disappointing, I agree that the use of the program in a pro-active way with clients of financial professionals will still be viable. We took a step backward in their acceptance of the product on a ‘discretionary’ basis, however, with the substantial increase in up-front MIP over the SAVER.
Shannon, You won’t approve what I would really like to say, so what is the point.
This is a terrible response from FHA. We expected a reduction about half way between Standard and Saver, but that is not what we got. Not only did they cut the PLF more, they put super impositions on how much can be drawn.
Does” Boss Hog Math” ring any bells? We’ve been Boss Hogged!
You are approved my friend. We always welcome views that may differ from ours or our readership. Thanks again for speaking out.
Did we expect a better product mix from the government who allowed no input from the public or professionals? Maybe I missed out the last few decades of history. I did not hear about the times that the government did a better job than private enterprise.
HOW MANY MORE PEOPLE DID THEY
ELIMINATE AND HOW MUCH MORE DID THEY REDUCE OUR INCOME ????
Hi Shannon,
I’ve been telling you that it’s not going to be pretty. What could we expect? This program was designed by the lenders represented by NRMLA and FHA. Also, it should be noted….this program was designed by the same entities that designed the previous programs including a fixed rate Standard which supposedly caused 70% of the defaults for taxes and insurance payments which got them into this mess. Seriously, should we be surprised?
Apples to Apples- Borrower age 68 3% interest-
New Product PLF- .554
current saver PLF- .543
Age 80
thru 9/30- saver PLF- .578
New Product- PLF- .610
and you can borrow up to 70% of that with an obligation in the first 12 months- correct?
Just so, Nancy. Even paying a higher mortgage insurance premium, some fixed-rate borrowers will do better waiting for the new principal limit factor.
Let us move away from reactions and look what it is HUD is telling us. The first thing is the MMI Fund is really in trouble. HUD is simply saying that like fighting a massive forest fire, the fuel in front of the fire must be cut down so that it does not reinvigorate the flames. By cutting down the PLFs and capping the amount of proceeds which can be taken in the first year, HUD is trying to get in control of the future book of business.
These may be drastic steps but if you do not believe they are necessary then reread Sections 292(a) and 292(a)(1) of H.R. 2767, which read as follows: “(a) Repeals- Effective upon the expiration of the 2-year period that begins upon the date of the enactment of this Act, the following sections are repealed:
(1) HOME EQUITY CONVERSION MORTGAGE PROGRAM- Section 255 of the National Housing Act (12 U.S.C. 1715z-20).” This bill was voted out of committee for a vote by the full House following their current recess.
Then we must look at the default situation. It has been absolutely atrocious despite the somewhat anemic efforts of counseling. While financial assessment deals with this directly as to future closings, lower PLFs and the new cap deal with it somewhat indirectly starting next month.
While the pill is bitter to swallow, it is our own pushing of the fixed rate HECM and later fixed rate HECM Standard combined with HUD’s own inaction which has resulted in this mess. Threatened with the loss of the HECM program, for now we need to swallow deep and press forward. As in fighting fires, as the situation is corrected, drastic measures can be reduced.
They’re pushing for private money to come in faster than it wants to….this will speed it up especially w/ rising rates.
Mr. Boyle,
The people at HUD know that private lenders will not rush into the HECM space. They cannot even get into the high valued home space right now.
If interest rates substantially rise, who will offer proprietary reverse mortgages? Mortgages protected by PMI are not as highly valued by the investment community as those protected by FHA insurance and GNMA guarantees. Can you provide one example of a proprietary reverse mortgage product which was protected by PMI?
This is entirely contrary to most Government run programs. Projected loss in 10 years Of 2.8 Billion, based on somewhat negative property values.
So bottom line, who does it hurt the most. The senior community, who is already suffering. Cash for Clunkers lost twice that mount in just 20 months. As long as we as an industry stand by and do nothing we will continue get results such as these.
Mr. Danner,
HUD is projecting the HECM portion of the MMI Fund will have a $5.2 billion negative net position as of the end of this month. Then there is the over $2.2 billion transferred from other MMI Fund programs during fiscal years 2010 and 2011. That is over $7.4 billion in losses in just five years; yet the law requires that the capital reserve for the MMI Fund be at least 2% of the outstanding insurance in force which is about another $2.4 billion for the HECMs endorsed during the last five years and still outstanding.
So the HECM portion of the MMI Fund is estimated by HUD to be about $10 billion out of compliance with the self-sustaining standard within a little over 3 weeks.
Cash for Clunkers was terminated. Are you suggesting the HECM program should be terminated? I don’t think so but using that program as a reason to keep HECMs sort of loses its impact since Cash for Clunkers was started months after new HECM endorsements began being accounted for under the MMI Fund. So far only about 360,000 HECMs are being accounted for by that Fund; that is about 10% of the seniors who turned 65 during this fiscal year. So how in the world does less than 2% of all seniors equate to abandoning our seniors? Under what standard does that measure up to a good argument?
We would all love it if the HECM portion of the MMI Fund were JUST $2.8 billion out of compliance at this point. Don’t get lost in the numbers so much you do not see what the full picture is.
Most of my clients are struggling to live on SSA and have medical bills. The previous RM program was a life line that allowed them to pay off current mortgages, credit cards equity loans and live o there fixed income without applying for assistance. The new restrictions will drive a high number to welfare or assistance.
I was thinking of transitioning my mortgage business from traditional to reverse. After reading this, sort of scary. Would you recommend a move into this niche for someone who understands and appreciates the benefits of this product. thanks
bull,
We are an entire industry in transition.
The changes HUD is mandating has eliminated a significant portion of our very profitable traditional market. Some of the more respected industry analysts are predicting that total industry UPBs at closing on new originations could be lower by as much as 49% than the UPBs at closing we had during last fiscal year. Add to that reduced investor premiums being paid for HECMs and lender revenues could be down as much as 60-70%. Imagine seeing your revenues for the current fiscal year being 30%-40% of what it was in the prior fiscal year.
Offsetting that grim picture are origination fees which when not discounted could make up for a significant part of the lost YSP but certainly not all. Because of the high volume of very profitable fixed rate Standards, origination fees were the exception rather than the rule over the last few fiscal years. That situation may turn itself around during this fiscal year with the smaller backend per HECM we expect to see this fiscal year.
Some industry optimists are saying endorsements could increase this fiscal year but like most unrealistic estimates, they provide no foundation for that conclusion other than faith in the market and demographics both of which have yet to show up in HUD provided endorsement numbers.
Yet some predict that the results for fiscal year 2014 may end up resembling fiscal 2003 when endorsements were about one-third of our endorsements in fiscal 2009. Fiscal 2003 was a period when we were still groping for our market niche.
Things are different now than in fiscal 2003 since our products are beginning to find some traction in the financial planning community and we have HECMs for purchase. The proceeds we can offer today are much better than what we could offer in fiscal 2003.
Some expect HUD to back off of their restrictions over the next five years but the question remains how far and how much? Then there is the mood in Congress over projected HECM losses, HUD overly optimistic presentations on the future of the HECM program, the so called $1.685 billion bailout last month, and the continued inability of the MMI Fund to meet mandated 2% capital reserves.
So if you do well with REALTORS and financial advisors, transitioning into the HECM industry may be a great idea. If not, then adding reverse mortgages to your other mortgage offerings might be a better approach. Good luck with your decision.