The new year is upon us and we can leave 2016 in the rear view mirror, with the exception of HUD’s pending reverse mortgage rules. Are additional HECM reforms truly needed to strengthen the HECM program?

In the wake of the election and the new year, lingering HECM program changes can be easily forgotten. Last May FHA introduced a series of new rules to strengthen the Home Equity Conversion Mortgage program. The changes included required HECM counseling prior to signing s mortgage contract, disclosure of all HECM features and options, and most problematically, a 5% lifetime cap on the adjustable rate HECM with a 1% annual interest rate cap. Numerous industry participants and the National Reverse Mortgage Lenders Association submitted inputs to the agency in the Federal Register. Several months have passed and yet there is no word if these substantial product changes will be enacted. Presently the proposed rule changes are in the final rule stage prior to regulatory review.

Many industry participants have voiced their concern that these changes will negatively impact the HECM program. Perhaps a more relevant point is the question if such changes are even necessary. Is the HECM program’s economic outlook as bleak as HUD’s recent report to Congress suggests?

HUD’s most recent report to Congress shows the HECM portion of FHA’s portfolio is valued at a negative $7.7 billion dollars. That represents a $13 billion dollar swing to the negative dropping from the previous year’s valuation of a positive $6.8 billion. Much of the impact can be attributed to slowing home appreciation upon which much of the economic modeling depends upon.

However, what is somewhat problematic are reports that HUD’s internal assumption are based on 100% of the available principal limit is used at the beginning of the loan. This assumed front-loaded loan balance is then factored based on future interest rates and the borrower’s age. This mathematical approach drastically increase the negative amortization of the HECM loan and the assumed ending loan balance…

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