The good & the bad from recent HECM changes
**CORRECTION** In this piece I inadvertently referred the previous ongoing FHA insurance rate being 1.25% per month prior to October 2nd, 2017. To clarify, I should have stated the ongoing annual MIP was 1.25%. As always, the ongoing MIP is calculated on the proration of the annual rate applied to that month’s outstanding loan balance. My apologies for the confusion- Shannon
The new rules for the federally-insured reverse mortgage that went into effect October 2nd have resulted in much consternation, confusion, and in some cases hyperbole on the part of financial pundits. What nuggets of truth can we glean from the most recent HECM reforms?
1- Upfront costs are substantially increased. Contrary to what some bloggers assert, recent changes do not raise overall costs in exchange for less money. Sure, one could argue that initial costs have spiked, but that ignores the dramatic reduction of ongoing loan costs- those that have the biggest impact on equity consumption, recurring fees, and interest charged. While origination fees are quickly returning and the upfront FHA insurance premium is much higher for those using less than 60% of available funds, the ongoing savings should not be overlooked.
2. Ongoing costs are dramatically reduced. While HECM borrowers are not required to make payments, the growth of the outstanding loan balance should not be ignored. The previous…
…Â Â Download the video transcript here.
3 Comments
The two points I refrain from addressing is class warfare and the direction of marketing. There is little question that Shannon is absolutely right on the class warfare issue. As to the marketing issue, Shannon has a strong expertise that I for one learn from.
As to the first two points, Shannon generally hits the issue on the head. The one variable he leaves out is time.
For very short-term HECMs, costs are up to some degree for HECMs. with case numbers assigned after 10/1/2017
For HECMs with relative.ly short lives and significant balances due, higher costs generally are found with HECMs with case numbers assigned after 10/1/2017. However, we also must look at the issue of mid-term and longer loans where higher costs are found with HECMs where case numbers were assigned after August 3, 2014 but before October 2, 2017. So facts and circumstances come in to play with evaluating which HECMs have the greatest costs.
Further if we look at the Standby Reverse Mortgage Strategy, it is centered around having a line of credit that cannot be arbitrarily reduced, terminated, or frozen by a lender. It is a bonus to have one that grows. In this strategy it could easily be that the costs of a HECM with a case number assigned after 10/1/2017 could be higher than for one with a case number assigned before 10/2/2017. Such determination requires 1) payoff strategies, 2) size and frequency of draws, 3) the actual interest rates in the periods when the HECM has a balance due, and 4) other significant variables.
For those who do not need the entire original net principal limit at any time throughout the life of the loan, the growth in the line of credit is a true contingent luxury if the strategy includes low balances due throughout all but infrequent draws for short periods of time.
Ongoing MIP was not 1.25% per month as stated in this piece and in the transcript. It was per year
Tim, you are correct…the ongoing rate was 1.25% annually being prorated each month. Thank you for catching that and clarifying.