For years there has been an unspoken prejudice against wealthier homeowners taking a reverse mortgage. In fact, in many instances, they are providing the lowest risk loans that FHA is unlikely to ever pay a claim. First, let’s examine the loan limits themselves.

Lending limit increases are not popular with everyone. On December 2nd, 2020 in an official HUD press release former FHA Commissioner Dana Wade stated, “FHA has seen consistent increases in loan limits during the past few years, putting it in a position to serve a segment of borrowers that may be better served by the conventional [non-agency] market.” Speaking of the 2021 lending limit Wade added, “FHA’s mission is to support low-to-moderate income borrowers, so why does the law permit FHA to insure mortgages up to $822,375? This is a question for Congress and the taxpayers who stand behind FHA to answer.”

So how are HECM lending limits or maximum claim amounts determined? 

First, the national lending limit is calculated at 150% of Freddie Mac’s national conforming limit. For 2022 the conforming lending limit was $647,200 multiplied by 150% which equals $970,800.

Second, Section 1124 of the 2008 Housing and Economic Recovery Act mandates that the conforming loan limit shall be adjusted effective January 1st of each year by adding a percentage increase of the most recent 12-month increase in the Federal Housing Finance Agency’s Housing Price Index or HPI.

In other words, lending limit increases are statutorily ‘baked-in’ to the HECM program.

So how do homeowners with higher-valued properties reduce the risk to the Federal Housing Administration’s Mutual Mortgage Insurance Fund? Simply put, it’s the equity buffer. Homes that appraise well above the maximum claim amount have a larger margin of equity that helps prevent the loan future balance from ever exceeding the home’s value.

To be fair, borrowers with a home at or slightly above the lending limit present a unique risk. Here’s why. The five states with the highest share of maximum claim amounts issued in the fiscal year 2021 are also the states that are the most vulnerable to a reduction of home price appreciation. California, Florida, Texas, Pennsylvania, and New York hold the majority of total HECM MCAs and therefore pose a geographical risk.

In the final analysis, ‘needs-based’ borrowers come from all income levels. Consequently, the house-rich but cash-poor are not necessarily low-income households. In fact, many mass-affluent individuals have a bonafide need to increase their monthly cash flow. Whether their money is tied up in investments or real estate cash flow is king.

Home values are not equitable, and neither are the benefits to homeowners. However, homeowners with properties that significantly exceed the maximum lending cap are certainly paying more in upfront insurance premiums while posing a significantly smaller risk.