HECM growth in 2022 may hinge on one word
Last Tuesday the Federal Housing Administration announced they have raised the national lending limit for FHA-insured mortgages up to $970,800 for FHA loans assigned case numbers in the calendar year 2022. Which homeowners will benefit the most? We’ll examine that in a moment but first how the national loan limits are arrived at in the first place.
The answer is two-fold.
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First, the Maximum Claim Amount or national lending limit is 150% of Freddie Mac’s national conforming limit. For 2022 that’s $647,200 multiplied by 150%. 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. The agency’s press release last Monday reported an 18.5 percent increase in U.S. home prices from the third quarter of 2020 to the third quarter of 2021. The 18-percent increase of this year’s limit nearly equals the HPI index gains. As an aside, what happens when home values fall? In such circumstances, the conforming loan limit is not decreased but rather remains the same. However, any declines in home values must be erased by subsequent years’ HPI increases before an increase is made. [SHOW CHART OF MCA HISTORY] So which homeowners stand to benefit the most? That depends on their location and their current outstanding mortgage balance. Older homeowners with homes over $822,000 who didn’t qualify due to a lack of home equity in early 2021 may find themselves with just enough loan proceeds to pay off their slightly lower mortgage balance thanks to their home’s appreciation. That would be your more affluent homeowner looking to retire monthly payments on a rather sizable mortgage. All this of course depends upon stable home values or moderate appreciation along with continued low-interest rates. Then you have your equity harvesters. HECM-to-HECM Refinances accounted for 4 of every 10 HECM endorsements in the fiscal year 2021 thanks to a booming housing market and low-interest rates. Thanks to the higher lending limit many may qualify to refinance their existing HECM loan even with moderate or little home appreciation as long as interest rates remain at their historic lows. Next are those who live in these regions. The Motley Fool reported average home prices for all 50 states in the Union. Not surprisingly Hawaii ranks first with the highest average home price of $730,511 followed by Washington D.C, California, Washington state, and others. However, the Top 10 states with the highest average home price don’t quite match up with actual historical HECM loan production. According to FHA’s Report on the status of the MMI Fund to Congress [SHOW MAP] half of all aggregate HECM Maximum Claim Amounts in the fiscal year, 2021 came from the following states: California, Florida, Texas, New York, and Pennsylvania. Considering average home prices and endorsement concentrations older homeowners in the following states may stand to benefit the most when getting a HECM for the first time or refinancing thanks to their home values and their share of the HECM’s national Maximum Claim Amount distribution.
2 comments
Great summary of the HECM limit increase. I would add there may be other beneficiaries – ALL future HECM borrowers.
Consider a 70-year old homeowner with a $1.5mm home value that now sees the value of a HECM in 2022. That homeowner will pay $19,416 into the Mutual Mortgage insurance Fund 15 days after closing. That loan presents little risk to the fund. The PLF may be 50% or more, but the maximum LTV at origination would be 33% because the home’s value exceeds the HECM limit. I see this MCA Limit increase as a big win for FHA as well as the borrower.
Thank you Dan! Excellent points!