BREAKING: HUD Cuts PLF Factors, % Rate Floor & Increases Upfront FHA Insurance Premiums

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Without any prior warning or industry comment, HUD formally announced an increase of upfront insurance premiums for all borrowers, regardless of initial distributions, to 2% upfront, and .5% for ongoing mortgage insurance premiums. The agency stated the need to ensure the continued economic sustainablity of the HECM program and its fiduciary responsiblity to taxpayers.  [See Mortgagee Letter 2017-12] [ Wall Street Journal Article View on Facebook to see full article]

HUD has lowered the interest rate ‘floor’ from 5.06% to 3.00% in it’s PLF tables, essentially pushing lenders to compete on interest rates and margins. We expect to see more lenders switch from the monthly to the annual adjustable LIBOR index in response. In addition the new PLF tables accomodate a rising interest rate enviornment with lending ratios provided as high as up to 18.875%, wheras the previous tables zeroed out lending ratios at 10%. [New 2017 PLF Tables] [Old 2014-2017 PLF Tables]

In our analysis, the reduction in ongoing FHA premiums will significantly reduce the ongoing growth of the HECM’s Principal Limit (available funds), or what many refer to as the line of credit. This development will substantially change several strategies touted in recent years, such as the Standby Reverse Mortgage, and those seeking to use increasing available funds as a hedge against unexpected financial shocks in retirement.

Principal Limit Factor will be reduced from 64% to 58% on average and an approximate 20% reduction available funds for most borrowers:

Screen Shot 2017-08-29 at 4.41.43 PM
* 20% reduction with new PLFs and lower interest rate floor after October 2nd, 2017

HUD is soliciting feedback from interested parties until September 29, 2017. Feeback can be submitted to: answers@hud.gov

Official Mortgagee Letter 2017-12 “Home Equity Conversion Mortgage (HECM) Program: Mortgage Insurance Premium Rates and Principal Limit Factors

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15 comments

Kevin August 30, 2017 at 3:23 am

This hurts!

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Tim Ryan August 30, 2017 at 5:28 am

This is overkill by HUD and possibly a death blow to our industry. They blame losses in the insurance fund but I would bet the majority of those payouts are from the fixed rate loans from 09-2013. No matter how much they restrict the HECM now, those losses are still going to come. Have they even looked at HECM performance since 2014 changes? These changes are going to shrink the industry even more. HUD is going to lose a huge amount of revenue. Lowering the rate floor is the biggest blow. Margins will shrink forcing lenders out of the business. These are not the old days when lenders like Wells Fargo had multiple streams of income. Most lenders now are only reverse. How can they survive with a 1% margin? Am I missing anything?

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The_Cynic September 1, 2017 at 10:20 am

Tim,

You are like so many in the industry assuming falsehoods and spreading endless myths. Why not just look at a single HECM Actuarial report for example the latest one for fiscal 2016. Guess what? On page 18, the actuaries show the projections for the new book of business for fiscal years starting in fiscal 2016 through fiscal 2023. If you read the prior reports, you would fill in the gaps you bring up about 2014 forward.

It seems you want to rant, not learn or put in the effort to see what HUD is really doing.

I am glad you are not my accountant. Sometimes sales that result in loss have to be cut even if that reduces revenues. Your comment is ridiculous.

Since when is HUD blaming us? Some leadership in the industry would like us to think like that but such thinking is so full of unwarranted bias.

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Michele August 30, 2017 at 6:54 am

Wow, Shannon, that is going to have significant negative impact!

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Tim Ryan August 30, 2017 at 8:15 am

This is typical Government thinking. The drop in originations is going to hit the Insurance fund hard and in a year, the losses will be even more. They will still blame it on us. They should be driving for more originations, not less. When you have losses the worst thing to do is cut revenue.

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Richard C. Kay August 30, 2017 at 9:42 am

Well, if HUD could have delivered a more decisive “kill” blow to our industry, they certainly have done it now. These modifications will drive the lower income earners out of the running. With lower LPF and still the potential LESA, the originations will drop substantially. What has been a great program for many senior citizens will soon be too difficult to utilize. Where is NRMLA fighting for the HECM?

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Chris Handy August 30, 2017 at 10:14 am

As a broker, this is going to force me to reduce my focus on HECMs and servicing those clients. This simply due to the fact that I will probably have to seek additional revenue streams.

Reducing the floor and forcing lenders to compete sounds great (to them) but it means reduced revenue while origination costs (mostly marketing/advertising) remain high. Many lenders and originators will just shift there focus elsewhere to areas of higher return.

Simple economics dictates if you raise the price on something, people will buy less. Quadrupling the cost of the upfront MI is simply going to make that many more people walk away. And its not just small lenders that will feel this crunch. Look at AAG’s numbers. They generate 500,000 inquiries (think leads) per year but close maybe 9,000 loans. That’s a 1.8% conversion rate. How are they going to keep running TV ads and expand awareness for the industry when that closing ratio gets even smaller.

And the final thing is, risk based pricing for upfront MI made sense. Higher MI pricing for those who are at higher risk of pulling all their funds and defaulting and lower for those less likely to do that at lower utilization levels. Why not just expand and cascade this by adding more brackets rather than just abruptly turning away from the idea. And good like shifting our industry focus from the needs based borrower to a financial planning borrower. They are much less likely to pony up 2% for money they don’t need right now rather than .5%.

The sky is not necessarily falling but these changes create a tremendous challenge for our industry. Part of dealing with this is to now lobby HUD to come up with something less drastic, especially for those on the lower risk spectrum. Otherwise we will have a tough time growing beyond the only 2% of eligible seniors who currently use this program.

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The_Cynic September 1, 2017 at 10:47 am

Chris,

You have to run the numbers to see what is best for the client. So let us look at an example.

Let us look at a $600,000 home where the borrower takes out $100,000 and leaves it outstanding for 15 years. Let us say the upfront costs without MIP are $2,700 with no origination fee. In the first case the beginning balance due is $114,700 and in the other $105,700 for a difference of $9,000. Let us say the average effective interest rate in each case is 4.25%.

At the end of 15 years, the balance due is $233,554 in case one. In case two, the balance due after 15 years is $240,741. Of course if we use a shorter period of time, the HECM with the lower upfront costs is preferable and if for a greater period of time, the higher upfront costs are preferable.

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Forward In Reverse August 30, 2017 at 11:25 am

Many of the seasoned professionals will remember the awful Fannie Mae Homekeeper, it was the Edsel of the Reverse Mortgage products and so poorly designed that it was rarely used and eventually faded away…
Given how HUD made these changes “Without Notice and Without Warning” and the major impact they will have on our industry on top of what has already been done with FA, etc. clearly tells me that HUD ultimately wants the entire HECM program to fade away as well. Unfortunately, one way to ensure that something doesn’t continue is to make it very undesirable to get…

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The_Cynic September 1, 2017 at 11:15 am

The Home Keeper was no Edsel and it was not demand alone that killed that program but Fannie Mae who did.

Many of us used the Home Keeper to put people into reverse mortgages who had property types, HUD would not approve, such as coops. It was at times effective at providing more proceeds in counties where the lending limit was quite low. So when HERA came along and most competitive points were improved for HECMs, Fannie Mae saw no reason to provide any Home Keepers after 2008.

Financial assessment should be less restrictive but such change is probably several years away. The losses projected by the HECM actuaries on the new book of business from 2016 through 2023 must be stopped or we will the negative net asset position for HECMs in the MMI Fund will go from $7.7 billion as of 9-30-2016 to over $12 billion by 9-30-2023.

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George Johnson August 31, 2017 at 4:49 pm

Devastating, at the very least. I can not disagree with the above comments. What I can’t see is where the positive to these changes comes in. Is there a positive?
There doesn’t seem to be, either for our companies or for our clients. I am surprised that NRMLA was not consulted or notified prior to the letters. Is NRMLA going to get involved for all of us? Are clients going to accept big cuts and higher costs? Is there investor appetite for reverse mortgages at 3%? Is the industry going to come down to a few large companies? I am having trouble seeing anything past October 2.

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The_Cynic September 1, 2017 at 11:02 am

George,

These changes were intended to shore up the HECM portion of the MMI Fund. As to whether the changes up in higher costs or not, see my comment to Chris above. But the answer is, it all depends.

Many of us have lived through 2% upfront MIP and 0,5% ongoing MIP. That was the way the industry was before 10/4/2010 with a 1.5% margin throughout all but the last two years of that period; however, our only secondary market outlet was Fannie Mae.

So as premiums will no doubt drop, people in the industry will have to decide if working for less money is worth it.

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A Sigh of Relief: No HECM changes announced…yet | HECMWorld.com September 24, 2018 at 1:00 am

[…] Just one year ago reverse mortgage lenders were rocked with the news of a reduction of principal limit factors, higher upfront mortgage insurance premiums for low-utilization borrowers, and a lowering of the interest rate floor. Where does that leave us for the coming year and is there a reason for optimism? […]

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2018: A tumultuous year for the reverse mortgage | HECMWorld.com March 21, 2019 at 9:21 am

[…] with a whimper after a year of slumping volumes. Most industry participants rightly point to the trifecta of changes enacted on October 2nd, 2017 as the primary culprit for lackluster loan volume. The brutal truth is that 2019 will continue to […]

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The Positive Realist March 25, 2019 at 12:17 am

While this is an interesting comment, it does not explain why when it looked like April 2018 was the nadir for monthly HECM endorsement counts since 10/2/2017, except for February 2019, monthly HECM endorsement totals have only gotten worse. Is the contingent 2nd appraisal driving endorsement totals even lower when excluding the endorsement total for last month?

For those who are not familiar with the count for February 2019, it is generally believed that the very low endorsement counts in December 2018 and January 2019 were the result of the partial federal government shutdown during those months and the February count of 4,000 endorsements consists of about 2,500 to 2,800 in normal processing the the difference reflects HECMs awaiting endorsement at the end of January 2019 which were actually processed in February 2019.

Many have predicted and are trying to persuade that the endorsement situation is somehow in recovery. The monthly endorsements since May 2019 have not followed that pattern. Based on Case Number Assignment counts for December 2018 and January 2019, It would seem that the count for March 2019 is more likely to be under 2,700 than over 4,000.

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