Why reduce the HECM’s upfront FHA insurance premium?

An argument why the HECM’s upfront FHA insurance premium should be reduced.

There’s been much discussion recently on the Federal Housing Finance Authority’s recent changes to what’s called Loan-Level-Pricing-Adjustments. But what about the HECM’s upfront fee structure? Before we address that let’s address what loan-level pricing adjustments actually are. After all, in recent weeks social media and news outlets have been buzzing about the Biden administration’s recent changes to loan-level pricing that go into effect today. The Mortgage Reports defines them as “A loan-level pricing adjustment (LLPA) is a risk-based fee assessed to mortgage borrowers using a conventional mortgage. Loan-level pricing adjustments vary by borrower, based on loan traits such as loan-to-value (LTV), credit score, loan purpose, occupancy, and number of units in a home. Borrowers often pay LLPAs in the form of higher mortgage rates.” 

Some pundits claim that borrowers with a better credit score are paying a subsidizing borrower with a lower score by paying a slightly higher interest rate. Is that true? Housing Wire contradicts those claims asserting that borrowers with lower FICO scores are not getting better rates than someone with worse credit. However, borrowers with low or moderate incomes will pay no additional fees for loan pricing adjustments, and those who put less than 5% down regardless of their FICO score will benefit Housing Wire reports. Truth be told if one examines specific bands of the new pricing structure an argument could be made either way. 

The loan level pricing controversy does bring to mind one of the major challenges to the expanded market acceptance of the HECM: our current fee structure for upfront FHA insurance premiums paid by HECM borrowers regardless of other factors that may mitigate the risk of a claim paid by FHA. 

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Richard Hegg May 8, 2023 at 6:42 am

Yes. Over the years the IMIP has varied and the 2% amount is truly on the high end. But we should also be pushing HID to adjust PLF table. With the current floor at 3% while rates are in the 6%+ range, is a bigger killer.

Carl A Self May 8, 2023 at 7:20 am

The biggest detriment to the program is the upfront insurance fee. I have had several clients walk away from this great program due to the huge upfront costs caused by the UFMIP. Many financial advisors also say the same thing.

Tom Kronen May 8, 2023 at 10:30 am

Absolutely! The HECM has been, and continues to be, a one-size fits all without regard to a risk-based assessment of the borrower and collateral. Just about EVERYTHING in the financial services sector of our economy has some sort of risk assessment engine behind it. The one-size fits all design should be modified in favor of a more efficient model. Yes, the problem is HECM-to-HECM refinances but there has to be a way to mitigate that risk, and at the same time open up the HECM to a large new marketplace that currently does not consider this option. We simply are not going to move the needle on the miniscule market penetration rate with the current model.

Larry Melton May 8, 2023 at 11:37 am

In my opinion there needs to be a better balance between the UFMIP and the PL tables. We are at a point of High Cost to the client along with the lowest borrowing power we’ve ever seen with the program. I fee like small adjustments to both could bring the program to more people and still keep the risk to a reasonable level. FHA/HUD could make small adjustments and greatly expand who could benefit from a HECM

Todd Woodcock May 8, 2023 at 12:57 pm

What’s good for the goose is good for the gander. If we are capped at a $6,000 origination fee, they should also be capped at a $6,000 IMIP.
And yes, I agree with Richard that we need to adjust the PLF’S if we want to gain traction.

Greg Boehle May 8, 2023 at 1:56 pm

Hey Shannon
I lost seven or eight loans in the last year because of the 2% MIP.

Bryan Fitzpatrick May 9, 2023 at 7:53 am

“What’s the cost of the loan” has always been an issue with the HECM program. Now with FA going into it’s eighth year, FHA needs to take a much closer look at this and possibly introduce “Loan – Level Pricing Adjustments” for our borrowers. Look at it on a tiering system for credit, income, etc. Lowering the LTV tables and the 60% rule is only hurting the senior and industry. People want access to their home equity today not 12 months from now. Would like to see NRMLA have more of a voice with HUD as I feel we are leaving our seniors behind.

Brian Albrich May 9, 2023 at 11:46 am

The UFMIP is definitely the biggest detriment. As mentioned by others, the fee is a huge hurdle for both the borrowers and their financial advisors.

Is FHA even open to discussing changes?

Dan Hultquist May 9, 2023 at 1:59 pm

HUD has two methods for managing risk – 1) Insurance Premiums, and 2) PLFs. Most of us “FEEL” intuitively that the cost (IMIP) is too high relative to the available proceeds (PLFs). This makes the product challenging to sell.

However, to find the optimal premium is an economics problem that requires mathematical analysis.
– What is the appropriate premium for the assumed risk?
– Could HUD increase loan volume and collect more FHA premiums with a premium reduction?

The economist in me would ask “what is the elasticity of demand?” I don’t know the answer, but my gut tells me even a small reduction in premium would boost loan production significantly.

Consider a bell curve:
– If the premiums are extremely LOW (left side X axis), FHA would generate few premiums and expose itself to massive risk.
– If the premiums are extremely HIGH (right side X axis), FHA would still generate few premiums because nobody would buy the product.

So, where is the peak of the bell curve that maximizes premiums and minimizes risk? I’m not the one to do the analytics, but it sure seems 2% is on the far-right side of the bell curve.

I’m not sure if anybody has publicly challenged this and asked for a study. Maybe it’s time.

MariaEsther Villanueva May 22, 2023 at 11:47 am

Absolutely, MIP should be reduced at least to 1%.


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