HECM Regional Limits? A look at HUD’s Legislative Requests

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HUD’s 2025 Congressional Budget Justifications reveals proposed HECM changes

Will HECMs return to regional loan limits? This question arises from the Biden Administration’s 2025 Federal Budget and HUD’s 2025 Congressional justifications for their budget request. Today I’m going to walk you through the relevant changes including several notable proposed legislative changes to the Home Equity Conversion Mortgage program.


First, the proposal to allow HUD to establish regional loan limits. The Congressional justification states, “Currently, Home Equity Conversion Mortgages (HECMs) are subject to a single national HECM limit of $1,149,825 regardless of property location”. If approved this proposal would allow, but not require, HUD to establish regional loan limits aligned to the limits currently in place for the single-family Forward program. 


The operative words are allow versus require which means the agency could potentially use their discretion to determine which areas would fall under a lower HECM limit. If Congress were to approve such legislative changes borrowers with higher-valued homes in Low Cost Areas would be most impacted. While HUD’s motives are unclear such limits if enacted would substantially reduce available HECM loan proceeds leaving a much larger equity cushion for homes that far exceed county limits.  


For example, the single-family single-unit loan limit for traditional or forward FHA loans in a low-cost area is $498,257. That’s over $650,000 less than the current national HECM limit.  Those originating in counties with lower average incomes and values would be most impacted. 


But let’s look closer at some real-life examples. Using HUD’s FHA mortgage limit lookup tool we’ll look up the list of FHA limits in Kansas City, Missouri. As we can see every county in the state falls under the low-cost area limit of $498,257 for single units. If a regional limit were enacted, a 72-year-old reverse mortgage applicant in Kansas City Missouri with a home appraised at $750,000 at an expected rate of 7.25% would see their gross principal limit reduced from approximately $271,000 under today’s HECM limit regime down to $180,000- a $91,000 reduction in proceeds with only $498,257 of the home’s appraised  $750,000 value considered. 


Let’s try a state with a concentration of higher-valued homes, California. Here you’ll see both Low Cost Area and High Cost Area limits for single-unit properties by county or Metropolitan Statistical Area. Remember, these are not conforming limits but FHA limits. Some counties such as Los Angeles currently have a $1,149,825 maximum which is the same as our current national HECM limit. Keep in mind, that these loan limits are presently for FHA-insured forward mortgages. 


Other regions such as Kern County and Bakersfield have homes that are typically worth far less than homes in larger metropolitan areas. Kern County’s 2024 FHA limit is $498,257 while areas such as San Jose, San Francisco, and Los Angeles all fall under the high-cost limit. 


When considering these proposed legislative changes remember that similar requests to return to regional HECM limits, prohibiting HECM refinances, among others have been put forth but never passed by Congress.


Other notable proposed legislative changes to the HECM if approved by Congress include requiring HECM counseling for all refinance HECM transactions regardless if they received counseling within the last five years which is the current standard. Another proposal is to clarify the definition of a non-borrowing spouse as the NBS identified at the time of origination, but not to subsequent spouses. A removal of the cap on the number of HECMs that can be insured by FHA is also proposed. Lastly, since HUD has complied with the requirement that the HECM Actuarial Analysis examines the impact of HECM premiums, lower upfront premiums for refinances, and the existing national loan or HECM limit, the agency is asking for a conforming change to collect lower insurance premiums for HECM-to-HECM refinances. It’s unclear if that means the agency could eliminate or reduce the current upfront mortgage insurance premium credit allowed for refinances.


Of course, we will keep you updated should we see any developments regarding these proposed HECM legislative changes.

 

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Is the HECM Durable or a Drain?



Despite improvements, the HECM remains a reliable target of fiscal scrutiny

In its Fiscal Year, 2020 Financial Report the Department of Housing and Urban Development called out the HECM program saying it ‘undermines’ the financial soundness of FHA’s Mutual Mortgage Insurance Fund which backs both HECMs and traditional FHA loans. There have also been repeated statements that the program is being subsidized by traditional FHA mortgages- a claim that has been recently challenged in a recent blog post by New View Advisors writing,

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“We think Forward Mortgage does not subsidize Reverse Mortgage now any more than Reverse Mortgage subsidized Forward Mortgage in 2009. A true subsidy would mean outsized realized HECM losses, and a compelling case that this will continue. This is not demonstrated in the report.” New View concluded by referencing a recent revision to the Actuarial review of FHA’s insurance fund. That revision increased the HECM’s economic net worth in the MMI fund from a negative $5.4 billion to a positive $1.268 billion. That revision was made after Jim Veale- an industry watcher and HECM originator contacted Pinnacle Actuaries in late November. Veale noted a discrepancy between the actuaries calculation of Total Capital Resources of a negative $5.64 billion versus a positive $1.597 billion shown in HUD’s report to Congress. As a result, Pinnacle updated their report which now has added $7 billion dollars to make the HECM’s economic net worth a positive $1.2 billion. This strengthens the argument that the HECM is presently not a drag on the overall FHA fund which backs the program.

Looking back the HUD’s recent annual report released December 4th, one area of concern that rightly deserves focused effort and attention is monitoring the servicers of loans that have been been placed into assignment with HUD. That oversight is crucial as HUD states the majority of losses from Type 1 claims are the result of the borrowers no longer occupying the home as their primary residence (or in some cases even living in the property at all) and the failure to pay property charges such as taxes and insurance. Such instances call for active and prompt intervention by assigned HUD servicing vendors to preserve the economic values of properties, and preventing occupancy fraud- both which stand to substantially contribute to continued and avoidable insurance claims and losses.

HUD Secretary Ben Carson’s comments became somewhat political in the December 9th official HUD press release which accompanied the agency’s financial report which reads in part, “When an institution becomes insulated from the success or failure of its policies, it loses its incentive to operate efficiently. Private businesses, while engaged in different work than the federal government, do not have the luxury of being protected from their failures or maintaining damaging courses of action,” adding, “Irv Dennis was able to accomplish the impossible task of providing the financial stability that had gone left unchecked for so many years.” Keep in mind, January will bring us a new administration and agency heads which are certain to have a direct impact on housing policy and the HECM program.

Setting politics aside much has been accomplished to improve the HECM program since the great recession of 2009. However, merely increasing oversight of lenders. “HUD must strengthen its effort to ensure that the lenders participating in the HECM program comply with its regulatory and administrative requirements and minimize claim costs” reads the agency’s 2020 financial report. With very few notable exceptions, HECM lenders have worked closely with HUD to ensure ethical and efficient lending to today’s older homeowners. Chances are that the largest liabilities to the economic value of the program can be found in the servicing of assigned loans for non-compliant borrowers as mentioned earlier, and reexamining the structural change of upfront FHA insurance premiums charged made in October 2017.

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