In an effort to further reduce the risk of potential losses to the Federal Housing Administration’s Mutual Mortgage Insurance Fund (MMIF), the U.S. Department of Housing and Urban Development (HUD) has, once again, changed the requirements for its home equity conversion mortgage (HECM) program, including increasing premiums and tightening lending limits.
As per a recent HUD mortgagee letter, borrowers must pay an initial mortgage insurance premium (MIP) rate of 2% of the maximum claim amount. This initial MIP rate is applicable to all borrowers and is no longer associated with disbursements made to or on behalf of the borrower at closing or during the first 12-month disbursement period.
However, borrowers will pay less insurance over the life of the loan, as the annual MIP rate has been reduced to 0.50% of the outstanding mortgage balance. Currently, most borrowers pay 0.5% up front and 1.25% annually over the remainder of the loan.
Some borrowers who have borrowed more than 60% of the amount they can borrow against the home in the first year already pay 2.5% up front, so they will see premiums go down slightly.
But most seniors won’t be able to borrow as much as they could previously. The average borrower, at current interest rates, will be able to borrow about 58% of the value of his or her home, which is down from about 64%, according to a recent post in the Wall Street Journal.
These changes, which take effect Oct. 2, are on top of the changes made by HUD in July 2016 that are designed to prevent HECM borrowers from missing their property tax and insurance payments. Those changes are projected to cut the number of defaults on new reverse mortgages by about 50%.
What’s more, HUD recently issued a mortgagee letter laying out new servicing guidelines for HECMs, including new rules regarding due-and-payable notifications and cash for keys transactions.
So, will this slew of recent rule changes benefit borrowers? And will they help reduce the potential for losses in the MMIF? Dan Hultquist, director of learning and development for ReverseVision, a provider of origination technology to the reverse mortgage industry, gives MortgageOrb his perspective.
Q: HUD recently changed up its reverse mortgage rules yet again. Tell us in a nutshell what these recent changes are and what they mean for the reverse mortgage industry.
Hultquist: The two core changes are the ones to MIP and principal limit factors (PLF). The changes to MIP actually align with traditional lending. Our previously low upfront MIP, although a consumer benefit, was priced less than traditional market. Analyzing our data, literally 50% of the consumers will see a benefit, and the other 50% will have slightly higher fees. These corrections to MIP will help the government in insuring these loans.
As far as PLF goes, though on the surface it is a blow to the current industry, new lenders will not need to change their sales model much. The point of creating this loan in the first place was for seniors to age in place; this has not changed. HECM60 was a drastic change; these changes tighten the limits, but they don’t fundamentally change the strategic reason a new lender would come into the industry, as I mentioned previously.
Q: Some say these changes make HECMs less attractive to consumers – do you agree, and if so, why?
Hultquist: Overall, the strategic reason for having flexible payments in retirement is unchanged. Coupled with lower fees for many borrowers, the program, I think, is evolving in a positive way for all parties: consumers, lenders and investors. In many cases, there will be lower fees to consumers, and this is a good thing. Consumers who are looking to utilize their equity, and age in place, will continue to benefit from this loan. However, some consumers that have not built up enough equity will not get as much tax-free money from their property.
Q: What aspects of these rule changes would you say are positive, if any?
Hultquist: I think lower borrower fees and more competitive rates are positives for consumers. In addition, 98% of HECM for Purchase applicants will benefit from reduced initial MIP.
This is also positive because it gives investors more options for creating proprietary lending products.
Finally, it is a positive development because it helps normalize HECM in lending. As many traditional lenders are adding this product to their portfolios, these changes align with what a loan officer typically sells. With HECM being less than 2% of overall lending, anything that continues to normalize this product in the traditional market is positive for the industry.
Q: Do you agree that these rules will have the end result of further protecting the MMIF?
Hultquist: Time will tell. Smart people put this in place with the goal of long-term sustainability. HECMs are non-recourse loans. This means that neither the homeowner nor the heirs will owe more than the value of the home. With the new rules, it will be less likely that the loan balance will exceed the home’s value.
Q: In addition to these rule changes, HUD also issued a mortgagee letter in late August laying out new servicing guidelines, including rules regarding due-and-payable notifications and cash for keys transactions. In total, these are a lot of changes for the industry to absorb. Do you see any operational impacts from these rule changes on either the origination or the servicing side?
Hultquist: The HECM industry has learned to adapt to change. In fact, the last few years have made the reverse mortgage unrecognizable from the product offered prior to 2013.
I believe the HECM product will be stronger now. Although principal limits may go down, the consumer should benefit from lower interest rates, lower annual MIP rates and, consequently, lower long-term costs.
The big winner may be the HECM for Purchase product. This option has been misunderstood and has struggled to gain acceptance in the Realtor community in part because of the fees. With the new reduction in initial MIP and annual MIP rates, the long-term costs to the borrower have been reduced.