April 25th, 2018
by Charlene Turner, NMLS # 456052
Since it is Reverse Mortgage Education week, let’s examine changes in the FHA Reverse Mortgage product in the past year.
In October 2017, the Reverse Mortgage program introduced more sweeping changes to the Home Equity Conversion Mortgage (HECM), or informally, reverse mortgage. The changes were brought to a continually evolving program and reflect lessons learned as the program has matured.
Why change what seemed like a successful program that helped so many? Homeowners over 62 were beginning to understand, accept, and take advantage of the benefits that a HECM can provide. One problem, though, was that there was a drain on the resources of the program from past loans. Many reverse mortgages were obtained at the time of the real estate bubble – when real estate values were unreasonably inflated. The correction in the real estate market meant that many of the homes with a reverse mortgage now had loan balances and/or lines of credit available to the borrower that far exceeded the value of the property. Since a HECM loan is nonrecourse (the borrower will never owe more than the value of the property), loans that were maturing due to a borrower leaving the property were causing a drain on the FHA insurance that backed these loans.
The addition of a fixed rate option to the HECM program in 2008 (at the height of the mortgage bubble) allowed for complete access to all available funds, whether needed or not, and did not require an analysis of the sustainability of the loan; in other words, the determination of whether a borrower could afford to stay in the home, even without a mortgage. No real attempt was made to ascertain whether the borrower had the income to make payments on taxes, insurance, homeowners’ association dues, debts, upkeep, etc. after a HECM loan was originated. Defaulting loans caused an even greater drain on the FHA insurance fund.
In 2013 -2015, changes were made to help alleviate these problems. Of note, the Financial Assessment was born. Borrowers had to meet residual income guidelines or have extenuating circumstances (such as cash reserves) or submit to a Life Expectancy Set Aside – a portion of the proceeds was set aside to pay property charges for the life of the loan. The 2017 reforms tightened the loan to values on the property and adjusted the FHA insurance charges. Previously, borrowers aged 62 could expect to net roughly 50% of the property value after closing costs. With the most recent changes as well as the rising interest rates, the same borrower can expect to net at most 38-40% of the property value at closing.
HECM endorsements for March 2018 were the lowest of the last 5 years for the same period.¹ Many potential borrowers have been discouraged by the newer principal limits (the amount that the borrower can actually access with a HECM).
The new changes were not ALL bad news for the borrower. The FHA upfront mortgage insurance fee was standardized at 2.0% for all loans. The monthly FHA premium decreased from 1.25% to .5%. The lower loan-to-value and FHA insurance premium should help to preserve equity in the home – a concern for many borrowers.
We’re still early in the post-2017 changes to the program. Many see these changes as necessary to sustain the FHA insurance fund and therefore, the Reverse Mortgage program. As the year progresses, statistics will show whether these changes continue to be a deterrent to obtaining a HECM. While a HECM is not right for every homeowner over the age of 62, it is still a wonderful tool for many to be able to use the equity built in a home as a resource in the retirement years.
¹Top 100 HECM Lenders Report as published by Retirement Funding Solutions. March 2018. Data provided by Reverse Market Insight