Last month, the Trump Administration announced proposed changes to the U.S. Department of Housing’s reverse mortgage program, the Home Equity Conversion Mortgage (HECM). Senior reverse mortgage borrowers and originators of reverse mortgage loans should be aware of impending changes and how they may be impacted.
HUD Secretary Ben Carson delivered written testimony in September, which noted:
1. A recommendation that Congress amend HECM’s loan limit structure to “reflect variation in local housing markets and regional economies across the U.S. instead of the current national loan limit set to the level of high-cost markets in the forward program.”
2. A proposal that Congress “set a separate HECM capital reserve ratio and remove HECMs as obligations to the MMIF (Mutual Mortgage Insurance Fund),” on the basis that it would allow more “transparent accounting of the program costs and decrease the cross-subsidization that occurs with mission borrowers in the forward mortgage portfolio.”
3. A proposal that “FHA eliminate HECM-to-HECM refinances as these loan transactions result in greater appraisal inflation, increasing program costs, and negatively impacting GNMA guaranteed HECM MBS (HMBS) due to quick ‘churn’ in pool participations.”
Many see the changes as necessary to protect the MMI fund and the future of the reverse mortgage program itself. Others feel that the proposed changes would drive up the costs for American seniors looking to age in their homes. As a mortgage industry veteran of over 40 years, I can say one thing with certainty: Since the market implosion, the reverse mortgage portfolio had suffered large losses, and addressing these issues is imperative.
In 2012 alone, FHA reported a loss on reverse mortgages so large it prompted a request from Treasury of $1.7 billion in 2013. Since losses are not reported until years after loan origination, those losses stemmed from loans originated prior to the market implosion. HUD has continued to push reforms for years since, tightening guidelines, lowering amounts available to borrowers and looking hard at appraisals. But are they still missing something?
Some Markets Just Don’t Appreciate
HUD previously utilized county-by-county maximum claim amounts (the maximum value HUD will consider when determining benefits), which would limit principal lending limits (actual loan amount or loan benefits) by area for the HECM program. It moved to one nationwide maximum claim amount in 2008. Rather than implementing a county-by-county separate limit again, I believe HUD should consider principal limit values based on historical property appreciation for the area.
The effect would be that properties in areas that do not appreciate as rapidly would be limited to a lower initial loan as a percentage of the value of the home. The new calculation would consider the same factors currently used — age of youngest borrower, value of the home, current interest rates — but would also add an adjustment for properties in historically low-appreciating areas.
Adjustments could be updated annually to account for changing markets. These adjustments would lessen the interest that accrues for properties showing less appreciation. It seems that giving all borrowers the same percentage principal limit locks in a higher percentage of loss in areas with less appreciation.
A Separate Fund Is A Good Idea
Putting HECM loans into a separate fund is probably a great idea. The accounting should be open and transparent for all to see. The HECM program was always intended to be a revenue-neutral program.
But the recent changes have not had a chance to be fully measured, as losses are reported years later. HUD has antiquated computer programs, and measurement has often been unavailable. That which cannot be measured and tracked cannot be improved, and separating the loans would help.
The Need To Protect Existing Nonborrowing Spouses
Finally, HUD’s recommendation is to eliminate the HECM-to-HECM refinance. The National Reverse Mortgage Lenders Association (NRMLA) moved to make it an ethics violations to refinance existing reverse mortgages with less than 18 months’ seasoning on the loan, to eliminate refinance churning and the propensity to push senior borrowers to strip their properties or their equity ahead of HUD.
HUD requires material benefits for the borrowers to be eligible to refinance, but this does not keep borrowers from stripping their equity with multiple refinances, nor does that protect the MMI fund. We could support curtailing refinances but not eliminating them in all cases. The exception I would urge HUD to consider is to include a previously ineligible spouse.
Prior to the 2014 HUD program changes for underaged spouses, if one married borrower of the couple was under the age of 62, the only way for the couple to obtain the reverse mortgage was for the underaged spouse to deed off of the title and let the older spouse do the loan separately. These borrowers were often told they could refinance in both names later after both were eligible.
If there is no exception to allow a spouse who is not on a loan at origination, these spouses would lose their homes if the borrowers passed and they could not pay off the loans. This is true with a spouse who was previously ineligible or married after the loan was closed. HUD can protect the fund and still allow some currently eligible borrowers to refinance existing loans to add previously ineligible spouses. With proper underwriting, such an exception would not cause churning or additional risk to the fund or cost to the program.
It is my contention that HUD is losing too much money on loans that are left outstanding after the last borrowers have left the property, which amplifies the losses on the loans, but that is a subject for another day.
It is clear that HUD needs additional changes to ensure the longevity of the program. I urge borrowers to look at their circumstances and do some advance planning. If one of the spouses is not currently on a reverse mortgage, refinance now if possible to add nonborrowing spouses so there are no surprises later in the event HUD does make the changes it has indicated are likely.