When I entered the reverse mortgage business back in 2003, I thought it was a great program that would never change…Then 2008 happened.
Change began slowly in 2009 with a small change to the amount the government would allow us (lenders) to loan. This is called the “principal limit” (PL). The PL is calculated using a “principal limit factor” (PLF). The PL is calculated using by multiplying the value of the home (up to the maximum value allowed by HUD, called the Maximum Claim Amount [MCA] ), by the PLF. In order to do this, the lender needs to know the age of the youngest spouse (even if not a homeowner), the value of the home (up to the HUD limit, or more accurately, the MCA), and the interest rate.
In 2009 HUD changed the amount they allow us to lend by changing the PLF tables. This lowered loan amounts. This small change foreshadowed numerous changes that would occur over the next decade.
HUD started the decade off with a very busy year. They introduced a new reverse mortgage option called the HECM Saver (HECM stands for Home Equity Conversion Mortgage – This is just the name of the FHA insured reverse mortgage program). The HECM Saver dramatically lowered the upfront costs of the HECM by lowering the Initial Mortgage Insurance Premium from 2.0% of the MCA to 0.01%, by allowing homeowners to borrow a much lower amount.
The Federal Housing Administration (FHA) also made two changes to the HECM program in 2010:
1. The increased the ongoing mortgage insurance premium (MIP) from 0.50% of the loan balance per year to 1.25% per year.
2. They lowered the interest rate floor from 5.50% to 5.06%
HUD announced it is removing the HECM Saver option and instituting a tiered Initial MIP. The new Initial MIP will be 0.50% of the MCA if the homeowner takes out less than 60% of the PL in the first 12 months. Or 2.50% of the MCA when the homeowner takes out more than 60% of the PL in the first 12 months (to pay off an existing mortgage, for example).
HUD also begins limiting the amount a homeowner is allowed to withdraw during the first 12 months of the reverse mortgage to 60% of the PL, unless it is used to pay off a mortgage or other home related lien. In the case where an existing lien exceeds the 60% limit, the homeowner is allowed to borrow enough to pay the lien, plus 10% of the PL.
They also reduced the PL by another 15%, lowering the amount available to the homeowner.
HUD addressed the Non-Borrowing Spouse (NBS) issue. An NBS is a person who is married to a reverse mortgage borrower, but not signed on the reverse mortgage loan. HUD rules state that when the last remaining “borrower” permanently leaves the home, the HECM loan becomes due and payable. This was a problem for spouses who were not on the HECM loan. They had to pay the reverse mortgage off but did not have the means to do so without selling or losing the home to foreclosure.
HUD ruled that the due and payable status of a Non-Borrowing Spouse will be deferred for as long as the NBS continues to live in the home and satisfy the loan conditions (continue to pay property taxes and homeowners insurance as well as maintain the home and keep their name on title). However, no additional advances of proceeds will be available to the NBS.
The big news in 2015 was Financial Assessment. This rule requires lenders to analyze a potential borrowers’ income sources and credit history to determine whether or not they can meet their financial obligations after the reverse mortgage is closed. If they fail either the willingness (credit), or capacity (income), test, they could be required to have a mandatory set-aside of funds from the proceeds of the loan to cover the property taxes and insurance premiums. This is called a “Life Expectancy Set-Aside (LESA).
The reason for this rule is that HUD, as well as the lenders and homeowners, want the reverse mortgage to be a sustainable solution for the homeowner. A reverse mortgage needs to leave the homeowner with the ability to pay their property charges and monthly bills now and in the future.
2016: Hud increases the MCA (this is the maximum value a lender can use for calculation of loan amounts), from $625,500 to $636,150. This is first increase since 2009 and begins a trend of increases for four years in a row.
Hud announced another change to the Initial MIP charged to borrowers. They eliminate the tiered system and go back to the 2009 rules of a flat 2.00% of the MCA. It does not matter if you are taking all the proceeds at closing or very little.
They also increased the MCA from $636,150 to $679,650.
However, HUD dropped a bomb on the industry and future borrowers by dramatically reducing the PLF table, lowering the amount a homeowner can receive from the HECM by about 20%. They also lowered the interest rate floor from 5.06% to 3.00%
HUD begins Collateral Risk Assessment on a temporary basis. Mortgagee Letter (ML 2018-06), states the following:
“For all HECM’s, FHA will perform a collateral risk assessment of the appraisal submitted for use in the HECM origination. Based on the outcome of the assessment, FHA may require a second appraisal be obtained prior to approving the HECM.” The Letter continues, “Where a second appraisal is required by FHA and provides a lower value, the mortgagee must use the lower value of the two appraisals in originating the HECM.”
What this means is that all Home Equity Conversion Mortgages (HECM) will have the appraisal reviewed by FHA. They have a computer system called an Automated Valuation Model (AVM), that reviews the appraisal. This is similar to what Zillow and other on-line valuation web-sites use. If the actual appraisal falls outside of certain data points (we don’t know what these are), FHA will require a second appraisal.
On a more positive note, HUD also increased the MCA from $679,650 to $726,525.
HUD introduces “Single Unit Approvals” for non-FHA approved condominiums. In theory, this allows condo owners the ability to get their individual unit approved by FHA for an FHA insured loan. However, in practice, it has turned out to be a dud. The process is just as cumbersome and difficult as getting the entire complex approved.
HUD makes the collateral risk assessment program permanent and they increase the MCA once again from $726,525 to $765.600.
Whew! Just about every year HUD makes one change or another and I’m sure it’s not going to slow down anytime soon. Stay tuned and keep your seat belt buckled for the next 10 years.