Reverse mortgage industry analysts: 2022 lending limit welcome, with risks

Reverse mortgage industry analysts: 2022 lending limit welcome, with risks
Written by Publishing Team

Late last year, the US Department of Housing and Urban Development (HUD) announced that the maximum new mortgage claim amount (HECM) – often referred to as the “reverse mortgage lending limit” – is $970,800. Effective January 1, 2022. When the potential differences that a lending limit can make in the case of the reverse mortgage industry were worked out, it was very understandable that loan originators were very encouraged by the facts that the almost million dollar limit for the federal government would come – Insured reverse mortgage program.

However, while higher MCAs are likely to make a difference in terms of loan production, there are potential long-term disadvantages that could present themselves with such limited lending including additional pressure on the MCI (Mortgage Mutual Insurance Fund) MMI), the potential for disruption in the private products market, and the additional production of HECM-to-HECM refinancing transactions that accounted for up to half of the volume of reverse mortgage loans in 2021 according to data cited by an independent actuarial firm.

These are some of the views shared with RMD by a group of reverse mortgage industry analysts in December shortly after the lending limit was announced.

The potential impact of the HECM limit on the MMI fund

Among the analysts who shared their views with RMD, all agreed with the general ideas of lenders and originators that a higher lending limit would likely translate into greater volume. However, with the HECM book of business within the MMI fund now having just succeeded in returning to positive territory for the first time since 2015, the higher lending limit could add to perceptions of reverse mortgages as being expensive.

That’s according to Wendy Peel, managing director and partner in reverse lending at BlackFin Group.

“A significant increase in the lending limit by HUD is likely to help maintain or even increase the loan size,” Bell says. “However, securing a new loan mortgage at the new lending limit can push the initial premium to nearly $20,000 to the borrower, and unfortunately there is still a perception that this loan could be predatory because it is a high-cost loan primarily due to these fees.”

Wendy Peel, a longtime reverse mortgage specialist and expert.
Wendy Bell

It says higher fees for HECM borrowers should be explored to offset this perception.

The MMI Fund was recently reported to have improved since the initial 2% fee was introduced in 2018; Ensure that the loan remains as a non-recourse loan that makes the HECM program viable,” Bell explains. “Now would be a good time to look for opportunities to offset some of those borrower fees.”

The upper limit on the loan is certainly welcome, but the risks to the MMI must be acknowledged by those in the reverse mortgage industry and government according to Michael McCauley, partner at New View Advisors.

“While we commend the FHA for continuing to serve an increasingly larger proportion of homeowners aged 62 or older through its HECM program, the new lending limit, set after the rapid multi-year rise in home values, will place MMI fund is at increased risk of cross loss, especially in light of what was disclosed in [November’s] MMI Fund’s 2021 Annual Report to Congress”.

That disclosure centered on the report’s attribution of HECM’s contribution to the fund’s equity ratio which comes largely from high levels of home price appreciation (HPA), he says.

“HPA’s potential return to the mean will negatively affect HECM’s MMI Fund’s contribution going forward,” McCauley explains.

Proprietary product Effects

While most reverse mortgages feature their own loan limits of up to $4 million and offer a reverse mortgage option for those with higher value homes, HECM with a loan limit of approximately $1 million has the potential to carve out a property space, but there may also be Possibility to unlock property options for some potential borrowers, says Bell.

“In the longer term, the private sector – which was really gaining momentum a couple of years ago – may have more opportunity,” she says. Will competition with government programs be a challenge or an opportunity for differentiation? [private products] for borrowers? Many experts consider a balance in private and government lending to be the advantage.”

However, the potential to stop the spread of proprietary products also exists, says McCauley.

“Higher MCA limits also stifle the volume and sophistication of property products as an increase in MCA allows higher-value homeowners to qualify for more HECM returns,” he says. “The less proprietary product dampens institutional investors’ enthusiasm for non-agency reverse mortgage securities, which in turn hurts product innovation. This effect also has the unintended consequence of placing an increased proportion of risk directly with HUD, rather than spreading it evenly between the two sectors.” public and private.”

HECM-to-HECM Refinance Lending unit

Some industry voices remain concerned about the high level of ongoing reverse mortgage refinancing, and the new lending limit may affect the status of HECM-to-HECM refinancing transactions in a number of ways, according to analysts’ views.

“This puts a little more inclusion in the HECM-to-HECM refinancing angle, since loans originated less than 18 months ago are likely to have a significant underestimate of the value a new loan could have at the upper end,” he says. John Lund, President of Reverse Market Insight (RMI). “There is still a limited and limited market here but it is now larger and has a longer life than it was before the announcement.”

Ultimately, the new lending limit will likely mean more references are on the way, McCauley says.

“The new MCA effective from January 1 will also cause additional HECM-to-HECM refinancing, as borrowers—particularly those who have recently acquired HECM—will be able to access additional returns from higher lending limits,” he said.

Reverse mortgage product perceptions

As we mentioned when it comes to the potential for a borrower’s cost to rise on a per loan basis, a higher lending limit can negatively impact producer perceptions of reverse mortgages among some power voices, Bell says.

“[The higher lending limit] It may lead some non-HECM experts in various government agencies to continue with the impression that the product may be inherently predatory, which is unfortunate because this administration has an agenda to help [the senior] To meet demographic needs in retirement,” Bell explains. “The need for education in government agencies has never been more important.”

John Lund, reverse mortgage industry analyst at Reverse Market Insight.
John Lund

At the same time, a number of the current realities older Americans face when it comes to the state of the housing market and the COVID-19 pandemic could also cause more seniors to take a fresh look at reverse mortgages because of the new. Limits, says Lund.

“The current environment of high inflation, low interest rates, high home prices, and higher lending limits is giving homeowners plenty of reason to seriously consider HECM as a way to counter some of their lost purchasing power over the past year in a way that we haven’t seen officially on inflation measures in decades,” As he says. “Dumping some volatility in the stock/bond market combined with the unattractive prospect of nursing homes from a pandemic perspective, and the collateral embedded in HECM could increase stability for a significant portion of families.”

Lund also remains curious about how the demographic shift occurring away from the country’s urban areas to more suburban and rural areas might affect the reverse mortgage industry, he says.

“Higher lending limits provide a greater range of options for potential customers who are looking to HECM to purchase in a less dense location, whether to pursue a remote working family or for other reasons,” explains Lunde.

Ultimately, much of the climate in the broader housing market plus the facts brought in to reverse mortgages through the new lending limit create a general sense of optimism for lenders and originators to look for new HECM borrowers to bring into the fold, says Husk.

“Ultimately, the limit to incremental lending on the surface combined with rising interest rates and the peak population boom coming from the HECM era — there has never been a better time for the industry to bring in new borrowers, new lenders, banks, and an exemplary level versus the HECM-to-HECM refinancing boom last year.”

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