Lenders Plan to Adjust to Loss of One HECM Product
Reverse mortgage lenders are virtually dependent on federally insured Home Equity Conversion Mortgages for their bread and butter. And normally it would be considered a blow to the industry when the Federal Housing Administration decides to take one of the most popular HECM products off the market.
But that is not the case in this instance, according to industry lenders.
They expect seniors will migrate to other HECM products when the Department of Housing and Urban Development imposes a moratorium on the fixed-rate, full-draw Standard HECM product.
“In terms of consumer demand, I don’t believe it will have that much impact,” said Peter Bell, president of the National Association of Reverse Mortgage Lenders.
Walter Investment Management Corp. recently acquired Reverse Mortgage Solutions Inc., based in Spring, Texas. RMS is a HECM originator and services $12.4 billion in reverse mortgages.
WIMC chairman and chief executive Mark O’Brien told investors and stock analysts that he supports the changes HUD is planning and it will not affect the outlook for RMS.
“We have not revised our expectations for RMS,” the CEO said during a Dec. 21 conference call. O’Brien stressed that he learned HUD was planning changes to the HECM program before purchasing RMS.
“We don’t think these changes will negatively affect our origination volumes in 2013 and beyond,” he said.
On Dec. 18, HUD sent a letter to Sen. Bob Corker, R-Tenn., outlining several changes it plans to make to the FHA single-family program, including a moratorium on the full-draw, fixed-rate Standard HECM product.
Newly confirmed FHA commissioner Carol Galante also notified the senator that the agency would start drafting rules that require lenders to conduct financial assessments of seniors before approving a reverse mortgage. The new regulations will also require lenders to set aside reserves for the payment of property taxes and homeowner’s insurance. (Many seniors are in technical default on their HECM loans because they no longer have the resources to keep up with their T&I obligations.)
Seniors liked the fixed-rate feature of the full-draw Standard HECM, but they were often “forced to take out more money than they needed,” Bell told NMN.
The Standard HECM product allows seniors to take out a large lump sum at closing—ranging from 62% to 77% of the appraised value of the property.
As an alternative, they can turn to the FHA Saver HECM, which has a maximum draw of 51% to 61%. The Saver can also be tapped like a home equity line of credit.
The Saver has a nominal upfront fee, compared to Standard HECM products, which have a 2% upfront fee.
Seniors who need more money can also turn to the adjustable-rate Standard HECM product once the moratorium goes into effect.
In fiscal year 2012, lenders originated 47,950 Standard HECM loans and 12,850 were adjustable-rate Standard HECMs. Lenders originated only 3,820 HECM Savers in FY 2012, which ended Sept. 31.
Executives at Walter Investment Management Corp. expect most seniors will turn to the adjustable-rate Standard HECM, which will allow them to take out a draw in nearly the same amount as the fixed-rate product.
“It is my belief in the current rate environment, it is unlikely people are going to go in any volume to the Saver product,” O’Brien said.
In a higher-rate environment, however, the Saver product would be more attractive due to the lower-cost structure.
Until mortgage rates go up, the ARM and fixed-rate standard HECM products are nearly the same in terms of margins for the lenders.
“In the first year, the economics appear to be almost identical,” one WIMC executive said.
But the ARM product also permits borrowers to take future draws, which can make the reverse mortgages more profitable over time.
Industry officials expect the transition to the other HECM products will be relatively smooth.
“People in the reverse mortgage business have grown accustomed to a continual state of change,” Bell said. “I am confident that once again we will be able to make the adjustment and continue to serve the growing number of senior homeowners who need and want our product.”