Lenders are waiting with “bated breath” for FHA to release its final rules, which will require financial assessments for the first time, according to industry consultant Jeffrey Taylor. The new rules will require lenders to determine if the senior has the income or financial resources to pay their property taxes and homeowners insurance once they take out a FHA-insured HECM loan.
If not, the borrower’s application may be rejected or will have to set aside a portion of the HECM proceeds to cover the taxes and insurance over a period of time.
“I think we are going to see a 20%-30% fall-off in volume during the first nine months of this year as the industry adjusts and as the borrowers adjust to the new rules,” says Taylor, adding the new rules are needed to eliminate borrowers who end up in foreclosure after two years.
“Overall, it will make sure there is a home equity conversion program available for seniors five to 10 years from now,” he says.
FHA is expected to issue the financial assessment and set aside rules soon and lenders will have 90 days to implement the changes. Last spring, FHA effectively terminated the popular Standard HECM fixed-rate product because it resulted in too many technical defaults as senior failed to pay taxes and insurance. The Standard fixed-rate product required senior borrowers to take a full draw in one lump sum.
In September, FHA took another step and limited draws to 60% of the principal limit allowed on a HECM loan, unless the senior has a larger mortgage that needs to be paid off. In addition, the agency cut the principal limit amount by 12% to 15% depending on the age of the borrower.
These changes have had an impact on loan production. Lenders originated 18,865 HECM loans in the third quarter, compared to 13,100 during the final quarter of 2013.
But it has moved the market as seniors are taking out more adjustable-rate HECMs that have a line of credit feature that seniors can tap for unexpected expenses or emergencies.
HECM production used to be 70% fixed rate and 30% adjustable rate. But that has flipped and today 70% to 75% of HECMs are adjustable rate, according to Reza Jahangiri, chief executive of American Advisors Group in Orange, Calif.
“That is what FHA wants from a policy standpoint because the adjustable product allows borrowers to maintain some equity in a line of credit,” he says.
AAG is funding upwards of 1,000 HECMs a month through its retail and wholesale channels. Former Sen. Fred Thompson is the company’s TV spokesman.
The reverse mortgage market has been shrinking since 2009 but it is finally beginning to stabilize due to the HECM reforms, Jahangiri notes.
“I think 2014 is going to be an adjustment and stabilization year. Starting in 2015, we will see some growth,” the CEO says.
AAG and other lenders are working on proprietary reverse mortgage products. AAG might introduce one this spring. “It is not going to take over the HECM market. It is a supplemental product,” he stresses.