Do New HECM Rules Hurt Seniors?
2017 HECM Update
I would like to extend a special thank you to a lender friend of mine who specializes in Home Equity Conversion Mortgages (HECM) for the following article.
This is a topic that I am very interested in, and will continue to explore. I will interview John in the future for more insight into this announcement.
If you have comments, or any questions you would like me to ask during the interview, leave your comment below, or email me directly to firstname.lastname@example.org.
Guest Author: John A. Krochman | Branch Manager – NMLS# 278683 | Broadview Mortgage Corporation
Cell / Text 714-906-4357 | email@example.com
Effective October 2017
The department of Housing and Urban Development (HUD), the agency that insures the Home Equity Conversion Mortgage (HECM), is set to increase the Mortgage Insurance Premium (MIP) and shrink the Principal Limit Factors which determines the amount of cash available to borrowers from their home equity.
The new MIP rates will affect all senior borrowers across the board, with the new Principal Limit Factors having the most effect on the youngest seniors, and those who pay the highest interest rates.
The department issued its decision citing the need to maintain viability of the HECM program for aging homeowners and to strengthen the insurance fund.
How Will I Be Affected?
First, the new changes will affect the average new HECM borrower by reducing the amount of cash initially available by about 12%. Some estimates, including those from the National Reverse Mortgage Lenders Association, believes the impact could be as high as 15%.
We estimate the average HECM borrower will be effected by reducing the initial benefit from about 65% to about 56%.
Next, if you have been thinking about a reverse mortgage or are on the fence you should move quickly to preserve the current terms of the program.
To beat the deadline, it’s important to first complete the required counseling which requires an appointment with a HUD approved counselor.
As we near the deadline, appointment availability will slim, if not completely fill up.
Last, once you have completed counseling, it’s important to shop around for the best terms. Whether you beat the deadline or wait, the maximum claim amount (amount you may borrow) is determined in part by upfront costs and interest rates.
A Silver Lining
If you are on the fence and choose to wait, there may be a silver lining. Because the Principal Limit Factor of the program is determined in part by the expected rate of interest, lenders may be forced to bridge the gap, if borrowers decide there is not enough benefit to take a HECM, by lowering their own margins.
While this would be a cost to the bottom line, lenders have the flexibility to do so if the same margin is offered to all borrowers of a particular lender.
For example, if Expected Interest Rates are teetering in the market between the 3 and 4% factor tiers, lenders may opt to reduce their margins to keep borrowers under 4% which has virtually no change under the new rules.
This chart published by HUD illustrates the upcoming changes.
How the Numbers Work
Homeowners who start a new HECM beginning October 2, 2017, will pay an upfront premium of 2% of the maximum claim amount and .05% annually based on the mortgage balance.
These rates are increasing from just .05%, for seniors who would draw less than 60% of the maximum claim their first year, and reduced from 1.25% of the mortgage balance annually.
Additionally, the Principal Limit Factor which determines how much home equity can be borrowed (a measurement determined by the age of the youngest homeowner combined with the amount of interest being charged for the loan) will decrease limiting the amount seniors can borrower from their equity.
The HUD Insurance Fund
In their most recent review of the HECM insurance fund, HUD estimates that the current $7.7 million negative value of the fund will further decrease to about $13 million by 2023.
Most of the projected losses are based on the home price discount rate which occurs when the last living homeowner permanently leaves the home and the property is transferred to their heirs. T
his discount rate provides an incentive for the heirs to pay off the outstanding mortgage with an amount that is less then they amount owed.
Additionally, because of the HECM’s non-recourse feature, which guarantees that the homeowner will never owe more than the value of the home, homes that are underwater are mostly forfeited by the senior’s heirs and left for disposition by HUD. This further increases the costs to the fund.
Getting Your Questions Answered.
I would like to extend a special thank you to John Krochman for this great article. If you have questions about this article and would like to contact John directly, you can email him at firstname.lastname@example.org, or text/call him at 714-906-4375.
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