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NEW Principal Limits Demystified


Reverse Mortgage Education

[vimeo id=”99788342″ width=”625″ height=”352″]

The Present & Future Impact of new Lending Ratios

Revised Principal Limit Factor
Last week we saw two watershed events for the federally-insured reverse mortgage program. Revised Principal Limit Factor tables and the inclusion of younger non-borrowing spouses under the age of 62. First a little background. The pace of changes to the HECM program has been swift with FHA’s new authority to make substantial changes via Mortgagee Letter rather than the lengthly rule-making process. In other words, FHA and HUD can act quickly to modify the reverse mortgage program as they see fit. Second, the displacement of non-borrowing spouses has been a thorn in our collective side and a ready source of negative news stories which featured elderly individuals being foreclosed upon. In light of these two factors HUD released new Principal Limit Factor tables which go into effect August 4th. First the good news. Younger borrowers aged 62 to 74 will see…

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  1. Shannon
    Could you please give me a call? I would like to discuss one unintended consequence of the early HECM

  2. Shannon, another great video.

    I and many of my fellow HECM Specialists have been making the same point for some time now.

    ***Don’t Wait Mr. and Mrs. Senior/Retiree!***

    Rising interest rates will reduce your borrowing power much quicker that any reasonable amount of property appreciate could ever off-set.

    We as an industry should be banging on this drum as often and loudly as possible.

    Actually this has been my story for several years now. And even though rates have held steady, the amount of proceeds my borrowers may have received has been eroding away, even with some modest property appreciation.


    Don’t Wait!

    Don’t Wait!

    Don’t Wait!

    Don’t Wait!

    • Jerry,

      The “don’t wait” warning can get as worn out as the cry of the boy who warned of a wolf in Aesop’s Fables. When a wolf actually came, no one listened to that boy.

      In my area, we have seen property values rise by 50% since the lows of the Great Housing Depression. So in broad terms if a person in my neighborhood with a home now valued at $600,000 and is now 70, his principal limit is now $338,400. If he had done his HECM in 2008 (in this case a Standard), his principal limit would only have been, $251,600. If the average effective accrual rate on the HECM was 4% between 2008 and today, the current principal limit would only be $319,719 which does not take into account the balance due which would be closing costs plus accrued costs.

      So looking at the line of credit on a 2008 Standard from which proceeds had not been taken except for closing costs (origination fee $0), the available balance would be about $305,700. On a 2014 HECM, assuming the same facts, the available balance would be $331,900 for about a $26,200 difference.

      So is your “don’t wait” message as important as you state? As the very old but very valid wise statement goes, “all real estate is local.” It may be a very great warning in Kansas but not such a great warning in DC.

  3. Shannon,

    You made a great presentation on these issues. It was easy to understand and you covered a lot of ground in a short period of time.

    The one main point to take notice of is the younger borrower versus the older borrower. We know statistically younger borrowers are coming to the plate at increasing numbers to take advantage of the reverse mortgage. This will undoubtedly be a handicap for the younger borrower. I am sure this was factored in as the plan all along when the PLF tables were prepared?

    John A. Smaldone

  4. Anecdotally, the decision of most of my branch applicants and pending applicants is to elect the higher Principal Limit Factors (PLFs) provided through Mortgagee Letter 2014-12 and thus not close before August 4th.

    While the PLF Table story may have a compelling message for some sitting on the fence, it lacks the urgency which generated the unusually large volume of case number assignments (“CNAs”) in March 2013 and September 2013 as HUD eliminated Standards.

    To be fair, one must also offset our new PLF message to close now with a message that HUD can change the Table long before we see a 5.8% expected interest rate on fixed rate and higher margin adjustable rate HECMs. Of course, one never knows if the HUD change would be to increase or decrease PLFs when compared to PLFs available after August 3rd; however, required implementation dates normally leave sufficient time to obtain a CNA between the date of notification and the implementation date.

    There is another message which the PLF Table engenders and that is the need to have a data resource available which will remind originators about those who are leaning toward a HECM when expected interest rates rise. That resource should also aid the originator in getting out that the increased expected interest rate message.

    While the PLF Table message is important to communicate and compelling, it appears to lack the urgency which drove CNAs in March and September last year. Perhaps an even bigger message is to originators to have a data resource available which will aid in selecting prospects who are sitting on the fence and in sending out a message about the need to act due to an expected interest rate increase.


    • Cliff,

      You sound just like the boy who cries wolf. Your day and that theme may see its time of being wise but in most places in the US, it is counterproductive.

  6. Responding to the Critic’s valid point about real estate being “local” – for every market seeing 50% appreciation since 2008, there are 100 that have seen small if any increases over that same period. The story with real estate generally has been that prices have stabilized, not skyrocketed.

    If I’m going to speculate on direction and velocity, I’m betting on interest rates over real estate appreciation in ALL but a very few select markets…..and even in those markets that have seen big moves in the past couple of years I’d lean toward rates over appreciation now, given the typically inverse relationship between the two.

    Don’t wait.

    • Jim,

      Obviously the validity of the concept that all real estate is local is not that of The_Critic but rather the masterminds of real estate for decades.

      I do not agree that the principal limit growth rate (including the MIP rate which you do not reference) will exceed the appreciation rates in 99 out of 100 residential MSAs nationally for the remainder of this fiscal year. As CNBC correctly noted today, most (let me say that again MOST) MSAs are still seeing appreciation rates between 8% and 10%. Add to that the small but significant increases in HECM principal limits due to age, and it seems this is a period when “don’t wait” does not apply to most MSAs in the US.

      By mid fiscal 2015, things could be much different. Right now the “don’t wait” applies to 1) neighborhoods like those of The_Critic not because of lower appreciation rates in the near future but rather because all of those homes are near or above the current HECM lending limit and 2) a great deal of the “fly over” portion of the country.

      The negative “optimism” is this thread is ridiculous. Let us all come back to being educators who base their presumptions and rationales on realistically sound assumptions. This thread displays how little realism is left in our industry.

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