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HECM Changes: The Consequences of Interest Rate Caps

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% Rate Caps to Increase Costs: Secondary Market Concerns

rate-trapIf there’s one word that describes the recently announced proposed rule changes it’s digestion. As many professionals comb over the finer details, one can begin to see a clearer indication of the true impacts on our industry and most importantly, reverse mortgage borrowers.

First a correction. In the last episode, I regret to say that I incorrectly described the continuing payments of monthly insurance premiums as now being required to be sent to FHA monthly. That actually has been an established process for HECM lenders and servicers. What is different is that ongoing monthly premiums must be submitted even after the HECM has reached assignment status with HUD. Premium payments under the proposed rule must continue until the loan ultimately terminates.

Next, lower interest rate caps. There are two primary factors that will reduce the amount of available money to borrowers: home values and interest rates. However, another consequence of lowering adjustable rate HECM interest rate caps is the increase of interest rate margins. Lowering the interest rates caps on the adjustable rate loan would appear to benefit the consumer at first glance, but look again. While the lifetime cap will reduce volatility in FHA’s…

Download a transcript of this episode here.

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4 Comments

  1. As I stated in a comment I put in the RMD last week.

    I feel this can have a serious impact in the trading of trailing GNMA’s, especially in rising market conditions. These caps, as they may be attractive to the borrower and the origination market could put a stop in trading some pools that started out with low UPB’s. These pools could consist of low margin product and low initial rates, which may be fine for the initial trade!

    The problem lies in trading future pools, consisting of those same loans. Remember, pools that start out with low UPB’s, low margins and low initial rates trade again at some point in time as additional draws are taken against the line of credit or when tenure payments build up.

    With the proposed caps, based on those low initial rates (Especially ARM’s) in a high interest rate environment, could make that pool, untradeable! What do you think that would do for the marketability of the HECM, today and tomorrow!

    Lets hope FHA is open minded during the comment period on this subject, however, I am sure they will and we will see a major shift from this proposal!

    John A. Smaldone
    http://www.hanover-financial.com

    • John,

      The only type of HECM that can trade in tails currently are adjustable rate HECMs so what do you mean by the following? “With the proposed caps, based on those low initial rates (Especially ARM’s) in a high interest rate environment, could make that pool, untradeable!” They would not be untradeable (sic), they would have to be traded at a discount, i.e., a loss. Unless they could afford the loss, they will have to hold onto the tails and wait until they can sell them when interest rates permit selling them at a profit or finance them at what most likely be an arbitrage loss (interest income vs. interest cost).

  2. Excellent comments and analysis above – FHA must walk a fine line between what benefits seniors,keeps the program solvent, encourages secondary market participation, and – here’s the part I detest – panders to those who believe in kneejerk overregulation and consumerism. Even when it crushes the consumer it was supposed to be helping. Oops, did I say that last part out loud?
    The HECM program is so much better than what it originally started out as decades ago, and yet has recently gone downhill on a rocket sled with the decimation of the HECM LTV’s, FA, etc. What is needed is some common sense, Do we want to help the largest number of seniors? Do we want to give the secondary market a reason to participate? The equity requirement is enough by itself to eliminate a huge percent of potential HECMs. Add in FA, and the NRMLA HECM to HECM restrictions, state overlays, lender overlays, and it is amazing that any HECM’s are being done at all! When AAG, the 800 pound gorilla in the industry, comes up short of 1,000 loans last month, in spite of more public awareness of the program, there is a problem.
    The HECM should be the most liberal program out there based on its stated purpose and structure. And yet it doesn’t even match FHA forward guidelines on closing cost contributions or payoff of debt, just to name two areas.
    What nobody will admit, is that market forces rule. If values go up, less claims will be paid. If home values fall, nothing will save the insurance fund or program from huge losses. Tough! That is why we pay taxes, so that Uncle Sam can do good works that cannot be accomplished otherwise.Or has that been lost in the sauce?
    Just my two cents after 30 years in the business…and as someone who has to tell people ‘no’ every day who really need our help.
    These comments and views are strictly mine, not those of my employer of course.

    • Paul,

      As part of the MMI Fund, one purpose of the HECM program is to be profit AND loss neutral. With almost $1.7 billion taken from the US Treasury, FHA proved it was not capable of meeting that goal with the change requirements it had to meet and the program designed as it was. Beyond that HUD has taken an approximate $5.8 billions, net, from forward mortgage MMI Fund programs.

      This program is designed to help seniors help themselves not create a new form of welfare for homeowners! The program is still running at an overall cumulative net operating loss of about $700 million, making the ending balance of the HECM portion of the MMI Fund at about $6.8 billion as of 9/30/2015 all of which (and more) is taken from the US Treasury and forward mortgage MMI Fund programs. The ending balance is window dressing at least as to what exceeds $1 billion (the amount taken from the U.S. Treasury netted against the cumulative operating loss).

      For those who want the HECM program to be a welfare program, congratulations it is!


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