If interest rates rise after a loan is issued, the agency fears, servicers may be on the hook to advance funds at a higher cost.
So the agency will not permit such lines of credit on fixed-rate Home Equity Conversion Mortgages into securitizations after May 31.
“The origination of HECM loans in which servicers are committed to advancing future funds at fixed interest rates gives rise to the risk that such advances will become uneconomic should interest rates rise from the time of origination,” Ginnie says in an April 1 memorandum to HECM lenders.
“The impact of negative spreads between the fixed note rate and future prevailing rates could be exacerbated in such loans, and endanger the servicers’ capacity to meet their … obligations,” the April 1 memorandum says.
From now on, Ginnie Mae issuers will be able to securitize fixed-rate HECMs that offer fixed monthly payments.
FHA reforms that went into effect last fall limited the amount of HECM proceeds seniors could receive during the first 12 months. To tap the remaining proceeds after the first year, seniors could choose between a line of credit or fixed monthly payments.
These FHA reforms made the adjustable-rate HECM more attractive because of the line of credit feature.
However, many seniors prefer fixed-rate loans. So some reverse mortgage lenders found a way to combine a fixed-rate HECM with a line of credit.
Introducing the line of credit feature “provides improved cash flow while also satisfying the preference for a fixed product,” according to a Reverse Mortgage Funding press release dated Dec. 18.
The Melville, N.Y., based reverse mortgage company could not be reached for comment about Ginnie’s action.