Will increased HECM claim amounts boost reverse mortgage production?

Lending

On Friday, the Federal Housing Administration announced an increase in the maximum claim amount for reverse mortgages in 2019, raising it more than $50,000 to $726,525.

The higher limit means that borrowers could potentially extract more of the equity in their homes using the government-insured HECM.

“We welcome the news that the HECM lending limits will be increasing in 2019,” the National Reverse Mortgage Lenders Association said in a statement.

Others in the industry looked favorably on the news, although some questioned how impactful higher limits would really be.

With the HECM market experiencing a significant downturn in 2018, will higher claim amounts really help the product pick up some of the volume it lost after changes made on October 2, 2017?

“I can’t see this change having a significant impact on future volume,” said Mike Gruley of 1st Nations Reverse Mortgage. “Any increase in volume due to this increase would be negligible compared with the loss of volume from the 10/2 changes by HUD.

Kent Kopen of United American Mortgage said the limit increase is “helpful,” but that he also doesn’t think it will have a tremendous impact.

Kopen said the borrowers who will be most affected are those who were at the margin, or with homes valued around $680,000. He estimates that the average 62 year old could get approximately $19,000 more in proceeds, while an 80 year old could get an extra $25,000.

Reverse mortgage borrowers must pay off their existing mortgage before obtaining the loan, but under new rules that limited proceeds, some borrowers could not access enough equity to qualify. Would this $20,000 bump be enough to help more borrowers qualify?

“Sure, but I’ll bet the number is small,” Kopen said. “First, many areas do not have large numbers of homes worth over $680,000. Second, we’re talking a very thin slice of people who couldn’t or didn’t want to transact at the amount they could get when the limit was $679,650 versus what they can get now.”

Gruley agreed that it could help more borrowers qualify, but that the number would not be very significant.

“It is a benefit for those in high-valued homes, but the additional incremental funds available probably won’t have a tremendous material impact on borrowers,” he said. “Additionally, the limited benefits will only extend to high-property-value states. Most states with average property values much lower than the current maximum lending limit will not gain any benefit to this increase.”

By granting the HECM a higher claim amount, the FHA has helped narrow the gap between its offering and the proprietary reverse mortgages that have been gaining popularity this year.

Proprietary reverses are also called jumbo reverses as most have a maximum claim amount of $4 million, catering to borrowers with higher-priced homes.

But while they can accommodate high-value properties, several proprietary lenders have said they view borrowers with $700,000-$800,000 homes as their sweet spot.

Will the HECM now snatch up borrowers who would have had to go the non-agency route under the old limits?  

“One would assume that the higher loan limit will compete better with proprietary products for higher-valued homes, but comparative things such as closing costs, interest rates, and product function will always come into play in the decisionmaking process for the borrower,” Gruley said. “In short, I don’t think it will have much of an impact on proprietary production.”

While many seem to agree that the higher limit won’t provide a massive boost to HECM production, it’s still not a bad thing.

As Kopen said, “Anything that helps more people qualify and doesn’t jeopardize the overall program (i.e., tax payer) is good news.”

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